Here's Why Housing Must Be Propped Up

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If housing tanks, the last prop under the veneer of middle class wealth collapses.

The Powers That Be have gone to extraordinary lengths to prop up housing by whatever means are necessary since the collapse of the housing bubble in 2008: the Federal Reserve has pushed mortgages rates down by buying mortgage-backed securities, the federal housing agencies (FHA, VA) have issued millions of low-down payment loans, and the federal government has essentially taken over the mortgage industry, backing 90+% of all mortgage loans.

Why is the status quo so keen on propping up housing? If we examine this chart of U.S. and Chinese household assets, we understand why Chinese authorities would be keen to prop up housing values--75% of China's household assets are in real estate. Meanwhile, U.S. household assets are predominantly financial:

So why are U.S. authorities going all out to prop up housing if it represents such a modest share of total household wealth? I see two dynamics at work.

The majority of household assets are owned by the top 10%, and this includes the majority of financial assets. The top .1% own 22% of all U.S. household wealth, the top 1% own 35% and the top 10% own 75%.

Households below the top 10% may have financial assets such as insurance policies, 401K accounts or pensions funded by employers, but a house is typically the largest store of value the household owns.

If you want to make the top 1% and top 10% happy, you prop up stocks and bonds. if you want to make the 60% of the populace who own a home happy, you prop up housing.

2. Housing is the only real source of the wealth effect for households below the top 10%.

As earned income has stagnated for secular reasons (automation, rising debt service, stagnating productivity gains, advantages of capital over labor, globalization/ wage arbitrage, etc. etc.), the Status Quo has attempted to compensate for this decline in middle class earned income with gains in unearned income/wealth via asset inflation-- housing being the major component of middle class wealth, and stocks/bonds to a lesser degree.

Unfortunately for the Powers That Be, their mechanisms for boosting asset prices (with the goal of generatingthe wealth effect in the middle class) also generate credit/asset bubbles.

These boom/bust cycles actually reduce middle class wealth as people buy at the top and then see their paper wealth plummet in the next crash.

This has left many middle class households either 1) too cash-poor to save money to gamble in stocks or 2) wary of investing in stocks. That leaves housing as the only possible "fix" for stagnating middle class income/wealth.

Housing doesn't just create paper wealth; it can also boost income--via HELOCs (home equity lines of credit), cash-outs followed by a move to a lower-cost region, reverse mortgages, etc.

If housing tanks, the last prop under the veneer of middle class wealth collapses. No wonder the Powers That Be are so desperate to prop up housing. But the bubbles and busts they've engineered are integral to credit/asset booms; their goal--a steady, permanent rise in prices that never falters--simply isn't possible.

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Looney's picture

Yellen is a Bubble-Blowing Banker Bitch with Baghdad Bob syndrome. ;-)

Looney

j0nx's picture

Housing will never crash again. You know how I know that? Because I'm renting and waiting on the sidelines with cash to buy a cheap house. That's why I know it will never crash again because fortune never smiles on me like that.

Collapsed_Elastic_Pants's picture

Maybe it won't crash, just do a downward slide. Sometimes that's more satisfying in the end. It's like "FUCK YOU FORTUNE......I WIN!!!!!!!"

 

This time.

eatthebanksters's picture

If TPTB would have just let the market normalize back in 2008 we'd have gone through some pain and be out of trouble...but by kicking the can down the road they've only made it worse.  The tools of manipulation, other than helicopter money, are pretty much gone.

Panopticon 131's picture

If the endgame of Globalism is placing the western nations' living standards roughly on par with the rest of the world, then keeping housing prices and other essentials inflated relative to income levels would be an objective.  Makes the average person even more strapped to buy essentials, reduce their consumption in preparation for Agenda 21 rationing and national debt collapse ("restructuring" IMF style). 

Buck Johnson's picture

Exactly, they say how will the world end not with a bang but a whisper and that is how the artificial house prices will end in a whisper.  They will continue to slowly go down and people will be stuck with a mortgage worth more than the house. 

 

doctor10's picture

BS article

Housing is the last remaining relatively un-molested collateral for the banks. They ALL detonate 100% when housing collapses

if the prices tank-the property tax base evaporates-the muni-bonds then blow out

the wage slaves will have less incentive to continue to be worker bees for the tax- slave state if housing becomes priced to reality.

 

Unfortunately, the loss of freedoms a debt-infested surveillance slave state creates, basically prevents the spontaneity and creativity a society requires to generate real wealth. Hence the "circling-the-drain" phenomenon we see all around us.

RaceToTheBottom's picture

MTWDA=

Mark To Wet Dream Accounting......

debtor of last resort's picture

I think that's what the article is about doc. You just wrote part 2.

