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Major Lenders May Be Fabricating the Housing Recovery by Manipulating Market Factors

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For many Americans, small indications that the economy is improving are big news items. The overwhelming belief that things “have to get better” is one of the few sentiments that all Americans can agree on right now.  After a while, though, the emotion needs accompanying results to feel justified.

In her piece, “Don’t be fooled by the false economic recovery,” The Guardian writer Heidi Moore takes an in-depth look at the economic data we use to prove to ourselves that a recovery cometh. She finds flaws in this information as a predictor of real economic growth.  

One of the items Moore points to is the real estate market.  The long-lasting effects of the mortgage crisis remain prevalent according to Moore who suggests we may simply be rounding another corner of the vicious circle:

Similarly, the idea of a strengthening recovery is out of step with some bubblicious activity, including the dubious and sudden rise in housing prices.

Housing prices have risen at the fastest rate in seven years, as the Case-Schiller Index of national housing prices showed today. However, the sources of that rise - as with all sudden booms - are dubious. While house prices are rising, incomes, purchasing power and lending are not keeping up.

The housing recovery, for instance, seems to be just another stage of the foreclosure crisis. Note that the areas where house prices have risen the most - Arizona, Las Vegas and California - are all areas that were hurt most deeply by the housing crash. So pry between the boards of the housing recovery and the termites start crawling out. Here, you’ll find some old villains of the last housing bubble, crawling on the same properties. There are the house-flippers and the financial institutions, the foreclosure players that regenerate whenever there is a boom.

In this case, they may be creating the boom themselves. House-flipping in California has reached levels not seen since 2005, according to the Wall Street Journal. This rise in price is, by all accounts, artificial. Housing, like all products, responds to the laws of supply and demand. When supply decreases - when there are fewer homes on the market - then prices will rise. This is what is happening now.

Moore explains how the numbers are being manipulated by major lenders in hopes of encouraging new investment.  In reality, the housing market may just be fooling itself and the U.S. consumer in the process:

There is evidence that lenders are controlling the housing supply by reducing the number of houses for sale. Last year, AOL Real Estate’s reporting suggested that as many as 90% of available properties were not even really on the market, but just polished for sale and being held back to keep supply low.

Then, last month, three major banks, including Citigroup and Wells Fargo, halted all their sales of homes in foreclosure; this also reduced the supply of homes on the market. The reduction in housing supply, then, is largely artificial, designed by the banks and institutions that hold thousands of houses and thus have the most to gain from higher house prices.

The result is what looks like a housing recovery to the rest of us, but is, in fact, something of a trap. Fitch, the ratings firm, issued a warning that the alleged recovery in housing is moving too fast and could reverse.

There is one thing that housing prices do accomplish, however: the so-called “wealth effect.” Along with a booming stock prices, higher property values make people feel rich. This then encourages them to go out and spend money.

There are enough problems with the wealth effect idea, but let’s leave it here: spending real money based on vaporous paper wealth is unwise. Household debt is still high and savings are still low, which has been a persistent problem in the US for years. Median household incomes have collapsed since the recession, indicating that most households are making do with less money.  

It is dangerous to gin up optimism in order to temper the pain of coming to grips with ‘the new normal’ of a lower standard of living. That approach serves only to stunt policy innovation, inhibit important regulation of public trust violators and squelch important tide-rising efforts that might, with complete and accurate information, have a chance to lift all boats.  


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