Looks like there’s a wave of optimism towards the housing market in the U.S. economy. Mainstream gurus are arguing that, because existing home sales are up and home prices are rising, we have a recovery in the housing market.
Let’s put the brakes on for a moment and take a step back.
For the housing market in the U.S. economy to enter a growth stage, there has to be increasing amount of first-time home buyers; people who actually buy a house to live in. They are the ones who take out mortgages, buy the new lawn mower, furniture, and other items needed for a new home.
But right now, we are seeing the opposite in the U.S. housing market—a lack of first-time buyers, a glut of investors.
In October, existing home sales data revealed that foreclosed and distressed homes accounted for 24% of all sales, virtually unchanged from September. At the same time, cash sales accounted for 29% of all transactions in October. Cash transactions were 18% of all transactions in October 2011. (Source: National Association of Realtors, November 19, 2012.). Year over year, we have seen an increase of 61.1% in cash transactions in the U.S. housing market. First-time home buyers do not pay cash.
So who is buying these homes? Who has the cash to buy houses? It’s definitely not the first-time home buyers—they are actually declining in numbers. In October, first-time home buyers accounted for only 31% of the purchases in the housing market. In September, first-time home buyers accounted for 32% of sales. A year earlier, in October of 2011, first-time home buyers accounted for 34% of sales. We’ve had a one-year decline of nine percent in the number of first-time buyers in the housing market!
So, here is what I think is happening. The housing market is improving only because investors are driving up the home prices in the U.S. economy. Again, it’s investors, not home buyers. Investors are buying in the housing market at an accelerated pace!
The chief economist at the National Association of Realtors agrees. He recently stated that all cash transactions in the housing market in the U.S. economy have increased significantly since 2008, as investors and the international buyers are the driving force of the market. (Source: National Association of Realtors, November 10, 2012.)
To give you perspective, 66,780 homes in the U.S. economy were bought by the investors in August alone—the highest number of homes purchased by investors since the beginning of the foreclosure crisis!
Money runs the point of highest return. For this reason, investors are buying houses, renting them out, and securing a rate of return they consider high and safe. So what happens to the housing market when interest rates rise and investors move their money to other investment forms that offer higher, more secure returns? The answer is that housing comes back down again.
The housing market in the U.S. economy is simply being propped up by the investors; cash sales and declining first-time home buyer data prove my reasoning. Until first-time home buyers start coming into the housing market, the talk of recovery shouldn’t be taken all that seriously.
Quantitative easing, a fancy name for increasing the money supply, invented by the central banks around the world, has been going on for years now. Does it work to stimulate the economy? Well, if it did work as projected by the central banks, the global economy wouldn’t be in such trouble right now.
As time goes by, central banks and the people that run them are coming to the same conclusion: quantitative easing can only go so far when it comes to improving the economy.
If you are a regular reader, you know I’ve been very critical about quantitative easing since the Federal Reserve announced QE1. I believe it serves the interests of large banks and Wall Street and does next to nothing to help the average consumer, the driving force of the economy.
However, the attitude towards quantitative easing by central banks may be changing, outside of the United States.
The central bank of England, the Bank of England, showed an astonishing development: the monetary policy committee (MPC) recently took a vote on further asset purchase. The result of the vote was eight against and one member for it. (Source: Bloomberg, November 21, 2012.)
What was their reasoning? Why has the majority of MPC members all of a sudden turned against quantitative easing? Do they realize that quantitative easing only works for a certain period and then returns diminish, or are they looking at other central banks in the global economy and realizing it doesn’t work at all?
Maybe after seeing that the Bank of Japan, having started its eighth round of quantitative easing, is still flirting with a recession in its country, the MPC members have realized it may not be worth it.
At about the same time the Federal Reserve announced its third round of quantitative easing, the Bank of Japan took a similar step for the eighth time. The central bank of Japan announced it will buy 10 trillion yen worth of assets. (Source: The Telegraph, September 19, 2012.) Through this, the Bank of Japan hopes to end the economic slump in the Japanese economy that has lasted for 20 years now.
Quantitative easing has clearly not worked in Japan. The Bank of England is turning against it. Will more of it work in the U.S. economy? I doubt it. It hasn’t worked despite multiple attempts. But I expect the Federal Reserve to keep following in the footsteps of Japan and announce QE4—maybe going to as far as QE8—as opposed to following the Bank of England’s lead of saying no to more quantitative easing. The more money printing there is, dear reader, the higher the chances of hyperinflation and the repercussions that follow.
Where the Market Stands; Where it’s Headed:
The bear market rally that started in March of 2009 is close to the end of its rope. Until the end of this year, I expect to see the markets trading sideways on very light volume. I believe 2013 will be a key reversal year for the stock market as the bear market rally and Phase II of the secular bear market retrench.
What He Said:
“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in Profit Confidential, November 29, 2007. The Dow Jones Industrial Average peaked at 14,279 in October 2007. A “sucker’s” rally developed in November 2007, which Michael quickly classified as a bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.