USA Watchdog | August 29 2012

There was some good news released yesterday by the Standard & Poor’s/Case-Shiller home price index.  Residential housing prices rose .5% year-over-year for the first time since June of 2010.  In a press release, David M. Blitzer, Chairman of the Index Committee, said, “All 20 of the cities saw average home prices rise in June over May and all were by at least 1.0%. . . . We are aware that we are in the middle of a seasonal buying period, but the combined positive news coming from both monthly and annual rates of change in home prices bode well for the housing market.”  (Click here for the complete Case-Shiller press report and release.)  

Does a .5% increase (year-over-year) really “bode well for the housing market”?  It has been widely reported the Federal Reserve has spent trillions of dollars suppressing interest rates.  There’s been quantitative easing (money printing), “Operation Twist” and near 0% interest on a key Fed lending rate.  A 30-year mortgage is hovering at or near historic lows–around 3.5%.  This is all we got after all that?  According to the latest Case-Shiller report, “As of June 2012, average home prices across the United States for the 10-City and 20-City Composites are back to their summer 2003 levels.”  Home prices are back to where they were 10 years ago and this is good news?

The 0% Fed interest rate policy and suppression game may be great for home buyers, but it is a total rip-off for savers.  People trying to get a return on their hard earned money are being robbed of hundreds of billions of dollars a year because of artificially suppressed interest rates.  CD’s are paying a fraction of a percent for locking up money for years!

Bloomberg was also jumping on the “good news” housing band wagon yesterday.  “Finally, the housing market is forming a bottom,” Mohamed El-Erian, chief executive officer and co-chief investment officer of Pacific Investment Management Co., said on Bloomberg Television’s “In the Loop” with Betty Liu. “That should be welcome. It is not surprising because affordability is so attractive right now.”  (Click here for the complete Bloomberg story.)  I guess Mr. El-Erian is right when he says, “the housing market is forming a bottom.” But I think you have to add one caveat to the equation, and that is the housing market is forming a bottom as long as mortgage interest rates are artificially suppressed! 

Remember, home prices are where they were 10 years ago.  You know what the average 30-year mortgage rate was 10 years ago today?  It was 6.32% for a 30-year loan.  (Click here and see for yourself courtesy of ycharts.com.)  It is a little less that twice where they are right now.  What do you suppose would happen to that “bottom” in home prices if the Fed stopped or could no longer suppress mortgage interest rates?  I would say the price declines would look like a cliff dive into a glass of water.

In a Cato.org article two weeks ago, monetary specialist James Dorn wrote, “The presumption is that the Fed can promote economic growth through easy money and “exceptionally low” interest rates. More likely, the Fed is creating another asset bubble, this time in the bond markets. . . . Investors have relied on the Fed to prop up prices when economic news is dismal. The “Bernanke put” has replaced Greenspan’s. The longer the Fed waits to normalize rates, the more costly the final adjustments to market realties will be.”  (Click here for the complete Cato.org report.) 

So, is this a true real estate turnaround?  I say no way.  When interest rates go back up, it won’t only be housing taking a cliff dive.  It will be the entire economy.