Back in late 2009, I did a post on what I felt was a bull trap in the housing market and advised buyers to wait until the bull trap had completed its cycle and look for the arrival of the double-dip. (Note: do a search on my blog for “Bull Trap” to read several posts where I’ve discussed this.)
As of the end of May, the Case-Shiller Index has reported that we have officially begun our double-dip in home prices. Which is ironic since I first learned about bull traps from a paper written by Robert Shiller I discovered on-line from the Yale library.
The white chart is from the Case-Shiller Index from May, 2011. The pathetic drawing below in green and yellow is a drawing I did and dropped into my October, 2009 post on the likelihood of a bull trap and double-dip. Notice any similarities?
From investopedia.com, a bull trap is “a false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline.”
Notice that a bull trap is a “false signal.” In this case, our government created this bull trap and its associated false signal by spending billions stupidly trying to prop up the housing market. Home buyer incentives, credits, rebates, foreclosure moratoriums, suspension of the mark-to-market rule for banks, bank bailouts, the loose standards of FHA loans, etc… were all injected into the housing market as ways to suspend the decline in prices. Like all government interventions, they eventually come to an end, and when that happens, the reversal reverses and the declining trend continues.
The correction in home prices is absolutely necessary. The average home price for the average American earning the average income is still too high. Banks have returned to their pre-bubble loan lending standards which require a 20% down payment, verified income, a steady job history, a very good FICO score, and minimal debt. This is why the banks have all but stopped lending…most Americans do not have all of that for homes at their current prices. They will have all of that once prices get back to normal.
The FHA on the other hand, as part of the government’s efforts to continue distorting the free market and prop up these artificially high home prices, has picked up where the loose lenders of the bubble era left off. FHA loans require only a small 3.5% down payment, a low but not abysmal FICO score, a job..any job, and you can have a certain amount of debt. As a predictable result, the FHA is losing billions of dollars and is well under its federally mandated reserve requirements as a significant number of FHA loans continue to default.
Again…home prices are still too high and lowering lending standards to let people squeeze into a house they shouldn’t be trying to afford only ends one way…foreclosure. The government has already removed the debt limits on the FHA (during a quiet Christmas holiday vote nobody paid attention to) and they are talking about increasing the down payment requirement and the FICO score. In other words, the government is learning ten years after this bubble started, and five years after the bubble burst, what the banks have known all along…that it’s a bad idea to loan money to people that can’t pay it back. Is the Government where all the “Children-Left-Behind” were left behind to work? Unfortunately, you and I will pay these defaulted loans back for them as taxpayer bailouts. It’s more than likely the FHA will eventually be dissolved.
The government’s intervention in the free market did what government interventions always do in any free-market, they create a distortion in the market that causes capital to be invested incorrectly though the false signals the distortion creates, and the only way for the government to maintain that distortion is to continue spending billions of dollars until it can’t.
Home prices are now on their continued and absolutely necessary price correction to their appropriate levels of affordability.
Do we have any other government free-market distortions to look out for on the horizon? Just one. One BIG one coming right at us like a freight train. The entire economy itself is currently in a government induced free-market distortion just like the housing bubble but a thousand times worse, driven by the trillions in debt the government is stupidly injecting into the economy to prop it up which means a double-dip is just around the bend…Prepare for the OTHER double-dip…