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Cashing In While the Economy Burns


Housing prices are rising fast. According to CoreLogic, home prices increased 5 percent nationwide on a year-over-year basis from September 2011 to September 2012. The new data is the strongest sign yet that the housing bust is over and a recovery is underway.

The reason economists watch the housing market so closely is because housing and personal consumption usually lead the way out of recession. An uptick in home sales and prices, normally indicates a surge in economic activity, lower unemployment and stronger growth. So it’s all good.

But today’s housing market is not “normal”, not by a long-shot. Prices have been artificially propped up by historic-low interest rates, manipulation of distressed inventory, lavish perks to investor groups, and endless industry-generated propaganda.

Still there is no denying that prices are going up, that’s clear by the data. The question is whether the data reflect “sustainable” gains that will lead to stronger organic demand or if this is just another blip on the radar brought on by the Fed’s low interest steroids, patchwork government mortgage-mods, and boatloads of liquidity.

So what would a healthy housing market look like?

A healthy housing market would be a microcosm of the larger economy, that is, if unemployment was low and wages were steadily growing, then one would expect to see housing sales and prices rise accordingly. Is that what we’re seeing?

No. What we’re seeing is the Central Bank shovel money into the financial markets to keep stocks bubbly while the real economy is being starved to death. Monetary policy has not strengthened the fundamentals; wages continue to stagnate while unemployment has remained abnormally high. Here’s a blurb from the Wall Street Journal on the dismal state of the jobs market 4 years after Lehman Brothers:

“Companies hired fewer new workers in September than in August, and posted fewer new job openings. Workers lucky enough to have jobs, meanwhile, decided to stay put—fewer Americans quit their jobs in September than in any month since last November.

Those are the key takeaways from the Labor Department’s latest Job Openings and Labor Turnover Summary.

The monthly report, known as JOLTS, gets less attention than the high-profile jobs report, largely because it lags a month further behind. But by tracking hiring, firing and other job moves in more detail, JOLTS can provide valuable insights into the inner workings of the labor market.” (“Weak Hiring, Fewer Quits Make for Sluggish Job Market“, Wall Street Journal)

We can all agree that unemployment is still way too high and that the jobs market stinks, but what about wages? If wages are growing, then that would explain why housing prices are on the rebound, right?

But, no, wages are not growing. Here’s the scoop from the Wall Street Journal:

“U.S. job growth has accelerated, but the bad news is that people who already have jobs aren’t getting raises or more time on the clock.

While perhaps good for corporate profits and a restraint on inflation, weak wage gains could also crimp consumer spending in coming months.

The Labor Department Friday reported that hours worked were flat for the fourth straight month. Meanwhile, average hourly earnings for all employees on private payrolls fell by 1 cent to $23.58 in October. Over the past 12 months, earnings have risen a scant 1.6%. That’s not enough to keep up with inflation. The consumer price index was up 2% in September from a year earlier….

Average hourly earnings of private-sector production and nonsupervisory employees edged down by 1 cent to $19.79, only a 1.1% increase over the past year. HSBC‘s chief U.S. economist Kevin Logan crunched the numbers:

“This is the smallest increase in wages on record for the data going back to 1964. The persistently high level of unemployment over the past few years is clearly restraining wage gains and suppressing any inflationary pressures that might have possibly emanated from the labor market.”” (“Number of the Week: Stagnant Wage Growth”, Wall Street Journal)

Repeat: “The smallest increase in wages on record for the data going back to 1964.”

That doesn’t sound good, does it? So workers are actually running faster just to stay in the same place. And, on top of that, (according to the Fed’s Survey of Consumer Finances) real median household income has dropped 8.2 percent since 2007, while median worth has plunged 39 percent in the last 3 years. In other words, fewer people are in a position to buy a home than there were two or three years ago.

What part of this grim analysis of employment-wages sounds encouraging for housing?

Working people in the US are worse off today than any time since the Great Depression, which is to say that any improvement we see in housing must by necessity have more to do with Central Bank hanky panky, government giveaways, and bank cartel manipulation.

Of course, the pundits disagree. They believe that the rising prices are to do the reduction in supply. In other words, prices are going up because inventory is shrinking. That sounds logical, after all,  according to HousingTracker / DeptofNumber,  housing inventory is off 26.8% compared to the same week last year in 54 metro areas.

Ah, so fewer homes mean higher prices, right?

Not always. Particularly not when home sales have already returned to their historic trend, which they have. The main reason prices are going up is because the banks are withholding more of their low priced distressed inventory from the market. Get a load of this from a post at Calculated Risk:

CoreLogic … today released its National Foreclosure Report for September that provides monthly data on completed U.S. foreclosures and the overall foreclosure inventory. According to the report, there were 57,000 completed foreclosures in the U.S. in September 2012, down from 83,000 in September 2011….(Calculated Risk)

Do the math: That’s a 26,000 difference between 2011 and 2012 (in September), a nearly 50 percent drop-off in the number of foreclosures. Naturally, if the banks are slashing the number of distressed homes they’re putting up for sale, then prices are going to rise. But then maybe the banks are simply running out of distressed inventory to process? Is that it; are we finally seeing the light at the end of the foreclosure tunnel?

Nah. That’s not it. Most of the experts know that the banks are sitting on a massive stockpile of 5 to 9 million distressed homes that will eventually have to go to auction. But just to underline that point, take a look at this from Dr Housing Bubble:

“There was an interesting trend that emerged last month. 2012 has seen a reversal in the housing market yet this topic has been largely absent from all debates. The piece of data that was released addressed the still formidable foreclosure pipeline. Foreclosure starts saw a 260,000 increase from the previous month. It is expected that actual foreclosures are decreasing as the pipeline is being sold and as the economy recovers, this figure will slowly move down. Yet to see the foreclosure starts pipeline increase goes counter to everything we are hearing. What gives?….

