 |
Policymakers at the Federal Reserve, and many Wall Street economists, just don’t get it!
I know, you’re shocked to hear that. Those men and women always accurately, proactively identify trends in the economy — and respond properly to them, right? Wrong.
But it’s becoming increasingly clear that when it comes to a key sector of the economy — housing — they are once again missing the mark! They figured that by slashing interest rates to the bone, they would magically revive the animal spirits in the housing market, create a massive wealth effect that would radically bolster the economy and otherwise bring back the glory days.
Wrong again! Instead, they helped inflate an “echo bubble” in housing by creating a massive scramble among institutional and individual investors for income. Facing rock-bottom Treasury yields, those investors took their cash and dog-piled into rental real estate.
They increasingly outbid each other for property, driving prices higher and higher even as underlying economic growth, income growth, and job growth didn’t justify the double-digit price gains. Now, as those investors realize the folly of their ways and as rate pressure builds, we’re slipping further into the “Echo Bust” I predicted more than a year ago.
Even Fed Chair Janet Yellen, in testimony before the Joint Economic Committee in Congress today alluded to this. Her comments were generally upbeat on the economy, but she said that “readings on housing activity — a sector that has been recovering since 2011 — have remained disappointing so far this year and will bear watching.”
 |
| Fed Chair Janet Yellen clearly misread what slashing interest rates could do for the economy. |
The thing is, Yellen offered basically no insight into WHY that is happening. And that is sad. I believe it’s because the Fed doesn’t understand that housing’s problems go beyond the economics of homeownership — higher interest rates, tighter lending standards, lackluster wage growth, etc. It’s the psychology of potential buyers that I think is a key, underappreciated reason why housing is still stuck in the mud nine years after the peak of the real estate bubble!
You see, many of today’s potential first-time buyers don’t WANT to own a house! They saw their parents’ retirement dreams collapse in the housing bust. They may have lost a job in the recession, or know a friend or family member whose home tumbled into foreclosure.
Worse than that, many of them are buried in student loan debt. They are coming out of college buried in tens of thousands of dollars in loans, or more! That means their monthly budgets are being squeezed, making a mortgage payment less affordable, and their overall debt burdens are high enough that they may not meet today’s more stringent lending standards.
| “The Fed doesn’t understand that housing’s problems go beyond the economics of homeownership — higher interest rates, tighter lending standards, lackluster wage growth, etc.” |
Finally, they don’t want to be tied down to a house or specific neighborhood. They want to have the freedom to move if they have to change jobs, which many young Americans need to do these days. And they often want to live closer to their places of employment or in the city, versus the far-flung suburbs where builders have focused on developing for years.
The Wall Street Journal had a great story today that shows just how prevalent these trends are and what the implications may be. In the piece headlined “Developers Turn Former Office Buildings Into High-End Apartments,” the Journal explores how the East Ohio Gas building in Cleveland — a 21-story downtown tower that used to house offices of Ohio’s most respected companies — is being converted into residential apartments.
It’s not just Cleveland, either. The same thing is happening in Cincinnati; Baltimore; Richmond, Virginia; and Providence, Rhode Island. Developers are clearly responding to the needs and wants of their clientele who simply don’t want to own or can’t afford to own. Or in simple terms, unlike in the early 2000s, “rent” is no longer a four-letter word.
So don’t be surprised if you continue to see housing struggle — and continue to read about how flummoxed the Fed is at this development. They didn’t have a clue that housing was going to crash in the mid-2000s, and they don’t have a clue about why their strategies for “fixing” housing are continuing to fail now!
| OUR READERS SPEAK |
What”s going on over at the blog? Well, reader Mike thinks it’s “pretty common sense that all these mixed signals are Fed induced. When you suppress something you create a bubble or bubbles like we have now. I do not have a Ph.D. or Masters in economics, but I could do what the Federal Reserve has done.”
Mike, I agree that the Fed is going to get a serious lesson in the law of unintended consequences over the next few years. They’ve gone far beyond tinkering to intervention and interference on a grand scale — and it’s going to get messy from here!
Susie added her take on the financial data safety issue, saying that “If you are traveling, pay cash at restaurants and if by credit card, never let the card out of your sight … Be loyal users — they get to know your purchases and call you if they think anything is out of the ordinary.” Good advice Susie, thanks!
And finally, Bob M. spotted some ominous technical action in the market despite the recent record high for the Dow Jones Industrial Average. His warning: “The market often makes triple divergent tops on daily charts. Right now individual stocks are making triple divergent tops on weekly charts. This usually calls for a large correction.”
I said this week that either stocks or bonds are going to be proven “right” soon. I’m willing to wait it out a bit longer before getting aggressive with new recommendations, short or long. But if Bob is right, some inverse ETF protection or select put options might not be a bad idea!
| MARKET ROUNDUP |
Here’s a quick recap of the OTHER important news of the day …
 Remember that game of Pong from the early days of the video game era? That’s what the stock market feels like! First, we tank. Then we surge. Then we tank again. But we don’t go anywhere overall. That was the case today, with Yellen disclaiming any equity market bubble, helping becalm investors and sending the Dow up by 117 points on the day.
But tech stocks and small capitalization stocks continued to lag. Longer-term interest rates drifted slightly higher, while the dollar firmed up a bit ahead of tomorrow’s big European Central Bank policy meeting. Traders are waiting to see if ECB head Mario Draghi does anything to weaken the euro.
Sad, but true. Whatever happened to both workers AND shareholders prospering from American growth? Doesn’t this kind of stuff get you steamed? What do you think? Tell us here.
The stock collapsed by more than 20 percent at one point — its worst decline in more than seven years — thanks to weaker-than-expected earnings. Competition in the natural foods arena is putting pressure on margins — good news for consumers, not so good news for shareholders.
That’s happening despite the 10 percent penalty the IRS levies on withdrawals before age 59 1/2. Those penalties have surged 37 percent in the past decade on an inflation-adjusted basis, showing how strapped many Americans are.
Reminder: If you have any thoughts to share on these market events, don’t hesitate to use this link to put them on our blog.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
