How important is housing to the American economy?
If a 2011 SMU paper entitled "Housing's Contribution to Gross Domestic Product (GDP) quot; is right, nothing moves the economic needle like housing. It accounts for 17% to 18% of GDP.
And don't forget that home buyers fill their homes with all manner of stuff—and that homeowners have more skin in insurance on what's likely to be their family's most important asset.
All claims to the contrary, the disappointing first-quarter housing numbers expose the Federal Reserve as impotent at influencing GDP's most important component.
The Fed: Housing's Best Friend
No wonder every modern Fed chairman has lowered rates to try to crank up housing activity, rationalizing that low rates make mortgage payments more affordable. Back when he was chair, Ben Bernanke wrote in the Washington Post, "Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance."
In her first public speech, new Fed Chair Janet Yellen said one of the benefits to keeping interest rates low is to "make homes more affordable and revive the housing market."
As quick as they are to lower rates and increase prices, Fed chairs are notoriously slow at spotting their own bubble creation. In 2002, Alan Greenspan viewed the comparison of rising home prices to a stock market bubble as "imperfect." The Maestro concluded, "Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole."
Three years later—in 2005—Ben Bernanke was asked about housing prices being out of control. "Well, I guess I don't buy your premise," he said. "It's a pretty unlikely possibility. We've never had a decline in home prices on a nationwide basis."
With never a bubble in sight, the Fed constantly supports housing while analysts and economists count on the housing stimulus trick to work.
2014 GDP Depends on Housing
"There's more expansion ahead for the housing market in 2014, with starts and new-home sales continuing to rise at double-digit rates, thanks to tight inventory," writes Gillian B. White for Kiplinger. The "Timely, Trusted Personal Finance Advice and Business Forecast(er)" says GDP will bounce back.
Fannie Mae Chief Economist Doug Duncan says, "Our full-year 2014 economic forecast accounts for three key growth drivers: an acceleration in spending activity from private-sector forces, waning fiscal drag from the federal government, and continued improvement in the housing market."
We'll see about that last one.
Greatest Housing Subsidy of All Time Running Out of Gas
With the central bank flooding the markets with liquidity, holding short rates low, and buying long-term debt, mortgage rates have been consistently below 5% since the start of 2009. For all of 2012, the 30-year fixed mortgage rate stayed below 4%. In the post-gold-standard era (after 1971), rates have never been this low for this long.
The Fed's unprecedented mortgage subsidy has helped the market make a dead-cat bounce since the crash of 2008. After peaking in July 2006 at 206.52, the Case-Shiller 20-City composite index bottomed in February 2012 at 134.06. It had recovered to 165.50 as of January.
However, while low rates have propped up prices, sales of existing homes have fallen in seven of the last eight months. In March re-sales were down 7.5% from a year earlier. That's the fifth month in a row in which sales fell below the year-earlier level.
David Stockman writes, "March sales volume remained the slowest since July 2012." He listed 13 major metro areas whose sales declined from a year ago, led by San Jose, down 18%. The three worst performers and 6 of the bottom 11 were California cities. Las Vegas and Phoenix were also in the bottom 10, with sales down double-digits from a year ago.
This after housing guru Ivy Zelman told CNBC in February, "California is back to where it was in nirvana." Considering the entire nation, she said, "I think nirvana is not far around the corner… I think that I have to tell you, I'm probably the most bullish I've ever been fundamentally, and I'm dating myself, been around for over 20 years, so I've seen a lot of ups and downs."
Housing Headwinds
Housing is contributing less to overall growth than during both the days of 20% mortgage rates in the 1980s and the S&L crisis of the early 1990s.
In Phoenix, where home prices have bounced back and Wall Street money has vacuumed up thousands of distressed properties, the market has gone flat.
In Belfiore Real Estates' April market report, Jim Belfiore wrote, "The bad news for home builders is they have created a glut of supply in previously hot market areas… Potential buyers, as might be expected, feel no sense of urgency to buy because they believe this glut is going to exist indefinitely."
Nick Timiraos points out in the Wall Street Journal that with a 4.5% mortgage rate and prices 20% below their peak, "… homes are still more affordable than in most periods between 1990 and 2008." So why is demand for new homes so tepid? And why have refinancings fallen 58% year-over-year in the first quarter?
"Housing's rocky recovery could signal weakness more broadly in the economy," writes Timiraos, "reflecting the lingering damage from the bust that has left millions of households unable to participate in any housing recovery. Many still have properties worth less than the amount borrowers owe on their mortgages, while others have high levels of debt, low levels of savings, and patchy incomes."
More specifically, "So far we have experienced 7 million foreclosures," David Stockman, former director of the Office of Management and Budget, writes. "Beyond that there are still nine million homeowners seriously underwater on their mortgages, and there are millions more who are stranded in place because they don't have enough positive equity to cover transactions costs and more stringent down payment requirements."
Young people used to drive real estate growth, but not anymore. The percentage of young home buyers has been declining for years. Between 1980 and 2000, the percentage of homeowners among people in their late twenties fell from 43% to 38%. And after the crash, the downtrend continued. The percentage of young people who obtained mortgages between 2009 and 2011 was just half what it was ten years ago.
