The Housing Shell Game: Prices Up, Ownership Down

Why are housing prices rising when the home-ownership rate has dropped to its lowest level in 18 years?

Actually, it's not as confusing as it sounds. The Fed's low interest rates have triggered a flurry of homebuying by Private Equity firms and other speculators which has reduced already-tight supply and pushed up prices. Of course, there is a downside to all this speculation, which is that real, "organic" demand from ordinary working people looking for a place to live, has dropped off sharply. That's why the homeownership rate is in the dumps. It's also why existing homes sales declined 0.6 percent in March and "the volume of purchase applications is at levels last seen in 1998," because as prices edge higher, more people are opting to rent rather than own. Who can blame them?

Five Star Institute economist Mark Lieberman has done considerable research on the homeownership rate by combing through the US Census Bureau report. He found that:

"The number of housing units held off the market in the first quarter though was 7,609,000 up from 7,299,000 in the fourth quarter and but down from 7,633,000 a year ago." (Homeownership Rate Drops to 18-Year Low, DS News)

Can you believe it? So the banks are keeping more than 7 million homes off the market to reduce listings, create the illusion of "scarcity," and push up prices. And just look at the numbers. They haven't budged in the last year, which means that things aren't really getting better at all. It's a complete hoax, in fact, it might be the biggest charade of all time.

That's why I still think the housing rebound is fake and that eventually prices will return to earth. Ultimately, a sustainable housing recovery depends on three things: Solid wage growth, low unemployment, and easy access to credit. Presently, all three of these are weak, which means the current surge in prices won't last.

Surprisingly, Fitch Ratings Agency agrees with me, or so it would seem, judging by a recent article in DS News titled  "Fitch: Recent Price Gains May Not Be Here to Stay." Here's a clip:

"While some might be rejoicing at the recent rising home prices and rising home sales seen across the nation, Fitch Ratings "still views these gains cautiously." In fact, the agency predicts price gains will slow and perhaps even reverse over the next year. ...

"While rising prices and sales volumes suggest a recovery, they are not moving in sync with key economic indicators that would otherwise support a sustainable price level. ...

"Persistent low interest rates, little new construction, and formerly-reluctant buyers are bringing action to the market, but Fitch warns this burst in demand will not last." (Fitch: Recent Price Gains May Not Be Here to Stay, DS News)

And Fitch isn't the only naysayer, Yale professor Robert Shiller is skeptical, too. Shiller maintains that "we might not see a really major turnaround in our lifetimes." Shiller's reaction may surprise many readers since his own Case-Shiller home price index showed (just this week) that prices rose a stunning 9.3 percent in the last year. That's hardly reason for pessimism, is it? Even so, just hours after the report was released, Shiller appeared on the Daily Ticker where he said he thought that, "Home prices will remain relatively stagnant for the next 10 years." Here's more from the same interview:

"Shiller says the housing market is operating in an 'abnormal economy' where the Federal Reserve is buying $40 billion worth of mortgage securities and $45 billion worth of Treasury notes each month. This has driven mortgage rates to record lows.

[...]

"The Fed will eventually stop buying these securities, says Shiller, and mortgage rates will rise...

"When asked where this all leaves the housing market 10 years from now, Shiller says home prices will be 'about where they are now' after adjusting for inflation." (See the whole interview here: Home Prices Will Remain Relatively Stagnant For Next 10 Years, Daily Ticker)

So, yes, the vast majority of analysts and experts say the housing recovery is real, but there are still a few contrarians, and their reasoning is sound. The fundamentals are weak, and they could get weaker still as the budget cuts take hold and the economy shifts into low-gear.