[quote=TheBreeze]
I wasn’t alive back then, but I’ve read that Volcker took interest rates to 13% back in the early 80’s in order to combat hyperinflation. That would be a little less than a doubling of the interest rate from here. What would happen to housing if that happened? Could prices get cut in half even from these levels?
[/quote]
Volcker wanted to fight inflation. Bernanke wants to cause it. Bernanke will not raise the Fed funds rate to 13%. No chance, no how.
However, the federal funds rate only can influence mortgage rates, but it doesn’t control them. Mortgage rates could go to double digits even with the fed funds rate at 1%. That would be if mortgage interest rates were controlled by market forces. But sadly, the government just nationalized everything, and market forces have much less clout than they used to. The government can print new money and push it through the mortgage markets at an interest rate well below the rate of inflation. They can even do what Bernanke suggested during his 2002 “helicopter” speech, print money to buy US Treasuries and manipulate the interest rate on the national debt. Great! The Treasury can borrow directly from the Fed. Who can guess what long term interest rates will do anymore?
That really isn’t the question. If inflation becomes that severe, if Bernanke prints that much money, any inflation hedge will go up in price in nominal terms. If inflation is 100% and mortgage interest rates are also 100%, home prices will rise again. They may rise at 90%, lagging inflation, but people will take out 100% interest rate loans rather than hold cash.
The key is: real estate must still correct further in real terms, but what homes do in nominal terms depends on how aggressively the Fed prints money, regardless of interest rates.