Young people don't seem to view owning a home as the American dream, as was the case a generation ago. Plus, who has room to take on more debt when 7 in 10 students graduate college with an average $30k in student loan debt?
"First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly," Fed Chairman Ben Bernanke told homebuilders two years ago.
There's not much good news for housing these days. For a little while, the Fed's suppression of interest rates juiced housing enough to distract Americans from weak job creation and stagnant real wages. Don't have a job? No problem! Just borrow against the appreciation of your house to feed your family.
But Yellen's interest rate wand looks to be out of magic. The government had a pipe dream of white picket fences for everyone. But Americans can't refinance their way to wealth. Especially in the Greater Depression.
Read more about the Fed’s back-breaking economic shenanigans and the ways to protect your assets in the Casey Daily Dispatch—your daily go-to guide for gold, silver, energy, technology, and crisis investing. Click here to sign up—it’s free.


Next Stop Dow 17,000!!!!!!
When I saw the post title "Yellen's Wand", I was worried Tyler had crossed into the adult website space.
Bullish.
I've heard this over and over for the last 5 years. I call bullshit. There are plenty of trillions left to invent.
I don't think Yellen gives much of a shit about the economy. None of these people ever did. I think her magic wand is working better than ever. She has followed up the Bernak and actually is winding down QE, letting the air out of the retarded momo bubble, all while the indexes crack through new highs.
we will muddle along a while, probably have a few large 'corrections', and our debt will keep creeping up as our population ages and our labor force participation rate drops. Eventually, we will do what japan did, since our central planners never learn their lesson. They will unwind QE, and the fed will probably even let interest rates creep up a bit, which will destroy housing, since no one these days can afford 6-7 % on a 30 year mortgage. then, probably 8-10 years from now, they will pull some kind of Abe-nomics type shit, and that will signal they have finally gone full retard. QE at japan levels would mean around 200 billion or so a month. thats why i watch japan, since i think thats where we will be in another 10 years or so. Not saying everything wont go to shit eventually, I just think it will take a lot longer than most on here
I agree about Japan. It certainly is the global canary. But I think from here until there it is all about trying to keep your head above water and staying sane while you watch others around you disappear below the surface. It's freaky.
Only happen that way if the $ remains GRC.
I rate that at about a 10% chance with the damage both
Benspankme, and Obozo have done/are doing.
Tick tock.....
what is going to replace it? im not defending the USD, but what viable alternative is there? despite what many on here seem to think, china is a shitshow, and so is their currency. same with the euro. and no govt is going to willingly go to any kind of gold standard, it cant be printed or conjured out of thin air, which is why we left the gold standard in the first place.
The gold backed BRICtm for international trade.
A transnational GRC . An eastern SDR if you like , administered by their new competing world bank.All the
west has to offer is debt ,so why include it ?
That's where we are headed IMO.Its the only thing that will
work.No one nation should or will control the GRC for a long time going forward.
no one nation may not control it, but it would require a central bank, which would be run by the same people who run ours now. it isnt just western nations who offer nothing but debt, thats all any big govt has to offer. borrowing money against future generations. my 7 month old was born with 100k debt, and he cant even walk yet. none of the BRIC nations want a gold backed currency that they can't print, same reason why none of the '1st world' currencies are backed by anything. even if no one nation controled this new world currency, some nameless/faceless group of central bankers would, which would be no better than what we have now
To what extent is a reserve currency needed? Individual countries can do individual quasi-barter deals like Russia and China are doing with many 'partners'. This won't dispense with the GRC but would entail a sharp deop in its share of world trade. Same thing in the end if it goes far enough.
In the global and interconnected economy in which we all live, we are all Japan mate.
When Japan blows, we all blow. End of story.
When China blows, we all blow, End of story.
When the Eurozone blows, we all blow. End of story.
World War III is all these mother fuckers know.
We need to dispose this world of men I think.
So in other words....MISSION ACCOMPLISHED
Plenty of magic left in those ink wells, bowaaa, shazzam, powwwaa - instant GDP growth!
Yellen's magic wand couldn't stimulate this dried up economy if it was filled with D batteries and set on Hillary.
The Dildozer from Idiocracy couldn't stimulate Hitlery.
Even if the Panted One were drinking Brawndo with all them electrolytes?
Housing is off because close to 17% of mortgage are in default still or just underwater and unable to arrange a shortsale. That equates to a large chunk on the buying public out of the game. The boom requires churning and you must not decrease the number of buyers. We have broken the rules required of every bubble. The FED is so inept it cannot even inflate a bubble it created by mistake.
Chinese buyers were 80% of home sales in Irvine ... for cash.
http://www.doctorhousingbubble.com/cash-buyers-reach-record-level-of-all-home-purchases-at-over-42-percent-80-percent-of-all-sales-over-past-year-in-irvine-went-to-buyers-from-china/
It's like that in New York also.
The only ones buying houses, Jewish and Chinese people and some Russians.
I would say 10% Jewish 70% Chinese 20% Russian.
It seems there is some kind of government plot to prop up the housing market by bribing other countries to come here and buy worthless land at inflated prices.
