Home Starts Drop 10.6% and Shock the Unconscious

In a recent L.A. Times article, “SHOCK” at the drop in home starts leads the story.  Yawn.  Bores me.

I am not sure why anyone is shocked, and anyone shocked by a drop in home starts isn’t paying attention.  I am always amazed by the number of very well paid individuals who work for very lofty firms who miss the economic equivalent of softball pitches.  This is easy guys.

Two prior posts here and here include more detail explaining the new bubble that is bursting, but let’s review…

First, you have the FHA loaning money to anyone with a pulse, effectively replacing the sub-prime lenders.  With almost no income requirements, only 3% down and stamping APPROVED on loans for people that recently went through bankruptcy or a foreclosure, how well can we expect those loans to perform?  I’d imagine about as well as the ones we’re bailing out right now.

Second, once sub-prime lender’s loans started going bad, they had to cover them with the money they had in their bank, and when that ran out, they went bankrupt.  This theoretically limits the number of bad loans you can write.  But the FHA doesn’t have any money in the bank, they have YOU…so they can write loans to anyone and not worry about those loans going bad because YOU will pick up the tab.  Which is why the FHA has now become the largest mortgage lender because the banks would never qualify the people the FHA is qualifying.

Third, these income tax credits create an incentive for people to buy homes.  This is ridiculous.  An $8,000 tax credit on a  $400,000 house (a condo in SoCal) is 2% of the purchase price.  That is enough to make people buy in? Really?  Apparently it is.  As far as throwing someone a bone, that’s a pretty gnarled, marrowless pathetic looking chicken wing bone to gnaw on.  There’s a lot more downside risk in the housing market, and certainly enough downside risk to drop a home’s price another $8,000 and eat right through that bone.

With all of these factors keeping home prices artificially inflated, I am not surprised at all that home starts dropped now that the home buying season is over.  The reason is simple…the run on houses this summer was artificially supported by the FHA and tax credits and an artificial market can not be maintained.

Home prices are still too high for a traditional 30 year mortgage with 20% down.  The government will have to continue this artificial inflation at the taxpayer’s expense or let the market correct and bring prices back in line with people’s income (low) and savings (next to none).

Anyone watching the market is not surprised by this news at all, they’re yawning instead.

Categories: Housing Market

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