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The "Good News" on Housing, and what could go wrong

By       Message Mike Whitney       (Page 1 of 3 pages)     Permalink    (# of views)   1 comment

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There's good news and bad news about housing.

The good news is that housing starts are up, way up. In fact, housing starts in October were up nearly 42 percent compared to September 2011. (2012 = 894,000 starts vs 2011= 595,000 starts) That's a vast improvement by any standard.

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And existing home sales have been picking up, too. Sales on existing homes rose 2.1 percent in October to a seasonally adjusted annual rate of 4.79 million. It looks like pent up demand is finally having an impact on sales.

Then there's prices, which appear to be headed in the right direction, too. According to a recent real estate report by Zillow, home prices have gone up 4.7 percent in the last year, which suggests that housing may have bottomed and is starting to rebound.

Finally, there's existing inventory, which according to has plunged 17 percent in the last year. The dwindling supply of homes in many of the country's hottest markets has boosted demand and increased the number of multiple-offer bids.

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So, there it is in a nutshell: Housing starts, sales, prices and inventory. Good, good, good and good. And just to top it off, the Federal Reserve has initiated a program to purchase $40 billion in mortgage backed securities (MBS) per month "indefinitely" (QE3) which provides a powerful incentive for banks to boost lending so they can take advantage of this gigantic market-distorting subsidy.

So, what's the bad news?

Well, for one thing, the homeownership rate is falling.

Huh? But how can that be, after all, sales are up, right?

Yes, but there's more to that than meets the eye. Here's the scoop from blogger Sober Look:

"Some readers have been asking how one can reconcile positive signs in the housing market with declining rates of homeownership. Indeed, homeownership is falling at an even faster pace than during the 08-10 period.

"The explanation is that so far a great deal of net demand growth in housing has been in rental units. Households are putting a premium on mobility. This demand for rentals is in fact one of the factors supporting the housing market -- for every renter there is a landlord who buys a home." ("Fallinghomeownership rate and the housing market," sober look)

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Whoa! So the Fed's "accommodative" monetary policies haven't really revived organic sales at all. What they've done is breathed new life into real estate speculation. Zero rates and QE3 have triggered a housing market gold rush with all kinds of yield-seeking investor groups and private equity pirates looking to make a killing in property management. Here's more on the topic from CNBC:

"The October numbers were driven entirely by multifamily apartment starts, up 10 percent month-to-month and up 63 percent year over year. ...Younger Americans are in fact moving out of their parents' basements, but many are moving into rental units, and that is also a formed household." ("Yes, Housing Starts Surge, but Rentals Are the Drivers," CNBC)

Well, that doesn't sound like much of a "recovery" to me. It sounds like Bernanke is just doing what he always does--- cut the fat hog for the bankers while everyone else gets table scraps. And here's another thing to mull over (from the same article):

"Housing starts at 894,000 is near where they were at the depths of the 1981 and 1991 recessions and 60 percent below the peak in January 2006," pointed out Peter Boockvar at Miller Tabak."

So, while the increase housing starts is encouraging, we need to keep it in perspective. The market is still in the tank. Naturally, if the banks withhold distressed inventory, the government lends money to underwater homeowners, and the Fed slashes rates to record lows and buys whatever MBS the banks produce, then there's going to be a surge in activity. But how long will it last?

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Mike is a freelance writer living in Washington state.

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