Remove the Chinese buyers, and housing prices in NY would be down 45% atleast, all the deals are ALL CASH (with cash under the table).
The Chinese come here open 20 Chinese restaurants, pay no taxes and buy your house all cash, while you the asshole works and hands 60% of your money over to some bureaucrat who will use it to play golf and do blow with hookers.
Americans are losing their houses while foreigners come and scoop them up all cash.
Then the Americans will be stuck holding a worthless bag of Fiat.
Then the Americans will work in Chinese slave camps in "Red" detroit.
Maybe its running low on Fraud, not magic.
When banks have committed every crime in the book, you eventually run out of laws to break.
Peak Criminal.
great link, thanks..
"The bankruptcy terms allows Berkshire Hathaway and Ocwen to purchase over $400 billion worth of mortgages and RMBS trusts for less than $5 billion"
Better than get rich quick.
let's just be thankful she keeps that thing in her pants while she's in public, ok?
Take Texas out of the picture, and housing comes into real focus. A pile of bad news is still a pile of bad news, no matere how much perfume you put on it. Top it off with the inept Fed, and this ain't gonna end well, except for the .1%
Low rates have minimal effect on monthly payments because they are immediately arbitraged to the asking price.
Yellen'$ Wand, metaphor much?
Janet Yellen has been head of the Federal Reserve bank long enough that we no longer need to speculate as to her job performance. As we begin to critique her ability to perform we must remember perception is often just as important as reality. Another issue that comes into play is how you stack up or compare to the person who held the position previously, this often extends to style as much as it does to substance.
As expected it appears Janet Yellen has chosen to take us down the same the rabbit hole as Bernanke on a journey to prove that if we just continue doing what is not working, all will turn out fine. More on Yellen as the head of the Federal reserve in the article below.
http://brucewilds.blogspot.com/2014/05/yellens-job-critique.html
"Plunk your magic twanger frogeeeeeee!"
Buster Brown
Oops, she doesn't have a "twanger"!
Yes she does.
I have owned an apartment complex for many years and we are currently experiencing the largest number of vacancies we have ever had. Many houses in the area are empty or under leased. In 2005 and 2006 prior to the housing collapse many people were looking at second homes, for investments or as a vacation getaway.
Today not only have many people shed the extra home many have doubled up with family or friends reducing the need for housing. We are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. We have a shortage of "qualified" buyers and renters. More on how low interest rates are hurting housing in the article below,
http://brucewilds.blogspot.com/2013/12/super-low-interest-rates-disservi...
What part of the country is the complex located?
Shrinking GDP in Q1 hasn't stopped rampapalooza since then.
Oh please......if the gov't had a dream of 'white picket fences for everyone' they were 20' tall white electrified fences heavily fortified with barbwire. Fuck the US gov't.
Yellen probably tried that magic wand up her butthole the first time she got her hands on it.
Can't wait for all those Chinese, Russian buyers to move in to their new digs....just in time for SHTF time. It will be fun watching the roving gangs drag their sorry asses into the street and loot the places for copper wire and anything else they can salvage. I'm out in the boonies in fly over country . . . too bad I won't have a front row seat for it all. The grid will probably go down and there won't be any live coverage of the mayhem. That sucks.
I don't know about her wand but her mirror sure is taking a beating.
The article alludes to one thing I keep seeing. The young lady in my office and her financee have been looking all over Seattle suburbs to buy a house. When they find one they are immediately blown out by a cash buyer.
So this young couple will not be stocking their new or used house with Ikea crap, appliances, carpets, etc. since they are priced out. There are in fact just the people you want buying into the 'dream' (aka nightmare) that has the add on effect of future spin off buying and also raising a family (more buying, more churn).
I have heard this same story a 100 times in the last couple of years from others. In effect all the Benny Bux have so overloaded the top tier with disposal sums that the young and restless are stuck in their apartments.
Financee. LMFAO...That typo was PRICELESS!
Not necessarily a typo. Multiple meanings are actually a sign there is intelligence here at the Hedge.
The purpose of "lower interest rates," which is to say counterfeiting, is not to "improve" the housing market or the "economy" in any way.
Counterfeiting is just a ruse for those who produce nothing to steal from those who produce anything, therefore, the purpose of lowering interest rates is theft as a means for crooks to support their usurped livelihoods.
Casey Research, you've been baited and hooked by accepting the terms of tyranny.
Please spit the hook out of your mouth.
Another sign the middle class has been dismantled.
Struggling malls suffer when Sears, Penney leave - Yahoo Finance
Her magic wand needs new batteries. And you DO NOT want to know where her magic wand has been...
Greater Depression, Tyler? How about The Great Gestation?
Yuck Fellen!
Here is the problem with real estate.. The cost of maintaining it.. Young people are already strapped with college debt.. do they really want to get involved with plumbers and electricians whose costs have skyrocketed? (no inflation)Gas and Electrical bills? Home insurance?
Not to mention real estate taxes.... In a suburb of chicago, a house going for 250k has a real estate tax bill of 8500!! So college debt goes to teacher pensions.. Real estate taxes goes to municipal pensions... and Obamacare forced insurance payments goes to ....?