I normally listen to a few financial shows on my iPod but for the last month, took a hiatus from some of the financial media.  As I put on my earphones and listened to shows from early to mid-June, I realize how utterly wrong “analyst” are in predicting trends.  In fact, one show was aired when the DOW was up over 10,500 and they were talking how at the end of the month, only a few days away, we would end at 11,000.  We ended the month at 9,774.  Many in the financial mainstream press are like the shamans trying to heal illness with ritualistic dances.  In this case, the dance involves singing the praises of housing and the inevitable bull market run that is around the corner.

The first chart, shows the collapse in new home sales:

Chart 1 – New Home Sales

Why should we be concerned with the above?  New homes usually sell for a higher price but also create demand for jobs in construction.  With the market falling due to lack of demand (aka people dealing with a poor economy) there is little need for new home construction.  Much of the demand was pulled forward with every imaginable gimmick that the government could muster.  The U.S. Treasury and Federal Reserve have conjured up magical ways to get people to buy but there is only so much that can be done in the longer term.  The drop in new home sales shows us that the second half is going to be a major challenge especially for housing.  Keep in mind that spring and summer are the high selling seasons.  We have roughly two months for spectacular results before entering the weaker fall and winter.

When I talk with colleagues about a double dip we usually have to reflect on where things improved.  Sure, the 401k looks better than early 2009 but most don’t understand why.  They just assume that since the government juiced up Wall Street that somehow this will take care of itself.  Of course, much of the aid has been shifted to crony bankers who use the housing industry as a buffer for their own personal enrichment and at the detriment of society.  New home sales tanking is simply reality coming to a massively subsidized market.

Chart 2 – Employment by Sector

Government has been the big sector out there hiring.  Much of the growth in the last few months has come from temporary hiring by the Census.  As this retreats the private sector will need to pick up the slack but it doesn’t look like it can do it.  Some economist point to 1990 and 2000 with similar trends but 2010 is nothing close to those decades.  During those times, we weren’t dealing with an epic global housing bubble.  We also didn’t have a stock market reacting like the market during the Great Depression.  Right now the government is the housing market, employment market, and best friend to Wall Street.

The ADP report this week showed tepid hiring in the private sector.  This Friday we are expecting a job loss figure but the real data will be on how many jobs are added (or lost) from the private sector.  The trend of artificial stimulus is simply unsustainable.

Chart 3 – Deficit

It cost money to do all that we are doing.  The above chart looks like the balance sheet of many households.  A household with a budget like the above will be at risk of foreclosure and bankruptcy.  Yet for our government, we are supposed to believe that this is somehow good.  In May, we collected $146 billion in receipts.  At the same time we spent $282 billion.  For the current fiscal year we have a $935 billion deficit.  What are we spending this money on?

It would be one thing if we were spending these hundreds of billions in actually creating jobs and industry to put people back to work.  At least that I can stomach.  But we are using money for delusional tax breaks so people can buy homes they can’t afford and using the Federal Reserve as the Fort Knox of buying up mortgage backed securities.  There is something disturbing about the massive wealth transfer that is occurring in our country.  If the funds were actually going to putting people back to work it would be more palatable for the public but when all of it is going to backstop this real life Wall Street monopoly game, people start realizing something is seriously off.

If someone is going to argue about deficit spending they should at least argue that there can be no deficit spending without actually reforming the financial system first.  Otherwise, you simply spend more with the bulk going to financial firms and the tiny bit of crumbs that fall off the plate go to the economy.  It is taxpayer money that is keeping the system afloat yet they are being helped the least.

Chart 4 – Existing Home Sales

Existing home sales are a large reason why new home sales have collapsed.  Why pay that much more when there are tens of thousands of foreclosures to be had at much lower prices?  But even here, we are seeing demand wane as the tax credit euphoria begins to wear off.  This shows us that nationwide housing is in for a challenging second half.  Sure, the government can talk about extending tax credits and other gimmicks but part of the surge was the notion that “this was it” and people had to buy now to take advantage of these offers.  If we are going to have tax credits into perpetuity the market will simply adjust.  If people start seeing that home prices can move sideways and even fall going forward, why would they jump in?

You also need good income with a steady job to buy a home.  Those hundreds of thousands of Census jobs are merely temporary.  They won’t buy homes.  Who will?  Clearly the answer is not many once the air is let out of the balloon.  Going forward we need to have the economy and jobs stabilize before seeing any housing recovery.

Chart 5 – Home Prices

Home prices have moved sideways even with all the government intervention.  With some of this starting to wear off, we are likely to see two scenarios in the second half. The first one is a continuation of the sideways trend.  In other words, prices don’t move up or down.  The more likely case is prices move lower to reflect the demand pulled forward.  Should interest rates rise, this would be another reason to push prices lower.  Of course rates won’t go down because of the Fed but market forces can change dynamics quickly as we have seen in Ireland, Greece, and now Spain.  Certain areas of California are still clearly in housing bubbles.

There is much to be cautious about in the second half.  As I finished listening to the financial Podcasts from a few days ago, it is obvious that the so-called experts have no idea where we are heading.  They merely react to the day to day movements in the market and don’t take a larger macro approach.  The above data combined with massive amounts of shadow inventory and weak hiring tells us the economy needs to brace itself during the second half.  Can’t call it a double dip if most Americans are still in the trench.      

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To do the story justice, let us first examine the new home sales data:

Source:  Census

This merely reflects the underlying weakness with housing but more importantly, the fragility of the overall economy.  Keep in mind that this tax credit in combination with FHA insured loans allowed many recent home buyers to jump into homes with practically zero down.  For this reason, there is now a new inventory of home owners that are walking on a razor’s edge of financial peril.  FHA defaults have been skyrocketing due to the weakness in underwriting but also because the overall economy has not been fixed.  Too much time and money has focused on bailing out housing (what good did that do) and enriching the banking sector (which has “miraculously” done well in this crisis).  The housing market has merely been a charade for the public while banks setup protective barriers and funnel taxpayer money into their balance sheet to fix the gaping financial holes that they created.

Housing should be healthy because the economy is healthy.  Right now the government and Wall Street have it twisted.  They want housing to be healthy so the economy can be healthy.  And in more surprising news, it turns out that the tax credit has been abused:

“(USA Today) Despite efforts by the IRS to combat scams, thousands of individuals — including nearly 1,300 prison inmates — have defrauded the government of millions of dollars in home buyer credits, Treasury’s inspector general reported Wednesday.

The home buyer credit provided a federal tax credit of up to $8,000 for first-time home buyers for tax year 2008, the subject of the report. The credit, created to revive the housing market, was later extended to repeat home buyers. The latest credit expired with sale contracts signed as of April 30.

•1,295 prisoners, including 241 serving life sentences, received $9.1 million in credits, even though they were incarcerated at the time they reported that they purchased their home. These prisoners didn’t file joint returns, so their claims could not have been the result of purchases made with or by their spouses, the report said.

