Housing Demand Is Built on Monetary Policy
By Staff News & Analysis - October 17, 2012

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.

After Thoughts

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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