Increase in New Home Starts and New Home Permits – A False Signal?

Low Interest Rates Send False Signal to Home Builders

Are home builders receiving a false signal from artificially low interest rates causing them to build more homes than they can sell?

Home Builder’s False Signal.

Buy Gold Online

How To Buy Gold

JM Bullion

How to Buy Silver

The entrepreneur must estimate present and future costs and future revenues and therefore estimate whether and how much profit he will earn.” Murray Rothbard from Economic Depressions:Their Cause and Cure

Real Estate News

Yesterday we learned from the U.S. Commerce Department that the pace of construction of single family homes increased in August and building permits for new homes hit a five-year high. This data was trumpeted as evidence of “continued resilience in the housing market recovery.”

We are not convinced. New homes starts are still far below their historic norms because the total demand for homes is not robust as wage and job growth are non existent and in the words and recent actions of Federal Reserve Chairman Ben Bernanke, the economy is weak and would tank if interest rates were higher.

We wrote back in June that the supply/demand inventory shortage would reverse in part because home builders would increase output to meet the artificially stimulated demand. Yesterday’s housing starts report shows that prediction to have been correct.

Home builders are falling for the trap.

Low Interest Rates and Rising Home Prices Encourage Home Builders to Increase New Construction

Home builders are taking their cues, not from the health of the overall economy and the ability of their potential customers to buy homes, but rather from the cues sent by the Fed’s artificial manipulation of interest rates lower through Quantitative Easing (QE). This in conjunction with low for sale inventory has artificially stimulated demand and driven home prices higher and encouraged home builders to rush to meet demand.

Indeed, spec home building is on the rise across the country.

Taking business decision cues from the Fed may be sensible but its also dangerous because the Fed, while it has a great influence over the direction of interest rates, will not ultimately dictate the direction of interest rates, the market will – and that direction is higher.

There is a disconnect between rising home prices and the weak health of the economy. The continued weakness in the economy caused the Fed to acquiesce yesterday to the continuation of its $85 billion a month U.S. Treasuries and mortgage backed securities (MBS’s) buying program. More QE should mean lower rates (at least in the short term) because the Fed’s continued purchases of U.S.Treasuries and MBS’s artificially boosts demand for those securities and drives rates lower than the market, absent Fed intervention, would be willing to accept. Take the Fed away as a buyer of U.S. treasuries and MBS’s and rates rise.

We saw over the past few months that the mere talk by the Fed of tapering QE purchases caused interest rates to skyrocket and the Fed’s backtracking from tapering yesterday caused rates to plummet.

Liquidity Trap?

The Fed may find itself in the world’s most expensive liquidity trap in the coming months as interest rates may ultimately rise and economic growth remain stagnant no matter how many $billions of securities they may buy. That is the real danger for anyone investing, including home builders, based on the false signals that the Fed is sending by manipulating interest rates lower. Higher interest rates would be a disaster for the housing market and new home builders. Yet home builders are taking comfort in the still relatively low interest rates, the Fed’s ability to keep them low and incessant media reports that the economy is recovering.

The artificially Fed induced low interest rates are perhaps sending a classic false signal to home builders causing them to make “malinvestments” in Mises’ terminology or over investments in new construction during the current boom/recovery period.

Many home builders made this mistake in the early and mid 2000’s leading to this not so creative destruction of their own inventory:

2009 Southern California New Home Demolition

History has a way of repeating itself and those who don’t learn from the mistakes of the past are doomed to repeat them. This housing bubblet is happening just a few years after the prior housing boom went bust. Events that happened just a few years ago should hardly be called history, rather, recent memory.

Are the mistakes of recent memory being repeated? Will we see scenes like this again in our not too distant future?

Get Free Updates From Smaulgld.com

Subscribe to Smaulgld.com and get the free In Case You Missed Itweekly email as well as updates and analysis on gold, silver, real estate and the economy.

Also get the free report “Twelve Key Differences Between Gold and Silver” when you subscribe.






2009 Southern California New Home Demolition

Further reading:


Please visit the Smaulgld Store for a larger selection of recommended Kindles, books, music, movies and other items.

Or you can support Smaulgld.com by making all your Amazon purchases through the search widget below and by ordering your gold and silver by clicking on the JM bullion ads on the site:

Buy Gold and Silver

DISCLOSURE: Smaulgld provides the content on this site free of charge. If you purchase items though the links on this site, Smaulgld LLC. will be paid a commission. The prices charged are the same as they would be if you were to visit the sites directly. Please do your own research regarding the suitability of making purchases from the merchants featured on this site.

The content provided here is for informational purposes only. Making investment decisions based on information published by Smaulgld (SG), or any Internet site, is not a good idea. Accordingly, users agree to hold SG, its owner and affiliates, harmless for all information presented on the site. SG presents no warranties. SG is not responsible for any loss of data, financial loss, interruption in services, claims of libel, damages or loss from the use or inability to access SG, any linked content, or the reliance on any information on the site.

The information contained herein does not constitute investment advice and may be subject to correction, completion and amendment without notice. SG assumes no duty to make any such corrections or updates. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment. SG disclaims any and all liability relating to any investor reliance on the accuracy of the information contained herein or relating to any omissions or errors and as such disclaims any and all losses that may result.

Post Navigation