Has Real Estate Really Hit Bottom?

Includes: REZ, XHB
by: Acting Man

By Ramsey Su

There is apparently no shortage of answers to that question, one that has been asked repeatedly for a few years now.

Some offered their shoe shine boy opinion, others may ask what exactly is a real estate bottom? Are we talking about national sales prices? The Case Shiller Index? The number of new homes sold? The number of existing homes sold? Condos in Florida or McMansions in Vegas? Housing starts?

I need to throw in my two cents. My conclusion: we are nowhere near the bottom. By that I mean there are a great many parts of the real estate engine that need to be fixed or replaced before we can even say we have a functioning real estate market. In fact, the engine may need to be completely rebuilt. Until then, it is pointless to analyze what are ultimately meaningless numbers.

Allow me to state my case.

Below is a chart that I "borrowed" from my cyber-friend Bill, aka Calculated Risk.

Nominal house prices, via Calculated Risk - click chart for higher resolution.

I am using this chart to illustrate what should have happened to the real estate market versus what actually happened.

Starting with the year 2001, just before the 9-11 WTC attack, the real estate market had been riding a prolonged ascent, topping off with the bursting of the tech bubble. Free market forces said it was time to take a break. However, Greenspan said that was not acceptable and as you can see from the chart, he pumped prices straight up by providing easy credit.

Around 2004, it became obvious that real estate was in bubble territory. Free market forces again said it was time to take a break. Instead, Wall Street dreamed up the secondary market for subprime mortgages, selling junk to unsuspecting bond investors in all corners of the world. The real estate market soon reached outer space. Builders went hog wild and built enough houses to satisfy demand for decades to come.

In the period 2006-2008, the market finally collapsed. Free market forces said it is finally time to pay the price. As we can see by the recently released FOMC transcripts, the Fed governors were so far out in left field that they may not even have been in the ballpark. Policy makers were and still are clueless. Their ignorance resulted in a period of mass confusion, and they missed the golden opportunity to limit the damage of the Greenspan errors.

2008, post Lehman Brothers, was the start of the era of insane intervention. Every branch of government decided to pull out all stops. Builders were given free money via tax loss carry forwards and were encouraged to build more and more future foreclosures. Buyers were given tax credits. Bernanke said "drop those rates to zero" while he printed and printed and printed. In the meantime, Geithner said he would use taxpayers' funds to guarantee everything, resulting in the 90% dominance of government mortgage lending we have in place today. Attorney Generals said no foreclosures were possible because, well, there should be no foreclosures.

A decade of disastrous public policy has turned the molehill into the Himalayas. Look at the chart again. The data is corrupted and meaningless. It is impossible to make the proper adjustments for government intervention. What do you think that chart would look like if not for all the manipulation?

Furthermore, there is no doubt that demographics have changed. Overall demand for housing is no longer the same as it was when the baby boomers were in their most productive years. How can we use housing data of the last 10 years and apply them to projections for the next 10 years?

In order for real estate to have a true bottom, endless rounds of interventions would have to be removed from the free market. We know that is not going to happen. If the market hiccups, Bernanke is standing by with QE3. The administration is readying massive re-election plans by refinancing anyone who is underwater, by principal reductions and giveaways of foreclosed properties.

Greece is showing the world that it is quite easy to be hooked on crack and not so easy to get off.

Is there any doubt that the real estate market would crash immediately if Geithner were to stop guaranteeing loans and Bernanke stopped loading up the the Fed's balance sheet? Has real estate really hit bottom? I think the market is on life support.

We should re-examine the patient once all the feeding tubes have been removed.