Thursday, October 21, 2010

It's Still All About Housing

This is the reality folks.   It's impossible to turn around this economy without the housing market. 

The reason I say this is because housing touches almost everything.  Without a robust housing market the banks are toast and it doesn't stop there.  There is a rippling effect then filters down throughout many industries. 

Think about the different parties that are involved:

You have builders, Realtors, and finance that are directly effected.  

Then you have the indirects who also suffer when housing sputters like every industry that fill our homes with luxuries whether it be furniture or technology.

When you really drill it down, almost everything in our economy has some link back to housing. 

This is the reason why the Fed has taken such unprecedented steps in supporting this area of the economy.   They have basically put themselves "all in" on turning iaround housing. 

They really had no choice when you think about it.  Without housing the financial system is esentially toast.  The size of the mortgage market is around $10 trillion according to the last figures I saw which is close to 100% of our annual GDP.

The steps they have taken to prop up housing are startling when you think about it.  They have gotten mortgage rates under 4%, backstopped Fannie and Freddie, and backstopped or bailed out half of Wall St.

So how is their bet working out?  It's failed miserably when you look at the numbers:

The headlines of course will tell you a different story.  They will say mortgage applications continue to rise and at first sight they are right:

However, when you dig into the numbers, they aren't pretty because the majority of these applications are refi's:

Applications for purchase(which is the only number that matters) continues to plummet:

My Take:

Since the housing tax credit evaporated the housing market has basically collapsed.  That bottom chart tells you all you need to know.  As you can see we are far below the levels of activity that were seen during the depths of the worst recession since the 1930's.

We are seeing this free fall despite the fact that interest rates are at ALL TIME LOWS.

What's scary here is I expect this number to get markedly worse moving forward because the foreclosure market has been shut down by the banks. 

Can you imagine how fugly those numbers are going to look as the foreclosure moratorium gets more baked into the cake?  These were the only houses that were really selling before the moratorium.

The Bottom Line

The numbers never lie.  Housing was a bubble and it's popping like all bubbles do:  Violently!

The Fed and the other retards can scream recovery all they want.  The harsh reality is it's not happening folks despite what the stock market is telling you.   This is not a new secular bull market that we have seen since since March of 2009.There will be no sustained tally in the market without the financials.  

The Fed can spend trillions and goose the DOW up to 12,000 if it wants but I can tell you right now:   It's not gonna hold.  Not as long as housing looks like it does above.

The sad truth is without housing the banks collapse and without the banks we have no financial system.

The Fed knows this and it's the reason why they are using every trick they have in their book to reflate the housing bubble.  Ben is on his hands and knees right now praying to god that you buy a house.

Despite all of their efforts it "ain't happening".  Housing prices are down 30-70% from the highs(depending on the market), interest rates are at all time lows, and Americans have reacted by doing absolutely NOTHING.

As long as they continue to sit on their hands this economy is going to go nowhere.

The Fed can keep rates at zero, throw the currency in the toilet, and QE all they want...It's not gonna matter.

Until Fed realizes this was the wrong path to take there will be no recovery.  Housing must be left alone and prices must correct down to levels where there is demand.

Spending our grandchildren's money trying to stop this inevitable correction is simply just plain silly and it puts our whole way of life at risk.

It's time to walk away Mr. Bernanke and let the market forces do their job.


getyourselfconnected said...

Great post again!

Sorry to clobber the anon last post but I could not help it.

Ok, I am gone in 3..2..1...

Jeff said...


No prob dude

Thats what comments section are for!

Safe travels and enjoy getting away from this insanity.

Anonymous said...

Absolutely! Well said, let the economy start the natural healing process rather then pushing it off until some time in the future. Maybe some intervention was needed at first to prevent a total meltdown but at some point in time no matter how much is thrown at the problem it will still need to run thru the natural cycle. Sure makes it tough to make a sound decision to commit funds to equities.

Jeff said...


Yeah it's hard to invest in anything right now!

I couldn't agree more. This can't last forever. There will be a time where we see the investment opportunity of lifetime as reality is priced in.

We just must be patient!