CoolidgeLives's picture

Coming soon: Jingle Mail; part 2

pods's picture

I think it is more about the debt Charles. Housing is a very good source of churnable and increasing debt for our money system.

Student loans as well.

pods

Gilnut's picture

With such a large portion of the so-called Middle Class one paycheck from being broke, how long can this last?

ToSoft4Truth's picture

Position yourself so you aren’t one paycheck from being broke.  When the next downturn occurs scoop up houses on the cheap and rent them back to the former owners.

Gilnut's picture

I can't compete with Blackrock  :-/

giggler321's picture

very true, now anyway but remember blackrock is like all the others and when their pillars of strength disappear like the banks over night, they to will be holding nothing

Son of Loki's picture

My Dad's former house is still 450% over its 2002 price.

 

he built it in 1996 for $265k.

 

Crazy stuff. He says it's not worth this currect price.

world_debt_slave's picture

yep, went out with a relator today and looked at some properties, same here in the midwest, buy and flip, also rents are skyrocketing, between a rock and a hard place. oh, and wages don't go up

Hopeless for Change's picture

I can't wait to invest in the next bubble!  I wonder what they'll roll it into....

gatorengineer's picture

Idotic article, they are destroying 100K a year jobs which are required to prop up housing.  Nothing is being done to prop up housing.

Give me a NIRP mortgage to make late payments on, then we will talk.

pods's picture

If you miss a payment on a NIRP mortgage do they fine you like -1% of your monthly payment?  

That's gold Jerry!

corporatewhore's picture

once you lose your job and you get experience with financial devastation, you're not going to want a house ever again

j0nx's picture

I got stuck underwater in a house in a hood that went section 8/illegal alien rental hell during the last crash. 5 long years it took me putting up with that shit before I reached par and sold it. I swore I'd never buy another one again but the wife is putting pressure on me now. I keep telling her it will crash and we can buy one on the cheap and it never does. Personally I don't think it ever will again, certainly not like 2008.

corporatewhore's picture

patience, in this world that wants it NOW, is an extremely valuable commodity.  I'd say this bubble will be worse than 2008 because the replacement jobs that will be available once the layoffs cascade will all be at a lower wage than prior to the layoff.  Layoffs trigger loss of homes.

Sages wife's picture

Clearly. It will be epic, and I'm ready.

Gilnut's picture

I'm lucky.  I work IT for the bank that owns my mortgage.  If I get laid off I just walk away.  Fuk 'em.

Hopeless for Change's picture

Thanks for the French Flag in my screen, ZH.  Shouldn't it have a crescent moon and Venus star on it?

 

sheikurbootie's picture

WTF.  How many people do you know that are mortgage free?  This is to prop the banks up, not the fucking mortgage holder.

the grateful unemployed's picture

in the final outcome very few people will own their own homes, what the refi bubble did was extend mortgages out on the curve past the lifetime of the homeowner in some cases, who might just as well turn it into a reverse mortgage at 65 if there is any equity left. if you are fifty and have a fifty year mortgage you are renting. the fed would like to issue 50yr bonds, i think the Japanese do this already, but its bad PR so they just extend mortgage debt indefinitely, who knew permadeficits would become a feature of microeconomics

aliki's picture

truely is fuggin sad. anything to make people feel better. my state of NJ just popped the highest for foreclosures. if they raised rates, they'd turn a frail housing market into a 2nd time shattered one.

2thepeople's picture

private equity will not stand for a dent in their real estate portfolios, even if they got the money for nuthin, and the chicks for free. And THAT'S why we cant have a dip in the housing market.

lesterbegood's picture

All bank loans are fraud. All of them.

 

Sudden Debt's picture

But how high can you prop it up before nobody can actually buy them anymore?

Knowing that the everage employee makes about 1.5 million dollar in his lifetime if they work they entire productive life?

 

PTR's picture

1.5 mil?  The only SFH going up in my area ARE 1.5 mil homes.  (after tearing down 750k SFH and 2-flats.)

 

I'm seeing the definition of insanity with my own eyes.  The grandkids will never believe me.

Atomizer's picture

Foreclosure rate exceeds 60%. Mortgage banking industry has turned into house flippers. 

Keep up allotment of NAR new mortgage, run quarterly swing uptick. Reinstate through properties gone into receivership to rebuild a housing market demand. 

Receiverships in the Foreclosure Action - LexisNexis

Collapsed_Elastic_Pants's picture

I'm not seeing much propping in the northeast. I've been watching home values decline for some time now. And I don't mean off 2006 highs. Haven't seen much of an increase in rental prices either. Must be because I'm not a statitician or economist. 

insanelysane's picture

I actually heard a bank ad on the radio the other day saying that homeowners should come to the bank and check to see if they qualify for a home equity line of credit since housing prices are up.  Not sure which bank but it was in south eastern Massachusetts.  The ad said use the money for things like college tuition.  WE ARE TRULY SAVED!

