The Housing "Recovery" In Four Charts

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The unintended consequences of the Fed's unprecedented interventions will rip the heart and lungs out of the housing market

The housing "recovery" since 2010 can be summarized in four phrases: diminishing returns, unprecedented central state/bank intervention, unintended consequences, end-game. Three charts from our friends at Market Daily Briefing and one of the Case-Shiller Home Price Index tell the story.

Let's start with what we all know: declining mortgage rates, mortgage securitization, poorly regulated/unregulated no-document, no-down mortgages, easy credit policies of the Federal Reserve and massive Federal subsidies of housing and mortgages fueled an unprecedented housing bubble from 2001 to 2007.

The index of major housing markets rose from 80 to 227--a staggering 280% rise in a few years.
The housing bubble was a classic Ponzi Scheme. A recent article in Scientific American explains that Ponzi schemes do not require a fraud--all they require is the belief that another buyer will pay significantly more for an asset than we did: The Whole Economy Is Rife with Ponzi Schemes (subscription required; look for the June issue at your local library).

This bubble dynamic needs nothing more than a supply of greater fools willing to pay substantially more for assets that haven't changed qualitatively or quantitatively, and our expectation that the supply of greater fools is endless.

Alas, the number of people willing and able to borrow immense sums to buy more houses eventually falls below the number needed to sustain the bubble, and the bubble promptly implodes.

The Federal Reserve responded to the bubble collapse with unprecedented intervention to prop up housing values: the Fed dropped short-term interest rates to near-zero (i.e. ZIRP, zero-interest rate policy) and bought roughly $2 trillion of mortgage-backed securities in two waves. (That's about 20% of the entire U.S. mortgage market.)

In this chart, we see the original housing bubble and the echo bubble blown by the Fed's unprecedented interventions.

The home price index is now roughly 130% above its pre-bubble levels.

Not unsurprisingly, the housing market responded to the end of the Fed's first wave of mortgage buying by tanking. The Fed quickly launched a second monumental wave of mortgage purchases, and this corresponded to a renewed surge in housing prices.

A decline of just over 2% in mortgage rates helped push the housing bubble to insane heights. The Fed's unprecedented interventions pushed mortgage rates lower by almost 3% at the bottom, and housing prices rose by about 20%.

That's called diminishing returns: The Fed has pulled out all the stops in its support of housing (as have the Federal housing agencies such as FHA), yet housing managed only a weak 20% expansion on the back of this extraordinary, multi-trillion-dollar manipulation (oops, I mean intervention).

The Fed's policies of unlimited liquidity and zero-interest rates have generated an unintended consequence: the super-wealthy financiers closest to the Fed's money spigot can borrow money to buy housing at absurdly low rates, while regular home buyers have been largely frozen out of the market as a result of 1) bidding wars with all-cash investors desperate for yield in a zero-rate environment and 2) banks that have tightened lending standards as rates have plummeted and risk has finally been priced into the housing market.

(Recall that virtually the entire mortgage market is Federally backed/subsidized; in effect, the mortgage market in the U.S. has been fully socialized, with taxpayers on the hook for all the debt guaranteed by Federal agencies.)

The echo bubble is entirely driven by all-cash purchases by investors desperately seeking some sort of yield in a Fed-engineered low-yield economy via rental housing. Investors driven to extremes by the Fed's interevention are the greater fools, and the supply of these greater fools is finally diminishing. Once the pool of greater fools evaporates, the echo bubble will burst, just like the initial bubble burst.

Meanwhile, back in the real world where mortgages are serviced by earned income (wages and salaries), the ratio of mortgage debt to wages/salaries is still roughly double historical ratios. The debt/wages ratio rose in the go-go years of the dot-com stock market bubble, as rising wealth encouraged the belief that higher debt levels would be offset by rising income and stock market wealth.

But the current ratio is still 35% higher than the late 1990s.

Now we discern the end-game: the pool of greater fools is evaporating as prices reach nosebleed territory and newbie rental-housing investors discover houses and renters have all sorts of real-world issues that paper wealth doesn't have. In other words, that promised 6% net yield is not guaranteed, but is fraught with risks-- especially in a recession, where renters stop paying and the pool of renters able to pay sky-high rents dries up.

