Thursday, October 11, 2012

A Housing Recovery… at What Cost?

Looking at housing today, it's important to keep in mind the extent to which the Feds have gone in response to its collapse as well as the truly lackluster results we have seen so far.

From the first emergency measures taken during 2007's subprime meltdown to today's QE3 mortgage securities purchases, there has been a seemingly never ending list of plans and schemes conjured up in an effort to stave off, blunt, stimulate or otherwise fabricate grand macro-trends that were "better" than the ones that would have ordinarily occurred without such measures.

Yet, while even the most hardened anti-bubble pro-correctionist must acknowledged that these efforts have worked to build a base of sorts, however fraudulent and likely feeble, the fact is that it took unprecedented (even possibly "shows over" dangerous…. QE1, QE2, QE3, QEternity….) measures to generate what looks today to be a mere garden variety housing recovery.

The nation's housing markets have been hooked up on an extraordinary level of life support for over five years and yet there has only been a slight movement in the direction of recovery… a trend so insignificant for most measures that it pales in comparison to the extent of the preceding decline (home prices, housing permits, purchase applications, buyer traffic, etc.)

Given this, consider what these trends might look like in the face of a future crisis such as a new recession or an interest rate shock.

One of the most fundamental arguments in favor of allowing the "burn-out" collapse of the housing markets (i.e. resisting cowardice and allowing the natural market clearing function to operate unmolested by government schemes and “good intentions”) was that the end result, however brutal, would not be a fragile charade but a firm fundamental state for the housing markets, a state far more resilient and resistant to future shocks.

Instead though, the measures taken by the Feds have just projected major uncertainty into the future.

Make no mistake; at BEST, a recession is coming… they always do… in post-WWII era, recessions have been typical every 7-10 years… so there is no reason to expect any different today.

At worst though, all the liabilities amassed through the extraordinary efforts taken by the Feds (Government debt, Fed balance sheet, massively distorted macro-economy) to buy out the housing led economic collapse may work to setup a shock of a far more difficult sort.