If you search your favorite news aggregate for “US housing market”, you’ll find a whole mess of headlines guaranteed to make you feel good about that crappy McTractHome you might have bought at the height of the real estate orgy. Turns out that you’ll start making money on your investment sometime very soon. Just look at the stuff I skimmed off the top of Yahoo and Google News:
Hovnanian CEO sees signsof housing market bottom . . . US home prices turning the corner . . . Valley housing market picking up . . . The Housing Market: Has It Turned the Corner? . . . US Housing May Be Turning Around, Shiller Says . . . Leap in new home sales sends homebuilders higher . . . Home prices, sales on rise in Boston area . . . Dallas home prices showing gains, fueling optimism . . . Index Shows an Improvement in Home Prices
Most of these headlines are based on a single feel-good trend in the Standard & Poor’s/Case-Shiller’s U.S. National Home Price Index, which was just published for the month of June. If they are all talking about it, it must be big.
Here’s how Time magazine digested it for its senile Baby Boomer readers:
“Home prices across most of the country have started to rise from the depths of the housing slump, a critical trend that will help stabilize the broader U.S. economy. . . . Nationally, prices in the second quarter posted their first quarterly increase in three years. . .”
David Streitfeld of The New York Times is 100 percent in sync and hits all the same points:
“In a convincing sign that the worst housing slump of modern times is coming to an end, prices are starting to rise in nearly all of the nation’s large cities. . . . The trend, displayed in newly released data for June, is both pronounced and wide-ranging.”
“Pronounced” and “wide-ranging”? Hot damn! Them is some recession fightin’ words, boy! But this Streitfeld feller’s from that big city where everyone talks real fast and uses such big fancy words. I have even seen a commercial about the New York Times on the TV once that said something about how their journalists were the best in the world and told me to sign up for their weekend edition. So he must know what he’s talking about, right? Wrong. He’s lying. So are all his big-city colleagues. And they’re shameless about it, too. Not like us little town folks.
If there’s one thing I’ve learned during the six months I’ve spent living in the subprime wreckage of Victorville, California, is that most of the news you read about the real estate market is a lie. Positive statistics are routinely taken out of context and misattributed, headlines are exaggerated, and negative trends are totally ignored or dressed up and buried deep down in the text. (There’s another interesting strategy I’ve seen used to exaggerate positive real estate market news: newspapers routinely separate good news from the bad. They are put in separate articles, with negative pieces using technical/business language, while the feel-good fluff is written simply enough for the average sucker to understand.) The newspaper industry’s shameless shilling for the real estate industry knows no political bias. Who knows, maybe it has something to do with all the money that changes hands between them. Like in 2006, when real estate ads stuffed newspaper coffers with $5 billion.
Unfortunately, I didn’t get a single cent worth of that. So let me tell you what really happened to the housing market this June:
Everyone is pointing to the S&P/Case-Shiller Home Price Index as a sign of recovery. The Case-Shiller index tracks the resale values of single-family homes in 20 cities, watching how they compare over time. The index has a two-month lag. So in late August, they released the stats for June. And what those numbers showed—well, I’ll let the numbers speak for themselves.
The reason everyone is so fucking ecstatic is because—now prepare yourself—instead of dropping an expected 16.4% from last year, home prices only fell by only 15.44%. Whoopee! Roll out the marching band and let’s plan a parade! But for some reason, almost no one bothers to mention this piece of mind-bending good news. Instead, they look at the “month over month” changes. And compared to home prices in May, the index for June actually went up 1.4%. One point four percent! That’s right, this is the tiny increase everyone is so giddy about.
But don’t go sinking your kid’s college savings into K&B Homes stocks just yet, because, if you haven’t figured it out yet, the good news is not really good news at all. Looking at “month over month” changes to predict future real estate values is like trying to calculate the slope of a mountain with an electron microscope. At that kind of magnification, you can find convincing proof that the northern wall of the Great Canyon is as flat and smooth as the Great Plains.
Zoom out and it becomes pretty clear that the index’s trend line doesn’t leave much to be optimistic about.
See that little knob at end of that graph? That’s what passes for “pronounced” and “wide-ranging” in financial reporting circles these day. The fact is, the Case-Schiller Index is down 15.4% over the last year and 31.3% from the high in 2006.
The positive gains don’t look like much, especially when you find out that this minuscule hick-up was a direct result of shady manipulations of and government intervention in the real estate market. (Hell, the Case-Schiller Index isn’t even seasonally adjusted. Recession and market inflation aside, there is almost always an increase in home sales during summer months.)
Financial reporters sure do have short memories. It seems everyone has forgotten that 2009 will go down in history as the Summer of Real Estate Reinflation, which was fueled by legalized accounting fraud and a whole lot of taxpayer money.
