Sucker Punch On Main Street - Disturbing Facts About The Fed's Phony Housing "Recovery"

Tyler Durden's picture

Submitted by WallStreetExaminer's Lee Adler, via Contra Corner blog,

Whether you think there has been a housing “recovery” or not is a matter of perspective. Sales are indeed up 117% since the 2010 low, but that low was literally the worst level in the history of this data (since 1963) as a percentage of population growth. It was the Great Depression of Housing, the only possible result of the greatest housing bubble since the 1920s, if not in history. While sales have rebounded since that low, the current sales rate has barely recovered to the levels seen at the recession lows of 1991 and 1982. This rebound is little more than a dead cat bounce after 6 years of recovery, and now it may be faltering.

Mainstream economists give the Fed credit for stimulating this “recovery.” But, in fact the Fed has created a Catch 22 with no way out. The only thing the Fed has stimulated is house price inflation while destroying interest income on savings for millions of ordinary Americans, especially former middle class retirees. With mortgage rates pushed down to all time lows, house prices have consequently inflated at a rate that offsets the buyer’s savings in the interest component of the mortgage. Meanwhile American savers have lost not only massive purchasing power, but also have been forced to consume principal. The Fed has not stimulated sales but it has succeeded in transferring wealth away from those who can least afford it to those who least deserve it.

Had mortgage rates stopped falling at higher levels, house price inflation would have been stunted. More of a buyer’s mortgage payment would have been apportioned toward the higher interest component of the payment and less toward inflating the purchase price.

But the Fed got the result it intended. It wanted to inflate prices to save the banks from their stupidity and criminality. Decisions were made at the highest levels of the Fed and the Federal Government to not only let the banks off the hook, but to rescue them. The only way to do that was to forego prosecution of massive criminal wrongdoing, and to engineer price inflation, so that the criminal perpetrators of the fraud that drove the Great Bubble would be free to re-offend.

Thanks Fed For Helping The Average Guy- Click to enlarge

The Fed’s claim of trying to help the typical consumer is hogwash. The benefits of the low interest rate policy have flowed only to the upper income strata. In our monthly updates of our “Thanks Fed For Helping the Average Guy” we see that the chance of the “average guy” to buy a new home remains virtually nil. Not only has there been no recovery in homes priced under $200,000, sales in that price range have essentially disappeared in spite of the world’s major central banks pushing mortgage rates down. Builders no longer have any interest in producing product in that price range because demand has weakened so much at that level. People at the reported median US household income simply can’t afford to buy houses regardless of the fact that they may be borderline qualified.

Prior to the housing crash, most new homes sold were in the under $200,000 price range. Since 2007, mortgage rates have been cut nearly in half. Yet production and sales of homes in the under $200,000 range have continued falling, now down 61% since 2007.

Builders have shifted their efforts to the $200-$400k range, where they still have some margin, and can move enough inventory to earn a profit. The higher the price of the home, the more profitable it is for a builder. Unfortunately, homes priced above $230,000 are beyond the reach of households earning the reported median household income of $56,000, a figure which itself we believe is overstated. Because of central bank driven housing inflation, and suppression of household income growth (also partly attributable to ZIRP) home ownership is increasingly out of reach for an ever growing percentage of US households

If monetary policy were helping the housing market, the rate of homeownership should be at least stable. Instead, as mortgage rates have been consistently suppressed since 2007, homeownership has fallen concurrently.

Mortgage Rates Vs. Home Ownership Rate - Click to enlarge

The problem is that as the Fed and its cohort central banks have been busy pushing down long term interest rates, that has pushed house prices up so fast that there has been no increase in affordability.

Median New Home Sale Price Vs. Home Ownership Rate- Click to enlarge

During and after the 2007-2010 crash, homeownership fell due to the massive increase in foreclosures. The foreclosure crisis began to recede in 2012. Since then the drop in the homeownership rate has not been because of people losing their homes, it has been because fewer people can afford to purchase, even in spite of the world’s central banks subsidizing buyers with absurdly low interest rates. As we’ve shown, the subsidy is self defeating. It does not benefit buyers.

Meanwhile, the only US regions that have seen any rebound at all in new home sales have been the West and Southwest. The Northeast and the Midwest remain absolutely dead in the water. In the Northeast, sales are down 60% relative to the 1991 recession low. Let that sink in for a moment–not versus the bubble peak, but since the low of a recession 25 years ago, when the US population was 25% less than today. Sales in the Midwest are down 12.5% since the 1991 low.

