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A Whirlpool of Speculation

Housing Shifts Into Reverse

by MIKE WHITNEY

Here are a few headlines you might want to mull-over before you plunk 20 percent down on that $500,000 Tudor in Rancho Mirage:

“Mortgage Applications Drop for Seventh Straight Week”,  “Homeownership slides to 18 year low”,  “Investors start to move out of housing”,  “Sellers Worry Rising Rates Will Lower Demand”,  “PE Scrambles To Exit Housing Market”,  “Higher mortgage rates lead to softer home demand, Beazer exec says.”

Of course, all you’re reading is stories about the 12.2% year-over-year price surge that’s started the buzz about the next housing bubble.  And it’s true too, housing prices have gone up.  Financial manipulation and corporate propaganda DO work, even in an no-growth, high unemployment economy where half the college graduates under 30 are shackled to loans they’ll never repay, where one-in-six people scrape by on food stamps, and where “four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives.” (AP News) Hurrah, for the American Dream! Hurrah, for propaganda!

So, what is the truth about housing, aside from the fact that the fundamentals (wage growth and low unemployment) are weak, weak, weak?

Conditions in the US housing market are rapidly deteriorating. Mortgage applications dropped for the seventh weeks straight while refinance activity is down 57% from its peak. Refis are now at a two year low having slipped another 4 percent in the last week in July. The rate-sensitive housing industry has been pummeled by the Fed’s announcement in June that it planned to scale back its asset purchases (QE) by the end of the 2013 ending the program sometime in 2014. The announcement triggered a sharp selloff of US Treasuries which pushed mortgage rates more than a full percentage point higher in less than a month. The 30-year “fixed” mortgage rate is now 4.58 percent, a mere 10 basis points below a two-year high hit earlier in July. The higher rates have dampened demand by prospective buyers who have decided to either hold off on their purchase or abandon their search for a home altogether.   Either way, fewer mortgage apps mean reduced sales in the months ahead.  If sales fall, prices will follow.

Droopy mortgage apps is just one of many headwinds facing today’s Potemkin housing market. There’s also  shadow inventory, the 5 million-plus homes that are not presently listed on the MLS, but are expected to enter foreclosure sometime in the next few years. Millions of homeowners have been living for 3 years or more without making a mortgage payment. The banks have slowed the process to stem their losses on non performing loans and to conceal the condition of the bulging (“overbuilt”) market from the public.  According to Census data released last week, the number of homes that are currently vacant and being held off market is LARGER NOW than 2009, the year financial system collapsed. The nation’s largest lenders have been assisted in their game of hide-n-seek by the compliant Fed and the other regulator-accomplices who simply look the other way. The banks have been able to report record profits even though a sizable portion of their asset base has lost 40 percent or more of its original value leaving their balance sheets deep in the red. (If the assets were marked to market, which they aren’t!)

Another headwind facing housing: Firsttime homebuyers. Check this out from the Wall Street Journal:

“First-time home buyers, long a key underpinning of the housing market, are increasingly getting left behind in the real-estate recovery.

Such buyers, typically couples in their late 20s or early 30s, have accounted for about 30% of home sales over the past year. They represented 40% of sales, on average, over the past 30 years, and accounted for more than 50% in 2009, when recession-era tax credits fueled the first-time market, according to data from the National Association of Realtors….

“First-time buyers are important to get the housing market to move to a new plateau,” said Steven Ricchiuto, chief economist with Mizuho Securities USA Inc. “Without them, you just get stuck at a marginal recovery environment”…

In June, first-time buyers accounted for 29% of purchases of existing homes, compared with 32% in June a year ago, according to the NAR’s June existing home-sales report released Monday.

FHBs, along with investors, are key sources of new housing demand and chief enablers of the upgrader market, since upgraders typically sell to FHBs or investors. If demand from FHBs is restrained, then logically it could have flow-on effects up the chain, potentially stifling the housing recovery.” (“Housing Recovery Increasingly Prices Out First-Time Buyers,” Wall Street Journal)

First-time home buyers are scarce because the economy stinks. Wages are falling, unemployment is high, and 40 percent of traditional FHB’s are so loaded with debt from student loans they’ll never enter the middle class.   The fundamentals which supported strong housing markets of the past no longer exist. You can’t buy a house with paycheck from Burger King. It’s that simple. The upward redistribution of wealth has widened the chasm between the nation’s rich and poor which has weakened demand creating conditions for a long-term and irreversible slump. Here’s a clip from the New York Times which explains what’s going on:

“Wages have fallen to a record low as a share of America’s gross domestic product. Until 1975, wages nearly always accounted for more than 50 percent of the nation’s G.D.P., but last year wages fell to a record low of 43.5 percent. Since 2001, when the wage share was 49 percent, there has been a steep slide.

“We went almost a century where the labor share was pretty stable and we shared prosperity,” says Lawrence Katz, a labor economist at Harvard. “What we’re seeing now is very disquieting.” For the great bulk of workers, labor’s shrinking share is even worse than the statistics show, when one considers that a sizable — and growing — chunk of overall wages goes to the top 1 percent: senior corporate executives, Wall Street professionals, Hollywood stars, pop singers and professional athletes.”

From 1973 to 2011, worker productivity grew 80 percent, while median hourly compensation, after inflation, grew by just one-eighth that amount, according to the Economic Policy Institute, a liberal research group. And since 2000, productivity has risen 23 percent while real hourly pay has essentially stagnated….

