Is The Housing Recovery Just an Illusion Created by the Federal Reserve?

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It’s now conventional wisdom that the housing market — once the anchor that sank the American economy — is the ballast that’s keeping it afloat, however tenuously. The Case-Schiller index of home prices, released last week, showed a sixth straight month of year-over-year increases. Rising home prices buttress consumer demand as home prices are the single biggest source of the average consumer’s wealth. In addition, a recent report on housing starts showed that more new buildings are being constructed than at any point since July of 2008, and a revitalized construction industry could do much to bring down unemployment and spur economic activity.

Jed Kolko, the Chief Economist for the real estate website Trulia, compiles a “housing barometer” that measures how close the real estate market is back to normal based on housing starts, existing-home sales, and delinquency and foreclosure statistics. His most recent reading put the housing market at 47% back to normal. Writes Kolko:

“In the past three months, Trulia’s Housing Barometer has risen from 34 percent to 47 percent, which is the largest quarterly increase since we started tracking the recovery 18 months ago. Not only is the housing market closer to normal than at any other point since the crisis, the recovery is also accelerating.”

(MORE: Why Are Real-Estate Listing Sites Hot Right Now?)

In other words, there’s plenty of data to choose from for a housing market bull to make his case. But even if these data clearly show an incipient recovery, what exactly is the reason for it? Tim Iacano of Iacano Research believes that most — if not all — of the recent rise in home prices is a direct result of efforts by the Federal Reserve to stimulate the economy.

The Federal Reserve has kept short term interest rates at near-zero since 2008. In order to stimulate the economy further, the central bank has engaged in quantitative easing (QE) or the purchase of U.S. treasury bonds and mortgage debt in order to drive down long-term interest rates as well. The most recent round of QE was specifically aimed at mortgage-backed securites (MBS), and was effective at lowering mortgage rates to all-time lows.

One of the main ways this sort of action helps stimulate the economy is by increasing home values, for the reason that if you lower the interest rate you need to pay in order to finance the purchase of a particular asset, you raise the price at which a home buyer can afford to purchase it. As Iacano points out, lower home mortgage interest rates can mean dramatically higher home prices. Iacano notes that with today’s record-low rates of 3.3%, an $1,100 per month mortgage payment can finance a house worth $280,000. He continues:

“Even if mortgage rates moved back up to their 20-year average rate of 6.5 percent (what many thought were  simply unbelievable rates when they first dropped that low last decade), that same $1,100 mortgage payment would finance a home purchase of just $193,000, not the current $279,000. The difference between these two prices is nearly 50 percent!”

(MORE: Home Prices Rise Across the Country in September)

Iacano admits that the Federal Reserve isn’t solely responsible for what he calls “freakishly” low mortgage rates. Any time an economy is depressed to the extent ours is, interest rates are going to fall. But given the Fed’s aggressive action to drive down rates, we can safely assume that they are primarily responsible.

Of course, one might counter that boosting the economy by boosting home prices is exactly what the Fed had set out to do. And our economy is undoubtedly better off by being in a situation where home prices are rising rather than falling. But this analysis does beg the question: What happens when the Fed tries to extricate itself from quantitative easing? How will homeowners react when — because of the Fed’s selling of MBS — their home values plummet? That will be a politically tricky task, regardless of how committed Ben Bernanke, or whoever the Fed chair happens to be at the time, is to it. In addition, while the housing market is recovering, any measure of its health like housing starts still will show a very depressed market by historical standards. We still have a long way to go. When can the Fed safely start to sell off its assets, and how will it time this move correctly?

(PHOTOSThe Recession in Pictures: America Copes with a Stagnant Economy)

This is not to argue against quantitative easing. The risks of a highly depressed economy, and the type of human suffering that is the result of it, arguably outweigh whatever negative side effects aggressive central bank policy create. (And I generally agree with that argument.) But if the main bright spot in our economy is so dependent on the Federal Reserve, we should be wary of getting too giddy about a recovering housing market, and be aware that reversing central bank influence once the economy recovers may be more difficult than the Fed claims it will be.

MORE: The Risks of Reviving a Revived Economy

14 comments
him
him

Money doesn't grow on housing markets. Businesses and industry are not the back bone of a strong economy.  Never believe anything they "try" to teach you. Money grows on trees, it is called food. Everything else is secondary. Look at all the economic collapses in history. They are all based on food. The great depression happened during a massive crop failure in the united states. Then why aren't food prices going through the roof.  Because your country has enough food. The elite attack their own economy to divvy up enough food to pass the plate. If they don't war breaks out or more people starve. War is breaking out in rich countries with no food supply of their own. Not because of political issues or this or that, religion or rights issues, oil, or even psychotic power hungry leaders. Don't look on the outside look on the inside.

