
Few deny that we are reflating the housing bubble. Most use the comforting euphemism "recovery," but this is not semantically correct. The housing bubble was characterized by an unprecedented detachment from fundamental values. The deflation of the housing bubble was the recovery. What we have now is a concerted attempt by lenders, the central bank, and government officials to reflate the bubble because the banks can't afford the loss of capital associated with sales at "recovered" prices. Since banks stopped foreclosing on properties when the settlement agreement was reached, the MLS inventory dried up. Corresponding to this reduction in supply was a 30% decline in mortgage interest rates which greatly increased the ability of borrowers to bid up prices. Even…[READ MORE]