If the housing market is to see any sustainable growth moving forward we need to shore up our employment base. Fundamentally there has been a tremendous disconnect from measuring real estate growth and employment. This disconnect was the red hot fire that fueled exotic mortgage financing and led us into the biggest housing bubble the nation has ever witnessed. From 2000 to 2007 weak growth in the real economy didn’t stop housing from going up because lax lending and easy credit created a shadow economy based on funny money and neurotic real estate passion. It seemed like times were good but I’m sure a drunk also enjoys his buzz and isn’t thinking about the next day hangover. As of today, the entire housing market is being held up by a thread spun by incredible government intervention. When 95+ percent of all loans being originated come from Fannie Mae, Freddie Mac, and FHA insured loans you know this is unsustainable.

We’ve enjoyed a one year respite in the housing crash. Yet housing in many parts of the country is overpriced relative to local area incomes. I want to examine 10 charts that give substantive evidence that we are merely in the eye of the housing correction hurricane.

Chart #1 – Unemployment rate and labor force participation





It is often touted how great it is that the unemployment rate is falling. First, a large part of that has to do with massive government hiring. Next, a large part of the rate appearing better has to do with people simply dropping out of the labor force. The headline unemployment rate is 9.5 percent but if we count those unemployed and underemployed the rate spikes over 16 percent. Not only do we have an elevated unemployment situation, we have 40 percent of our country working in low paying service sector work. This doesn’t provide a solid foundation for growing housing prices let alone a bustling economy. Keep in mind we need to add 150,000 jobs a month simply to keep up with population growth. Our economy faces challenges that rival those of the Great Depression. If the unemployment rate were dropping because of adding a good portion of non-government jobs then that would call for a champagne celebration. Yet calling it great news by massaging numbers is simply an exercise in self-delusion.

Chart #2 – Pending home sales





Given the weak employment situation, it should be no surprise that simultaneously the amount of pending home sales has collapsed to record levels. The jump you see above from 2008 to 2009 came from gigantic forms of government stimulus. The Federal Reserve purchased $1.25 trillion in mortgage backed securities. Why? No other investor in their sane mind would buy this. The Fed has also kept interest rates dangerously low trying to encourage additional borrowing. Alan Greenspan instead of confronting the real structural problems that came after the tech bust decided to take the easy road out and created a credit bubble and brought on a plastic recovery. We now know none of it was real in sense of it being sustainable. The above collapse shows the sugar high running out from the Fed and also the very expensive tax credits.

Chart #3 – Construction spending





As home sales jumped on a sugar high from government intervention, construction spending did jump up in the residential sector. How long will this last now that the government is pulling back? And in the more sensitive commercial real estate market, growth has contracted. This is a better reflection of actual demand because who is going to build a strip mall during a time that consumers are embracing austerity? The residential sector did go up but again, this was merely based on massive government intervention that has no guarantee going forward. All we did was pull demand forward for one year and operated on tax credit fumes.

Chart #4 – Hires and separations





As expected hires have increased in the first half but this is largely due to government temporary hiring. But look at the separation line above. People are hanging on with their clenched hands to their jobs (jobs that are largely paying less). Do you think these people are looking to buy a massive ticket item like a home moving forward? The above chart does a good job reflecting the psyche of workers. Confident workers are willing to leave a job to find a position that better matches their wants in a healthy economy. What the above shows is that people are holding on tight to their positions even if they are not ideal and fund their needs. It is all about needs today. With 5 unemployed workers competing for each single job opening you can tell why the above pattern is holding.

Chart #5 – Export prices





During the Great Depression import and export prices collapsed. During this globally difficult time we faced massive deflation. Last week we saw that the CPI went negative. The market is so tight right now that there is little pricing power for producers. Ben Bernanke gave a speech a few years ago where he outlined every way we can avoid deflation. He hasn’t been shy about keeping rates low and also offering quantitative easing. But this has only helped the banks and that is ultimately who the Fed works for. Americans as a whole did not benefit from this easy money. In fact, say you buy a home today with a low down payment FHA insured loan, are you confident that you will have the money to pay off that debt for 30 years? If anything, the decline in export prices shows that people are not confident about the future and are more concerned about the present. They are competing on a price level and that is why even with home sales, the large push has come from lower priced foreclosed properties. As time goes on we are looking more and more like Japan.