(“Did the foreclosure pipeline increase last month”, Dr. Housing Bubble)

Yeah, what gives, and more important, where did the banks come up with another 260,000 foreclosures when everyone but the man in the moon has been saying that shadow inventory is “drying up”? It looks like the Pollyannas got it wrong, after all. The banks have been pulling the wool over everyones eyes…..again!

It’s obvious what’s going on here, isn’t it? The banks want to attract more buyers, so they’re pushing up prices by withholding distressed inventory. That’s the easy part. But they also want to maximize sales, so they cannot allow prices to rise too fast. (Higher prices discourage sales) So what we’re seeing now (with the 260,000 foreclosure starts) is an effort to fine-tune the market to achieve both objectives. It’s all part of the Bank Politburo and Comrade Bernanke’s masterplan to effect a Potemkin housing recovery while the real economy languishes in a long-term slump. Now, take a look at this from Michael Boyer:

“Reports of foreclosure activity have been in the news for more than a year or two, with more players and more bulk buying. Along with private equity and individual investors, international players have piled billions into the US residential housing markets. Even large homebuilders are getting into the game. The wealth of buyers could increase the cost of foreclosures, and the additional multi-family construction could add competition in the rental market potentially decreasing the rents.” (“Private Equity’s Foreclosure Binge (& Purge)”, Seeking Alpha)

And, here’s more on the same topic from PR Web:

“The Real Estate Marketing Insider comments on news in Bloomberg Businessweek that insurance giant American International Group Inc. (AIG) is increasing its investments in real estate.

REMI released a statement today regarding news from Bloomberg Businessweek that American insurance conglomerate AIG is increasing its direct investment in real estate, stating that this was good news for the real estate market, as big-company investment in actual property rather than securities or high-risk mortgages would help to prevent another housing crash.

American International Group Inc. (AIG) was among the companies to receive a government bailout after its meltdown in 2008. …. In attempting to replace the government’s holdings in the company (still 16 percent) with private investors, AIG is working to increase its holdings in real estate; the firm is increasing direct lending and home loans, along with rental property investment. …

AIG’s real estate designs can already be seen; as of June 30, the insurer’s real estate investments amounted to $2.92 billion, a 5.1-percent increase over six months prior.” (“AIG Getting Into the Real Estate Business”, PR Web)

How do you like that; our old bailout buddies at AIG are getting into the housing game. That must mean that Uncle Sugar is sweetening the pot, right? I mean, c’mon now; this whole deal stinks to high heaven.

So what kind of tasty inducements has Obama cooked up for his moneybags friends to lure them into the moribund real estate market? For that, we turn to housing expert Michael Olenick who gives a brief rundown of recent goings-on at the GSEs in an article titled “How Fannie enriches Private Equity investors at Taxpayer and Homeowner Expense”. Here’s an excerpt:

“Corporate welfare queen Fannie Mae has decided to spread their taxpayer provided love, doling out taxpayer subsidized sweetheart deals to a small number of lucky real-estate investors. Let’s examine one of those deals, Fannie Mae’s SFR 2012-1, which includes three groups of properties in Florida.

Fannie Mae sold 699 Florida properties, appraised at $81.5 million, for $12.3 million cash to San Diego based Pacifica Companies. In exchange, Pacifica must rent the homes, paying Fannie another $78.1 million from rental proceeds, but during that time Pacifica is allowed to keep a 20-percent management fee plus 10-percent of rental proceeds.

If that doesn’t sound like money for nothing, like the song goes, Fannie sweetened it by adding a trigger allowing Pacifica to keep 50-70 percent of rental proceeds, depending upon performance, after Fannie’s been “paid” (read: collected rent) amounting to $49.3 million.

Finally, adding insult and injury – to the American taxpayer and the former homeowner – Pacifica can eventually sell the houses and keep the proceeds or use them to pay off the expected rental income stream faster.” (“How Fannie enriches Private Equity investors at Taxpayer and Homeowner Expense”, Naked Capitalsim)

Let me get this straight: “Fannie sold nearly 700 homes, appraised at $81.5 million, for a measly $12.3 million upfront”? Whatever for? These are precisely the low-end, bargain basement-type homes that everyone’s looking for, and yet, Obama’s shunting them off to his tycoon buddies in “sweetheart deals”. Why?

The truth is that the banks don’t want to list their distressed inventory because that would drive down prices and slam their balance sheets. So Obama just giving them a hand. That’s what the Foreclosure to Rental program is all about. It’s another backdoor bailout for Wall Street.

But there’s more to this story too, because as Olenick explains, the administration could have settled on a different policy altogether that would not have only kept people in their homes, but also made tons of money for US taxpayers. With simple principal reductions and low interest refinancing, many of these people could have been spared the humiliation of foreclosure. They would have been in a position to pay off their mortgages on time while turning a hefty profit for Uncle Sam. Instead, the homes have been passed along to investor fatcats.

And that’s why housing prices are going up, because investor mucky-mucks are piling into the market en masse to take advantage of Obama’s “Handouts for Honchos” jamboree, the latest round of bounteous under-the-table corporate welfare perks for ravenous speculators. Some experts figure that investors may now comprise 30 percent of the market. Absent that Bunyanesque infusion of speculator capital, housing would still be circling the porcelain. So the question we should be asking ourselves now is this: How long will it be before margins shrink and the speculators pack it in?

We’ll have to wait and see.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

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