•2,555 taxpayers received $17.6 million in credits for homes purchased before the dates allowed by law.

•10,282 taxpayers received credits for homes that were also used by other taxpayers to claim the credit. In one case, 67 taxpayers used the same home to claim the credit.”

And what success do we have to show for it?  A record low amount of new home sales and foreclosures at peak levels (not exactly records you want to tout).  These are your tax dollars at work here.  If we look at the Southern California market we’ll see that MLS inventory continues to spike upwards in the peak spring and summer selling season:

In more wasted money to failed policies, $1.5 billion (a pittance to the trillions stolen by the Wall Street crooks) is now being given to the kings of foreclosure states with California receiving the lion’s share:

“(AP) According to the proposals from state housing finance agencies, the largest recipient of the funding is California, which will get nearly $700 million to assist about 46,000 borrowers.

California officials are asking for matching contributions from lenders for its programs, which provide subsidies to unemployed borrowers and those who have missed mortgage payments, and for reductions in borrowers’ principal balances.”

This is more nonsense.  Why not give money to unemployed renters?  Or what about helping to reduce debt for those who don’t own but have debt in other forms?  What makes housing debt so sacrosanct?  If we are giving away money we don’t have why stop there?  It isn’t that the public really desires this, the banking PR machines want this to line their pockets and saddle taxpayers with more junk.  This game has been going on for decades.  And then you wonder why the U.S dollar has done this over the years:

Sure we’ve seen the dollar spike up recently but this is only because the second largest reserve currency in the Euro is actually looking worse with their shenanigans.  Is that something to be proud about?  Over this time the amount of debt we have taken on and the amount we are taking on is putting more and more at risk for our future.  The Federal Reserve is concerned with preserving the security of a handful of banks even if this means keeping many people indentured to debt.  Now, government sponsored mortgage failure Fannie Mae is going to penalize those that walk away:

“Seven-Year Lockout Policy for Strategic Defaulters

WASHINGTON, DC — Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.

“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”

In other words, keep paying your mortgage on an overpriced asset or else you won’t be able to purchase another overpriced asset in a 7 year time frame.  There is little reason to believe the housing market will stand on its own two feet.  So when we get additional data in the next few weeks expect more “stunning” news that home sales are falling and indicators turn weak again.

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It is disturbing that there is a significant school of economic thought out there that somehow jobs do not matter.  This line of reasoning is baffling.  In many ways, this is similar to the collective deep capture that occurred during the housing bubble that somehow prices were justified even in the face of rampant fraud and mass delusion.  They don’t call it mania for nothing.  Take for example the wonderfully unstable budget of the biggest state of our country, California.

Only last week, State Controller John Chiang announced that the state is falling behind $1.1 billion in receipts from a budget only enacted three months ago.  Keep in mind the estimates made only a few months ago were conservative by California standards yet somehow money isn’t coming in.  This is occurring at the same time that the state has hiked taxes and is also front loading tax collections earlier.  To the obvious person on the street, you cannot tax someone without a job.  Well, that isn’t necessarily true because you can tax them on items they buy (in some counties like L.A. that rate is near 10 percent).

We are now 21 months into this recession.  Job growth is no where on the horizon.  It would appear that people are waiting for some ambiguous industry to emerge out of the ashes like some financial Phoenix.  Will it be the green sector of our economy?  Yet even in that optimistic scenario, does that sector have enough to make up for the 8 million jobs lost in this recession and the growing demands from a larger work force?  If we examine eras like the 1920s in Florida and their real estate bubble, prices did not come back for years.  So if you factor in the 1920s coupled with the Great Depression of the 1930s, things didn’t turn around for nearly two decades.  California and Florida are coming off unsustainable highs.  What does this mean?  Let us go back to the State Controller report.  What that translates to in the real economy is less money coming in to the government.  And that means either more tax hikes or more spending cuts.

Let us take a look at a sign of economic vitality.  U.S. Exports:

Source:  Federal Reserve

Does that chart look like a recovery to you?  Keep in mind the above chart factors in every imaginable bailout and trillions funneled into the financial sector.  Yet exports haven’t moved.  Before we can talk about housing rebounding and moving upwards shouldn’t we talk about the real economy first?

In this article we are going to examine 10 charts from housing to auto sales that show not much has changed at the core of the economy.

Chart 1 – Auto Sales

As it turns out, cash for clunkers was merely a way to frontload auto sales.  After seeing a spike in August sales the September number fell back to the year long trend.  As one colleague told me, we helped stimulate the foreign auto maker market since most of the cars bought were non-domestic in brand.  Talk about a horrible strategy.  Given that we now own GM and Chrysler making the U.S. government auto CEO, why would you want to reward your competitor?  Seems like our politicians don’t think things through because a one month boost came with an expensive price tag.

And is this even the right way to go?  Again, non-domestic auto makers make up a big part of our economy even though many provide jobs outside the U.S.  I’m all for open trade.  But why is the American taxpayer subsidizing this?  As we had speculated back when the cash for clunkers program was announced, this was a big gimmick like Hope Now and other policies that have yielded poor results in action.

Chart 2 – Housing Starts

This chart should tell you the big story regarding home building.  Sure, single family building is up a bit but wouldn’t you expect that with trillions being funneled into this industry?  But look at the chart closely.  Notice the multiple housing starts?  Still at record lows.  Why?  Because the market is saturated with inventory!  So trying to spur more building when we are seeing some 300,000 distress actions on homes hitting the market each month just doesn’t make sense.  If anything, it will prolong this housing slump.

Housing starts have fallen so hard that we have to go back to the Great Depression to find another similar trend.  It would seem that those calling bottom somehow believe that we are heading back to those 2005 and 2006 points.  We are not.  In their mind, everything is boom and bust.  No middle ground is allowed.  Let us assume we are back on normal ground.  Then what?  Why rush to buy a home now?  If we are back on normal footing then housing should reflect employment conditions.  After all, most Americans pay their mortgage from wages.  So until employment and wages move up, there is little rush to purchase a home right now and later charts will highlight why.

Chart 3 – Single Family Home Sales

The stabilization with home sales is largely due to the big amount of distress sales going for rock bottom prices.  Couple this with the Federal Reserve buying agency debt and keeping mortgage rates at historical lows and home buying conditions seem prime.  Add fuel to the flame with an extremely expensive $8,000 tax credit and sales go up.  It is simple.  Just like cash for clunkers.  Yet what happens when you remove that tax credit?  Cash for clunkers gives us a crude look at what will happen.

And look at new home sales.  They are off their lows but nothing remotely close to their peak days.  So this chart ties in with the previous chart because all the action is in the existing home market.  No need to build homes when people are buying and selling already made homes.  So much for those construction jobs.

