The Recovery is Worse Than The Recession
“A bad peace is even worse than war” – Publius Cornelius Tacitus, Roman Senator and Historian
We wrote here over the past several months that the air would soon start coming out of the housing bubblet. We noted that the temporary inventory supply/demand imbalance would soon reverse. We noted high levels of student loan debt and a poor jobs market producing mostly part time jobs would hamper any further housing sales and price appreciation.
We noted interest rates would rise because of the Fed’s taper talk (not because the economy was improving) and put further pressure on the real estate market. We noted Bernanke’s admission that the economy was weak and would tank without low interest rates.
We also noted that the supposed strength in the stock and real estate markets were not what they appeared and the employment situation was worse than it appeared. Stock and home prices were soaring but despite all the recovery talk, the economy was not recovering.
We were assured through endless Keynesian self congratulating that quantitative easing (QE) spawned a recovery that was underway and the worst was over. We thought such celebrations premature. We were told interest rate increases didn’t matter;the housing recovery would continue apace. We disagreed.
Finally we asked –can the housing recovery continue?
Last week we learned what we suspected all along – housing demand was not widespread and did not include individual home buyers in significant numbers. Goldman Sachs reported that more than 50% of the real estate market was being driven by cash buyers and speculators attracted by super low interest rates driven by QE.
On Friday last week July new home sales data was released and we watched it fall off a cliff. We were not surprised.
The recent run up in the prices of real estate have not been matched by any corresponding productivity, employment or wage growth – not even close.
Indeed, according to the Washington Post, U.S. workers’ wages did not grow at all during the “recovery” of 2010-2012. Another study conducted by Sentier Research showed household income dropped 4.4 % during the recovery!
The labor participation rate that measures the percentage of the population in the work force is at a thirty-two year low. People are working fewer hours and making less money while home prices are rising and the cost of borrowing is going up (check the mortgage rate chart to the right). Given that toxic mix, how can we expect home prices to continue to rise?
Perhaps another mega dose of QE might slow the rise of interest rates? Maybe not.
A better approach would be to allow interest rates to rise and let home prices fall. After all there many benefits of lower home prices, including home affordability. Endless Federal Reserve manipulation of monetary policy and monetization of debt prevents the economy from restructuring in a productive way.
We have just witnessed an expensive failed monetary experiment. The Federal Reserve embarked on a multi-year/multi trillion dollar money printing endeavor designed to driven interest rate lower so that people would buy more houses and thereby grow the economy. It didn’t work.
The Fed managed to engineer a mini housing bubblet of short duration that benefited mostly a small group of real estate speculators and drove home affordability out of reach for many buyers. These speculators ultimately may not benefit as one of the larger home buying companies, American Homes 4 Rent reported recently in their Securities and Exchange Commission public filing: “At June 30, 2013, we owned approximately 17,949 single-family properties, approximately 9,882, or 55%, of which were leased.” We wish them luck in renting out the remaining 8,067 homes in a timely and profitable fashion.*
A musical chairs economy of people moving in and out of existing homes can not drive an economy. The housing market should be reflective of the strength of the underlying economy, not the driver of it. If the economy is increasing production and people are working longer and harder and getting paid more, we will have a housing recovery. We won’t get that through continuing QE, tapering it or increasing the dosage.