New House Sales By Region- Click to enlarge

Lest you think that the West is going great guns, its sales are only up 8% since 1991. That is in spite of US population growing by 25% in those 25 years. The West has grown even faster– 45% since 1991.

The issue in the West is an ever growing affordability crisis. It too is largely driven by the central bank interest rate subsidy of the past 8 years. It has reignited a massive housing bubble throughout California, the nation’s largest housing market. Tiny 3 bedroom bungalows in the suburbs of San Francisco now go for more than a million dollars. Absurd.

Finally, the South has seen a surge of 35% in new home sales since 1991. But that’s is less than half the population growth of 72%. A long term demographic-geographic shift drives growth in the South. This trend has gone on for decades. Fed policy has nothing to do with it, other than to inflate prices.

Notably, even after recovering from the 2007-09 crash, all regions remain well below the levels of the 2001 recession low.

The argument that the Fed policy of ZIRP and suppression of long term interest rates through QE bond purchases has stimulated housing simply does not hold water. It has stimulated house price inflation, and that price inflation has fully offset the cost-reduction effect of the interest subsidy to home borrowers. At the same time Fed policy has cost millions of savers trillions in interest income that could have boosted not only consumption,  but also cash available for down payments on home purchases. The idea that low interest rates stimulate the economy by stimulating housing is The Big Lie.

The Fed has created a situation where the housing industry is so dependant on the massive interest rate subsidy that any uptick in rates is likely to cause a cataclysm. The Fed and its cohorts are responsible for this mess. They have left themselves, and us, with no way out.

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order66's picture

Mortgages with only $1,000 down now being advertised on Colorado radio. What could possibly go wrong?

SomethingSomethingDarkSide's picture

Try listening to Rocket Mortgage commercials in New England.. *cocks gun, shoots self in face*

Paul Kersey's picture

As I posted on the 25th:

Low interest rates push home prices. It's the low interest, Government backed mortgages that are causing the financialization of house prices. Bring mortgage interest rates back to 8%, where they were in 2000, before the "Greenspan put", and a $300.000 house payment would be over $31,000 per year PITI. Today, at the current rate of 3.25, that same loan payment would be slightly over $20,000 per year PITI. Also, the average new house size in 2000 was 2,266 SF. Today, it is 2,467. That 200 square foot difference, at $125 a square foot, adds another $25,000 to the price.

Location is also a big factor in house prices. We sold our parents' house in 2006 for $570,000 (they paid $65,000 in 1963, new). It is now being offered for sale for $502,000. If mortgage interest rates went back to their historical average, the whole US housing market would collapse and prices would be in the toilet.

That said, it is also those interest-free loans to corporations, allowing them to buy back their stocks, that has kept stock prices high. If corporations had to borrow at an historic level of 6%, the stock market would also crash and burn.

The Fed, at all costs to the public, will continue to work to keep asset prices high and the bondholding class from ever losing principal.

SomethingSomethingDarkSide's picture

*cocks other gun, shoots self in stomach*

monad's picture

Comey isn't a role model. Show some enthusiasm for your work.

dizzyfingers's picture

"...the whole US housing market would collapse and prices would be in the toilet.

It's inevitable; the mainstream of the boomers haven't yet had to sell their homes. It will happen. Then, buyers' markets.

Younger folks, keep your wallets in your pockets, and your pockets zipped. Wait. Nothing is sacred about owning a house except for the real estate tax you'll pay for so many other peoples' retirement benefits. Houses own us, not the reverse.

seek's picture

Everything is in a bubble. (With the possible exception of PMs, but I bet they drop along with everything else when things implode because no one will have liquidity to buy them.)

The CBs have guaranteed a collapse of absolutely epic proportions.

asteroids's picture

Sadly, I believe you are correct. Stay in cash and wait for the implosion. If you sense that even cash is no longer King then buy PM's, quickly.

Dan'l's picture

Better have 20%+ in PMs now.

pitz's picture

Some stocks would do well in a higher rate environment.  For instance, low rates act to create more capacity in some sectors, which make it hard for any of the participants to profit.   Wherever credit is being sprayed has probably incurred losses because of the Fed.  The key to investing these days is to find those dark corners where there has been no Fed participation, or even dis-participation.  For this reason, the precious metals miners look extremely attractive as the sector has very minimal debt. 

f_symbols's picture
f_symbols (not verified) Paul Kersey Sep 28, 2016 5:26 PM

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... http://tiny.cc/gn1afy

Osmium's picture

I accidentally butt dialed a mortgage last week.

corporatewhore's picture

damn... i just looked up these housing finance authorities giving out the down payment assistance and I don't qualify./sarc--I'm working.