Since average wage earners are effectively frozen out of the market, that leaves current homeowners who are selling and "moving up". Oops: 20% of all homeowners are effectively underwater and cannot sell/buy another home. Housing debt still traps 10 million Americans.

The returns on the Fed's unprecedented interventions are diminishing, the pool of greater fools is shrinking, households are either underwater or frozen out of the market, and the economy is supposedly healthy.

So what happens when investors lose their appetite for housing? What happens when the economy slips into recession? What happens when the Fed's purchases of mortgages slacken or end?

The whole echo bubble is based on unsustainable extremes of interest rates, central-planning intervention and investor fantasies that the supply of greater fools will never decline. If history is any guide, rates will rise (albeit modestly), the economy's "recovery" will end in recession, the Fed's manipulation will cease having any positive returns while the unintended consequences of the Fed's unprecedented interventions will rip the heart and lungs out of the housing market.

Jason Burack of Wall Street for Main Street and I discuss the changing nature of work, jobs and entrepreneurial skills: Charles Hugh Smith: Entrepreneur Skills A Must for Any Job (34 min, YouTube)

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LawsofPhysics's picture

And the real kicker is that none of the fucking "arsonists" who profitted immensly from all of this have gone to PRISON!

Are you paying attention Timmy?

CrashisOptimistic's picture


The definitive housing recovery chart.

50 million more people in the country buying the same number of houses as the 1960s.

Spastica Rex's picture

Off the lows!

Oh, boy! Things are lookin' up, Up, UP!

I Write Code's picture

That's new houses, plenty of old ones around especially "old" ones built 2007-2009.

CheapBastard's picture

Please note: Hank Paulson and Mozillo were not harmed in the making of this article.

BeetleBailey's picture

Had to laugh at this - on Yahoo (as I checked the weather)

An anonymous bidder paid $70,500 to have lunch with former Fed chairman Ben Bernanke. Who's your dream lunch date?

This poll is expired

  • Hillary Clinton (858)
  • Elon Musk (1490)
  • Donald Trump (786)
  • George Soros (352)
  • Yahoo's Jeff Macke (622)


Osmium's picture

Deep down, I think you know the answer to that question.  Yes, yes they are.

JJdog's picture

must be all the clowns from CNBC 

JustObserving's picture

My dream lunch date is when all of the above idiots are at least 10,000 miles from me.  But placing them on the dark side of the moon would be very good - except it would make it darker.  A galaxy, far, far away would be best - I would pay for that.

Headbanger's picture

Nahh.. My dream lunch would be a barbeque with them being launched into the sun!

TheEndIsNear's picture

There is no "dark side" of the moon, only the far side that never faces Earth. The far side of the moon is illuminated just as much as the side facing Earth.

Cognitive Dissonance's picture

"The pool of greater fools is endless, just like our ability to create 'money'." - Greenspan Bernanke Yellen

TideFighter's picture

The new dead-of-night IRS ruling to not allow small businesses to put their employees on the health insurance exchange, or pay $36,500 per employee if they don't, will certainly improve wages and help people buy homes. /S

Seasmoke's picture

After watching Gold collapse once again. I am now getting pissed off at every ZeroHedge headline that is posted.

It must be good news , that the TPTB are close to breaking me. I am taking it out on ZH.

Mission Accomplished or Light at end of tunnel ??

Spastica Rex's picture

To you offer you some hope -

Once I lost it, it only took a couple of years to realize that it wasn't that great, anyway.

I'm happier now with far less stuff, no status, and few friends. If somebody offered me a free ticket back to the middle class for only a promise that I would resume the behaviours of a good American consumer, I would decline.

Dingleberry's picture

They could afford it...if they gave up their smokes, 40's, cable, smart phones, monthly nail job, quarterly tattoo shop visit, and dope.


garcam123's picture

Boy, What a wonderful life you are proposing.....Let's see.....I've got a low wage shit sucking job working for an overbearing piece of shit, somewhat more wealthy than me.......I live in a tenement with roaches and trash all over, and no air conditioning.  I don't have a TeeVee anymore because I couldn't afford one. So I sit here in this rathole with nothing to do, but try and think of ways I can change my conditions, because it's such a wonderful existence!

When I do go out on the street, I see the big cars of all of the "wealthy" people zoom by, like there goes the doctor and his nurse/sexratary riddin by on their way to the country club.  Oh yes and thre goes the Banker with his squeeze.....and.....and....what's that I smell coming out the window?  Is that reefer?  Oh, Hell!  They're doin some lines too!


