David Stockman: Housing Boom Is Not Sustainable; Another Bubble Waiting To Burst

Many believe the robust housing data signals a long-term recovery in the struggling housing market and is a bright spot in the overall broader domestic economic recovery.

The euphoria is not without a basis as data supplied by the National Association of Realtors show existing home sales in December shot up 12.8 percent over the same period in 2011 while the total number of sales rose to a five-year high in 2012. The annual increase in existing home prices also surged to the highest level since 2005, with the median home price up 11.5 percent in December over the same period in 2011.

But not everybody is convinced the recent recovery is sustainable and believes it is another bubble in the making. David Stockman, former director of the Office of Management and Budget in the Reagan Administration is one of the skeptics.

David believes we are not witnessing a real, sustainable and organic recovery because in a world of medicated money by the central bank, things are not what they appear to be. There is some uptick in volume and prices are starting to come out from the sub-basement where it was down 30 percent. But it is happening in the most speculative former of sub-prime markets where massive amounts of fast money is rolling in to buy or rent on a speculative basis for a quick trade and as soon as they conclude that prices have moved enough to produce a return, they’ll be gone as fast as they came, he noted.

For example, global investment firm Blackstone now owns 16,000 rentals, and these are not apartment buildings but single-family homes. Other institutional investors like Colony Capital LLC and Two Harbors Investment Corp. along with individual investors are all coming in.

But the problem is that this is not organic demand that will support recovery in housing. In housing the two forces you need to recover, first time buyers and trade-up buyers, are both missing. The first-time buyers, i.e. the young people, don’t have jobs, or if they do, they have so much student loans they can’t raise enough down-payment to become effective buyers, he observed.

Secondly, the trade-up buyers are becoming the baby-boomers, heading for retirement and basically they don’t have no savings and they are going to have to sell their ‘castles’ into the market. So they are going to be trade-down sellers, and not trade-up buyers, he explained. These two headwinds are going to go on for years and that is the problem we are having in the market today, he added.

Having the Fed come in and make interest rates artificially low is a huge mistake. We are just recreating the same speculative bubble that we had before, he reasoned.

Asked to comment on the quality of borrowers that have fueled the recent boom, David said if we look at the markets that have really bounced like Phoenix, Las Vegas and parts of California, 50 percent of buyers are cash buyers who are basically buying to speculate and run. They are not buying to move in and live and are not real home owners, he added.

Asked to explain the problems that arise when speculators enter markets, David said because so much cheap money is available to speculators, they are buying these properties as a spec on a lot of debt. As soon as there is enough price movement to achieve their buying objective, they will move out, but there may not enough buyers available.

So it is wrong to mislead markets with low interest rates because it basically fuels speculation, driving prices up. And when markets crash, banks end up with bad loans on their books and mortgage investors lose money. This is a little more sophisticated than what flippers and other speculators were doing in the last bubble, he added.

Asked if this bubble will burst when interest rates start going up, David said as soon as the Fed starts normalizing interest rates, house prices will stop appreciating or probably head down.

The fast money will sail as soon as they can and the bubble will pop almost as rapidly as it appeared, he noted. Every time the Fed take such measures, the top one percent is going to benefit – the hedge funds, the LBO funds – the fast money people who come in for a trade, make a quick buck and move along to the next bubble. This is the consequence, serial bubbles, of what the Fed is doing, he concluded.

You can watch the video here.