AdamSmith1
AdamSmith1

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JeffD
JeffD

Consider this: Banks are keeping 90% of their inventory off the market (fake suppy shortage). Foreclosure related sales (short sale, reos) are 36% of current total home sales nationwide. There are 33 delinquent mortgages for every1 mortgage already forclosed on in Ohio, 13 for every 1 REO in Florida. Prices are for the most part flat at best nationwide. If the market can barely gain in value trying to obsorb the 10% of the banks repos now, what will happen to prices if it releases the other 90% of its current inventory or actually continues to forecloses on the huge amount (13 to 33 times as many for these states) waiting in the wings. The banks can't continue to hold these properties off the market. The holding cost will BK them. They are going to have to do something.

BobCarpenter
BobCarpenter

We are also sacrificing our future for stability today..  People need compounding for retirement and for saving. Low interest rates effectively destroy any hope of retirement.  Pensions were built on 8% interest rates.  After 30 years, you nearly triple what you put in because of compounding.   So in essence we are creating a future pension crisis.  Check Mate. 

CharlesReed
CharlesReed

The Fed has spent over $1 trillion purchasing artificially lowering the prime mortgage rate giving many rich and upper middle class a bailout from the higher rates they refinanced from. However when it come to asking those same folks to allow the people down the street who have never missed a house payment and have good credit, but are underwater because bank decided to create bad loans and sold them to other people, which cause foreclosures then widespread unemployment.

These are some of the same people who also took advantage of the Cash for Clunkers and Appliances, but are calling Obama a Socialist when wanting to extend to those who at no fault of their own, now find themselves underwater. Look while doing loans the only people who had 20% where families that were helped by their parents, which there is nothing wrong with that, however Fannie & Freddie had 5% down prime loan mortgages with PMI attached for insurance.

Now over at Countrywide they started something in the 80/20 loans that caught fire and all the big lender had a program that was a 1st & 2nd mortgage that cut out the mortgage insurance. However as Angelo Mozilio said it was one of the worst products, but is was not some borrower that created the programs but smart guy like Mozilio.

So that property values are at 25%-50% lower now because of all the foreclosing which cause all the unemployment, so even with the 20% down at 25% lost of value that borrower is still underwater. I say that had not the Fed step in the property value would be even lower. Borrower who have now gotten from 3.5% to 4% interest rate so when the talks of eliminating the property deduction these folks are already taken care of.

Now let get to the real reason that housing is still the biggest obstacle to the economy bouncing back, as there are 20 million vacant home and these homes are a big part of that shadow inventory, and without counting these properties in the listed for sell pool there is a fake reality. Also what a huge deal is that in the case of Mortgage Backed Securities, Ginnie Mae is running a Ponzi Scheme and has had 800,000 government insured loan illegally denied a modification and then had a illegal foreclosure performed.

What going on is that we got a government program that is a $1 trillion Ponzi, where Ginnie Mae is not the "holder in due course" and illegally cannot and does not have the legal right over the alleged underlying collateral. What is a fact is that Ginnie Mae can never purchase or sell a home mortgage loan as they are not a lender and is not regulated to be a home mortgage bank. So long story short, We the People are currently due from servicer that legally foreclosed on the 800,000 loan the OCC & Fed had already identified, is $264 billion which includes treble damage. It also opens up just how Fannie & Freddie have taken possession of the Notes to loans placed into their pools.

States as in Washington, Oregon, Ohio, New York, North Carolina and Massachusetts have come to their senses and realized that you must owe the debt and be in title as the debt holder, in order to be the party bringing the foreclosure action. If you don't have a Note there is no debt, and if you don't have a debt there is no Note, and without the two you cannot attach a lien/titled!         

