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!
My slogan is “analyzing the news to give you a clear picture of what’s really going on.” So, I spend a significant amount of time watching news on TV and the Internet and even the good old fashioned newspaper. If you only got your news from the mainstream media (MSM), it’s easy to understand whyso many people think the economy is not all that bad. For example, yesterday, I heard the “R” word a lot. No, I am not talking about recession but “recovery.” This is preposterous when you consider the latest report from the Case-Shiller Home Price Index that was released yesterday. The spin from the MSM said home prices were down from October to November by 1.3%. Makes you think—ok, not too bad. The real story is home prices declined on average by nearly 4% year over year. A quote straight from the actual Case-Shiller press release said, “For a second consecutive month, 19 of the 20 cities covered by the indices also saw home prices decrease. The 10- and 20-City Composites posted annual returns of -3.6% and -3.7% versus November 2010, respectively. These are worse than the -3.2% and -3.4% respective rates reported for October.”
Are you getting this? The real estate market is getting worse. The only city that saw an increase was the pork capital of the world—Washington D.C., and prices were only up by a paltry .5% year over year! All the folks I heard, yesterday, on the MSM talked as if the so-called “recovery” was alive and well, when the evidence shows unfolding disaster. Please keep in mind, home prices are falling despite the fact the Federal Reserve is suppressing interest rates. A 30-year mortgage is going for around 4%. What do you think will happen when rates rise to around 6.5% (a very good historical rate)? Don’t you think home prices will continue to slide?
Over the last several days, I began hearing a new description of the economy by the mainstream media (MSM)—“turnaround.” I can’t tell you how many different ways this phrase was used, but it was enough to get my attention. I don’t know who comes up with this stuff or where it is hatched, but I think this phrase is the new “recovery” term. Remember when we started out with “green shoots”? That phrase turned yellow and died. Then, there was the “fragile recovery,” and that turned into just a “recovery.” After that, we hit a “soft patch” and that was just “transitory.” Now, we have moved on to the “turnaround.” Is the economy turning around? The data says no.
Sure, we had a recent uptick in consumer confidence, and there was some improvement in car sales, but both are way down from their highs before the 2008 meltdown. When it comes to home sales, well, the most recent numbers from the Case-Shiller index shows an ongoing disaster. In the 20 city survey of home values, all but one market was down—Washington, D.C. This is, of course, the home of the big spending government. How much were home prices up there?–a whopping 1.3%. The average year over year decline in the entire 20 city survey was a negative 3.4%. Some markets, such as Tampa, Seattle, Minneapolis and Las Vegas, were down between 6% and 8.5%. In Atlanta, home prices were down by nearly 12%!
Please keep in mind, these declines are happening despite a 30 year mortgage rate of around 4%. Many say this is an artificial rate that is being engineered by the Federal Reserve. What do you think will happen to home prices when interest rates rise to a modest 7% level? Can you say second leg of a housing crash? I’ll say it again, what “turnaround”?