Chart 4 – 30 Year Mortgage Rates

If you look at the chart above you can thank the Federal Reserve and U.S. Treasury.  What you don’t see is the parallel destruction of the U.S. dollar for these cheap mortgage rates.  There is no free lunch.  Mortgage rates are near historical lows.  Rates hovering at 5 percent don’t even mesh with historical standards.  Over the past 40 years the average 30 year fixed rate has averaged 9 percent.  That is, if we even revert to the mean rates will double meaning the amount people pay on a monthly basis will explode.
With Alt-A and option ARM loans not even eligible for these rates, how does this help distressed owners?  It doesn’t.  The market is artificially being juiced with trillions of dollars and at some point, something has to give.  The Fed is betting the economy will miraculously find some other bubble (i.e., technology, real estate, ?) and will expand again.  Yet we may be out of bubbles for the short term.

Chart 5 – Personal Savings Rate

Americans started saving at a pace not seen in decades.  Yet the cash for clunkers program and the home buying tax credit once again got people out and buying.  But is this sustainable?  It is too early to tell.  The recent dip is because of these last two programs.  The next phase will be the holiday shopping season.  Many retailers depend on the November and December months for a large chunk of sales.  We will soon find out how tapped out the average American is.  Last year, people went out shopping like crazy even though economic indicators were equally poor.

Yet over this year, credit card companies have been yanking lines in light of higher default rates.  Without the plastic, will Americans shop till they drop this Christmas?

Chart 6 – Hours Worked

The work week has gotten shorter.  So short, that it is the lowest it has been in record keeping history dating back to the 1960s.  The average American work week is now down to 33 hours.  Keep in mind this is for the employed.  If we look at the under utilization rate (includes fully unemployed and those working part-time for economic reasons) the U-6 rate is up to 17 percent.  The above chart reflects those but also those who supposedly have full-time jobs.

What is occurring is overtime is being cut and furloughs are being implemented like the 200,000 state workers of California that are now earning less.  Earning less means less money to spend.  The state is learning this lesson quickly.  Jobs absolutely matter.  The problem is Wall Street has captured our political process and convinced many that if Wall Street is happy, somehow little crumbs will trickle over onto Main Street and all will be well.  So far, politicians have given everything the bankers have requested and nothing has changed on the streets of America.  How is TARP working out?

Chart 7 – Household Debt Burden

Even as debt is being destroyed through foreclosures and bankruptcies, many households are still in record amounts of debt.  Why?  Because losing jobs and less pay reflect a new reality even though the system is washing out old obligations.  Debt is not wealth as many are now realizing.

This above chart may show why the American consumer is reluctant to go out and spend without getting massive incentives like cash for clunkers and home buying tax credits.  Are we now going to give Americans a $1,000 holiday shopping voucher?  Some in the retail sector have asked for similar goodies.  Make no mistake that the crony bankers will ask for anything to fluff their own profits.

Chart 8 – Household Debt Service

Now the above is a fascinating chart.  What we see is a trend of less financial obligations for renting households.  Rents have been falling across the country.  This only makes sense since people are earning less.  However, the financial debt obligation of homeowners is still near peak levels.  Same amount of debt on a home that has seen equity evaporate.

Many people are now unable to qualify to buy a home and that is okay.  We need to remember that during the bubble anyone with the desire to own was given that opportunity.  Alt-A and option ARM products were the mortgage of choice for many.  We are dealing with the repercussions of those decisions even today.  In fact, we have yet to deal with them since 2010 to 2012 will bring many of these home loans to roost.

Chart 9 – S&P 500 Double Bubble

The above is perfect chart of the double bubble we have experienced in the last decade.  It is interesting to see the recent trend as if a triple bubble is in store.  The market is trending as if we will have a V shaped recovery.  As we have seen with all the data above, if anything the cliff diving has stopped but this does not equate to a booming recovery.  We are betting on another bubble even in light of no job growth and also trillions in bad loans coming due soon including commercial real estate.
The market price/earnings ratio is still high.  It believes that 2010 will somehow bring back a 2005 year.  But digging beyond the debt, 2005 wasn’t a stellar year.  The only reason it looked stellar was the mania in housing and absurd financial sector profits.  The financial sector profits are back with taxpayer money but the boom in construction is nowhere to be found.  Unemployment is also officially nearing 10 percent.
Chart 10 – Health Care Employment

Maybe the next bubble is in healthcare?  This chart tells you the story of an aging population that doesn’t make much anymore since it has outsourced a gigantic portion of its manufacturing base.  Many younger workers are looking at boomers who lived up the 1960s and 70s, got serious in the 1980s and 90s and now are expected to shoulder the burden of their entitlements all the while understanding that they will not have those benefits when they retire.  If anything, just look at the ages of those on Wall Street.  The young brokers were merely fodder in the recent downturn as we saw these young Gordon Gekkos walking out of places like Lehman Brothers brown box in hand with desk goodies and a sad look on their face.  Yet their bosses made out with millions in bonuses.  So much for company loyalty.

Healthcare costs are growing and so is this part of our economy.  With many boomers retiring in the next few years, an inordinate amount of stress will be put on our system.  Younger generations are not having gigantic families anymore.  So there are fewer people paying into the system for an enormous size of our population who will now start collecting.  Social Security is minimal with average payments around $1,000 to $1,300 a month.

Yet younger workers are looking at this and also seeing these workers with pensions of $4,000 to $6,000 per month (and higher) and are now told to put their money into the 401k casino and hope it makes out because Social Security will be a shell for them when their time comes.  Many have lost thousands in this recent crash that was the deepest since the Great Depression.

I doubt healthcare will be the next boom.  This is a cost to our economy that is only set to go higher as people retire.  What is the boom going to be in?  Viagra?  With annual sales of over a billion, maybe this is the boost the economy needs.  I mean is this what it now boils down to?  We need to get back to making things.  The economy for much too long depended on youngsters in front of Bloomberg terminals punching in keys and trading billions of dollars as if it were the new version of Halo.  Then the “real economy” was largely based on everyone dressed up in a suit pretending they were the next HGTV flip this house expert and trading homes like baseball cards.  It was so easy.  Paper pushing and house flipping.  Heck, at least in the technology bubble we were left with some great companies.  What are we left with after this housing boom?  Gigantic McMansions for families that don’t even plan on having that many kids.
Until jobs start showing up, any talk of a rebounding housing market is moot especially with this entire artificial stimulus still bouncing around the economy.  And collapsing tax revenues are not a good sign.  I don’t buy the jobless recovery argument and the government tends to agree.  If all is well, why is the U.S. government and Fed buying $1.25 trillion in agency debt to lower mortgage rates, putting in place an $8,000 tax credit, boosting car sales with gimmicks, encouraging risky low money down loans with FHA insured products, and extending unemployment insurance to a record 92 weeks in states like California?  Do these things sounds like policies of a booming economy?

