Is the Fed creating a housing bubble by keeping rates low?

Not transferring wealth to banks is a good thing. If people are too rich, tax them. If houses are too expensive, build more houses.

Rates are impossible to normalize.

I calculated the interest on our debt of 28.6 Trillion [1] at a rate of 1.5% to be 429 Billion of interest. This is Approximately what we are paying today [1]. If we normalize to say 5%, which is the historic average [2], paying only the interest on our debt, we would be paying 1.5 trillion each year. Or 50% of the federal budget on interest. We have 3.42 trillion in revenue.

I don't see how we can raise rates, so housing prices could keep going up.

  1. https://www.usdebtclock.org
  2. http://www.freddiemac.com/pmms/pmms30.html

At this moment in time the interest on debt created by governments, multinationals and rich elite is paid for by the increased housing rent of people in the range of poor to upper middle class. Not only in the US but almost everywhere. Low and even negative interest rates cause investors to invest in bricks. and where investors go, lowlife speculator creeps seem to follow.

It's interesting that this topic becomes a source of populist rage, because the whole mechanism is that buyers are indifferent to principal vs. interest. The same cheap loans are available to you too. Interest rates are probably not driving your inability to afford a house.

I suppose you could be a cash buyer, whose cash was not previously exposed to real estate, hoping to get into it. But that's a pretty niche constituency.

Yes.

Hmm, some low effort comments here.

Here's a different perspective (fully admitting that I only read the headline, it seems to be paywalled): I think the causality is reversed here. Low interest rates are a mere symptom of the lower natural rate of interest (r*). The Fed can do all it wants to the short term interest rates, but the long term rates are ultimately set by the market. 30y treasuries are being traded today for 1.9%. Even if you believe that the Fed is manipulating things in the short end, there's nothing it can do in the long end (well, technically it can carry out QE and buy 30ys and suppress yields, but the WAM of the SOMA[0] has been falling since the COVID crisis, so I don't think that's what's happening here).

Okay, so why is the r* low? I personally ascribe it to demographic shifts (older population -> more savings -> savings glut -> capital is cheap -> rates low). Atif Mian and Amir Sufi presented some work at Jackson Hole this weekend that claims that it's all about inequality, not demographics. I'm not entirely convinced just reading the headline result, but it's plausible, and Atif and Amir are serious researchers, so I would give them a non-zero weight in forming your world view.

EDIT: [0] WAM = weighted average maturity SOMA = Fed's System Open Market Account

Basically a shorthanded way of saying that the average maturity of the Fed's holdings are not constant, but rather shortening, indicating that the Fed is not purchasing new 30y paper (at least, not at the same clip) and simply letting the existing debt roll off the books.

As the kids say, "Always has been"

Greenspan Fed really kicked it into gear.

Ah yes, capitalists and mortals can't handle abundance so they blame a central institution managing a interest rate that has no natural market forces in the case of abundance. Once there is deflation interest rates have to become negative but people can take their money out which raises the risk free return even though sitting on a pile of cash does absolutely nothing for the economy.

Awareness about our monetary system has gotten so bad people think the central bank is the source of interest and that debtors are just a fictional entity equivalent to the tooth fairy. Interest rates are raised according to the availability of solvent debtors the same way stock prices go up when the company is earning more profits.

When interest rates are lowered future income streams become more valuable. That means non reproducible assets like land become more valuable and it is not just a speculative fluke if you make money off of it since land is needed to live, work and eat. Every single plot of land has a monopoly on its location. You can't manufacture location. The only thing weakening that monopoly is the government allocating more land to residential zoning, meaning sprawl. Just like inflation and low interest rates weaken the monopoly of money.

The solution is permanent ground leases from the government or just progressive land taxes where individual home owners pay capital gains on land when they sell and anyone above a threshold pays the full land value tax on all his land holdings.

Alternatively we start a war, destroy all the sources of abundance and suddenly interest rates are 10% because investors have 2 billion potential borrowers, whose population is increasing, standing in front of ruins that need to be rebuilt. Yes, that is the time in which boomers lived. Our benchmark for success is a destroyed world that quickly recovered. How long until the next war to satisfy investors?