The pictures below do not represent the free market at work. Instead, they track the endless cycle of economic distortion and dis-location unleashed by the Fed’s regime of bubble finance. The foreclosure tsunami hit the bottom tiers of the housing market the hardest because that’s where the sub-prime, Alt-A and other varieties of predatory finance were concentrated.
Then, when Bernanke unleashed his money printing spree, Wall Street hedge funds and LBO shops rolled into Scottsdale AZ and dozens of other busted sub-prime markets and scooped up foreclosures by the thousands. Their concentrated and manic buying soon dried up most of the available defaulted and distressed inventory, sending home prices soaring in the lower tiers of the market.
Yet this wholly unnatural buying spree amounted to nothing more than a “flash boom” that lasted just 15-20 months in most markets. Now, with prices up by 25-50% and mortgage interest rates beginning their long march back up the hill toward normalcy, the Wall Street spread-sheet jockeys are cancelling their orders for more John Deere lawnmowers and closing up shop because their financial models go tilt at the current jigged up housing prices.
At the same time, the Fed fueled equity bubble continued to expand—generating riotous bouts of ” wealth effects” buying at the very top tiers of the housing market—especially in the West where NASDAQ Bubble 2.0 has its heaviest footprint. Consequently, while existing home sales volume collapsed during March in lower-end neighborhoods where the $5,000 suits are riding their John Deere lawnmowers out of town, activity continued to bound upwards in those more rarefied precincts (2% of the market) where ownership of financial assets is concentrated.
Needless to say, the odds of the pattern shown below— sales volume down 45% at the bottom (below $100k) and up 13% at the top (above $1m)—occurring on the free market are so low as to be incalculable. But it is virtually certain that this utterly anomalous deformation will not be noticed by the monetary politburo.
Their doctrine calls for financial accommodation and interest rate repression until the nation’s macroeconomic bathtub is filled to its mythical full employment brim. So it is no wonder that the American economy bumps from one crisis to the next. It is being run by a pack of academic zealots who are self-evidently blind to the baleful consequences of their own handiwork.