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What you will find in the following headlines is a scatterbrain attempt of the media trying to make sense of an economic bubble.  Instead of examining the deeper intricacies of the market and looking at the U.S. Treasury and Federal Reserve the media seemed to report what was one step in front of it.  If that is the case, then who is really minding the store?

Let us go through each year and watch as the housing market was reported in the press for the past decade.  The evolution is fascinating.

2000 – Incredibly, we find articles were the press is questioning affordability, looking at incomes, and even wondering if housing has hit a peak!

May 18, 2000 (USA Today)

Priced out of Silicon Valley Insane housing market is pushing away teachers, police

“Local governments prosper from higher tax revenue, but a real- estate market that stretches reality keeps hammering the middle class. Escalating rents and housing prices make it particularly hard for teachers, police officers and city workers to live where they work, or even close to where they work. Many can neither afford the rents nor qualify for mortgages. Increasingly they are leaving for jobs outside Silicon Valley.”

May 23, 2000 (Business Week)

Has the Housing Market Hit Its Ceiling?

“For several years, economists have unsuccessfully tried to call the top of the white-hot housing market. Each time they’ve been foiled by unexpected stock market gains that boosted consumer confidence and wealth. But with stocks cooling off since the start of the year and interest-rate hikes coming in bigger increments from the Federal Reserve, the experts may finally get it right.”

September 14, 2000 (L.A. Times)

Heat Wave Hits Housing Market; Declining 30-year mortgage rates, rising consumer confidence push county’s median price up 14% from ‘99.

“Led by spectacular gains in the new-home market, the median price of Orange County houses and condos sold last month jumped by 14% from a year earlier to a new record of $274,000.

Even so, the big price gains in markets such as Orange County have shut out more and more families. Based on income estimates and mortgage rates, only 27% of Orange County families can purchase an existing home, according to recent reports from the California Assn. of Realtors. In Los Angeles County, fewer than 40% of consumers can afford a home.

Builders, however, are putting up ever more expensive homes, out of reach of most buyers. Indeed, the median price of a new Orange County home sold in August was $400,250–up 22% from a year earlier. Existing houses jumped more than 13% to $295,000 and existing condos rose more than 11% to $181,250.”

2001 – We need to remember that a recession is on us at this point.  The stock market gets hammered.  Interestingly enough we have people looking at housing to dig us out of the economic malaise.

January 8, 2001 (BBC News)

Housing market – boom or bust?

“With conflicting signs all around, Dharshini David examines what really happened in the UK housing market over the past year.

Are we set for a year of rising prices – or have the good times finally come to an end?”

June 11, 2001 (Newsweek)

Sold! Can a hot housing market save the economy from the deep freeze?

“Carl Statham isn’t sticking to the script. In a sputtering economy, consumers are supposed to rein in their spending, particularly on big-ticket items. Yet even with the faltering stock market and headlines about mass layoffs, Statham and his wife, Gloria, recently moved into a new $1 million home near Chicago–complete with an indoor driving range and putting green to lower his 12 handicap. It’s not that the Stathams are immune from the ups and downs of the economy. They own an auto dealership, and sales have softened as shoppers downshift to buying cars based more on need than want. But as Statham lines up a practice drive in his 6,000-square-foot home, he seems confident that his new house is a better bet than Tiger Woods’s sinking a six-inch putt. “A home is the safest investment to make right now,” he says.”

November 7, 2001 (Contra Costa Times)

Uncertainty Hits California’s Housing Market.

“Patience has always been a virtue when looking to buy into the Bay Area’s real estate market. For Bob and Lori Edwards, however, patience became a necessity as they were forced to deal with the uncertain and unexplored — the post-Sept. 11 housing market.

The Edwards began their house hunt in Concord again in early September after an earlier deal fell through. They were willing to spend around $350,000.

There was only one problem. It appeared no one wanted their money.

“We found nothing on the market,” Lori Edwards said of home listings right after the tragedy. “It was like everything went on hold right after Sept. 11.”

2002 – Bubble talk is still on the table.  People associate the housing market with the economy.

February 13, 2002 (San Diego Tribune)

Housing market propels economy, S.D. analyst says

“The stock market slaughter wiped out $4 trillion of wealth between 2000 and mid-2001, says [Todd Buchholz]. But over the past three years, home values have gone up 5 percent annually. That has added $2 trillion in wealth that has helped offset the stock market’s mayhem.

Massive mortgage refinancing last year (55.7 percent of mortgage originations) dropped monthly payments sharply. “For each point that interest rates fell, the average homeowner has saved $150 to $200 per month,” says Buchholz.

The value of U.S. housing jumped from $8.8 trillion in 1992 to $14 trillion last year, says Buchholz. Lower-priced homes appreciate more than higher-priced ones, he says.”

July 24, 2002 (Fox News)

Housing Market Roundtable

“NEIL CAVUTO, HOST: With stocks tanking, everybody wants to know what’s going to be the next bubble to burst? Could it be the housing market? Who better to ask than the heads of the top homebuilders in the nation. From Dallas, Larry Hirsch, the CEO of Centex Corporation; Donald Tomnitz, the CEO of DR Horton; and from Miami, Stuart Miller, the CEO of Lennar. Gentleman, welcome to all of you.”

November 24, 2002 (Boston Globe)

IS HOUSING MARKET A BUBBLE THAT’S WAITING TO BURST?

“Q. As a renter in Boston for the past five years, I have kept my eye on the real estate market, trying to figure out when to jump in without drowning. I have been saving actively, and at this point the down payment is no longer a problem.

I have been told not to try to time the market, but the speed with which home prices are accelerating is a huge concern. To try to get more house for my money, I have been looking at multifamily homes, but even there, the trend is scary for a first-time.”

2003 – Greenspan says housing likely to cool even though his dropping of rates spurs the buying frenzy.  Warnings of a crash enter the headlines but not on mainstream outlets like ABC or CBS.

March 5, 2003 (Toronto Star)

U.S. housing market likely to cool, Greenspan cautions ; ‘Home prices could recede,’ top banker warns Sharp decline ’seems most unlikely,’ he adds

“U.S. Federal Reserve Board chairman Alan Greenspan said yesterday that the high-flying U.S. housing market is likely to lose a bit of altitude this year. That could slow consumer spending, one of the American economy’s few bright spots, he cautioned.

“The frenetic pace of home equity extraction last year is likely to appreciably simmer down in 2003, possibly notably lessening support to household purchases of goods and services,” Greenspan said in a speech delivered via a satellite video link to the Independent Community Bankers of America meeting in Orlando, Fla.

U.S. Federal Reserve Board chairman Alan Greenspan, shown here testifying on Capitol Hill last month, sparked criticism from builders yesterday by warning house prices could “recede.”

