The Market Ticker
Commentary on The Capital Markets- Category [Housing]

I chuckled when I read this over the weekend...

You can now nab a 30-year fixed mortgage for under 4%. That’s the second week in a row, by the way, that rates have been so low. As of this writing, the numbers tick slightly, but the range remains remarkably low – 3.96% to 4.08%. In either extreme, extremely weird, and stunning when you consider we are supposedly in the latter stage of a recovery.

Usually at this point in an economic turnaround, things are rocking, and interest rates are jumping. But we all know the economy isn’t rocking. And as a result, interest rates are not jumping. What’s weird is those rates are dropping, which usually presages something bad happening.

Then again, this hasn’t been your father’s recovery, has it? Even with absurdly-low interest rates for what’s been years now, it’s hard to make the case they’ve triggered any kind of housing boom. Sales of new single-family homes fell 4.9% through the first six months of the year. They were down 8.1% in June. So let’s just say the trend is not the housing industry’s friend.

Neil goes on to moan about people being "tentative" or even "skeptical" about buying a house, but offers no answers for the reason we're seeing what is happening.

That's because he is either deluded or intentionally refusing to talk about the facts -- although he does dance awfully close to the truth with his last sentence:

None of this means housing still isn’t a compelling investment, but when real estate trendsetter Zillow estimates some home values may take another few years to reach their pre-meltdown peak…it’s enough to make you…puke.

Really Neil?

How did we get those so-called values that render getting "back there" in a "few years" something that's puke-worthy?

It was all fraud -- and in fact had been for the last 30 years in one form or another.

That's the dirty secret.

How does housing go up in "value" without median family income also rising?  It cannot, except through two mechanisms -- ever-falling rates and fraud.

That is, loans that are not really loans -- they're speculative leverage vehicles where the only rational expectation for ability to pay is the ever-decreasing rate of interest and/or ever-looser standards for said loans, so you can roll it over into a new loan with a higher alleged "value" for your house.

What is a 2/28 or 3/27 other than this?  There was never an expectation that the alleged "borrower" could pay at the 28 or 27 rate.  The 2 (or 3) rate was "affordable", but this was nothing more than a gambling vehicle, with the gamble being that you could come back and refinance before the 2 or 3 year period expired.

The "benefit" to such a gamble is that each such refinance generates more closing fees and costs, stealing money from you and putting it in the banksters pockets.  The problem with such a gamble is that first it effectively extends forever the time in which you have an essential zero in equity in your home (in other words you're renting it for the price of the monthly payment) and the roll-over risk is yours; if you cannot roll the loan at an acceptable price when the time comes since you can't afford the fully-amortized payment you lose the house and have nothing.

Incidentally, that same scheme was a huge part of the reason The Depression was so damaging -- the exact same game was played with balloon mortgages in the 1920s and Fannie Mae was created as a specific response to it.  Unfortunately like nearly all government "intervention" that simply substituted one fraud for another and vectored the benefit of same toward a politically-favored few while shrouding the scam in a legal protection racket.

At the core the entire housing market over the last 30 years has been a gigantic leverage machine, predicated on the fact that everyone buys a payment, not a house.  That in turn means that the secular, 30 year trend toward lower rates as shown here has created a false belief of home price "appreciation" that has become ingrained into the national psyche, along with the pronouncements of people like Neil and, of course, the NAR.

Unfortunately that which is false always eventually percolates to the surface, and the truth becomes known.  The simple fact of the matter is that housing is not an investment, it is a depreciating and relentlessly taxed capital asset that one factually rents forever, and one only does that because it is cheaper than renting and the buyer has the personal and financial stability necessary to make the transaction costs rational (meaning, you're going to be there for a good long time.)

We've spent more than 30 years destroying that second premise along with the interest-rate distortions.  The relentless drive to offshore labor, to sell worthless degrees and lard up educational costs to the point that the marginal value of college has been siphoned off to a large degree by banks and universities and the biggest con game of all -- federal deficit spending -- has eviscerated what's necessary for home purchases to make sense for most Americans.

Many people like to blame The Fed but in fact it is Congress and The Executive that are responsible for the destruction of purchasing power that has occurred -- all of it.  It is Congress that allows banks to lie about how they operate; the common chestnut of banks taking in and then lending out deposits is a factual lie and everyone in the industry knows it.  Instead the banks literally print money and then when those funds are spent and deposited by a merchant the "reserve requirement" (such as it is) is met ex-post facto, which is in fact fraud -- never mind the various dodges to avoid even that tiny constraint on bank leverage.

The Fed, government and media have spent most of the last 5 years trying to convince people that fraud is good instead of bad, and that they should jump back into a game that marks them as losers.  So far it's not working out very well -- while there are those who are going for it, enough thus far are simply saying "No!"

It's about damn time.

PS: Those buildings Neil used in his image at the top?  They're not houses -- those are hotels in the game Monopoly.  It would figure that a limousine rider like Neil wouldn't know that, as he has never stooped so low as to play an actual board game.

View this entry with comments (registration required to post)

Main Navigation
Full-Text Search & Archives
Archive Access
Get Adobe Flash player
Legal Disclaimer

The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.


The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.

The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.

Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.