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The U.S. Housing Market Recovery Is Fabricated Optimism

Housing-Market / US Housing Mar 26, 2015 - 10:36 AM GMT

By: Money_Morning

Housing-Market

When I moved to Sarasota in 1999 I was invited by a prominent local to an "un-wedding wedding" to make new friends in town. I accepted the invitation and, not wanting to display my ignorance, avoided asking the burning question, "What's an un-wedding wedding?"

Inevitably I found out what an un-wedding wedding is. It's a full-blown wedding, only the host isn't actually getting married. They want to get married but aren't, and go through the motions anyway.


The truth about the manipulation of celebratory events to fabricate optimism about a desired future reminds me of the state of housing in America today. Here's why…

Celebrating Housing Market's Recovery Is a Mistake

There's no reason to celebrate anything in the housing market's un-recovery recovery.

Past and present manipulations must be continued to prevent collapse, but they won't help economic growth in the United States as they did until 2000. Instead they'll only act as a headwind from time to time.

Take February housing "starts" for example, they were down 17% from January. The annualized single-family starts number for February was 593k units, which was essentially flat from the year-ago February 2013 starts number of 589k.

According to the Commerce Department, "Start of construction occurs when excavation begins for the footings or foundation of a building." David Stockman, the former head of the Office of Management and Budget in the Reagan administration, says slow starts aren't as much weather-related – although February 2013 and 2014 were especially cold months in the East – but about swings in interest rates.

At his DavidStockmansContraCorner.com site in a column titled, "Pulling on a String: The Fed's Spectacular Failure to Stimulate Housing" Stockman explains:

"The seasonal adjustments are supposed to factor in weather," said Stockman. But the raw unadjusted, non-annualized starts number for February 2014 was 40,700. In February 2013, it was 40,600. In 2009, it was 25,000. In 2005, starts were 124,000 and in 2000 they were 88,000 units.

He makes the case that rather than weather being the reason starts fluctuate so much over the same month of different years, Federal Reserve manipulation of interest rates has caused the wild fluctuations.

"In short, in the name of improving upon the alleged instability of the private economy – absent the Fed's expert ministrations – the geniuses in the Eccles building have actually caused the rate of housing starts to gyrate wildly," said Stockman.

Stockman goes on to say that the U.S. economy isn't analogous to a giant bathtub, as Keynesians might suggest, as pouring, "demand into the housing market through what amounts to cheap, subsidized interest rates (from the hides of savers) and, presto, activity rates will soar."

That hasn't happened.

Residual Free Market Props Are Suppressing the Housing Market

New home sales in February rose 7.8%, to a seasonally adjusted 539,000 units. That's the the best number for new home sales in seven years. Still, according to a graph on the NAHB's website, new single-family home sales going back to 1978 shows that current levels of sales are barely approaching 1980 levels. They are more than 50% below average sales from the period between 1980 to 2006.

While new home sales, which make up one-tenth of home sales, on the surface looked robust in February, existing home sales rose a scant 1.2% according to the National Association of Realtors.

That's what I call an un-recovery recovery, or a bum wedding.

Free market capitalism wedded to democracy yields a living, changing economic system that thrives on creative destruction and withers under socialist-style command and control. The Federal Reserve's interest rate manipulations over the past 20 years only prove they are incapable of fostering natural growth in the economy.

The Fed never should have been allowed to manipulate rates so low for so long to inflate the housing bubble in the first place. Fannie Mae and Freddie Mac had to be bailed out, but by now should have been dismantled. They're backing more mortgages now than ever before.

While two governments and the Fed couldn't let the financial system implode and Too-Big-to-Fail insolvent banks eat their own poison, everybody should have by now worked together to have broken up Fannie Mae and Freddie Mac once they were back on their feet.

What people forget is the Fed and the government helped bailout builders after the crash.

Turning to a May 6, 2010, Reuters article, "Bailed Out Homebuilders Collect Fat Paychecks," author Helen Chernikoff quoted Moody's economy.com chief economist Mark Zandi saying, "Without the government's support, in all likelihood we would have seen more failures among the builders. It's almost hard to list all the things that have been done to support homebuilding either directly or indirectly."

Then the Fed, with a wink and a nod from successive government administrations went on a $2 trillion treasury-buying binge to effect their ZIRP, or zero interest rate policy.

And to prove no matter how much money they throw at housing they are hapless, the Fed bought $1.8 trillion of mortgage-backed securities to narrow the MBS over Treasury spread to try and make more mortgage money available.

That didn't work.

The Takeaway

Without a so-called "clearing mechanism" that balances home sales and rental rates based on supply and demand against free-market interest rates reflecting real-world risk and returns in the U.S.'s $16.8 trillion economy, not only won't the housing market ever fully recover, the economy won't either.

Like an un-wedding wedding, the housing market's un-recovery recovery is a sad state of affairs.

Source :http://moneymorning.com/2015/03/25/cnbc-is-hazardous-to-your-financial-health/

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