At the beginning of the year there was a growing chorus that U.S. housing was on the freeway to recovery. In March, I remember watching “Your Money” on CNN when hosts Christine Romans and Ali Velshi were pleading with Americans to buy homes before things really took off. Words like “hot” and “booming” were used liberally.
They were partly right. National home prices had risen about 15% from the recent bottom. However, prices were still off a significant 23% from the 2006 highs (prices had fallen 33% from peak to trough and have spent the last five years fluctuating in a range).
The miscalculation for those who thought U.S. housing was on a sustained recovery and back on a track towards its old highs was that it was a traditional recovery: the economy was doing a bit better, employment was slowly improving, and housing usually does well when this is the case. However, from our perspective, it was the financially-engineered and artificially low interest and mortgage rates that were pushing up prices.
The real reason is now more evident as mortgage rates have jumped since the Federal Reserve hinted that it would slow down the rate at which it pumps money and liquidity into the U.S. economy. Rates are up well over 1% since May.
One would think that a real recovery in housing would have a great deal of inertia. Instead, the 1% increase in rates has been enough halt the momentum. New mortgage activity highlights this. The number of new mortgages in the last three months has been hammered by about 30%. It has gotten so bad that yesterday the Bank of America announced that it had begun to lay off 2,100 mortgage-related staff. JP Morgan said that it now expects to lose money on home lending in the 2nd half of 2013 as new mortgage volumes will fall by 40% compared to the 1st half of the year.
Unless the Federal Reserve decides against “Tapering” the rate of money printing (which would be a bombshell announcement at this stage), U.S. housing is going to face headwinds. With prices only climbing to mid-2004 levels and still 23% below the peak, U.S. housing is falling well short of a full recovery. But, maybe it was never a real “recovery” at all if it was mostly due to Ben Bernanke, the Wizard of Oz, pulling levers behind curtains.
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