Boy what a great life they have.  I've either got to do something to turn this shit around or kill myself.

I think before I go, I'm taking some of these motherfucker with me!

That's how it'll go down, dingleshit, and you're probably the one living in the tenement!

You're so smart that you think you're on to something.......Fuck you asshole!

donsluck's picture

Correct. Society is devolving into have, have-nots and the ever increasing angry white random mass-murderer.

N2OJoe's picture

Decreasing mass murder, check your stats.

Just because it fits the media's narrative and they have wall-to-wall coverage anytime something like that happens, does not mean it's happening any more than it used to. It's actually becoming less and less frequent.

minosgal's picture

'So I sit here in this rathole with nothing to do...'


Not for nothing, but I still like the public library...any book I ask for, they mail it to my house. We should keep that, in the economy built on the other side of all this.

Bay of Pigs's picture

Housing BOOM?

Look northward to Canada if you want to see an even more ridiculous situation (sky high prices and lots of greater fools).

steelrules's picture

Bay o pigs,  you couldn't be more right, I drive by our Costco or the biggest regional mall in my area no matter what time of day the parking lots are full, the people up here think Canada's doing great, but if not they figure spend like a drunken sailor and and it'll all work out. 

You show them in the 2013 Federal budget where the government made it legal to steal your deposits and turn them into bank assets and they look at you with a dumb blank look on their faces like your the stupid one.

I've fuk'n given up trying to warn anyone, if all goes as planned I'll be mortgage free this year, I'll have zero debt business or personal and my safe is full of firearms, silver and ammo.

I believe most Zerohedge members post here in some small part to put out a warning, I believe most are good hearted people and don't like to see others suffer. To those I say quit wasting your time look after yours and your selves.

Time is getting short!   

CheapBastard's picture

Bay o Pigs...check out Australia where the median house price in their 10 largest cities is a whopping $653,000!

agstacks's picture

All I know is I will be punished for not playing along.  I am fully expecting my idiot, banker brother to get a giant write down on his priniciple after housing collapses and they roll out new programs to keep it afloat.  It will be funded by the average taxpayer becuase "we're all in this together." FML

hidingfromhelis's picture

Best dog training advice I ever heard was, "You get what you pet."  Applies to lots of other situations as well.  Our leaders (criminals themselves) reward irresponsibility and criminality at every level and punish responsibility.  Nobody should be surprised by the results.

I Write Code's picture

Please draw a 5% inflation line across the chart, or discount prices 5% a year.

corporatewhore's picture

please let me know when the collapse will occur so i can time my mortgage application to take advantage of this development.

I know it's imminent because i have an itch to buy

starman's picture

but good news is home equity loans are back again! now you can refy your home and by a vacation home and have money left  for a new Range Rover! "recovery"

CheapBastard's picture

Nah....use the Student Loan money for that Rover....then you can use that equity for more iPads and a much needed anti-Fuki Thyroid shield for thyriod cancer and a lead helmet for that neuroblastoma ... but sadly, that won't do much to protect your bone marrow from leukemia...


Oh well, two-out-of-three ain't bad.  Can't have it all.

corporatewhore's picture

maybe by then they'll perfect the smallpox or polio to eradicate the cancer.  best novel thinking since the boondoggle war on cancer began.  if only more scientists could step back from all they've been trained and rethink approaches.


Ban KKiller's picture

STILL living in my house for only taxes, insurance and upkeep. I am fighting the banksters and their scumbag attys as you may know. I asked for sanctions against the plaintiff and their attys for submitting a forged document into open court in the lame foreclosure attempt. OUCH! So...scumbag attys made a motion to withdraw. I argued, in my brief, that they can not withdraw just because I caught them lying to the court. I love fukking up the banksters and their idiot attys. How? They have no clear chain of who, what, where, when and how did they get the alleged note/deed/mortgage? Hmmm? What? Securitized with Wall Street and in their greed they never followed the Pooling and Servicing Agreement? TOO fukking bad! 

My housing recovery is going just fine!

honestann's picture

Good luck.  Those predators deserve whatever harm and pain you can deliver... and infinitely more.  However, beware judges-in-cahoots.