July 23, 2003 (L.A. Times)

Hot Housing Market Isn’t Cooling Off; The median sale price of a Ventura County home reached $396,000 in June, up 18.2% from a year ago and second- highest in the region.

“Depending on the sales category, median prices increased by $56,000 to $108,000 in the year-to-year period. Resale home prices rose 16.8%, to a median of $410,000, while new home prices increased 24.2%, to $555,000, according to DataQuick. Condominium prices for resale increased 24.3%, to $286,000.

Oxnard experienced sales increases from 19.3% to nearly 37% in June, depending on the ZIP Code. Median prices rose 14.3%, to $392,000, in the 93035 ZIP Code and 39%, to $365,000, in 93030. The 93010 ZIP Code in Camarillo saw 31.4% more sales last month — 92 compared with 70 in 2002 — while median prices climbed 9.6%, to $400,000.”

November 5, 2003 (The Independent)

Vincent Cable: Be warned – the housing market is about to crash

“Little has been learned. Lemming-like behaviour by banks is familiar to students of past debt crises.

As the Bank of England Monetary Policy Committee meets, almost certainly to raise interest rates, there is growing alarm in government about an impending crash in house prices. Higher interest rates and falling house prices could trigger a bloody end to economic growth driven largely by unsustainable consumer debt tenuously secured against nothing more substantial than asset inflation.

As the Bank of England Monetary Policy Committee meets, almost certainly to raise interest rates, there is growing alarm in government about an impending crash in house prices. Higher interest rates and falling house prices could trigger a bloody end to economic growth driven largely by unsustainable consumer debt tenuously secured against nothing more substantial than asset inflation.”

2004 – C.A.R. misses bubble peak for California housing.  Tons of people start getting jobs in real estate as an easy meal ticket.  Housing bubble talk is a myth.

February 12, 2004 (The Washington Post)

In Hot Housing Market, a Booming Job Shelter; Real Estate Beckons As Ranks of Agents Expand in County

“It was the first tour of the day for [Hollie Pakulla], an agent for two years in the Columbia office of Coldwell Banker Residential Brokerage. She answered questions as the husband and his pregnant wife enthused about the wet bar, wood floors and $1,000 special- order chrome bathroom faucets.

Many were people like Pakulla, who in 2001 left a 13-year career as a Prince George’s County firefighter and spent about $1,500 to take classes and tests to become an agent. She was following in the footsteps of her mother, father, brothers and sister. Her first listing hit the market that fall. She has since sold 76 houses for about $13.5 million and was last year named rookie agent of the year by the Maryland Association of Realtors.

Pakulla has to brace home buyers for the county’s soaring prices, some of the highest in Maryland. Howard’s reputation for good schools and a strong quality of life continues to lure new residents while a local housing shortage drives costs up.”

July 09, 2004 (The Record)

California Realtors group’s economist says state’s housing market has peaked.

“The hot California housing market has hit its peak and is going to start cooling off, because the price growth of the past two years is too strong to sustain, the chief economist for the state Realtors group said Thursday.

You can’t maintain annual price inflation that has ranged in some areas between 25 percent and 40 percent, the California Association of Realtors’ Leslie Appleton-Young said at what has become an annual luncheon presentation to members of the Central Valley Association of Realtors. (The state median sales price — half sold for more, half for less — was $465,160 in May, up 26.5 percent from May 2003.)”

December 30, 2004 (The Street)

Reasons the Housing Bubble’s Still Bunk

“Speculation that there might be a bubble in the housing market appears wrongheaded. While it certainly is true that housing market activity and home prices are at elevated levels, there is little basis for believing that housing prices suddenly will ratchet downward.

The elements of a bubblelike condition simply do not exist, particularly in light of the low level of housing inventories relative to sales. Moreover, the laborious nature of real estate transactions is so great and the nature of home ownership is such that liquidations are extremely unlikely to occur en masse.”

2005 – This is where an interesting shift occurs.  As you noticed in the last articles, there were a few who called it right.  There economic analysis was right.  Yet by 2005 the vast majority assumed housing was at a new permanent high.  Greenspan won’t target housing market although he created bubble in first place with low rates.

February 23, 2005 (Dallas Morning News)

Foundation strong for housing market.

“Demographic pressures are so strong that the U.S. housing market will continue to grow even if interest rates rise, the chief economist for the National Association of Realtors predicted Tuesday.

David Lereah told a meeting in Dallas that the current housing boom is likely to last through the decade.

“The real estate market is still booming all across the U.S.,” Mr. Lereah said. “You can’t apply conventional wisdom to the real estate markets anymore.

“Interest rates going up don’t necessarily mean real estate will go down.”

July 22, 2005 (L.A. Times)

Fed Won’t Target Housing Market

“The revelation came as Fed Chairman Alan Greenspan on Thursday said the cooling of home prices in some regions could have a negative effect on consumer spending, both locally and nationally.

Greenspan also reiterated his view that economic growth is solid, inflation is well-contained and the Fed intends to continue raising interest rates to keep inflation at bay.

The minutes of the last Fed rate-setting meeting indicated that the Fed believes that targeting any asset bubbles, such as in housing, would be counterproductive.”

December 7, 2005 (USA Today)

Sustained decline forecast in U.S. housing market

“The U.S. housing industry is in for a sustained decline, though signs of a cool-down have been slower to emerge than previously expected, according to the quarterly UCLA Anderson Forecast released Wednesday.

The widely respected forecasting center at UCLA said rising interest rates, slowing population growth, overbuilding and the fact that prices had reached bubble-like heights in some hot areas will drive the decline. Housing, which had been a big driver of growth, is contributing little to the economic expansion at present, the forecast said.”

2006 – Doubts creep into the market.  Ironically, the financial press like MarketWatch actually support a stronger housing market.  Experts headlines miss housing market completely.

February 4, 2006 (BBC News)

Optimism in housing market soars

“Confidence in the Scottish housing market is booming, according to a new economic study.

Experts at the Clydesdale Bank said optimism was at its highest level since their research began in 2001.

Latest figures showed almost 75% of people in Scotland expected to see property prices rise this year.

At the same time, the survey showed the prospect of higher council tax bills was deterring many first-time buyers from purchasing.”

August 10, 2006 (Seattle PI)

Housing market starting to wear thin

“The “For Sale” signs are staying out longer. House prices are easing as sellers try to lure in buyers.

The big question now: Will the nation’s five-year housing boom turn into a devastating bust that could derail the overall economy?

“We recognize the risk … and we are watching it very carefully,” Federal Reserve Chairman Ben Bernanke told Congress recently.

The Fed’s interest-rate increases, which have helped push mortgage rates to the highest levels in more than four years, are putting a damper on housing.”

December 21, 2006 (MarketWatch)

Shelter in a storm: Housing market got buffeted in 2006, expected to stabilize in 2007

“For many residential real-estate markets in the U.S., this year started with an advantage to sellers and ended with buyers holding the upper hand. But, unlike some people had expected, the switch didn’t follow the deafening “pop” of a massive real estate bubble.

