The absurd deformation evident in the latest data on housing bubble 2.0 sticks the fork in monetary central planning. In the attached post, Wolf Richter provides a succinct display of existing home sales on an April YTD basis versus prior year for 30 major markets. The pattern is stunning: Among homes sold to the top 1% of households, volume is up by 20-100% in most markets. By contrast, transaction volume during the last four months was down for the entire remaining 99% of the market in 26 out of 30 cities. And the bottom 99% volume was off by double digit amounts in places like Phoenix, Orange County and Los Vegas.
Moreover, a quick peruse of the chart shows that the pattern of soaring volume among the 1% is not just a regional aberration owing to the social media and technology stock boom in the San Francisco Bay area. Volume of top 1% home sales on Long Island, for example, was up by 72% during the first four months of 2014—bad winter weather notwithstanding. Contrariwise, volume among the less well insulated 99% of Long Island home buyers actually dropped below prior year levels.
Likewise, it is always cold during January-April in Minneapolis and this year was apparently no exception. So it is not the weather factor which explains the 50% gain among top 1% home transactions there versus a 13% decline in transactions among the 99%.
No, it was not an artic blast coming down from the polar north that explains the pattern below, but the financial storms emanating from the Eccles Building on the Potomac. To wit, the fundamental impact of ZIRP and QE has been to massively levitate the value of existing financial assets—-nearly 50% of which are owned by the top 1% of households and more than 80% by the upper 10%.
Since stocks rose by 30% on average last year, and by upwards of 100% in many of the red hot momo categories like social media, cloud stocks, biotech and much of the Russell 2000, it is evident that the Fed’s vaunted “wealth effect” has been busy at work. But hardly in the mechanistic Keynesian sense of goosing the cash registers at Red Lobster Inn or even Coach and Macy’s. The wealth effect, in fact, was an in-house wealth transfer: The 1% are taking winnings from the Wall Street lottery and bidding up the price of mansions in the tony neighborhoods where they live.
Once upon a time even mainstream economists understood that the secret to sustainable economic growth and real wealth generation is investment in new productive assets, not the inflation of existing financial paper and its derivatives and re-hypothecations. But we are now so deep in the Keynesian ukase proclaimed by the self-perpetuating academics and monetary policy apparatchiks which control the Federal Reserve System, that we have reached this strange pass: Namely, that even by their own dim Keynesian lights, the Bernanke/Yellen cabal claims that $1 of wealth pumping translates into only 4 cents of added consumer spending!
That’s right. Another graph below shows that to buy into the top 1% of the residential market in say Miami it takes a home purchase of about $3 million, and volume was up in that particular market by about 56% over prior year. So maybe a few dozen households chartered a yacht for 10 days rather than a week this past winter.
The fact is, ZIRP (zero interest rates) in the current American economy is an economic blasphemy. Cheap interest rates were the historic tonic by which the Fed induced the middle class to bury itself in debt by ratcheting up its debt-to-wage-and-salary ratio year after year for the better part of four decades.
But now that baleful work is over and done. Main street households have reached peak debt. This means that the only thing being leveraged-up today is student balance sheets which are backed by no income or assets and an increasingly evident hoax about future earnings gains; and by non-existent balance sheets among sub-prime auto debtors who are borrowing more than the car is worth at the closing.
Yet in some form of ritual incantation, the Keynesian zealots who run the Fed can’t get their collective feet off the monetary accelerator. Indeed, they loudly assure that they will push ZIRP and “extraordinary accommodation” into its seventh year running in 2015. That means that monetary policy continues to work red hot through the Wall Street gambling channel. That is, free money to the carry trades and a central bank put under risk assets.
But such massive and unrelenting deformation of financial markets does not announce itself in just an S&P price index that is now pressing 20X reported GAAP earning. What it actually does is invite speculation into the most rarified precincts of the financial universe where the privileged few get to experience gains of not 8% owing to stock investing for the long-run, but 100% owing to speculation in the moment.
After five years of incumbency, we now have an Obama Fed. Yet the irony is truly insensible. The Fed has now succeeded in creating a rip-roaring real estate boom in those rarefied neighborhoods that surely need no help from the state.
By Wolf Richter at Testosterone Pit
This is precisely what shouldn’t have happened but was destined to happen: Sales of existing homes have gotten clobbered since last fall. At first, the Fiscal Cliff and the threat of a US government default – remember those zany times? – were blamed, then polar vortices were blamed even while home sales in California, where the weather had been gorgeous all winter, plunged more than elsewhere.