News & Analysis
Housing Demand Is Built on Monetary Policy
Housing Starts in U.S. Surged in September to Four-Year High ... Housing starts in the U.S. surged 15 percent in September to the highest level in four years, adding to signs the industry at the heart of the financial crisis is on the road to recovery. Starts jumped to a 872,000 annual rate last month, the most since July 2008 and exceeding all forecasts in a Bloomberg survey of economists, Commerce Department figures showed today in Washington. The median estimate of 81 economists surveyed by Bloomberg called for 770,000. An increase in building permits may mean the gains will be sustained. − Bloomberg
Dominant Social Theme: Happy days are here again.
Free-Market Analysis: So builders are busy again in the US. The Fed has been flooding the market with cheap money so we are not surprised. But there are ramifications.
It certainly is a dominant social theme, however. The idea is that the economy went through a rough patch but that the magic of the markets has reasserted itself.
We are supposed to believe that the economy is resurgent just as it would be after any recession. In making this sort of argument, the mainstream media negates the larger business cycle by pretending it doesn't exist. Here's some more from the article:
A pickup in sales stoked by record-low mortgage rates and population growth combined with dwindling supply indicates construction can continue strengthening, contributing more to economic growth. At the same time, the level of starts remains below the pre-recession peak, limiting how much the industry can boost the rate of expansion.
"The housing market certainly has turned," said Brian Jones, a senior U.S. economist at Societe Generale in New York, whose forecast for 790,000 starts was among the highest. "But we still have a long way to go. The good thing is that construction will pull employment with it."
Estimates in the Bloomberg survey for housing starts ranged from 735,000 to 800,000, and the prior month was revised up to 758,000 from a previously reported 750,000 pace. Over the past 12 months, work began on 34.8 percent more homes, the biggest year-over-year gain since April.
The brighter building environment has made construction companies less pessimistic. The National Association of Home Builders/Wells Fargo builder sentiment index increased to 41 this month, the highest since June 2006 and the sixth-straight gain, figures showed yesterday. Still, readings below 50 mean more respondents said conditions were poor.
These numbers are fairly undifferentiated and we're not sure we believe the Commerce indices anyway. Government stats these days always emphasize good news over bad.
Beyond this, we have a hunch the new housing starts exist mostly in the high end of the market. Reading between the lines we think we can make an argument for this. The Wall Street Journal, for instance, reports that most housing starts are single-family units. Here's the important paragraph:
Construction of single-family homes, which made up 69% of housing starts last month, grew 11.0% in September to a rate of 603,000 units--the highest level since August 2008. Single-family construction was up nearly 43% from a year earlier.
And then there is this feedback left by Stan Wester after the Bloomberg story: "As a builder I am seeing a lot more people wanting to build. We are not building spec homes; these are contracts with clients. Why can't people see that the economy is improving?" [Punctuation adjusted.]
Okay. The housing rebound is coming in single-family houses and Wester, a builder, is doing mostly contract work. Sounds like the rebound is taking place at the high end of the market. This makes sense within the parameters of the larger, ongoing monetary stimulation that is taking place.
Much of the Fed's money-from-nothing ("easings") has found its way to bank coffers. But a good deal has ended up in the stock market. People with wealth are probably wealthier these days.
The larger issue, however, is that eventually the money now circulating will swell and move faster, causing intolerable price inflation and the Fed will be forced to tighten hard. This in turn will create another economic downturn that will include housing.
Conclusion: The current housing boom, then, is a monetary phenomenon, not a sign of vital economic spirits. The mainstream media will treat it as if it is a normal, demand-led recovery. We think not.
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Posted by dave jr on 10/19/12 10:27 PM
Hi Danny,
You said, "The money printers are in a constant battle to convert their worthless paper into valuable tangibles."
BINGO! Do you see the light? The fiat is worthless to them, and so it should be to us. The disparity is, we respect it and they don't, to our detriment. Law and contract has been tossed to the wind. What will happen next?
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Posted by Danny B on 10/19/12 10:00 AM
This is kind of a side issue. It has always been claimed that the banks would destroy the dollar to save the banking system. This means that, eventually, the banks would have to transfer out of the dollar and into something tangible. This is also true for the FED.
The FED has the advantage that they don't really have to work hard for the dollars needed to transfer out of paper and into tangibles. Since the FED has so much "money" it would seem difficult to find enough tangibles.
Lindsay Williams has a good track record in certain areas. In this vid, he says that the FED is spending $ 40 billion a month to buy mortgage backed securities so that they can scoop up all the real property when people default. It's at about 11:30;
Click to view link
It makes sense. The money printers are in a constant battle to convert their worthless paper into valuable tangibles. Since the FED has free money, it doesn't really matter what price they pay for RE. Q2, 2013 will see the whole shebang going off a cliff.