In June, I wrote about how the federal government was helping banks reinflate home prices by allowing them to keep huge numbers of their foreclosed properties off the market, which created a “shadow” inventory that even now could supply America’s housing demand for the next two years:
To put it simply: banks are limiting supply in order to keep inflating the bubble. Keeping properties off the market makes sense for two reasons: it allows banks to engage in another round of brazen ripoffs by selling at least some of their properties at artificially high prices to a new wave of sucker investors (many of which are first-time home buyers). But more importantly, it allows the banks to avoid recording a loss on their balance sheets, making them look more profitable then they really are
That same month, doing a little snooping around in Victorville, I stumbled on a horrifying discovery: the Federal Housing Administration had officially taken over for the subprime mortgage industry and proceeded to pump newer, riskier home buyers into the debtor game in order to prop up home sales:
It is as deadly to our vampiric debtor economy as a stake through the heart: the FHA loan. By guaranteeing certain mortgages, the Federal Housing Administration has been helping middle- and low-income Americans purchase their first homes ever since the 1930s. But this modest leg-up program has been been hijacked and transformed into the new subprime-loan market operated by lenders who are as corrupt, predatory and shortsighted as the original subprime lenders, and maybe even more so. Because this time taxpayers have been put on the hook for the risk well in advance. Real-estate insiders have been sounding the alarm about this new shadow subprime mortgage market — which is now almost $600 billion strong — for months now. But instead of listening, Congress has been trying to expand the FHA loan program.
Right now, the FHA is in essence giving out no-money-down loans to anyone who doesn’t already own a house, regardless of credit history . . . Not surprisingly, it seems that risk-free loans are the only way banks can be persuaded to start lending again.
Now, two months later, the FHA has taken on so much risky subprime debt that even FHA officials are beginning to worry that the agency will run out of funds and will be forced to come to Congress asking for a massive taxpayer bailout. Just in the past year, the FHA has taken on $200 billion in new obligations, according to the Wall Street Journal. In 2008, outstanding FHA-backed loans totaled $429 billion. By the end of 2009, they’ll be somewhere around $630 billion. (The FHA took on $16.7 billion of new debt obligations every month, or $835 million every day of the work week.)
But it gets worse. According to USA Today, the FHA backed about 3% of mortgages in 2006. This year, its market share is going to hit 24%. To put it another way: in just a few years, the FHA has ramped up its subprime mortgage operation so recklessly that now taxpayers are responsible for almost 1 out of every 4 mortgages!
Not surprisingly, default rates on those loans have been rising, too. This month, it was reported that 7.8% of FHA loans are no good. Which means that, right now, you and I are going to have to fork over $50 billion to banks like Wells Fargo, JP Morgan Chase, Citi and countless other welfare-queen banks to cover the borrowers who defaulted on their FHA-backed loans.
Look at the little knob on that graph again. That’s what $16.7 billion taxpayer dollars a month gets you. And it’s also one of the main things driving the “improvements” in the housing market, according to USA Today:
FHA loans “are one of the most important sources in this market,” says Mark Zandi of Moody’s Economy.com. “Without FHA, the housing slide would be much more severe. We wouldn’t be talking about a recovery now. We’d still be talking about a crash.” [emphasis mine]
People might not be talking about a crash, but they are talking about a bailout, which is nothing less than government intervention to avert a crash. Like in this recent article from the Wall Street Journal:
The rising losses at the FHA, part of the U.S. Department of Housing and Urban Development, come as the agency has rapidly increased its role in guaranteeing loans in an attempt to stabilize the housing market.
It isn’t clear how the rising losses may affect home buyers. Options for the agency could include politically unpalatable choices, such as asking for taxpayer funds to boost reserves or increasing the premiums borrowers pay for the insurance offered by the agency. Agency officials say if there is a shortfall, they don’t have to do anything except report it to lawmakers. But some mortgage and housing analysts see trouble ahead. “They’re probably going to need a bailout at some point because they’re making loans in a riskier environment,” says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. “…I’ve never seen an entity successfully outrun a situation like this.” [emphasis mine]
So there you have it, folks. This is America’s New Capitalism at work.
There has always been a socialist element to the real estate market, but now it is finally starting to come out of the closet and enjoy life fully out in the open.
And the thing to remember is that this coming-out process started long before President Obama turned the good ol’ US of A into the Socialist States of America. Backed by realtors, home builders and mortgage bankers, it was George W. Bush who morphed FHA loans into the bigger, better, fully taxpayer-backed subprime program that it is today. The same groups now wants to bring this process to its final conclusion and have the government guarantee pretty much ALL mortgages. And to think that all this started happening waaay back in 2007, when America was supposedly still a proud, capitalist nation.
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