Let’s call a spade a spade, please. What we have here is housing “inflation,” hardly housing “recovery.” Housing prices are rising 10-15% per year, but nobody in the media is calling it what it is. There’s a wall of silence.
We have narrowed the definition of inflation to such a degree that nothing is “inflation” unless the Fed or the BLS says so. Massive asset bubbles, particularly housing bubbles, go unrecognized by mainstream economists because they simply pretend that asset bubbles are not manifestations of inflation.
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Meanwhile they throw the term “recovery” around as if it actually means what it says. You want “recovery?” This ain’t it. The so called housing recovery is a Fed concocted dead cat bounce that will disappear along with the Fed and foreign central bank subsidized mortgage rates (which are tied primarily to the 10 year Treasury yield).
Prices have risen 10% in the past 12 months and 18% in the past two years while new home demand and construction has barely moved off historic lows. As for employment in the home construction industry, it remains dead. ZIRP and subsidized mortgages have caused gross distortions in the housing market that fool people into thinking that there’s some kind of fundamental recovery under way.
Those subsidized super low mortgage rates have driven phony demand. As mortgage rates normalize, the phony demand will dry up. Likewise, as fixed income investment yields return to historically normal levels, empty nesters and retirees who have wanted to downsize or cash out will soon be able to actually earn a decent return on their money. They have sat on their hands and stayed put in their old homes because the proceeds of a sale would earn zero interest. They’ll soon have an incentive to sell. For sale existing home supply will increase just when the phony demand is vaporized.
As for the Case Shiller Index, it’s ancient history. It tells us nothing about today’s market. There are far more timely indicators that I’ll cover in the days ahead as we look for cracks in this trend of housing inflation without recovery.
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