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Pushing On A String: The Fed's Spectacular Failure To Stimulate Housing
Submitted by David Stockman via Contra Corner blog,
The “incoming data” was disappointing again yesterday - this time the culprit was housing starts which were off by 17% from January. But please don’t blame the “weather” again.
The data below is for single family starts which are less volatile than apartment construction. At an annual rate of 593k units in February they were almost exactly flat with last February at 589k. If memory serves, the second month of 2014 was the epicenter of last year’s famous Polar Vortex—–meaning that winters happen but this year’s tepid results cannot be blamed on a winter that was not as bad as the real bad one.
Besides that, the seasonal adjustments are supposed to factor in weather—especially the possibility of snow and cold in the Northeast. On the considerable chance that the seasonals are screwed up, however, just consider the raw unadjusted, unannualized numbers for the month of February. During the coldest winter in recent times last year, the actual number of single family starts during the month was 40,600. This year it was 40,700. You need a microscope to tell the difference!
Fortunately, it is not the hairline gain from last year that’s the real story in today’s downbeat housing numbers. What we have here is another powerful case of the Great Immoderation. That is, the havoc that the Fed’s bubble finance policies have visited upon the main street economy.
So sticking with the raw unannualized numbers for single family starts, go back to the turn of the century and you will find the monthly number for February 2000 was 88k or more than double the current rate. Then, by the top of the Greenspan housing bubble in 2005—which he had ignited to dig his reputation out of the dotcom bust and tech wreck—-the February number had soared to 124k. After that it rolled-over sharply and then finally imploded to a low of 25k in February 2009.
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. To wit, by a factor of 5X from top to bottom—so far this century.
Maybe its time to take our chances with the good old unseen hand of the free market. Surely, it could not do worse than the gyrations shown below.
The above graph not only puts a stake in the Fed’s pretensions about its prowess as an plenary economic manager from its perch in the Eccles Building; it also obliterates the case for QE. The obvious starting fact is that when SF housing starts were booming prior to the financial crisis there was plenty of Fed stimulus, but not massive QE. By contrast, during the period between 2009 and 2014, the Fed purchased nearly $1.8 trillion of mortgage backed securities and debt issued by Fannie, Freddie and Ginnie.
That is not only a huge number, but in a relative sense it was ginormous. It amounts to more than 30% of the $6 trillion of GSE obligations outstanding. And it goes without saying that if you buy 30% of anything and are willing to pay the highest price the market requires——which is exactly what the Fed’s massive “bid” for GSE’s amounted to—-you will drive the price substantially above free market levels; and in the case of mortgages, yields will plummet inversely into sub-economic territory.
As shown below, that is exactly the result of the Fed massive bond buying program after March 2009. During that period it bought $2 trillion treasury notes and bonds, driving down the benchmark rate for all other debt including mortgages. And then it piled on top of that massive intervention in the government debt markets another layer of intervention. Namely, the $1.8 trillion of GSE’s in an effort to squeeze down mortgage rates even further by reducing the historic spread between treasury’s and government guaranteed housing securities.
Sure enough, the average yield on 30-year fixed rate mortgages was nearly cut in half before the “taper tantrum” blip upward in the spring of 2013.
So why are SF housing starts still churning in the sub-basement of the historical range after all of this direct intervention in the mortgage market and heavy-handed interest rate repression? After all, the mortgage rates shown above represent bargain prices if there ever was such a thing. At the low point in early 2013, the after-tax-and-inflation yield to an mortgage investor would have been a mere 80 bps.
The reason that all of this financial repression—-and its corollary punishment of investors and savers—-did not spur a housing boom is, in a word, that the US economy is not a giant bathtub. The Keynesian model says pour “demand” into the housing market through what amounts to cheap, subsidized interest rates (from the hides of savers) and, presto, activity rates will soar.
Moreover, this is an all seasons formula. It doesn’t matter, apparently, where you stand in terms of prior history and borrower and lender balance sheet conditions; or what constraints might arise from structural factors such as household formation rates and the condition of the housing stock and its current utilization and occupancy rates. Just pour in the demand stimulus until the housing bathtub is full to the brim.