 

I can't find anything liveable based on the wages which  are limited to very low income--like poverty level.

stocker84's picture

do you know how you know that the FED is so full of crap and that the federal government is so full of crap when it comes to numbers and pretty much everything else it's because everything they say is positive the economy is doing great the numbers are great for doing you guys a favor by giving you low interest rate Everything Is Beautiful now if the Fed was in fact an honest entity it would eventually have some bad numbers I'm not talking about the revised ones at any rate I'm driving and doing speech to text so I apologize if it's not entirely clear but I'm sure you got the gist of it

 

so in a nutshell the way we know that the federal government and the FED is lying to us is using some common sense in determining that all the numbers that are coming out are great and we have a recovery and believe me if we had a recovery they be saying we're at a surplus

 

funny thing is that they lied in 2008 and said everything is beautiful maybe they weren't there wouldn't have been a mass and this wouldn't have happened it's too late now fed.....it's too late now federal government...you've made our bed and now we have to lie in itand you're also forcing us to believe that it's a comfortable bed meanwhile it's just a dirty grimy sheet laid over some hay

j0nx's picture

Um 200k house sales have slowed because prices are so damn high now there are NO houses under 200k that anyone wants to live in. Duh. New townhouses in the DC area 30 miles from nowhere are $425k. For a fng townhouse that has an hour commute to work each way! Ridiculous...

venturen's picture

msybe you missed the news...when housing market was imploding...the Treasury and FED gave trillions to the richest most crooked banks and funds...they bought up all the housing...then rented it back to those without houses.... Never allowed it to naturally bottom. That is why rents are CRUSHING THE NEXT GENERATOIN! Bernanke and Yellen and Geithner and Lew should be SHOT! Throw paulson in there as well!

Dg4884's picture

A bit off topic, but I saw a Nissan commerical doing BOGO.  No shit!  buy one, get one for free.  We are so fucked!

aliens is here's picture

In my area builders are building 4 rows of 3 level townhomes with no yard, just packed tight together for $350K. Just think about it 350K for a TH. You have to be dumb to spend that money for that.

markitect's picture

Maybe in a highly dense inner city near major employers, like SF, NYC or Chi but out the burbs or anywhere normal, forget it.  Ive noticed this too when visiting relatives outside Richmond.  Theres new developments going up that are like mini cities with everyone packed in.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) aliens is here Sep 28, 2016 4:08 PM

Ewwwww. Sharing a wall with a neighbor. Been there, done that, never again.

chopd livr's picture

yep. try 1.35 M townhomes in my zone SF Bay Area. 40yrs old to boot. awesome.

Dan'l's picture

UN Agenda 21 & Obama has shoved us into the life as rat for our future.

you enjoy myself's picture

The last paragraph sums it up nicely.  Houses are only "worth" their current value because of the greater fool theory.  Every prospective buyer should ask themselves one question: would this house still be worth the ask if the average 30yr mortgage was just 6%?   Because locking in a nice low 3.5% rate now on a grossly inflated principal is only worth it if your resell value holds up across decades.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) you enjoy myself Sep 28, 2016 4:11 PM

My 3.5% fixed rate loan is assumable (if the person is a qualified party). One of the benefits of a VA loan. Great selling point once rates go up.

pitz's picture

The lender will probably go out of their way to make sure nobody is 'qualified'. 

YesWeKahn's picture

Bernanke can finally sell his house for he money he wanted, sucker

bjax's picture

Break it already. It's the only way anything is ever going to change. What goes up, just DOES come down, so let's get on with it, grow a pair .... and just pull it !! Then in ten years, I may be able to buy a hovel in some broken down town in the middle of nowhere, for a decent price. Maybe.

bornlastnight's picture

OT: CONGRESS HOUSE JUST VOTED TO OVERTURN OBAMA VETO 349-75.

THE BROWN CLOWN JUST GOT CROWNED. EVEN HARRY REID COULDN'T PREVENT IT.

CONGRESS IS REALLY WORRIED ABOUT THE ELECTION, I SUPPOSE.

gregga777's picture

Congress had best be worried about their own necks.

newbie vampire's picture

"CONGRESS IS REALLY WORRIED ABOUT THE ELECTION, I SUPPOSE."

