The Federal Reserve and the US government have held nothing back in trying to save the US housing market from their own depredatory excesses leading to its fall. The Fed has engineered the cheapest mortgage interest rates ever. Once the rate of inflation and the mortgage interest tax deduction are taken into account, home mortgage interest rates are now effectively negative. The Fed is quite literally giving away money to homeowers.
And the US government has hardly been idle on the fiscal and policy side. From the tax credit afforded to new home purchasers a few years back, to today’s program of refinancing underwater homeowners, to massive subsidies of the wholesale mortgage markets, the federal government has spared no expense in ensuring no homeowner is left behind.
By all indications, the efforts are beginning to pay off. Bloomberg reported that private equity, after picking the Phoenix housing market carcass clean, has descended like vultures on the Atlanta metro area, expending massive sums at foreclosure auctions to buy houses which they hope to fill with renters. It was reported just today (October 17, 2012) that builders broke ground on new homes at a higher rate in September (on an annualized basis) than they had in the previous four years. Case-Shiller’s home price index is showing home prices have stabilized and begun climbing (though at levels still well below the recent highs). The sentiments of homebuilders and stocks of their companies are several multiples beyond the lows experienced in 2009.
Thus it appears that the Federal Reserve and US government programs and policies have succeeded. A housing market boom is imminent. The bubble is re-inflating. Private equity is taking over where subprime lenders once tread, becoming the new slumlords, much the same as the old slumlords. Builders are adding stock at a rate exceeding household formation. And prices are soaring relative to the dismal lows of the bust.
But the question that seems lost in the euphoria (one thing about euphoria is that any questioning of its foundations must be ignored, else the euphoria collapses in a swirl of doubt as to the validity of its premises), is whether there has been any real expansion in housing demand to support a new housing boom.
Housing demand is heavily tied to demographics (excepting the housing demand of investors, which is mainly driven by loose monetary policies). And demographics would suggest that housing demand can’t have expanded by very much, if at all, of late. According to US Census Bureau statistics, the US population grew by only 9.7% between 2000 and 2010, the lowest population growth rate since—you guessed it—the Great Depression decade of 1930-1940 (which grew at a paltry 7.3%). But what did the housing stock do during the aughts? Again according to the Census, the US housing stock grew by 13.6%, or 15.8 million units. By 2010, the housing stock stood at about 132 million units, of which only 88.6% (116.7 million) were occupied. The remainder, about 15.1 million units, were vacant. Thus occupied housing increased by roughly 700,000 units in the most recent decennial census.
Housing supply increased much faster than housing demand during the aughts (if occupied houses are considered a proxy for housing demand, or at least a proxy for how many people seek housing for its utility as shelter for humans and not just for money), which is really all the explanation needed for why housing prices cratered late in the decade.
Supply and demand in the housing market in the last decade were mismatched for a myriad of reasons, all of which essentially resolve to Federal Reserve and Federal government tinkering with the housing market, much in the same manner as they have been doing since the crash, only now, they have doubled down on their failed programs and policies. Any boomlet that might result is certain to bust again, but on a shorter cycle. And it will again be feckless government policies intended to promote home ownership and support home prices, no matter the cost, that will be the culprit.
What happens when supply exceeds demand? Indeed, prices decline. The cycle of government idiocy, of tripling down on failed housing policies and programs, will reach a new apogee as housing prices reach a new nadir when everything crashes, again.
There will be some measure of gleeful Schadenfreude watching private equity bums lose their shirts this time, like the subprime boys did the first go around. What sort of incapacity for math is required for one to believe that all those empty and foreclosed houses will have renters beating down the doors to get in? The people who lost their homes presumably live somewhere right now, or at least do if they are to be desired as worthy, reliably-paying tenants. What great lure will these vacant homes present to persuade them to move? And a family moving from one crappy rental to another does not an expansion in demand make.
The housing market remains vastly oversupplied, unless roughly every fifth American household decides it needs more than one of them, an unlikely scenario given the prevailing economic conditions. The only expansion in housing demand that might obtain will be the same as that which obtained the first time around. Speculators sitting on piles of non-performing cash (due also to government policies stripping away any hope of reasonable returns outside of taking outrageous risks) who already think themselves smarter than everyone else will rush to get in on the bottom floor of the nascent housing boom. In a positive feedback cycle, their entrance will push prices up, just as happened before. The ground will break on suburbs of new supply. And then, when everything is extended well past the carrying capacity of inherent housing demand, i.e., demand tied to the utility of housing as human, and not monetary shelter, it will all crash to the ground. Again.