In fact, the Greenspan boom negated the Bernanke bond-buying binge. There was too much idle housing stock from the Greenspan bubble—–nearly 20 million unoccupied units including seasonal and vacation homes. There were too many households with impaired credit or underwater mortgages which couldn’t trade-up into demand for new construction of high value units. And unlike the past, there were millions of young families that could not provide demand for lower-priced “starter” construction units because they were burdened with student debt or ineligible for mortgage financing owing to unstable job and income circumstances.
So despite what amounts to a tidal wave of mortgage finance stimulus, new construction has remained in the sub-basement of history. Keynesian policy is all about the GDP accounts—–that is, about stimulating new spending for anything—-yet nominal spending for new housing construction is still at anemic levels.
So where did all the stimulus go? In a word, it went into the refi market where it drove up the price of the existing housing stock, not into the financing of new construction and GDP. Like everything else the Fed does, this was a redistribution game, not a growth stimulant.
But even within the wholly inappropriate realm of central bank induced redistribution the results were capricious at best and deeply unfair in fact. Thus, the “refi” benefits did not go to the 35 million households who own their homes free and clear. If anything, they ended up with the tab as savers earning next to nothing on their deposits. And it obviously didn’t go to the nation’s 40 million renters, nor the 25 million or so houeholds who are still underwater on their mortgages or so close to breakeven that they can’t generate the brokers fees and down payments to access the refi market.
No, the whole misbegotten enterprise of financial repression in the home mortgage market delivered a wholly unearned windfall to 10-15 million of housing equity-rich and more affluent households which were able to ride the great Bernanke “refi” train during the last six years.
That’s random redistribution with a vengeance—a level of social caprice that even the most vacuous Capitol Hill politicians could not have dreamed up. Good job pushing on a string, Fed.
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Could be worse, we could get cut off from the rest of the globe in June...
Oh, wait.
The minute the "financial engineers" transformed housing from a place to live, to an investment, it was doomed. The money men put their claws into the only valuable tangible asset that every family needs. From that point on, it had to be blown sky high into a great investment because of the ongoing need for a positive return, instead of looking at housing as a way of life, peaceful place to raise a family, enjoy friends, and relax.
The financialization of the most basic of needs, only because it's a highly valued fixed asset that can be "traded", was the start of this mess and the need for higher returns ensured a housing bubble of epic proportions. And it's far from over.
Everything has been tried so now that we've rinsed it's time to repeat.....
Or Johnny Kohn's very own 10 year old bicycle could break down in Geneva where he's ... Wait a minute. The US taxpayer is footing the bill for him to ride his own bicycle in Geneva? Wait? What am I missing here? A public servant takes his own bicycle to Geneva on our dime? What's wrong with this picture?
Oh well, he's privileged.
Maybe we can discuss race relations at Starbucks.
Like how come the Muzzies get to sell women as sex slaves and behead Christians because it's their practice but I can't even say nigger?
I guess I'm too sensitive or something.
I pulled on a string one time and ended up with a nasty tampon...true story.
I will be awaiting that check for my replacement keyboard and beer. I won't charge for the emotional scarring from the imagery, or the burning sensation in my nasal cavity.
Pushing on a string my ass. The crooks took the money and ran with it. Anybody know where Corzine is.
The article lost me when there was no mention of Blackstone and the other Housing Bubble 2.0 bad actors. The FED "stimulated" just the part of the housing market they desired, the flippers and rentiers got their pound of flesh via the FED.
In soviet USSA, the string pushes up your ass.
where IS Magoo when you need him? Not fucking Andrea Mitchell, no way. Oftern wonder what people like him and bernanke are doing at the moment.
Pushing rope = too drunk to fuck. Can't get 'er done.
The so-called "broken window" fallacy postulates that an economy can be stimulated by economic activity focused on replacing that which is destroyed by governmnet maleficence and crimes.
The FedRes practices and applies a form of that theory, the "stolen window" fallacy. They plunder the economy and hope that replacement economic activity stimulates the economy to cover their thefts.
The banksters need to repay us.
Is that a guillotine in your pocket, or are you just happy to see a bankster?!
