There was time in U.S. history when journalism reflected true investigative due diligence in which reporters made an effort to verify the validity of the topic being covered and to make a bona fide attempt to report facts. It is a process that is imperative to a healthy democracy. Unfortunately now the media is nothing more than an avenue for Wall Street, corporate America and political elites to promote false realities which are invariably connected to squeezing or stealing money from the public.
The idea that the housing market is “recovering” from the housing bubble that burst in 2005/2006 has been promoted ad nauseum by Wall Street and the housing market cheerleader organizations like the National Association of Realtors and the National Association of Homebuilders. And recently the mainstream media has gone full-throttle at pumping out housing market propaganda promoting the idea that the housing market is healthy.
A perfect example of this is an article by Bloomberg News about a week ago titled, “This New Indicator Shows There’s No Bubble Forming” (article link). The “indicator” is Nationwide Insurance’s “Leading Index of Healthy Housing Markets” report, which it unveiled at the end of March. Bloomberg’s news report was little more than marketing propaganda for the housing market. It was clear that Bloomberg did not research the validity of Nationwide’s new housing market “indicator.” But I did.
Although Nationwide offers no detail regarding the sources for the data it uses, the variables in its index are employment, demographics, the mortgage market and house prices. To be blunt, based on the information about the index provided by Nationwide, its housing index has to be one of the most preposterous economic indicators outside of the employment and GDP reports. The “employment” variable is likely derived from the Census Bureau’s non-farm payroll report, which is widely acknowledged to be statistically useless, if not outright fraudulent (see this commentary: LINK). The fact that Nationwide does not disclose any details about its index other than the parameter labels makes the quality level of the metric highly suspect.
The section of Nationwide’s website that describes its housing market index contains a quarterly report which summarizes the Company’s assessment of the housing market across the country. The report is a pdf file that reads like a marketing brochure for the housing industry, complete with booklet design and housing information. I was curious to understand Nationwide’s motive behind publishing this highly fatuous housing market report. As it turns out, Nationwide also owns a bank which offers mortgages, home equity loans and home equity lines of credit. This goofy housing market health report is a marketing tool for its mortgage business.
Let’s look at some facts regarding the housing market. Bloomberg is correct in one sense: a housing bubble is not about to burst. The housing bubble burst in 2005/2006. That bubble was never allowed to fully deflate. What’s occurred since the Fed began pumping $3.6 trillion of printed money into the banking system is a dead-cat bounce in the housing market – click to enlarge:
The chart above shows the seasonally adjusted, annualized rate of home sales reported monthly by the National Association of Realtors. What the graph shows is a series of “dead cat” bounces in sales volume which occurred primarily from Fed and Government intervention policies. For instance the spike in 2009-2010 was triggered when the Government implemented a first-time homebuyer tax credit effective between 2008 and 2010. The bounce that occurred after 2010 was primarily fueled by big investment funds buying hundreds of thousands of foreclosed and distressed homes. The Government offered zero-percent financing to any big fund which bought big portfolios of foreclosed homes from Fannie Mae and Freddie Mac.
But you can also see the from the red line I added to the graph that, since 2006, home sales volume has been in a longer term secular downturn. The black horizontal line roughly measures the “median” level of home sales that has occurred during this dead-cat, stimulus-induced sales bounce. The current average level of sales is slightly higher than 50% of the peak level of sales in 2006. But in 2006 mortgage rates averaged 6.75%. Currently mortgage rates are below 4%, with one Government program making 0% mortgages available. Contrary to the “housing recovery” mantra the media and Wall Street analysts are trying to drum into the public’s brain, what is occurring in the housing market in terms of transactions volume does not in any way define a “healthy housing market recovery.”
The Bloomberg article promoting the Nationwide Insurance housing index describes the housing market as being “in its best shape since 2001. Ironically, it was just after the tech bubble burst in 2000 that Alan Greenspan began inflating the money supply as means of inflating the housing bubble. Everyone remember when Greenspan referenced “home equity” as being the equivalent of a cash ATM (automatic teller machine)?
But let’s take a look at the homeownership rate in the United States, which is graphically tracked by the Fed – click to enlarge:
As you can see from the graph above, since hitting a peak in 2004, the rate of homeownership in the United States has plunged. The red line I added to the Fed’s graph shows that current rate of homeownership is back to where it was in late 1994. Shown in this context, it can only be described as Orwellian propaganda for Bloomberg to describe the current housing market as “healthy.” In fact, the information conveyed by the graph above is that the housing market is fundamentally in a state of deterioration.
Furthermore, the Nationwide Insurance housing market health index uses “demographics” as one of its measurement variables. From a demographic standpoint, the data trend depicted in the graph above is a complete disaster. In this regard, it is beyond ludicrous that Bloomberg and Nationwide can report the housing market to be “healthy.”
Both the financial media and Wall Street have pointed to inexorably rising home prices as evidence that the housing market is healthy and in a state of recovery. However, the Achilles’ Heel of a healthy housing market is rapidly rising prices. The graphic below produced by RealtyTrac shows that from 2012-2014, home prices rose at rate that is 13 times greater than the rise in the U.S. median weekly wage – click to enlarge:
Home prices have been driven higher since 2010 by a combination of the Fed artificially driving interest rates to record low levels and the direct injection of $1.7 trillion into the housing market via the Fed’s mortgage QE policy. In its attempt to stimulate the housing market, the Fed has only stimulated rampant housing price inflation.
The Fed’s housing market intervention policies have created a massive misallocation of capital by both homebuilders and home buyers. Homebuilders have built up a record level of inventory on their balance sheets. Moreover, the artificially induced rise in home prices is a massive wealth transfer mechanism from home buyers to home sellers.
Finally, let’s circle back to the assertion by Nationwide Insurance – and promotionally reverberated by Bloomberg News – that the housing market is in “its best shape since 2001.” 90% of all home buyers and 93% of all new construction home buyers use a mortgage. Because of the high correlation between the use of mortgages and home purchases, the validity of seasonally adjusted annualized rate home sales metrics can be measured against mortgage purchase applications.
The Mortgage Bankers Associations reports mortgage applications (refinance + purchase) on a weekly basis. According to the most recent weekly report, mortgage purchase applications are 31% lower than in 2001. In the context of nearly 14 years of population growth and near-record low mortgage rates, this metric represents a housing market in which sales volume has significantly deteriorated in comparison to the market in 2001. It further invalidates the Nationwide housing market healthy index and demonstrates the complete lack of integrity in the Bloomberg News report on the subject.
The Fed’s market intervention policies will victimize recent homebuyers and homebuilder shareholders when the housing market inevitably “corrects” the market imbalances engendered by the Fed. Unfortunately, the wealth destroying policies of the Fed are exacerbated by a media which is now completely controlled by the few who are benefiting the most from the corrupted Federal Reserve and Government economic policies.