Emmanuel Saez, an economist at the University of California at Berkeley, found that the top 1 percent of households garnered 65 percent of all the nation’s income growth from 2002 to 2007, when the recession hit. Another study found that one-third of the overall increase in income going to the richest 1 percent has resulted from the surge in corporate profits.” (“Our Economic Pickle”, New York Times)

Same old, same old, right? All the dough is going to the 1 percent. Everyone knows this already, but think of how it impacts the demand for housing, particularly first time home buyers who are feeling the brunt of 30 years of regressive anti-labor tax policy, the effective repeal of New Deal redistributive programs aimed at strengthening the middle class, and who may have been the victims in a student loan sting which has absconded with more than a trillion dollars from 20-something college grads?  This is why housing is weak, because the economic foundation for widespread prosperity has disintegrated beneath the withering influence of bankers, CEOs, lobbyists and corrupt politicians. What’s left is a transparently fake market propped up with excessive financial speculation, calculated inventory suppression, artificially low rates and criminal malfeasance. This is why housing prices have soared by more than 12 percent in the last year alone while the homeownership rate is back to where it was two decades ago.   How does that happen, you ask?

Simple. The banks create fake demand by lending cheap money to financial speculators to buy bank-owned homes. It’s a big game of circle-jerk and you and I are the victims. Check this out at Business Insider:

 “We now have an all-time high level of investor activity, reaching 30% of all resales in the markets we track and 45% in markets such as Orlando and Florida….

….. The big institutions have raised debt from banks, and Blackstone recently announced B2R, a platform to lend to medium-sized investment groups. We suspect that small investors are finding or will find debt soon. All of this will allow investors to double their platforms without raising any more equity.”  (“Investor Momentum In The Housing Market May Have Swung Too Far”, John Burns, John Burns Real Estate Consulting)

All the recent prices gains are due to speculation. Repeat: ALL THE GAINS. How do we know that?

Well, because the “Homeownership rate is at an 18 year low”. (Duh) In other words, that’s not a nice family with 2.4 kids and a dog that just moved into the rambler down the street, it’s a Wall Street landshark who’s been prowling the neighborhood looking for his next big killing. But now that rates have risen and profit margins have shrunk (because prices shot up 12% y-o-y), the moneybags speculators will either reduce the amount of their commitment or sell before the market turns south. Either way, sales are going to slide, and prices will fall.   Here’s an update from Diana Olick at Realty Check:

“They swarmed the distressed housing market, buying thousands of foreclosed properties and pushing prices higher faster than anyone expected. Now investors are pulling back, dissuaded by the higher prices they themselves brought about.

“Perhaps the numbers aren’t working out,” said Lawrence Yun, chief economist of the National Association of Realtors, which reported that just 15 percent of June sales were by investors. That is the lowest share since the association began tracking this cohort in October 2008.

Current homeowners are now driving the housing market, as even investor traffic fell in June for the fourth straight month, according to Campbell/Inside Mortgage Finance. That could mean slower sales going forward, as still tight inventory keeps move-up buyers in place. That, and negative home equity.”  (“Investors are moving out of housing. Here’s why”, Realty Check)

Remember how these Private Equity guys were going to hold on to their rentals for 4 or 5 years? My, how fast things can change!

It’s important to note that signs of  investors pullback began before the Fed made it’s “taper” announcement, which is to say that demand was already weakening before the surge in mortgage rates. That means that the dropoff in sales that appeared in June’s “existing home sales” data is just the beginning of a sharp downturn in demand. The downturn will intensify due to higher rates, skimpier profit margins, diminishing household formation, and vanishing first time home buyers.  Here’s how Dave Kranzler sums it up over at Seeking Alpha:

“Existing home sales over the past 18-24 months have been heavily driven by the private equity funds and hedge funds buying up huge blocks of foreclosed and distressed homes. At their peak, they were accounting for close to 40% of all monthly existing homes and an even higher percentage in several “hot” markets. This rather temporary source of demand also played a big role in driving prices higher. But the two warning signs here are that 1) this buying cohort is fading fast and 2) many of these funds are looking to sell their housing portfolios to the public via IPOs. It’s always a big red flag for me when the “smart money” private equity funds decide that it’s time to sell.

There are other signs that the housing market has topped out – like the reappearance and preponderance of home “flipping” and the expanded use of subprime mortgages and ARMs. But, as discussed above, the primary drivers of the market for existing home sales are rapidly deteriorating. As these factors become more apparent to a wider audience, potential home buyers will postpone purchase plans, banks will pullback on mortgage funding and those looking to take advantage of the price run-up will try to sell their home before the bottom drops out of the market again. In other words, the “negative feedback cycle” that drove the popping of the original housing bubble will exert itself, taking the market ultimately to new lows.”  (“Why The Housing Market Is An Accident Waiting To Happen”, Dave Kranzler, Seeking Alpha)

For more than a year, the Pollyannas in the establishment media have peppered the headlines with cheery stories about the faux housing recovery. In the months ahead, the data should prove that the rebound in prices was a “bubble on a whirlpool of speculation” (J.M. Keynes) built entirely upon unsustainable rate stimulus, government subsidies to the banks (via phony Mortgage mod programs), unprecedented investor participation,  and relentless corporate propaganda.

None of these will effect the final outcome. Prices will fall.

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. Whitney’s story on declining wages for working class Americans appears in the June issue of CounterPunch magazine. He can be reached at fergiewhitney@msn.com.