The All Powerful Fed
Has housing really turned the corner?
According to Calculated Risk— the nation’s number 1 economics’s blog– it has. Back in February 2012, CR’s Bill McBride boldly announced “The Bottom is Here”, and, sure enough, prices have been edging upwards ever since. In a follow up post on Wednesday, McBride explained exactly what he means by “recovery”. Here’s an excerpt:
“What is a ‘housing recovery’? There are really two recoveries: House prices and residential investment. Most people – homeowners and potential buyers – focus on prices, and for prices we should use the repeat sales indexes, and not the NAR National Association of Realtors) median price….What matters in the NAR report for prices is inventory and months-of-supply. And inventory is at the lowest level since January 2001, and months-of-supply fell to 4.4 months – the lowest since May 2005.” (Calculated Risk)
So, that’s settles it, right? After all, existing inventory is down nearly 20% in the last 12 months, prices are up a full 7.4% year-over-year (according to CoreLogic), and residential investment is gradually improving. That means McBride must be right, housing is finally rebounding.
But aren’t we missing something here? I mean, what if the rising prices and shrinking inventory are NOT the result of normal market forces, but massive government and Central Bank intervention? Does that change things at all?
For example, what if there were signs that the market was being manipulated with historic low rates, lavish mortgage modification programs, blanket gov underwriting and financing of mortgage loans, shadow inventory that is being deliberately withheld from the market to keep prices artificially high, and a $45 billion per month mortgage-backed securities (MBS) bond buying program (QE) designed to incentivize banks to lend more money to loan applicants? Would that change your attitude about whether the so called recovery was real or not?
After all, the presumption is that houses are bought and sold in a free “market” which Investopedia defines as: “A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. The price that individuals pay during the transaction may be determined by a number of factors, but price is often determined by the forces of supply and demand.” (Investopedia)
So, how does this definition apply to our current US housing market?
It doesn’t apply at all, does it, because everything has been manipulated from top to bottom by the people who are supposed to be the system’s impartial referees.
“Impartial”? You gotta be kidding. Interest rates have been slashed in half from 6.5% in 2005 to 3.25% today. How impartial is that? Mr. Market didn’t create that phony “rate stimulus”. Mr Bernanke did! This is central planning at its worst. Capital is being diverted into sinking, unproductive industries, like housing, not because it helps the broader economy and puts people back to work, but because Bernanke’s criminal friends on Wall Street need another handout. Isn’t that what’s happening?
You know it is. And just look at how this monkey business is impacting the market. Take a look at these inventory numbers in some of the major markets across the country:
In Boston, existing inventory dropped 38.7% in one year. Denver dropped 34.8%. Las Vegas was down 27.3%. Portland down 28%. San Francisco fell 68.1%, Seattle slipped 46.4%, Washington down 30.6%, and Sacramento was off a whopping 71.4%.
Okay. So now we are supposed to believe that we’re experiencing a shortage of homes in the most overbuilt industry of all time? Pardon my skepticism. Here’s how housing blogger Larry Roberts explains what’s going on over at OC Housing News:
Banks are letting delinquent borrowers squat rather than foreclosing on them and booting them out. At first, it was a self-preservation measure by the banks taken out of desperation when the first wave of foreclosures caused prices to crash. However, now the banks are content to allow squatting, even for years, because squatters do not become MLS supply weighing down prices. The houses occupied by squatters are effectively removed from the market creating an artificial shortage. The lack of MLS homes for sale and high affordability is causing prices to rise, and as prices go up, banks have collateral backing on their bad loans.” (“Lenders will target near-equity squatters for future foreclosures”, OC Housing News)
While I don’t agree with Roberts characterization of delinquent homeowners as “squatters” (Homeowners were the victims in this massive bankers scam), his basic analysis is correct. The banks are sitting on a gigantic backlog of non performing loans (by most estimates, more than 5 million mortgages) that they refuse to process to avoid writing down the losses. This is what’s keeping prices artificially high and inventory low. (although negative equity is also a factor)
Ironically, this manipulation of inventory has backfired, that is, the banks have kept too many homes off the market which has pushed up prices too fast. (7.4% year-over-year in not sustainable) That means they’ll have to increase their foreclosure operations to boost sales and slow down the price gains. Here’s more on the inventory flap from CNBC’s Diana Olick:
“The greatest concern in the market is the inventory situation…The reasons for the low supply are varied, and the low numbers are in fact feeding on themselves…..As a result, home prices are now rising more and faster than most analysts predicted due to this short supply, up 7.4 percent year-over-year in November, according to CoreLogic….
Healthy housing market gains are historically driven by increasing employment and income, not by lack of supply; the latter leads to price bubbles. First-time home buyers, who generally account for 40 percent of the home-buying market or higher are still under-represented at just 30 percent, according to the Realtors….
