Is it possible that the Federal Reserve, despite all of its protestations to the opposite, really hates the housing industry? Could Bernanke and the rest of the Fed cronies not only be totally incompetent, but actually have a vendetta against the middle class? Is there any evidence that the Fed is out to absolutely destroy the housing market even as it professes to be trying to save it.
And for proof, here’s a little Economics 101.
The housing market is a commodity market. Producers create an asset whose price fluxuates according to two factors. The first is consumer interest. The second is credit. Even in the “worst” credit markets, consumers can frequently create bidding wars for housing – for select locations, unique properties or investments that have a significant potential of upside over time. At the same time, during the “best” credit markets, consumers can simply be uninterested in the inventory on the market. For example, 1 out of 5 buyers in the last few years (and next few) was a Baby Boomer; and they aren’t in the least interested in 4 bedroom, 3 bath with one acre of yardwork. Of course, builders make more profit if they build larger homes (or so they think) and that didn’t stop them from overbuilding that segment. Yet condos still sold hotter, faster, during the boom than did McMansions in many markets. In other words, even with cheap money available to borrow, consumer interest in a commodity is still a factor.
So what does that have to do with today’s “crisis” in housing? Look at the two factors: First, consumer demand is actually stable: it may be on a longer purchase cycle in some cases, but the evidence suggests that people are still buying and selling properly priced, interesting homes (ie., with the features the buying segment desires) with little problem. Many properties are selling in normal 3 to 6 week periods. And while many sit around for months, it’s not because of lack of interest: it’s more like mis-management of their offering. Just as nobody is going to call their broker today and offer $82 a share for Bear Stearns when it’s value is more like $5 a share, so, too, will everyday buyers not offer $50,000 extra on a home whose value continues to decline.
Now, the question becomes, why is the housing marketing value continuing to decline? It’s not because of lack of credit. Mortgage rates are still 5-7%, for qualified borrowers (imagine having to qualify someone you’ll lend to? Hello, banking industry??) These rates are still at 45 year lows: many of the current buyers’ parents paid double those rates for their first home loans in the ’70s. So, clearly, the “availability of credit” argument is baloney. Anyone who can afford a home which is properly priced and assessed will have no problem finding funding. Those who are looking for silly-money are being told, rightfully so, to keep renting.
Yet the value of most homes, even those properly priced, continues to decline. Why is that?
There’s no magic in economics. No secrets. No strange force in the universe causing markets to rise and fall. There are always three factors: Supply. Demand. And the value of the exchange unit – Money.
The main reason the housing market is “broadly” in the tank is because of inflation. Every time the government comes up with a quick $30 billion to bail out an investment bank or $200 million to provide “rebate” checks to people who aren’t even working or paid any taxes last year, where do you think they get the money? They print it. They borrow against it. And that’s what inflation is. Adding fake money or borrowed money into the real money supply – so that all money becomes worth less. (Can anyone say, Chavez?)
Inflation is a monetary policy. Print more money or lower the cost of lending and inflation rises. That’s completely within the control of the Federal Reserve. Buy up dollars or peg its value against a real commodity, such as gold exchange, and the dollar becomes more “scare” and therefore more valuable. Even with the cries of “more demand from China means higher oil prices” the real price of oil should be more like $70 a barrel, not $110; yet over the past 5 years, the Fed has let the dollar slide to a point where foreign governments are dumping it and even the Swiss franc is worth more than the US Dollar.
Now back to housing: Since homes are traded in dollars only, then the value of a home is always in dollars. If the dollar is sliding in value then homes are sliding down in value as well. If inflation requires more dollars to buy basic staples and necessary commodities, then there are less dollars to spend on commodities like homes (which aren’t real assets since most people have little substantial equity in them). In other words, a weaker dollar makes housing a less attractive place to store dollars (value). And if the dollar is still on a “downward curve” then housing value will continue to drop. And the bottom of the market
can only come when the dollar stops dropping.
The housing market doesn’t have a “top” or “bottom.” The dollar does. If the dollar is becoming worthless, then anything priced in dollars is devalued, too. Contracts in dollars are worth less today than they were three months ago. Offers made on a home that won’t close for 8 weeks (due to lawyer intervention, ie., New York regulations) mean that by the time the closing occurs, the offer is worth less, and the home itself is worth less. And at some point, buyers will start canceling their closings if the gap gets to large.
Which brings us back to the Federal Reserve. If it wants to stop the housing slide TODAY it can do so by supporting a stronger dollar. Make the dollar – and anything priced solely in dollars – worth more, and the market slide will stop. Buyers and investors will come off the sidelines and start investing again. Right now, the dollar is so low, and looks to go lower, that these investors are seeking quality and returns elsewhere – like stronger, stable currencies in foreign countries. Look at certain corporate bonds – they are training 105% above par. This means there is investment interest in the market; but just not for declining commodities priced in dollars.
And that’s also why the Fed needs to stop insuring the bad investments (ie., Bear Stearns is really “deposit insurance” for shoddy investment vehicles) and taking these funds onto its own balance sheets. More debt – and specifically, useless debt that nobody will ever buy or redeem. That debt simply means higher taxes or – inflation – as the Fed will need to print even more money in order to “payoff” or write-down these junk funds.
Put more simply: Why would you expect buyers to store their value in a commodity that is worth less every hour using money that’s worth less too?
Weak dollar advocates claim that the inflated dollars make our exports rise, lowering our trade deficit. This may be true – except that we can’t export housing. And even “partial exporting” of housing – which is getting foreigners to buy US property – is declining because the value of property, priced in dollars, is still falling. And there are far more “homes” to export than cars or tractors or TVs, so if we really wanted to pump up exports, wouldn’t we want to encourage foreign investment in our housing industry – by making the commodity value stronger to buy and hold?
So it seems fairly clear that the Federal Reserve is actually hurting the housing market. It’s throwing good money after bad investments, like some sort of “double down” at the Blackjack table. In the process, it’s making ti more expensive for Americans to buy food and gas; and even foreign countries are feeling the inflation as their currencies rise against our worthless dollars. The best thing it could do is the only think it should do: support a stronger dollar. Inflation is the fastest road to depression.