SillySalesmanQuestion's picture

How are they going to prop housing up and what with? Cards, popsicle sticks, gingerbread and magical unicorn dust...inquiring minds want to know.

adr's picture

Chinese cash buyers.

If you try to buy a house outside Boston you'll need to compete with 100 Chinese buyers willing to pay over asking price and forego all inspections.

SillySalesmanQuestion's picture

@ adr Thanks! That's a stunning fact figure... That there is still that much "hot money" from China, looking for a "home."

Collapsed_Elastic_Pants's picture

Don't forget sugar and spice. And everything nice.

Atomizer's picture

This why we didn't proceed on buying in Palm Beach Island. My wife agrees now. Just wait and sit back. That 5 day stay in Boca Raton, the jewville city opened my wife's eyes. 

adr's picture

Home built in 1998 in shitty middle of Massachusetts town, Price $128k

Home goes up for sale in 2015, Price $345k

 

Average starting salary of my profession in 1998, $55k

Average starting salary of my profession in 2015, $32k

 

hmmmmmmm. Might be a problem there.

Hopeless for Change's picture

Why bring something as insignificant as math into this?  Rhetoric and hope are all that matter.

MASTER OF UNIVERSE's picture

Wall Street makes us think that only rhetoric & hope matter, but in reality we all know that only moar hookers n' blow matters, eh.

Atomizer's picture

The second number is too increae property taxes for the city to spend, invest, pay off current debt obligations, or squirrel away for piggy bank money saving on longer term infrastructure improvements. 

MoHillbilly's picture
MoHillbilly (not verified) adr Oct 15, 2015 12:01 PM

32k x 2= 64k

64k is larger than 55k

Got It?   Or are you lazy?

Don't worry about the wife, kids or a life , you can text them on break

orangegeek's picture

housing prices and employment are well correlated

 

so we have pockets of high real estate prices - where the higher paying jobs are

 

and when tech tanks, that should take care of the housing bubble in short order

 

keep buying AAPL yellen you fucking satanic cunt!!!

gcjohns1971's picture

The Fed still owns $1.7 TRILLION of MBS's that were already in default before banks transferred them to the Fed.

There can be no end to QE while those MBS's remain outstanding, for the simple reason that their default would evaporate a larger-than-$1.7-TRILLION in US currency...which would make many other loans UNPAYABLE (not enough money in the system to pay them), which then would also default, repeating the contraction of the money supply, and lead to debt contagion.

EVERYTHING they have done is to delay (but worsen) the symptoms, while exacerbating the underlying disease.  The disease is 'TOO MUCH DEBT FOR AN ECONOMY TO SERVICE".  It occured because the interest in those debts compounded faster than technology could compound productivity, leading to a situation where investment in productivity advances and business expansion had to be cut to continue servicing the debts.

The debts are both governmental and private.  Both back currency in circulation.

2008 happened when it was revealed that the debts could not be repaid, hence all the currency created based on those debts had to be written down.   But the contraction of the money supply to do this honestly was so extreme that it would lead to, essentially, ALL DEBTS becoming unpayable (because as each debt defaults it evaporates an amount of currency equal to its face value plus unpaid interest).

So, our current situation is one in which debts will not be paid, because they cannot be paid.   The 'flexible' currency designed in the 'Gilded Age' of the 19th Century to allow fractional reserve banks to sell the same depositor money to multiple loan applicants while simulatneously promising it to the depositor has reached its logical conclusion.    Now it is the national banks and currencies that are bankrupt.

And perhaps they don't know what to do.  Or perhaps they do, but simply can't do it yet.  Perhaps they are waiting for Gold Leases to be returned.

REGARDLESS,

The solution is that these debts must all be written off or the international monetary system will collapse in a way it never has collapsed before.  Bankers will be forced to surrender their preferential position in politics and government...or they will face liquidation by the very nature of their business.

Because the ONLY THING that can provide an ORDERLY transition to a new monetary system is a financial asset that does not depend on existing debts and currencies for its existence - commodities of some as of yet to be decided (or maybe already decided?).

What needs to happen is the commodity needs to be revalued UPWARDS such that it can back a replacement currency while the former debt-based currency system clears.

There is MATHEMATICALLY NO WAY TO CONTINUE THE PRESENT SYSTEM.  

What are they waiting for?

For concensus on the selection of the commodity?

For consensus on the needed higher price?

For return of the commodities, which have likley been leased to market for long terms?

Who knows?

But only one way leads out of this mess without total monetary system collapse.

MISES was right.