That spells good news for both buyers and sellers in 2007, as markets return to balance, prices moderate and, if interest rates remain subdued, sales begin to edge higher.

Many markets saw slower home-price increases and a build-up of inventory in 2006, much to the dismay of optimistic sellers. And while speculators — investors who many argue are partially responsible for the massive housing boom — tried to exit the market, buyers began waiting out the correction to get the best prices, causing a drop in home sales.

In many areas, however, the correction wasn’t as harsh as some had feared. In fact, the year as a whole might even have been described as “healthy” if the country’s perspective hadn’t been skewed by the boom of the past few years, said John McIlwain, senior fellow for housing at the Urban Land Institute. The market is still “well within long-term norms,” he said.

“I think the story of the year is the bubble that wasn’t,” McIlwain said. “Instead of a bubble busting, so far it has been a healthy correction.”

2007 – Cracks in the damn.  Yet the real estate industry at this point believes in a new permanent high.  This is like the Dow 30,000 book.  Robust housing market is only the last drink before the lights get turned on and end the party.

February 15, 2007 (Boston Globe)

Prediction: “robust” spring housing market

The planets are in alignment for a “robust” spring housing market as local consumers could experience the best buyers market in more than a decade, a Boston mortgage company said today.

Recent sales have been slumping; prices have gone sideways and down, but Summit Mortgage LLC sees a bright silver lining ahead.

“With reduced home values, historically low interest rates, and pent-up consumer demand, I think the spring real estate market will be a home run,” Richard S. Fedele, Summit’s chief executive, said in a statement. “We’re now seeing more affordability in the housing market than we’ve seen in years.”

May 25, 2007 (Forbes)

Housing Market Decline Eases

“The U.S. housing market may not be in a rebound yet, but the hemorrhaging seems to have eased. Existing home sales slid 2.6%, to the slowest pace in four years, real estate agents said on Friday. But the rate of decline is slowing and there are some signs that a bottom is near.

At the current rate the seasonally adjusted annual rate is 5.99 million units said the National Association of Realtors on Friday, slightly below analysts’ expectations of 6.13 million homes. The larger-than-expected drop in existing home sales, which represents 85% of the entire housing market, disappointed the Street but it was a smaller decline than the 8.4% plunge recorded in March.”

November 14, 2007 (Atlanta Journal Constitution)

Housing market at the bottom, realtors say

“The market for existing homes is “hitting the low right now” and heading for a “modest recovery” next year, the chief economist for the National Association of Realtors said at the group’s annual convention here Tuesday.

Existing home sales will be “much softer” this quarter compared with the same period last year, the economist, Lawrence Yun, said at a news conference. He said that for all of 2007, sales nationwide would fall to 5.67 million, compared to 6.48 million in 2006.

NAR expects the national median price of existing homes to decline 1.7 percent to $218,200 for this year, and hold steady at about that level in 2008.

The number of sales will rise to 5.69 million next year, Yun said. But the housing recovery will be very uneven, with some markets bouncing back more quickly than others, Yun predicted.”

2008 – Market falls hard.  Implosions ripple through the industry.  It becomes apparent that housing was the economy for the past decade.  That early headline in the decade called it stating that housing would pull us out of the 2001 recession.   NAR starts begging for money for housing market.

February 12, 2008 (Forbes)

Foreclosures hurt housing market further

“A growing share of home sales are from foreclosures, especially in states hardest hit by the housing bust. In some parts of California lately, nearly 50 percent of home sales come from foreclosed houses.

The trend, which is putting additional downward pressure on home prices, is most notable there and in Nevada, Colorado, Tennessee and Michigan, but is also evident in Ohio, Georgia, Florida and Arizona, according to an Associated Press comparison of 2007 sales and foreclosure data. In Nevada, for example, 17.5 percent of home sales were from foreclosures, more than quadruple the number in 2006.”

July 8, 2008 (CBS News)

Stocks Down Again On More Evidence Of Weak Housing Market

“U.S. stocks on Tuesday twisted lower in indecisive trade as comments from Federal Reserve Chairman Ben Bernanke offered only some respite from credit-market jitters and as an index offered further evidence of a weakened housing market.

“Unless and until the economic clouds part, we’ll likely see the housing market continue to struggle,” Mike Larson, analyst at Weiss Research, said of the National Association of Realtors’ measure of pending home sales, which fell 4.7% in May. .

Down at the start, the Dow Jones Industrial Average tossed its losses aside within the first 10 minutes of trading, but struggled to retain its gains, recently falling 39.41 points to 11,192.55.”

November 7, 2008 (TIME)

How to Revive the Housing Market: A Proposal from Realtors

“The National Association of Realtors (NAR) is lobbying for the U.S. government to artificially lower mortgage rates by purchasing loan points for home buyers. They say the program would cost $100 billion, and could raise home prices as much as 4% nationwide. Anyone buying a house for primary residence would be eligible for the mortgage-rate buydown, which would lower a purchaser’s loan rate 1% for the life of the loan. They say the incentive should be made available for the next 12 months. “The sentiment in Washington is that we need to get the housing market moving to get the economy back on track,” says Lawrence Yun, chief economist for the association. “We need to strike while the iron is hot.”

2009 – All of  sudden all is well even though American households have lost $12.2 trillion.  The real estate industry has seemed to forget the rollercoaster of a decade.  Data is mixed in the headlines.

January 27, 2009 (The Washington Post)

Existing-Home Sales Spike As Bargains Glut Market

“Homes sales surged unexpectedly last month, fueled by record-setting price declines in one of the weakest housing markets in 20 years.

Bargain hunters are making their way through the backlog of homes, but the market remains weak, analysts said. The recession is weighing on potential buyers, making a market recovery — or even stabilization — unlikely soon, the analysts said.

Existing-home sales climbed 6.5 percent to a seasonally adjusted annual rate of 4.74 million in December, according to the National Association of Realtors. That was better than analysts expected. Sales fell 3.5 percent compared with December 2007.”

July 23, 2009 (Mercury News)

Data show housing market starting to recover

“The U.S. housing market has started to recover from the most far-reaching crisis since the Great Depression, data released Thursday show.

Sales of previously occupied homes rose for the third month in a row in June, the National Association of Realtors reported. That hasn’t happened since early 2004, during the boom.

“The turnaround in the housing market appears finally to be here and indeed may be gaining some speed,” wrote Joel Naroff, president of Naroff Economic Advisors Inc.”

September 16, 2009 (ABC News)

Homeowners Struggle as Housing Market Slowly Recovers

“When real estate broker Sherri McBroom drove through a Phoenix suburb back in January, it was a tour of despair. There were more than 130 homes for sale in one neighborhood alone.

