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Housing Market Hype -- Are We Really Expected to Believe That Prices Will Rise with High Unemployment?

The "housing has hit bottom" talk is the biggest bunch of public relations BS since WMD.
 
 
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The "housing has hit bottom" trope is the biggest bunch of public relations horseshit since WMD.

 

Do you really think housing is going to rebound with 23 million people underemployed, manufacturing contracting, durable goods plummeting, corporate earnings on the ropes, wages shrinking, and China, Japan, and Europe in the toilet?

Dream on, my friend.

Sure, housing prices are going up....temporarily. That's what happens when the banks stop listing their foreclosures. The cheap options disappear and the average price goes up. But that's all just smoke and mirrors. The banks still have zillions of these dogs in their stockpile, they just don't want you and me to get our grubby little mits on them and push down prices further. That's what they're really worried about, the damage plunging prices will do to their balance sheets. So they play this stupid cat and mouse game like no one can figure out what the heck is going on. It's irritating. Meanwhile the cheeseball media provides the backround noise to lure more swimmers into the sharktank. It's all one big scam.

By now you've probably heard that existing home sales beat expectations in August soaring 7.8 percent from July and "rising to the highest level since May of 2010." That's pretty impressive, eh? But how many of those sales were the result of Obama's new foreclosure-to-rental program? Are you familiar with the program? Here's a clip from Businessweek that will bring you up to snuff:

"Private-equity investors including Blackstone Group LP (BX) and GTIS Partners are buying foreclosed houses to take advantage of prices that have fallen 34 percent from their July 2006 peak.....

The Federal Housing Finance Agency, which has overseen Fannie Mae since a September 2008 takeover of the Washington-based company, announced on July 3 that it had chosen winning bidders without disclosing the names of the companies or terms of the sale because the deals hadn’t been completed." (“Colony Said to Win Foreclosed Homes Sold by Fannie Mae”, Businessweek)

Well, how do you like them apples? It's all hush-hush so schlubs like you and me can't see how we're getting reamed again. Here's more from the same article:

"The 2,490 properties up for auction encompassed portfolios of 775 homes in Florida, 572 in Atlanta, 484 in Southern California, 341 in Phoenix, 219 in Las Vegas and 99 in Chicago, according to an offering document by Credit Suisse Group AG (CSGN), which managed the sale. About 85 percent of the properties already are operating as rentals, according to the document."

So all the hot properties that everyone wants are being sold to the big money guys at a hefty discount. Nice. And, not only that, but "85 percent of the properties already are operating as rentals", so Obama lied about that, too. He said the foreclosures would be converted into rentals. But, as you can see, they already ARE rentals. That means this is just more corporate welfare dolled up as aid to the struggling housing market. What a crock! The banks are just trying to ditch their loser homes without pushing down prices. That's what's really going on.

And, there's more, too:

"The winning bids in the Fannie Mae auction were at least 90 percent of the homes’ estimated value, said five people with knowledge of the auction, who asked not to be named because they signed confidentiality agreements. The FHFA offered bidders“synthetic financing” to reduce the up-front capital required if they agreed to form a joint venture with Fannie Mae and share proceeds from the rental or sale of properties, the people said."

"90 percent"? You mean these guys are getting another 10% off of the 34% discount they got to begin with? Such a deal! And here's the corker: "The FHFA offered bidders “synthetic financing” to reduce the up-front capital required."

Can you believe it? In other words, US taxpayers are providing the financing for PE speculators who want to reduce their risk while maximizing their profits via additional leverage. That really takes the cake, doesn't it?

In any event, the Foreclosure-to-Rental fraud accounts for a good portion of the uptick in homes sales, while all-cash buyers account for another big chunk. Check this out from CNBC:

"Close to one third of the homes that sold in August went to buyers using all cash, despite average rates on the 30-year fixed sitting around 3.6 percent. Rates appear to have less of an impact than hoped."

What does that tell you? It tells you that there were a lot of people sitting on the sidelines with their pockets stuffed with greenbacks who bought into the "housing bottom" bunkum and decided to buy a house pronto before they missed the boat. That's how propaganda works, by persuading people to do things that are against their own best interest.

Even so, there aren't enough of these all-cash buyers or investor groups to drive the market much higher. Why?

Because a vital housing market requires move-up buyers. Those are the guys who sell their starter homes and move up to something better. These people make up the bulk of organic sales. Unfortunately, that group of buyers vanished along with $7 trillion of home equity that went up in smoke following the bursting of the bubble in 2007. All that's left is the all-cash buyers and investor-types, both of whom are looking for the same thing, inexpensive or distressed homes. That's why all the action is at the low-end of the market, because that's where people feel like they can make the biggest killing.

So what happens next or, rather, what happens if the banks continue to keep prices artificially high by reducing the number of distressed homes on the market?

Answer: Sales drop off, which is exactly what's happening. This is from CNBC:

"Fewer Americans signed contracts to buy existing homes in August. After gains in home sales over the spring and summer, an industry survey surprised expectations, registering a 2.6 percent drop in pending home sales from July. This drop forecasts that final closings on existing homes will be lower heading into fall." ("After Brisk Summer, Pending Home Sales Drop in August", CNBC)

So, there's a surge in prices and activity, and then--Whammo--sales start to drop off just like that. And the reason they drop off is because unemployment is high, wages are flatlining, 40% of college graduates are drowning in debt (and can't qualify for a loan), and credit is still tight.

This is why Yale's Robert Shiller--who predicted the subprime bust long before the bubble burst-- had this to say in a paper published last week by the National Bureau of Economic Research:

"A recovery may be plausible, and home prices have been rising fairly strongly in recent months, we do not see any unambiguous indication in our expectations data of sharp upward turning point in demand for housing that some observers, and media accounts, have suggested.”

Huh? No "turning point in demand for housing"? Well then why have all the major media taken up the "housing has bottomed" meme? Could it be that they're just doing the banks' bidding by "catapulting the propaganda"? (as GW Bush famously said)

Oddly enough, the truth is available if you're willing to pick through the BS to uncover the nuggets. Here's an excerpt from an article in the Wall Street Journal that--just weeks ago--would have been dismissed these same claims as the ramblings of a Internet conspiracy theorist:

"Rising prices largely reflect a dwindling number of foreclosed homes being sold by banks and other lenders as well as stronger demand for those properties from investors. Foreclosures and other "distressed" homes typically sell at larger discounts, and with fewer of those properties selling, prices are under less pressure.

But rising demand, especially at the low end, is putting upward pressure on prices as traditional buyers—as opposed to investors—feel more confident about jumping into the market." ("Housing Market Displays New Vigor as Prices Rise", WSJ)

The article doesn't say that there's a shortage of these "distressed" homes, (which there isn't) just that the banks are not putting them up for sale. And that's what's behind the "rising prices".

Bottom line: Housing is going nowhere fast. All the hype will amount to nothing. The market is going to be stuck in a long-term funk until more people can find work, wages increase, student loan debt is whittled down, and prices fall. Of course, none of these are on the near-term horizon, so demand will remain weak.

 

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion(AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

 
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