United States: Housing Recovery is a Farce

According to news reports, the US housing sector has finally begun to recover from its historic crash as home prices are rising and the associated industries are all seeing an increase in sales and profits.

While everyone is enjoying this long-awaited good news, no one has noticed that this entire turnaround is a bubble and destined to crash once again – possibly at a steeper trajectory than before.

Before getting into my reasoning for this assessment, let’s consider how the housing bubble began and burst.

The primary reason for this bubble was easy credit. People were told and/or convinced that their homes were good short-term investments and that the rate of return on that investment was higher than anything else available either in savings or the stock and bond markets.

This meant that individuals and families who already owned primary residences or had no business owning residences got into the homeowner business. Everything else from derivatives to credit default swaps to subprime mortgages was driven by this fundamental misguided greed-filled belief.

Indeed, this fallacy was so strong and expansive that when it crashed it took down the entire US economy. Furthermore, this delusion was perpetuated around the world and in other countries – especially those in Europe – and almost destroyed entire nations.

Now, “thankfully” four long years later, the housing recovery seems to be gaining steam and millions of people are breathing sighs of relief.

I, however, am not one of those sheep, and, noted below, are some of the reasons for my skepticism.

The first reason is personal income. Everyone agrees – and recent studies have shown – that wages for a vast majority of Americans have declined over the past few decades. This means that households have less money coming in. Which, in a logical world, would result in people spending less on durable goods since they cost a lot more than a toothbrush.

A home is a very expensive durable good and, given the income stagnation in the country, unlikely to be affordable for most people.

The second reason is employment. Even if wages were stagnant but people had stable jobs, one could use that long-term static income to fund the purchase of a house. Unfortunately, that is not true since a majority of the country’s job growth has come from part-time jobs.

By the way, the lower unemployment rate is more because of these part-time jobs and less people looking for employment rather than higher paying full-time jobs so let’s not bring that topic up in the context of this discussion.

Despite these lower levels of disposable income, there is no doubt that houses are selling at a faster clip than in past recent years. So, what is the reason? The most simple, obvious and true reason is panic.

It is no coincidence that housing sales began rise in coordination with the US Federal Reserve chairman’s announcement that he was considering ending the government’s “easy money” or quantitative easing program.

This program has been a boon for the financial sector as it has allowed them borrow money – from the federal government – at incredibly low rates while loaning some of that same money at higher rates to consumers.

So, since the government is considering – no plan has currently been released – of ending this program, the nation’s lending institutions have begun to panic and started to raise their lending rates.

This has caused panic among the consumers since they have seen their rates start to rise. Seeing as how banks are not raising the savings rates, consumers have decided to “park” their money in something they know will at least hold the base current value i.e. their home.

Unfortunately, this is likely to backfire since the fundamental reasons for the previous housing crash haven’t changed. Incomes remain stagnant, jobs are uncertain, the government’s debt level is unsustainable and idiots run Washington.

This means that at a certain tipping point – much lower than during the pervious crisis by the way – the housing market will burst once again. Only this time, the reaction will be worse due to an already weakened economy.

The only positive news would come if the rest of the world doesn’t follow the US path preventing the globalization of this crash and allow those who have some money to park it overseas.

Life, it seems, is cyclical in nature and we Americans have both terrible short-term memories and no interest in history.