Today the story is completely different. While nationwide home sales jumped 16.7 percent in the first half of 2009, the turnaround in the same suburb is even more stunning — 150 homes have been sold since May, thanks to low prices, low interest rates and tax breaks for first-time buyers.

“Prices were so low in the valley, I expected the buyers to come out. I didn’t expect there to be a bidding war. I didn’t expect there to be 20 offers on every home,” McBroom says.”

And there you have it.  Towards the end bigger mainstream media outlets started reporting on the massive bust but this was too little too late.  It is now at a point of spectator sport journalism.  The time for action was early on.  And as it turns out, many people saw this coming even in the journalism community.  Yet the majority decided to ignore these warnings and learned to love the bubble.  Bernard Madoff was still a genius hedge fund manager, Lehman Brothers was still ripping it up on Wall Street, and IndyMac was just another lovable bank in California.

What a decade it has been for housing.

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-F. Scott Fitzgerald

The gospel of infinite prosperity is back in full bloom.  Echoing from the television talking heads and radio pundits preach that the economy is on the mend because we have spent our way into prosperity.  This recovery, as we are led to believe, is occurring even though jobs are being lost at the rate of 2.5 million a year and this is somehow good (or less bad in their words).  We are now led to believe that jobless recoveries are simply part of the new economic landscape.  This coming from a group of people that missed the largest recession since the Great Depression (maybe they should avoid predictions for a few years).  Since the recession started in December of 2007, a painful 20 months indeed, the U.S. economy has shed 6.9 million jobs.  That is the official number.  If we dig deeper, we have 26.3 million unemployed and underemployed workers in the economy.  For a recession that is the “worst since the Great Depression” we sure got out of it fast.

Getting out of it fast is what we are being led to believe.  Yet the public is being fed a bunch of nonsense from the gospel of infinite prosperity.  Much of this philosophy was also part of the Roaring 20s.  The near religious belief in the big business culture of the U.S.  Of course, much of this has influenced the way the crony capitalist have infected Wall Street with their cannibalistic method of destroying wealth for the country for short-term gain.  The notion that spending trillions of dollars and giving authority to those that have led us to financial Armageddon is perverse as it is backwards.  If anything, it simply demonstrates that Washington and Wall Street are wedded at the hip while ignoring the plight of the average American.

For a country that talks about the “small business owner” the reality is much different.  During this economic crisis it is the mighty who are receiving the biggest handouts.  You don’t see Jim’s local hardware shop getting a bailout.  But Bank of America, Wells Fargo, and JP Morgan all received their piece of the economic handout.  And look at all the bank failures.  In relative terms, the small are being allowed to implode.  In reality, they hold very little of the banking wealth.  The U.S. currently has 8,195 banking institutions according to the latest FDIC report.  116 institutions or slightly above 1 percent own and control 77 percent of all banking assets.

And wealth inequality is at record levels once again:

Source:  William Domhoff

81 percent of all financial wealth is concentrated with the top 10 percent.  If you are wondering about another time in history when so much wealth was concentrated in a few hands you can look to the Great Depression.  Even though the punditry proclaims to believe in the middle class the data paints a very different picture.

In today’s Lessons from the Great Depression series we are going to examine the Roaring 20s.  Much like our economic climate today, much of the “success” was confined to a small group.  Sure, many lived up the good times like during our HELOC housing bubble mania but once the tide went out, people learned a quick lesson between wealth and income.  Income can be taken away rather quickly as many people are now realizing.  Wealth on the other hand has longer sustainability and can impact control including favorable policies enacted by lobbyist to protect the unequally weighted status quo.

This is part XXVIII in our Lessons from the Great Depression series:

22.  The Infection of Consumerism and Living Fake Lives.

23.  The Worst Housing Crash in American History.

24.  Economic Crises Around the World in Synchronization.

25. Reconstruction Finance Corporation II

26. Pecora Commission Where Art Thou?

27. Current Net Worth Drop of $13.8 Trillion Equivalent to 21 Percent Drop.

I’ve studied the Great Depression in great detail.  Some of the best books on the topic include:

Only Yesterday by Frederick Lewis Allen

The Great Crash of 1929 by John Kenneth Galbraith

The World in Depression by Charles Kindleberger

Today I’ll be focusing on a few passages from The Year of the Great Crash 1929 by William Klingaman.  People think of the Roaring 20s with images from the privileged elite that may come from F. Scott Fitzgerald’s Gatsby like literature.  Yet the reality is very different.  What we find is a nation that shuns savings, spends on credit, cuts deep in to the working class, and ultimately leads the nation into financial Armageddon:

“Beneath all the sanctimonious probusiness rhetoric, the Coolidge boom was based upon the tremendous expansion in productive capacity of American factories in the 1920s, particularly in such basic industries as iron, steel, petroleum, chemicals, and light metals.  Because America’s fundamental transportation and manufacturing systems had been completed before 1914, and because the war had suddenly thrust the United States into an entirely unfamiliar role as a creditor nation possessing a record-breaking stock of European gold, businessmen were free to turn their attention toward refinements in the production and distribution processes.  Spurred by military demands during the war, and sustained by the adoption of scientific management techniques in the years immediately afterward, U.S. industrial production nearly doubled between 1919 and 1929.  Automobiles production skyrocketed; by 1929, Detroit was turning out nearly five million new cars a year.”

America is anything but a creditor nation.  We are a nation full of debt.  The green shoot argument was based on spending money we didn’t have.  The use of Keynesian philosophy in such a poorly managed way is disturbing.  It would be one thing if the bulk of the money was spent on average working Americans but the vast amount of bailout funds went to the top 10 percent while the middle class is seeing the American dream largely disappear.  If you want to see a current breakdown of the current bailouts, this is how it would look:

How the stimulus package can garner more heat when we have given the banking and financial sector nearly 20 times more in funds is amazing.  The crony capitalist have figured out a way to get the public to focus on smaller shiny things while ignoring the massive exploitation of fraud going on.
To think that suburban sprawl is only a thing from our current housing bubble is incorrect:

“Highway construction (funded primarily by state and local expenditures) provided thousands of new jobs; and as Americans enjoyed the benefits of increased mobility, sprawling networks of suburban development grew up virtually overnight, further fueling the building boom that also provided most of the nation’s cities with brand-new skylines, symbolized by the graceful, unadorned, and ultra-modern brick, cement, and stone skyscrapers that kept soaring higher and higher each year.  Utility companies expanded their grids throughout the countryside, bringing the blessings of inexpensive electric light and power to most of rural America for the first time; power consumption in the United States increased at the rate of 15 percent a year during the decade.”

The perma-growth model was in full force back then as well.  But I am certain that we protected the mom and pop shops back then right?  I mean that is the story of small business:

“In a never-ending quest for efficiency and greater control over every aspect of their operations, businessmen in the 1920s became obsessed with bigness.  Local utility companies merged into mammoth regional empires; nationwide chain stores such as A&P, Piggly-retail shops, and Woolworth’s squeezed out thousands of small, independent retail shops; big-city banks gobbled up defenseless competitors and turned them into branches of multitiered holding companies.”

