FOMC Day: There Has Been No Recovery – The Housing Bubble Is Re-Popping

The whole thing was in fact a giant lie used to cover up the fact that none of the money was spent to try and generate economic growth.  – Phoenix Capital Research LINK

The Fed’s FOMC is concluding another two-day meeting today and will issue its latest policy statement around 2 p.m. EST, as the idiots on financial tv sit on the edge of their seat trying to figure out which word or syllable has changed from the last policy decision statement.  The entire process is nothing more than well-staged theatre of the absurd.

How do we know the US is not in recovery? It’s really quite simple. If it were, the Fed wouldn’t have any issue with raising rates.  – Phoenix Cap Research

Now that we’re seeing retail sales decline month to month almost every month, manufacturing indices plunging to levels not seen since 2008-2009 and the GDP registering a decline, before inflation is stripped out – of almost 1% in Q1, it is highly improbable that the Fed will dare raise rates.  Not even a gratuitous quarter point bump.

Why this country’s debt-bloated, overleveraged financial system now has unmanageable levels of debt bulging for every nook and cranny in the system.  Even worse, there’s $100’s of billions of leveraged exposure lurking behind of the insidious facade of off-balance-sheet accounting at the big banks.

Then there’s housing bubble 2.0.  Only this time around its only a “price” bubble – as opposed to a price and volume bubble like housing bubble 1.0.   This price bubble has been fueled by the $2.0 trillion – and still counting as the Fed is still buying $10’s of billions of mortgages every month – of money printing.  – Investment Research Dynamics

Why do I say it’s only a price bubble?   Because, other than the loud noise of water cooler and cocktail party chatter about hot housing markets, transaction volume is at best tepid:

Based on the level of existing home sales for the last 7 years, it’s hard to characterize this as a “hot” market. Too be sure, there are some poor souls who are getting suckered into buying a home by their aggressive realtor, but they are competing with a large cohort of investor/flippers who YTD have represented roughly 40% of transaction volume (more on this later). Institutional investment buyers who drove volume in 2011-2013 are leaving the scene, with some of them unloading homes onto the gaggle of mom and pop flipper operations.

Here’s your housing bubble:   the median price of existing homes has soared 41% since 2012.  BUT as you can see from the graph just above, the price-action is not supported by volume.  As the volume dries up, there will be an an air-pocket collapse of the price.  Anyone who has traded relatively illiquid securities – homes are extremely illiquid most of the time – knows exactly what I’m talking about.  Once volume dries up and the market heads south, if you’re long, you’re wrong.

Speaking of a system bulging with debt protruding from every crevice, Jim Quinn’sBurning Platform featured a must-read article yesterday in which the author has discovered that the Loan-To-Value Ratio on Fannie Mae-issued mortgages is now at its highest level in history – nearly 10% higher than at the peak of housing bubble 1.0:

This is a debt and price bubble that has been fueled by the Fed and by the significant easing of credit terms for Government-sponsored and Government-backed mortgages. You can buy a home with effectively with a negative down payment. The Government requires a 3% down payment, the seller can subsidize up to 6% of your closing costs AND you can borrow the down payment.  That math adds up to a negative down payment.  Note:  Government = you, the taxpayer.

If the Fed raises interest rates, we will witness perhaps the the fastest systemic collapse in history.  We are going to witness a stunning collapse in housing anyway.  It’s just a matter of time before we see a reversion to the mean in which housing prices revert back to the true fundamental condition of the middle class in this country.  A fundamental condition which is has significantly and substantially degraded over the last seven years since the first housing bubble exploded.

Investment Research Dynamics