Sorry, but those things do not drive each other. Mortgages only have risk to the bank if the property values are out of line. If the values are out of line, the bank passes on the loan. Risk is limited by the feds. High property values is not "inflation". Inflation is an increase in national consumer prices, not housing. They go together at times, but not always. Housing tends to be more regional. The market forces are much different.
Do the 30 year average for inflation. That is what the bank would be using, not our short term bump.
Inflation is a real problem and the housing price increases are a real problem. Housing will crash in places like California because it has been overvalued for years and people are leaving the state. Here in Texas prices on housing will go up, except in remote areas.
The solution is both tightened money supply and fiscal restraint. Rates are just a part of that.
I agree on the need for tightening money supply and fiscal restraint, but respectfully disagree on other points.
The banks are primarily pricing interest rates based on what they can obtain funds for and not necessarily on risk. It isn't their money. They are lending their depositors' money with most bankers having a very short term view, in my experience.
Mortgage lending isn't as free of default risk as one might think. Speaking only to the valuation issue and not other risks of default, sometimes bank examiners will review appraisals on loans that have come under scrutiny due to payment defaults, but I tend to doubt that they give a systematic review of the entire mortgage loan portfolio. Even if they were to undertake such a review, there's enough play in appraisals in a rapidly evolving market that such a review might not be that much assurance of the strength of the mortgage portfolio.
Add to that the fact that there are only so many bank examiners to go around....they can't be expected to have reviewed that much of bank lending portfolios, especially since the growth of national banks makes it very difficult to examine any of the larger banks operating over multiple states.
The 30 year average to which you refer was after a serious effort was put into bringing inflation under control. Price stability in those years is not indicative of price stability to come in the future.
Any loan made today should consider the present level of inflation and the odds of when and if it will be brought back under control--ie., risk. Loans made today are being made after unprecedented levels of spending and QE by any historical standard. That must be considered in pricing loans going forward.
If someone was writing a dissertation today (and they weren't interested in being hired by the Fed), there's an argument to be made that QE first wrecked the CD/Bond market, then distorted the stock market as people searched for yields in that market, and then QE has contributed to pushing investors into the housing market distorting prices there as well.
I'm not sure the Fed would hire an analyst whose dissertation says, "hey, look what you did here."
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