Many things are large myths.  The Roaring 20s roared for a select few until it all imploded with the Great Depression.  Mega organizations ate and swallowed up small businesses like breakfast bars just like gigantic too big to fail banks are eating up smaller banks that are not too big to fail in the current recession.  Even in the 1920s, pushing an anti-saving mentality was easy to do in the United States:

“Unfortunately, there was no corresponding expansion of employment or wages to accompany this boom in industrial output – which was, after all, achieved largely by the substitution of machinery for manpower.  Without some powerful outside stimulus, production soon would have outpaced consumer capacity.  So, to encourage a wider distribution of the mushrooming supply of goods and services, advertising became a major industry in itself.  Saving was condemned as hopelessly out of fashion and almost unpatriotic; it was every American’s duty to provide himself with as many wristwatches, electric floor scrubbers, Frigidaires, Kriss-Kross razor blades, ultraviolet sun lamps, exercise machines, and canned peas as humanly possible.”

Does this sound familiar?  Just replace the Frigidaires with Sony plasma TVs and every other consumer good you can squeeze into your Visa card.  Only this time, we took it to another level with the home equity ATM because back in the 1920s homeownership was roughly 45 percent while this time we nearly took it to 70 percent.  The home became the personal stimulus machine sanction by the U.S. Treasury and Federal Reserve.  Once again spending does not equal wealth.  But for those at the top, they have to find ways to keep the consumer running on the treadmill faster and faster.  The birth of adverting was a good way to get this going:

“Advertising “makes new thoughts, new desires and new actions,” declared Coolidge approvingly in 1926.  “It is the most potent influence in adopting and changing the habits and modes of life, affecting what we eat, what we wear, and the work and play of the whole nation.”  In preaching the gospel of material abundance, advertisers received an incalculable boost from the invention and popularization of the radio; although the medium had been wholly unknown to most Americans before the war (only one American family in ten thousand owned a radio in 1920), the seemingly unlimited potential of radio captured everyone’s imagination during the twenties and revolutionize the nation’s communications and entertainment industries.  The advent of installment purchasing plans provided additional impetus to consumption; all one needed to buy a new washing machine or diamond necklace was a minimal down payment.  As the decade progressed, credit terms became even easier, with payment extended over longer and longer periods.”

Easy credit and media encouraging folks to buy things that are simply beyond their means.  Now those in advertising understand basic rules in human psychology.  People want to be loved, feel important, and take care of their family.  If you can make someone feel inadequate in any of these areas and promise them that your product will take care of the void, you have a good chance of selling it.

Speaking of making someone feel inadequate, remember this wonderful ad for real estate during the boom?

How many people bought a home because of a conversation like this?  I would wager that tens of thousands did because they wanted to avoid pain or be loved (both are bad reasons for making the biggest financial purchase of your life).

But the real underlying weakness could only be masked for so long:

“High-powered sales strategies only camouflaged the basic weaknesses in the American economy, however.  At one end of the scale there was too much idle capital; at the other end were too many idle workers.  Income and purchasing power were dangerously concentrated in the hands of a favored few: government statistics showed that 90 percent of the nation’s wealth was owned by 13 percent of the people.  While the number of truly rich Americans kept rising – a study by the Federal Reserve Bank of New York revealed that there were forty thousand millionaires in the United States at the end of 1928, where there had been only seven thousand in 1914 – millions of American families remained locked outside the charmed circle of prosperity.  Farm income declined steadily throughout the twenties, and unemployment kept climbing until it neared the four million mark by the end of 1928.  The coal and textile industries remained depressed for most of the decade, producing pockets of appalling poverty in the South and especially in Appalachia.  Federal surveys revealed that two-thirds of American families were struggling to survive on incomes below $2,500, the official minimum standard for a decent living.  Lured into exorbitant installment purchases, workers watched as a growing percentage of their wages was sacrificed every week to meet mounting interest payments.”

We find ourselves in a similar predicament.  All these cash for clunkers and tax credits for purchasing homes are simply a way to get people back into major debt.  How many people bought those cars with cash?  I would venture to say very few.  In fact, many now have 5 to 7 year auto loans that will commit a certain amount of their income to a depreciating asset.  Good move.  And those buying homes with the tax credit?  How many bought in areas where prices will continue to fall?  After all, a jobless recovery is in the books and it is hard to make a 30 year mortgage payment with no job.  This act of encouraging massive debt purchases in the midst of the deepest recession since the Great Depression is a page out of the Roaring 20s.  Wealth does not equal debt!  Those in the top 10 percent can tell you that but probably won’t.  Anyone that tells you spending more than you earn or can afford is a path to wealth is out of their mind or doesn’t understand the basics of finance.

One group that is on a quick way to financial wealth are those awesome Wall Street CEOs:

CEOs’ pay as a multiple of the average worker’s pay

If this is the reward they get for leading us into economic disaster, can you imagine the pay with green shoots involved?

At a certain point the gig is up:

“In the second half of the decade, as the struggle among producers for customers grew ever more vicious, it became clear that “prosperity” was the exclusive province of big corporations, as the mortality rate among smaller businesses increased inexorably.  “The business structure of the United States is undergoing a rigorous process of ‘rationalization,’” explained the managing director of the National Industrial Conference Board in early 1928, “in which many of the smaller companies find it increasingly difficult to compete with the high efficiency standards set by well-managed, large-scale enterprises.”  The New York World was less enthusiastic about the trend: “In the intensive competition which is now under way, and which shows no signs of immediate abatement, only the large organizations able to apply the best that science and skill have to offer are showing satisfactory earnings.  This goes far to explain what is sometimes called the ‘miracle’ of prosperity and falling prices.  When the nature of this prosperity is understood its miraculous features become less evident.”

History doesn’t repeat but it does bring back stupid financial moves.  I know I know, this isn’t the Great Depression.  But what industry is going to lead us out of this deep funk?  Are we going back to selling houses to one another while Tetris experts sell mortgage backed securities on their Bloomberg terminals on Wall Street to other foreign countries?  Is that our idea of a booming economy?  Do we think that putting a granite countertop on every home is the idea of a healthy economy while people max out their credit cards?  If anything, during the 1920s we did produce and produced a lot.  We were a creditor nation and exporter.  Now we export debt and U.S. Treasuries while we spend to no end.  The fact that we used the $8,000 tax credit to encourage home buying is disturbing because excessive home buying is what led us into this Great Recession!

But don’t let this get in the way of the new gospel of prosperity.  Everything is fine.  Just go out there and spend the money that you don’t have and wealth will magically appear.  The financial elite of the country appreciate your service to their wealth building.

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