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As U.S. housing prices rise and inventories fall the word on the street is the housing industry is on the rebound. Prices in many regions are up 20-30% from a year ago and inventories are slumping to pre-crisis levels. Additionally the homes are being bought by real buyers, gone also are the bad old days of nothing down and no credit needed housing loans. All is good news on the housing front or so it would seem. It appears that maybe the lessons from the last bubble have been learned and now the foundations for real growth forged.

With such information to go on, it is perfectly understandable that many of those who scan the headlines and follow economic trends are comfortable with the idea that the housing market has mended. Everything looks to be coming up roses for this part of the economy. Given all of this, it might be surprising to many that much of what is seen is because the spell of easy money has mesmerized many again.

Gambling on real estate and hoping to score on rising prices, the market is again being inundated with house flippers and institutional investors. What is found hidden behind the headlines and media hoopla is data that shows the U.S. in the midst of another housing bubble. The U.S. Census Bureau recent release on home ownership in the United States shows it is continuing the plummet. In fact home ownership is now the lowest in 18 years. The reason is two fold, people are still losing homes to foreclosure and more significantly first time buyers aren’t buying. A fact that is reinforced by the Mortgage Bankers association which reports mortgage purchase applications are the lowest in 17 years.

Home OwnershipThat leads to a question, if families are not buying homes who is? According to the National Association of Realtors, before the last housing bubble about 10% of home sales were done with cash, today its 30% with many areas seeing percentages in the 50% range or more. Hedge funds and foreign investors, especially from China, are the ones driving the markets. People with more money than sense it would seem. Little guys are sticking this bubble out, and that includes potential new homeowners.

A housing market built on investors is like a group of butcher shops without customers just trading beef among themselves. Sooner or later someone is going to get stuck with rotten meat. You would think this is a lesson many would of taken away from the last bubble, but apparently the lure of easy money is stronger than the appeal of common sense.

The truth is the housing “recovery,” like the booming stock market, is being driven by central bank stimulus programs. The central banks having already driven savings interest rates below the rate of inflation, have turned to buying assets with printed money. The Federal Reserve’s buying of Mortgage Backed Securities is a prime example. By buying these often toxic assets they are infusing their former owners: pension plans and various investment funds, with cash they need to reinvest. And, reinvest they have with billions flowing into stocks and housing. The end result is rich investors and wall street brokers are making a killing for now while average Joes on main street are seeing their situation deteriorate.

What has become evident is the Quantitative Easing program is not spurring real growth, it in fact should be referred to as the bubble machine. Infusing magic cash into the asset markets and inflating their values, its apparent economic successes are as fake as the money backing them. When the bubbles burst, as they inevitably will, tons of magic cash wealth as well as hard earned retirement savings will be destroyed. What isn’t will be redirected to the next “safe” investment where another bubble will form. A game of disastrous dominoes that will only end when the banks realize they can’t fix market problems, no one can. Markets aren’t fixed, the heal naturally when those things wounding them are taken out of the way.

Oh what a wicked web is weaved when banks try economic policy to conceive. In trying to makeup for faulty government economic policy by concocting monetary shenanigans they have created an addict trap. A situation where the drugs used to stop the pain are also slowly killing the user. The only way to stop the situation from progressing is to face the pain and address the cause. Unfortunately, stimulus withdrawal is both economically and politically painful. The alternative is of course worse. If the present course is not corrected one day people are going to realize too late that the spell being cast by the central banks is more hex than blessing.

“The Conservative Mind”

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