We can't keep having MORE of the same.

It is insanity.   Trump should emphasize that.   He has got to get the message thru.

gregga777's picture

Goldman Sachs' Feral Reserve System has succeeded in transferring $ trillions away from those who can least afford it to those who least deserve it.

#BANKERSLIVESDONTMATTER

HANG
EVERY
BANKER

gregga777's picture

Goldman Sachs' Feral Reserve System is the largest private housing owner in the world by virtue of their $ trillions in mortgage backed securities holdings. The last thing it wants is for homes to be affordable. Trump should emphasize that massive and criminal conflict of interest.

#BANKERSLIVESDONTMATTER

HANG
EVERY
BANKER

south40_dreams's picture

Never have we been so overwhelmingly rich with data. And never has that data been of such a low quality as to be virtually unusable

Mallus Darkblade's picture

Mort = Death

Gage = Pledge

 

 

 

dizzyfingers's picture

The only way to win one's game is not to play the other guy's game. Therefore, to rein in the Fed, avoid mortgages. Eventually, like retail, the housing market will cool. It already has cooled in some areas, but if people avoid house shopping for several years, or a decade or more, it will go moribund. Happened to retail, it can happen to housing, but shoppers have to be resolute.

Nuff said.

gregga777's picture

I'm just waiting for all of these insane asset bubbles to burst and for the S*** to really hit the fan. Starving people aren't going to listen to reason, on the laughable assumption that the Intellectual Yet Idiot classes can even spell "r-e-a-s-o-n". I'm just going to sit back and enjoy listening to the all of the lame excuses as the status quo criminals are led to the gallows and guillotines.

If you have a strong stomach it should be hilariously entertaining to hear the KKK (Klinton Krime Klan), the Bush Krime Klan, the banking gangsters, the Con Street Swindlers, the crony capitalist conporate criminals, the neoconservative war criminals, the mainstream media & entertainment oligopoly propaganda whores and the various and assorted political parasites all screaming:

"It wasn't my fault!",
"I tried to stop it!",
"I'm really one of the people!",
"I'm innocent!"
"I'm a woman of the People!",
"I was the first black President!",
"I was against the [Iraq] War after I voted for War!",
"I never gloated 'We came, We saw, He died' about Qaddafi!",
"They made me read their lying propaganda on the nightly news every night!",
"I knew that everything the government said was lies!",

I'm saving my popcorn for the greatest show in world history.

Dominus Ludificatio's picture

The average purchase price of a car is $33k and you expect people to build and sell a $200k house  

DaveA's picture

I'm still glad I bought a foreclosed house with my inheritance last year, even if it is in an economic dead zone. You can't live in a pile of money, nor will it be good for much else when the Fed finally overcomes deflation.

Hohum's picture

The Fed won't overcome deflation.

DaveA's picture

Zimbabwe defeated deflation, why can't we?

pitz's picture

Houses go to zero, or near to it, in hyperinflation. 

AgLand's picture

Hyperinflation is more of an event, not a continual process.  It can always be ended by a central bank any time it chooses.  there will be no hyperinflation in the US as we owe our debts in our own currency.  Financial represssion will continue...

DaveA's picture

In a rural area you can still grow vegetables and meat around your "worthless" house. But it takes time to get things going -- I've had rabbits for four months, chickens for three, and nothing to show for it but manure. You can't just wait until the collapse, then drive out into the country and buy a fully-functioning farm for a few gold coins.

newbie vampire's picture

It is NOT just housing.   The fact is there is NO RECOVERY.

The Fed should have left interest rates as they were.  Then we would have seen creative destruction.   What is the point of keeping zombie corporations and underwater real estate investors on life support ?

Had creative destruction taken place, we would NOW be seeing a true recovery with new corporations, investments and jobs in industries from genuine investors who had benefited.

After 96 months of ZIRP, we are still on life support.

 

 

CJgipper's picture

The better view of things is price versus income.  There are two ways out - price drop, income increase (or meet in the middle with prices falling some and incomes rising some).  

I have hope that Trump's economic plan will begin to increase wages.  IF he is elected and his plans implemented, then MAYBE we can avoid part of the pain.  Maybe.  Hillary?  Food, water, and lead are your best investments. 

JailBanksters's picture

But there is a way out, all you have to do is pull the plug on Jewish Central Banking Crime Syndicate