Since a higher percentage of loans will go broke, it's in the interest of the FED and bankers to get as many homes built as possible.
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Posted by dave jr on 10/18/12 06:19 AM
Basicly the Bernanke is aiming some fresh fiat at the people by purchasing MBS. The reason this is so, is because banks have a guaranteed sale of the mortgage, and so have lowered interest rates to record lows. A 15 year fixed rate of 2.7% in an economy running 8-10% inflation is like paying a borrower to borrow.
This surge in housing starts is just a surge from those in a position to grab the free money.
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Posted by taxesbyanyothername on 10/18/12 04:24 AM
In my neck of the woods there is plenty of empty commercial property, retail, office, and industrial. Even farms with nice houses and vast barns sit empty, getting more dilapidated by the day. Empty houses are everywhere. You can take your pick for less than the cost to build one. Yet more are being built. It is shameful and sad.
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Posted by Antonio G on 10/18/12 12:12 AM
This situation is like most economic 'good news' we have been hearing about lately - totally driven by cheap credit and not based in sustainable reality. The DB is entirely correct. This boom is a monetary phenomenon, not a sign of economic strenth or recovery. Tread carefully, and don't believe government statistics.
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Posted by Just John on 10/17/12 03:01 PM
Aloha,
The primary residence or HOME should NEVER be considered an asset! It is a primary brick in life. Pay it off first and frack the bank. Owe no one and you own your life. If property tax is an issue, well some things cannot be avoided completely, however not all places are the same and rural is usually lower than urban & suburban. I know..you need the 'City'... then DEAL with it!
We don't need you out here anyway if you do not have what it takes to survive hardship. Dream instead of acting, I do care. Life is not a freebie or a gimme. I do not care what 'They' tell you, listen to your heart, it is rarely wrong if you still have one.
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Posted by rmotley on 10/17/12 02:41 PM
New home SALES are 375,000 units annualized. At the peak of the boom sales of new homes were 2.2 million units. Due to population growth we need 1.2 million net units sold per year. New home starts are not a good indicator of sales. Builders are always too optimistic and will build houses on speculation if the banks will loan them the money. Banks are loosening up on spec lending in order to get some activity into the dead subdision loans they still have on their books. On monetary stimulus of housing. The fed is buying $40 billion per month of MBS. 75% of the loans are for refinancing and 25% for purchase mortgages. The fed is swapping out loans underwater(HARP program) onto their balance sheet from pension funds and other existing holders of MBS at par. A very small part of the 25% purchse loans are on new houses versus existing houses. Only new home sales create jobs. The fed is taking on underwater assets. These borrowers are making their payments but events can change that i.e. relocation for job, no job, death, illness, divorce. At that point the Fed will take the hit since Fannie and Freddie gurantees will be worthless. The fed goal is not to help housing but to help the existing houlders of MBS.
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Posted by Don from the Republic of Lakotah on 10/17/12 01:13 PM
The powers-that-be push hard to make real estate (RE) the centerpiece of American dreamtime. The American dream of RE provides many opportunities to impose authoritarianism. Buying into RE makes property tax donkeys out of occupants (the bank legally retains the title of "home owner" for as long as it holds a mortgage). Buying into RE enables judicial tyrannies (involuntary busing of people from one neighborhood to another).
Buying into RE also facilitates a false sense of wealth. The true value of an asset can only be discerned by actually selling it.
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Posted by ghendric on 10/17/12 01:07 PM
I keep hearing local stories of people losing their home where I live.. I'd love to buy a new home but my mortgage on my condo is under water and doing a short sale is out of the question because the bank can still come after me for the balance for 15 yrs. Plus, I make just enough money where I CAN'T buy a house with no money down. I have to have 3% or more to put down on a house to buy it and I did, it would clean me out. I can't save more money to do that because inflation is killing me. We're living paycheck to paycheck with my income even as high as it is. You can't do anything without it costing at least $100. Forget about going to the movies with the kids.. $100.. add dinner at your local pizza joint first, another $50..plus about 30% of my income goes out in taxes and inflation is getting the rest.. yeah, we're in a recovery alright.. I don't know who's recoverying but it isn't me.. It's more like hanging on for dear life..
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Posted by Bluebird on 10/17/12 12:00 PM
Yep, my husband is bricking the first huge McMansion in a gated community since the economy collapsed. I will be curious to see if it gets residents. And we heard that a local mental health center is building 100 small houses for clients. (State financed, likely) Not your every day family stuff.
