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Pushing On A String: The Fed's Spectacular Failure To Stimulate Housing

Submitted by David Stockman via Contra Corner blog,

The “incoming data” was disappointing again yesterday - this time the culprit was housing starts which were off by 17% from January. But please don’t blame the “weather” again.

The data below is for single family starts which are less volatile than apartment construction. At an annual rate of 593k units in February they were almost exactly flat with last February at 589k. If memory serves, the second month of 2014 was the epicenter of last year’s famous Polar Vortex—–meaning that winters happen but this year’s tepid results cannot be blamed on a winter that was not as bad as the real bad one.

Besides that, the seasonal adjustments are supposed to factor in weather—especially the possibility of snow and cold in the Northeast. On the considerable chance that the seasonals are screwed up, however, just consider the raw unadjusted, unannualized numbers for the month of February. During the coldest winter in recent times last year, the actual number of single family starts during the month was 40,600. This year it was 40,700. You need a microscope to tell the difference!

Fortunately, it is not the hairline gain from last year that’s the real story in today’s downbeat housing numbers. What we have here is another powerful case of the Great Immoderation. That is, the havoc that the Fed’s bubble finance policies have visited upon the main street economy.

So sticking with the raw unannualized numbers for single family starts, go back to the turn of the century and you will find the monthly number for February 2000 was 88k or more than double the current rate. Then, by the top of the Greenspan housing bubble in 2005—which he had ignited to dig his reputation out of the dotcom bust and tech wreck—-the February number had soared to 124k. After that it rolled-over sharply and then finally imploded to a low of 25k in February 2009.

In short, in the name of improving upon the alleged instability of the private economy——absent the Fed’s expert ministrations—– the geniuses in the Eccles building have actually caused the rate of housing starts to gyrate wildly. To wit, by a factor of 5X from top to bottom—so far this century.

Maybe its time to take our chances with the good old unseen hand of the free market. Surely, it could not do worse than the gyrations shown below.

The above graph not only puts a stake in the Fed’s pretensions about its prowess as an plenary economic manager from its perch in the Eccles Building; it also obliterates the case for QE. The obvious starting fact is that when SF housing starts were booming prior to the financial crisis there was plenty of Fed stimulus, but not massive QE. By contrast, during the period between 2009 and 2014, the Fed purchased nearly $1.8 trillion of mortgage backed securities and debt issued by Fannie, Freddie and Ginnie.

That is not only a huge number, but in a relative sense it was ginormous. It amounts to more than 30% of the $6 trillion of GSE obligations outstanding. And it goes without saying that if you buy 30% of anything and are willing to pay the highest price the market requires——which is exactly what the Fed’s massive “bid” for GSE’s amounted to—-you will drive the price substantially above free market levels; and in the case of mortgages, yields will plummet inversely into sub-economic territory.

As shown below, that is exactly the result of the Fed massive bond buying program after March 2009.  During that period it bought $2 trillion treasury notes and bonds, driving down the benchmark rate for all other debt including mortgages. And then it piled on top of that massive intervention in the government debt markets another layer of intervention. Namely, the $1.8 trillion of GSE’s in an effort to squeeze down mortgage rates even further by reducing the historic spread between treasury’s and government guaranteed housing securities.

Sure enough, the average yield on 30-year fixed rate mortgages was nearly cut in half before the “taper tantrum” blip upward in the spring of 2013.

So why are SF housing starts still churning in the sub-basement of the historical range after all of this direct intervention in the mortgage market and heavy-handed interest rate repression? After all, the mortgage rates shown above represent bargain prices if there ever was such a thing. At the low point in early 2013, the after-tax-and-inflation yield to an mortgage investor would have been a mere 80 bps.

The reason that all of this financial repression—-and its corollary punishment of investors and savers—-did not spur a housing boom is, in a word, that the US economy is not a giant bathtub. The Keynesian model says pour “demand” into the housing market through what amounts to cheap, subsidized interest rates (from the hides of savers) and, presto, activity rates will soar.

Moreover, this is an all seasons formula. It doesn’t matter, apparently, where you stand in terms of prior history and borrower and lender balance sheet conditions; or what constraints might arise from structural factors such as household formation rates and the condition of the housing stock and its current utilization and occupancy rates. Just pour in the demand stimulus until the housing bathtub is full to the brim.

In fact, the Greenspan boom negated the Bernanke bond-buying binge. There was too much idle housing stock from the Greenspan bubble—–nearly 20 million unoccupied units including seasonal and vacation homes. There were too many households with impaired credit or underwater mortgages which couldn’t trade-up into demand for new construction of high value units. And unlike the past, there were millions of young families that could not provide demand for lower-priced “starter” construction units because they were burdened with student debt or ineligible for mortgage financing owing to unstable job and income circumstances.

So despite what amounts to a tidal wave of mortgage finance stimulus, new construction has remained in the sub-basement of history. Keynesian policy is all about the GDP accounts—–that is, about stimulating new spending for anything—-yet nominal spending for new housing construction is still at anemic levels.

So where did all the stimulus go?  In a word, it went into the refi market where it drove up the price of the existing housing stock, not into the financing of new construction and GDP. Like everything else the Fed does, this was a redistribution game, not a growth stimulant.

But even within the wholly inappropriate realm of central bank induced redistribution the results were capricious at best and deeply unfair in fact. Thus, the “refi” benefits did not go to the 35 million households who own their homes free and clear. If anything, they ended up with the tab as savers earning next to nothing on their deposits. And it obviously didn’t go to the nation’s 40 million renters, nor the 25 million or so houeholds who are still underwater on their mortgages or so close to breakeven that they can’t generate the brokers fees and down payments to access the refi market.

No, the whole misbegotten enterprise of financial repression in the home mortgage market delivered a wholly unearned windfall to 10-15 million of housing equity-rich and more affluent households which were able to ride the great Bernanke “refi” train during the last six years.

That’s random redistribution with a vengeance—a level of social caprice that even the most vacuous Capitol Hill politicians could not have dreamed up. Good job pushing on a string, Fed.