Chart #6 – Employment changes in big counties





Even though the stock market rallied in the last year employment has gotten worse. The stock market is largely an indicator of the casino that we now call Wall Street and really doesn’t reflect reality for most Americans. Look at the above chart. While the stock market was raging in 2009 many large counties saw employment contract severely. This was across the spectrum. You have your typical Southwest locations but also Texas. Recent articles have talked about how immune Texas is from the contraction. Just because you don’t have a housing bubble doesn’t mean you don’t have people that used the same credit cards and auto loans to purchase other items. We’re all in this together and Wall Street banks are the biggest winners with the stock market rally. How anyone can look at the above chart and say things are economically good is beyond reason.

Chart #7 – Commercial real estate





Commercial real estate (CRE) prices are down 40 percent from their peak from only a few years ago. There is no pricing power in this market. CRE has collapsed and is also guilty of large amounts of toxic high flying mortgages. This market isn’t going to collapse it HAS collapsed. The only reasons we don’t see the ramifications of this more visibly is because banks are using extend and pretend tactics while siphoning off money from taxpayers. The CRE market is enormous coming in with $3 trillion in loans outstanding. Many of these bad loans are sinking smaller regional banks (we are reminded on bank failure Fridays). The big banks have these as well but they have a money sucking hose to the taxpayer wallet via the Federal Reserve and every loss they face is already buffered by the majority of Americans. More and more the public is waking up and public sentiment is furious. At a certain point, there will be massive calls for action. You think the public is looking to bailout the CRE market? There is no political will for helping this bubble market. In the end, reality will come to the surface.

Chart #8 – U.S. home prices





The only reason that you see home prices increasing above from 2009 to 2010 is because of the government. From the previous charts, you can see that prices did not go up because of income and wages growing. This is merely a tiny reflection of easy money coming from the government. But even with that, you can see that prices are way down from the peak. The median home price is still down by over 23 percent from the peak. Why would prices go up if incomes are not? There is little reason to believe we’ll see any jump here.

And this chart is very important. I hear people talk about the 1970s and how inflation eventually brought the price of everything up including wages. Well there is absolutely no pricing power for wages in our current market because we have largely outsourced our manufacturing base. Working at McDonalds isn’t going to buy you a $175,000 median priced home. Has anyone looked at what people earn in China? The real estate cheerleaders make little attempt to connect macro level economic movements with what is going on with housing prices. The Fed is vigorously trying to inject inflation into the market. But most of the money is going to the banks! It isn’t making its way back into the real economy. What sectors are we seeing wage inflation in? Without that, good luck seeing higher home prices.

Chart #9 – Total U.S. debt





We have more total outstanding debt as a percentage of our GDP than we did during World War II. Think about that incredible fact for a moment. In addition, during the early 1940s we had massive pent up demand and wages because of the deep problems of the Great Depression. Is a war going to boost our economy? If you haven’t noticed we are actively in two wars at the moment. Plus, modern warfare doesn’t require troops that resemble the Battle of Philippi. It puts things into a precarious state because anyone that is honest realizes we will never pay our debts back. Why would a global investor put money into a company it knows will never pay it back in full? Yet we insist on more spending without actually getting money into the economy. If we really want to stimulate the economy take all the money given to the banks and build infrastructure. At least it’ll leave something for the country instead of filling up the funds in some investment banker’s offshore account.

Chart #10 – Consumer sentiment





You might have noticed that the casino had a bad end of the week. Apparently the public realizes how bad things are out in the real world. Most people (as measured by ratings) don’t watch CNBC and are glued to their ticker tape counting their stock market wealth. Why? Because most of it is concentrated in the hands of the top 1 percent but more importantly, most pay their monthly bills and commitments through their job. The vast majority of Americans simply want a job that allows them to cover the needs of their family. They don’t care that someone shorted a stock and made a billion dollars. The demands of their daily life are so removed from that nonsense. That is why the above surveys are still near their lows. People are simply not confident with a bad economy. Outside of Wall Street, Americans are still having a tough time.

In a way, it is something of a coincidence that the big movie out is Inception. I love the tagline:

“In a world where technology exists to enter the human mind through dream invasion, a single idea within one’s mind can be the most dangerous weapon or the most valuable asset.”

Apparently some people were dreaming when they thought their most valuable asset was their home.

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