Tuesday, September 7, 2010

Reckless Fed/Government Policy Could Re-ignite The Housing Bubble Inferno

thereby ulitmately inflicting even more long-term destruction to our economic system.

As we have seen with the home-buyer tax credit, Obama succeeded in nothing more than "pulling forward" home buyer demand into the periods covered by the tax credit. He also managed to temporarily prop up housing prices.  But if you think about what really occurred there, you will see that propping up housing prices using tax subsidies only resulted in the transfer of wealth from the taxpayers and home buyers to the home sellers, real estate brokers and mortgage banks (Get it?  Home buyers paid more than they should have using taxpayer wealth vs. home sellers, who got paid more than they should have; real estate agents received more fees on the higher price basis of the transaction;  mortgage banks were more likely to get paid fully on the mortgage sitting on their books plus were able to earn higher fees on the higher principal basis of the new loan).  Once again Obama screwed the taxpayers for the benefit of those who did nothing to earn that economic largesse.

NOW, thru the magic of Fed-induced, artificially low interest rates, Fed money printing and Government guarantees, Freddie Mac (FRE) is rolling out the 95% refinancing mortgage and homebuilders are re-starting previously abandoned housing projects.  Check this out from FRE's website:  "Reach more borrowers with an easy refinance mortgage" LINK

And then there's this story from Bloomberg News detailing how homebuilding companies are reviving old, abandoned projects in the major bubble States: LINK This phenomenon is a by-product of absurdly easy monetary policy and the availability, given that the Government guarantees about 95% of all mortgages now issued, of easy, low down-payment loans.

Take a look at this chart from calculatedriskblog.com and tell me if you think the market really needs any more new housing projects:

(click on chart to enlarge)

This chart shows the number of vacant properties as a percent of total inventory vs. housing starts. Does that  chart reflect the need for new housing units to be added to the housing stock?  And just imagine what that chart would look like if the banks were stop delaying the foreclosure process in order to avoid ballooning their REO (bank-owned homes), as has been documented by many analysts.  That red line would be "off" the charts, so to speak.

The fact of the matter is that the best way to "fix" the housing market would be for the policy makers to just let prices/supply/demand be determined by the free market. Obviously this would result with much lower housing prices for quite some time. But eventually the excess inventory would clear the market, necessitating a "natural" revival of the homebuilding industry. 

Of course instead, in a quest to buy votes, the Government is once again in the process of engaging short term greed/long term destructive policy implementation.  Can't say I blame Obama, because according to the latest Rasmussen polling, not only is Obama's approval index lower than that of any President who is two years into his term, but it also looks like the voters are going to hand the keys to Congress back to the Republicans, for better or for worse.  Good riddance Nancy...


  1. So, how is it working out for private mortgage companies competing against the likes of Fannie and Freddie who are subsidized (to the tune of 3.3 Billion this last quarter-at least that's what we are told-and that's just to break even-not to be profitable except to pay bonuses) by the remaining population that pay taxes?

    Maybe GATA can apply for a grant within the Federal Budget for "the Study of Monetary Economics and its effect on real money" (actually that would be hilarious if granted--all midas needs is a sponsor)

    I guess that called competing against somebody who has deep pockets.

  2. Nothing to do with housing but there is an interesting video about the Russian Mint producing fake Gold coins

  3. Hi

    Indirect subject.

    But who's bloody money are the cartel pissing upstream trying to contain gold and silver prices. Never mind the manipulation, which is annoying to the rest of the world.

    But somebodies money is being wasted. And if it is the American people's money then something serious has to start happening.


  4. "The fact of the matter is that the best way to "fix" the housing market would be for the policy makers to just let prices/supply/demand be determined by the free market."

    Since when is there a free market in a centrally planned economy? Its all so clear to me now.

    And personally it looks more like fascism than socialism from where I am sitting.

  5. Agree Rothbard

    Torsten, it's the U.S. Taxpayer's money. Look at it this way, the U.S. Treasury gold is being leased out by the 100's of tonnes at an artificially manipulated low price. Eventually that gold has to repurchased by the bullion banks and returned to the Treasury. But at what price can you go out and by 1000's of tonnes of gold bullion?


    The manipulation is a MASSIVE transfer of wealth and power from the U.S. Taxpayer to the end buyers of the gold.

  6. The whole economy is a ponzi scheme, plain and simple. The only hedge against that is physical gold and silver.