RobHarrington
RobHarrington

http://www.conservativeactionalerts.com/2012/12/using-the-law-to-break-the-law/

This is EXACTLY what is happening in Foreclosurefraudland. Gov allowsmassive predatory/fraudulent lending to unsuspecting, unsophisticatedhome buyers. http://www.washingtonsblog.com/2011/12/the-fbi-es... Then the gov allows massive fraud in securitization. http://www.huffingtonpost.com/william-k-black/the... Then the gov allows massive fraud in servicing/foreclosure... http://deadlyclear.wordpress.com/2011/11/26/1448/ Thenthe gov bails out the banks (TARP/TALF/SERVICING BAILOUTS/etc.) whotake over "servicing rights" via bogus trusts from now cratered frontmen criminal banks (Depositor/servicer/custodians) (now cratered frontmen criminal banks who were previous trading partners in fraudulentmortgage lending via securitization with the current big 10 banks,) aswell with the FDIC (coup d'tat) receiverships. www.nationalwamuhomeownerssupportgroup.com Thengov takes over the loans vis Fannie/Freddie/GSE's... all parties areenriched unjustly except for the original bond certificate holderinvestors, taxpayers, and the HOMEOWNERS who all get screwed. THIS IS FASCISM! Wake up, Amerika! Need proof? http://www.msfraud.org/ http://www.foreclosureself-defense.com http://whatsignature.com/ http://www.foreclosurehamlet.org/ http://stopforeclosurefraud.com/ http://4closurefraud.org/ http://frauddigest.com/ http://livinglies.wordpress.com/ http://www.foreclosureself-defense.com http://chasechase.org/ http://foreclosuregate.prosepoint.com/story/new-o...http://www.conservativeactionalerts.com/2012/12/using-the-law-to-break-the-law/

r0yce1
r0yce1

@FishmanLevine Fwiw several weeks ago I read a few articles speculating Bernanke is inflating houses by 10-15%

danielrlevitan
danielrlevitan

After such a prejudicial headline the negative content of the article comes as no surprise.

Yes, low mortgage rates have assisted the housing recovery but, so what?  All that did was accelerate absorption slightly.  We have been under-producing new housing for the past six years based on household formations and that translates to pent-up demand that had to be satisfied sooner or later.  All th4 Fed did was to make that occur sooner 

Housing is recovering, there is no doubt.  Foreclosures and the "shadow inventory" have declined substantially.  Both new and resale housing Inventories are at record lows.  Home prices have recovered in most market areas and are rising consistently and the basic economic law of supply and demand would suggest that housing prices must continue to rise.

A recovery by any name, even one stimulated by an intelligent and appropriate policy of the Fed, is still a recovery.

JeffD
JeffD

@danielrlevitan  Consider this: Banks are keeping 90% of their inventory off the market (fake suppy shortage). Foreclosure related sales (short sale, reos) are 36% of current total home sales nationwide. There are 33 delinquent mortgages for every1 mortgage already forclosed on in Ohio, 13 for every 1 REO in Florida.  Prices are for the most part flat at best nationwide. If the market can barely gain in value trying to obsorb the 10% of the banks repos now, what will happen to prices if it releases the other 90% of its current inventory or actually continues to forecloses on the huge amount (13 to 33 times as many for these states) waiting in the wings. The banks can't continue to hold these properties off the market. The holding cost will BK them. They are going to have to do something. 

BradFoley
BradFoley

Learn what "begs the question" actually means.

Christopher_Matthews
Christopher_Matthews moderator

@BradFoley Most usage guides I have consulted agree that "beg the question" can be used to denote both the logical fallacy and a synonym for "prompts the question." The meaning is discernible by the context, so there's no reason to keep up the fight on this one. 

antonmarq
antonmarq

Is Mickey a cartoon mouse? Absolutely. First and foremost, any Boomers that have had their homes foreclosed on, should never, EVER, consider buying a house. Second, the appreciation of homes will be dead in the water for at least another 10 years or more. Third, most existing homes are energy inefficient, the cost of energy will continue to rise; therefore, adding more stress to existing home owners looking to sell. Finally, the number of vacant homes in America is over 18 million, more than the actual number of homeless people. If banks won't lend moneys to help alleviate the vacancies because they are holding out for better profits, then maybe real estate taxes should be increased on vacant homes to allow for new and cheaper buildingRead more: http://business.time.com/2012/12/07/is-the-housing-recovery-just-an-illusion-created-by-the-federal-reserve/#ixzz2EOFTIcqs

bryanfred1
bryanfred1

Good article - glad to see the issue finally getting some ink.  The Fed's actions are clearly designed to support housing prices, but eventually it will have to sell all the MBS it's buying right now and rates will increase.  Between this, the deficit and national debt the ONLY way out of the problem is sustained economic growth.  Every policy right now should have the goal of promoting private sector growth, but instead we're fighting over a tax increase that won't even move the needle.

rjsigmund
rjsigmund

the Fed has been creating bubbles since carter in an attempt to stimulate the economy....believe simon johnson wrote about this "doomsday cycle" around two years ago...