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U.S. Housing Market Shell Game - Prices Up Ownership Down

Housing-Market / US Housing May 05, 2013 - 12:31 PM GMT

By: Mike_Whitney


Why are housing prices rising when the homeownership rate has dropped to its lowest level in 18 years?

Actually, it’s not as confusing as it sounds. The Fed’s low interest rates have triggered a flurry of home buying by Private Equity firms and other speculators which has reduced already-tight supply and pushed up prices.  Of course, there is a downside to all this speculation, which is that real, “organic” demand from ordinary working people looking for a place to live, has dropped off sharply. That’s why the homeownership rate is in the dumps.  It’s also why existing homes sales declined 0.6 percent in March and “the volume of purchase applications is at levels last seen in 1998″,   because as prices edge higher, more people are opting to rent rather than own.  Who can blame them?

Five Star Institute economist Mark Lieberman’s has done considerable research on the homeownership rate by combing through the US Census Bureau report. He found that:

“The number of housing units held off the market in the first quarter though was 7,609,000 up from 7,299,000 in the fourth quarter and but down from 7,633,000 a year ago.” (“Homeownership Rate Drops to 18-Year Low” DS News)

Can you believe it? So the banks are keeping more than 7 million homes off the market to reduce listings, create the illusion of ”scarcity”, and push up prices.  And just look at the numbers. They haven’t budged in the last year, which means that things aren’t really getting better at all. It’s a complete hoax, in fact, it might be the biggest charade of all time.

That’s why I still think the housing rebound is fake and that eventually prices will return to earth. Ultimately, a sustainable housing recovery depends on 3 things: Solid wage growth, low unemployment, and easy access to credit. Presently, all three of these are weak, which means the current surge in prices won’t last.

Surprisingly, Fitch Ratings Agency agrees with me, or so it would seem judging by a recent article in DS News titled  “Fitch: Recent Price Gains May Not Be Here to Stay.”  Here’s a clip:

“While some might be rejoicing at the recent rising home prices and rising home sales seen across the nation, Fitch Ratings “still views these gains cautiously.” In fact, the agency predicts price gains will slow and perhaps even reverse over the next year. …

“While rising prices and sales volumes suggest a recovery, they are not moving in sync with key economic indicators that would otherwise support a sustainable price level”…

Persistent low interest rates, little new construction, and formerly-reluctant buyers are bringing action to the market, but Fitch warns this burst in demand will not last.”  (“Fitch: Recent Price Gains May Not Be Here to Stay“, DS News)

And Fitch isn’t the only naysayer, Yale professor Robert Shiller is skeptical, too. Shiller  maintains that  “we might not see a really major turnaround in our lifetimes”. Shiller’s reaction may surprise many readers since his own Case-Shiller home price index showed (just this week) that prices rose a stunning 9.3 percent in the last year. That’s hardly reason for pessimism, is it?    Even so, just hours after the report was released, Shiller appeared on the Daily Ticker where he said he thought that,  “Home prices will remain relatively stagnant for the next 10 years”. Here’s more from the same interview:

“Shiller says the housing market is operating in an “abnormal economy” where the Federal Reserve is buying $40 billion worth of mortgage securities and $45 billion worth of Treasury notes each month. This has driven mortgage rates to record lows.

The Fed will eventually stop buying these securities, says Shiller, and mortgage rates will rise…

When asked where this all leaves the housing market 10 years from now, Shiller says home prices will be “about where they are now” after adjusting for inflation.” (See the whole interview here: “Home Prices Will Remain Relatively Stagnant For Next 10 Years“, Daily Ticker)

So, yes, the vast majority of analysts and experts say the housing recovery is real, but there are still a few contrarians, and their reasoning is sound. The fundamentals are weak, and they could get weaker still as the budget cuts take hold and the economy shifts into low-gear.

For the last year or so, prices have been driven by low rates, inventory suppression, and a surge in investment. In the hotter markets, investors have accounted for more than 30 percent of all sales. But that  won’t continue through 2013, mainly because yield-seeking speculators are not making the money they figured they would buying up bank-owned properties (REOs) and renting them out. As analysts at Goldman Sachs recently pointed out: “Rental yields on single-family homes, conditional on the current market prices, are compressed. Even among the 10 metro areas where our estimated 2013 rental yields are the highest, the average rental yield is only 5%.”

So, even the best deals are only netting 5 percent. That’s not enough to wet the beak of the big players who thought they’d be raking in the moolah.  Now that the price of distressed properties has skyrocketed,  the Wall street guys are going to make even less, which means they’ll probably reduce their spending on housing and move on to more lucrative areas of investment. It might not happen tomorrow, but–as prices go up and profit margins narrow–it will happen. And that will leave the banks in the same situation they find themselves today, with millions of distressed homes in the pipeline and a dwindling pool of buyers.

Now take a look at this blurb from Moody’s Ratings agency that conflicts with the Census Bureau report, but sheds a little light on what’s going on behind the scenes:

“Nationally, the market holds about 3 million homes in serious delinquency or foreclosure—which is about 3 times the normal level, according to Moody’s.


Almost 40 percent of delinquent loans have been delinquent for three or more years, which translates to much greater losses than on loans in delinquency for shorter time periods.” (“Moody’s: Home Prices to Increase, Loss Severities to Remain High“, DS News)

See? It’s all a big shell game. Nearly half of ”the delinquent loans have been delinquent for three or more years”, and yet, the banks haven’t foreclosed. Why is that? It’s because they want to suppress inventory to prop up prices.

On top of that, the banks have enlisted Obama to provide them with a stealth bailout via home modification programs to keep underwater homeowners out of foreclosure until the banks are ready to take action. Take a look at this eye-popper from DS News:

“Starting July 1, large numbers of non-paying borrowers will have the opportunity to modify existing mortgages through a more streamlined process….

According to the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac will offer “a new, simplified loan modification initiative” to borrowers who are at least 90 days late with their mortgage payments. Modifications can include a lower rate, a loan term stretched to 40 years and principal forbearance in some cases.

“The loan,” says FHFA, “must be owned or guaranteed by Fannie Mae or Freddie Mac. Homeowners must be 90 days to 24 months delinquent, and have a first-lien mortgage that is at least 12 months old….

FHFA says the “key difference is that borrowers will not be required to document their hardship or financial situation, but will be able to accept a Streamlined Modification Offer by simply making the trial period payments and agreeing to the terms of the modification…. the bottom line is that documentation is no longer required.”  (“DeMarco Disappoints with New Streamlined Mod Program”, DS News)

Doesn’t this prove that Wall Street “owns” Obama?  Just think about it:  ”No doc” refis for underwater borrowers who have not made a mortgage payment for 2 years? And President Dumbass wants the US gov to guarantee these loans? Have you ever heard of anything more ridiculous in your life?

This is why housing prices are going up, because corrupt, carpetbagging public officials and their price-fixing allies at the Fed have moved heaven and earth to do the banks’ bidding and to make sure they don’t lose one red cent on their garbage stockpile of distressed homes.

The whole system is a joke.

By Mike Whitney


Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2013 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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