Notice how the residential construction spending basically flatlines in 2014---contrast this against the BLS data showing residential construction employment steadily growing in 2014. This relates to one of Tyler`s recent posts on BLS data.
How does the residential construction industry employ more people while spending the same amount? How do you square that circle?
More evidence of BLS rigging to achieve a goal-seeked Fed narrative....
The end must be near, I see huge commercial projects going up and there is empty commercial real estate buildings right fcking beside them. One in particularec very near to my locale is a strip mall with maybe 10 stores, new since 2008. Empty for years and is only up to 30% occupancy now. I think the developers are piling on while they can.
The Keynesian model says pour “demand” into the housing market through what amounts to cheap, subsidized interest rates (from the hides of savers)
Sure enough! Keynesians believe stealing from honest workers and savers is the key to stimulate demand. Well they can fuck off, all that is is subverting the foundation of capitalism. Capitalism is work, followed by saving, followed by investment, followed by wealth creation, followed by economic growth and jobs.
The idea of this is too much for the Fed, who have better ideas involving theft, to benefit a certain class of real estate speculation.
Capitalism is work, save, invest, and then get free money (steal) from the labor of others. It's no better. If it were possible to have a free market, eventually a few powerful corporations would own everything. Yes, in theory anyone is free to compete with them, but in reality it's very difficult to compete with someone who is far larger and more efficient than you. Those at the top have a huge advantage over those at the bottom.
But it's absurd to think that a free market is possible. There's no way to stop people from lying, cheating, and decieving one another. That's the system we have in reality, and it's not worse than capitalism (probably better). At least in reality the little people with no other recourse have a way to fight back by using force and deception.
Two things happening in my neck of the woods.
First off, there are buyers galore and no inventory, because the average homeowner is scared shitless to move, one way or the other. The only security they have is where they are.
Second, any new housing starts here take 4 years (give or take) from conception to finished product.
It is what it is.
US realestate, both retail and business, is aiming at following Japan and surprisingly china.
We are building office buildings with no possibility to rent them...
It didn't work because the QE wasn't big enuff...MOAR!
Reality must be made to fit the models.
Salt-N-Pepa - Push It
http://www.youtube.com/watch?v=vCadcBR95oU (4:26)
Salt-N-Pepa - Shoop
http://www.youtube.com/watch?v=4vaN01VLYSQ (4:09)
I think we should blame it on too low interest rates and high humidity.
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It would seem to me that the simple process of gathering economic data was the beginning of the downfall of capitalism, the true capitalism, such that with 'economic statistics' the 'economists' were able to 'view' the economy.
I wonder if that coincides with the rise of Keynesian and market interferrence by government? After all, only government would have the resources to create such data gathering?
And people being people, what they are… Dickheads… They thought they could screw with it, and make it more betterer.
My hypothesis.
What would happen if we stopped gathering economic data, and hence, couldn't interject any of the obvious Keynesian BS that an economist would be wont to do, upon viewing the statistics, and the arrogance that accompanies the Keynesians?
Just a thought.
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V-V
Should've just titled the article "The Spectacular Failure of the Fed". There. Fixed it for ya.
It is all about jobs. There are not enough good, decent pay, stable jobs. For the housing market to take off, we need the young guy/woman or family to have a decent job where they feel confident enough to enter the market. That in turn opens it up for the established homeowner to move up to a bigger, more expensive house. But the good jobs aren't there. No matter how hard the Fed tries to massage the unemployment numbers, the true numbers are a lot of parttime work and that just isn't going to make it happen.
Everyone got their loan when they were giving them away and are happy and sitting pat even if under water.
They are never selling because they would never qualify for a loan now.
God damn that is a sucess.
Everyone else are the ones in never never land.
Yeah buy a house now with price close to the crash price right be right on that. In case you do not know even if you paid me with a negitive rate I still would not buy.
Tell you a little secret why were not selling you know what we bought with the free loans the prime locations dumb asses.
And their kids who a living in a crack shack that cost 500,000 they will move into mom and dads prime location mcmansion as soon as they pass so even after the owners die those houses are still not coming on the market heck even the crack shack will be rented not sold.