December’s disappointing drop in home sales, month-to-month is a clear warning for the housing recovery going forward. Rising home prices are not the sole measure of a healthy market. Supply and demand need to fall closer in line, and a robust economic recovery should be driving both home sales and prices.” (“New Housing Fears: Home Prices Are Rising Too Fast”, CNBC)
Repeat: “Healthy housing market gains are historically driven by increasing employment and income, not by lack of supply; the latter leads to price bubbles.”
Isn’t Olick admitting that the market is seriously out-of-whack?
Sure, prices have gone up, but not because there’s a recovery in the real economy. There isn’t. Unemployment is down because more people have dropped out of the workforce and off the radar. Think about that for a minute: Let’s say your total workforce is 10 people and 9 of them get laid off in the recession. Three years go by, and none of them find jobs, so they get kicked off unemployment benefits. So, now you are down to just one full-time worker, which–by BLS standards–means you have “full employment”. Is that a positive development?
And what about wages? Wages are either flatlining or falling (inflation adjusted) depending on who you want to believe. But, one thing’s for sure; they’re not going up which is why the majority of homeowners are stuck in place and unable to move up the housing foodchain.
The point is, basing one’s views of a housing recovery on such thin gruel as “prices” and “inventory” (without taking into account the extreme meddling of the Fed and the banks) is as silly as insisting that Lance Armstrong deserves to keep his 7 Tour de France trophies for crossing the finish line first. It’s the same thing, isn’t it? Now get a load of this from Dr Housing Bubble:
“The last few years have seen a large amount of buying come from investors. Nearly one third of all sales were investor based. This is incredibly hard to find historical data on a normal figure here but I would venture to guess that it is around the 10 percent range for the nation. In California, foreign demand makes up this portion alone:
“(OC Register) The National Association of Realtors estimated that foreign buyers accounted for 11 percent of California home sales.
The California Association of Realtors, however, pegged foreign sales at 5.8 percent of the state’s transactions. Of those, 39 percent of the buyers come from China, followed by buyers from Canada (13 percent), and from India and Mexico (8.7 percent each), CAR reported.”
Last month over 33 percent of buyers in Southern California paid all cash for their purchases, tying a previous historical record set a few months ago. The monthly average since 2000 is closer to 17 percent so we are nearly double that.” (“What constitutes a healthy housing market?” Dr Housing Bubble)
Do you think a 33% investor share of housing sales is a sign of a healthy market?
In your dreams. Like we said earlier, a healthy market is characterised by low unemployment, solid wage growth, and low personal debt levels. These are the conditions that support new homes sales, move up sales and organic sales. They are the life’s-blood of the industry. This new wave of speculation has been brought on by the Fed’s zero rate policy and QE which have generated an ocean of liquidity looking for higher yield. In other words, there’s tons of money sloshing around the system looking for a place to go. This is why the yield on junk bonds is at all-time lows, because the Fed’s easy money policies have created uneven inflation in various financial assets. Now the trouble is spilling over into housing. Here’s more on the same topic from OC Housing News:
“The massive amounts of money hedge funds are spending on foreclosures clearing impacting the real estate economy. Last year several dozen investment firms backed by $6 to 8 billion in private equity hedge funds announced plans to purchase between 40,000 and 80,000 previously foreclosed homes….
Just last week Blackstone Group LP, the largest U.S. private real estate owner, accelerated purchases of single-family homes as prices jumped faster than it expected. According to Bloomberg, Blackstone has spent more than $2.5 billion on 16,000 homes to manage as rentals, deploying capital from the $13.3 billion fund it raised last year, said Jonathan Gray, global head of real estate for the world’s largest private equity firm. That’s up from $1 billion of homes owned in October, when Blackstone Chairman Stephen Schwarzman said the company was spending $100 million a week on houses.” (“Housing speculation explodes but with institutional investors this time”, OC Housing News)
So this is what a recovery looks like?
Give me a break. This is a disaster. The Fed’s policy is not creating more jobs or contributing to growth. It’s fueling another speculative ponzi-bubble that will lead to another meltdown.
Here’s more from CNBc’s Diana Olick:
“30 percent of all housing starts in 2012 were of multi-family apartments. That is the highest share in over 20 years. ….
Single family construction may in fact be slowing. Housing starts usually calm down in the fourth quarter. When you take out that seasonal adjustment, they fell 24 percent from October to December of 2012 compared to just a 10 percent pause in the fourth quarter of 2011, according to housing analyst Mark Hanson….” (Realty Check, CNBC)
How does that square with everything you’ve read about the “surge in housing”. There’s a surge all right; a surge in rentals and a surge in speculation, but there’s no surge in the kind of construction that most people associate with a strong housing market. As analyst Mark Hanson said, “Single-family is stuck in the mud.”
“Stuck in the mud”? Stretched out on a marble slab is more like it.
So why would anyone buy a house in this market?
I’ll tell you why: It’s because they think the Fed is so powerful that it can reverse the direction of the market. That’s why. But the Fed is not that powerful. Eventually, QE will end, interest rates will rise, investors will flee the market, and the meddling will stop.
It might not happen tomorrow, but it will happen. And when it does, housing prices are going drop.
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 firstname.lastname@example.org.