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5 Ways to Beat the Fed (and Crush Inflation)

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These Charts Show Exactly How the Fed Killed the Housing Market
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These Charts Show Exactly How the Fed Killed the Housing Market

By Lee Adler, Liquidity Specialist, Money Morning • October 30, 2015

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Lee AdlerLee Adler

Editor's Note: No one understands the complex, unhealthy relationship between the Federal Reserve and the economy like Lee Adler at Wall Street Examiner. Today he's calling out the Fed's zero-interest-rate policy for what it's done to our housing "recovery." Here's Lee with five charts that detail how damaged our housing market really is...

Don't believe any headlines that claim there's a housing "recovery" in the United States. The truth is, there is no single family housing industry to speak of today.

What for generations was a main driver of U.S. economic growth has been brought down by the past seven years of the U.S. Federal Reserve's zero-interest-rate policy (ZIRP). ZIRP has been a disaster for the U.S. economy, the middle class - just about every facet of American economic life has suffered from this fiscal disaster masquerading as coherent monetary policy.

Today I'm going to show you five charts that tell the story of exactly how much damage the Fed has done to U.S. housing. Most are derived from this week's release of new home sales data from the U.S. Census Bureau.

You'll see how the rise in home sales since 2011 has really been a four-year dead cat bounce that hasn't helped most Americans, hasn't meaningfully contributed to U.S. economic recovery - and now appears to be stalling.

Join the conversation. Click here to jump to comments…

Lee AdlerLee Adler

About the Author

Browse Lee's articles | View Lee's research services

Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.

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Jonathan Rabson
Jonathan Rabson
7 years ago

This article focuses on new housing. But with all the houses built during the bubble, and modest population growth, do we really need that much new housing? It may suck to be a construction worker these days, but the bottom line is, if people are already living somewhere, how much extra housing do we need?

The other problem with this article is that it blames the low interest rates without giving a clear argument. Suppose the Fed had hiked interest rates: Would that automatically raise wages, increase employment, and result in more home building? The gist of the article is a concurrency argument: The Fed has kept rates low during a time of slow economic growth. The author seems to assume that therefore, higher rates would spur economic growth. But any reasoning as to why that would be the case is completely missing here.

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radarphos
radarphos
7 years ago
Reply to  Jonathan Rabson

I'm no economist; and I struggle to understand charts, etc. and all the financial related readings I subscribe to. However, I bought my upper MidWest "old" (1936) home for cash. It was a good Looker when I bought it and still is! (old does not mean run-down). But shortly thereafter the interest rates tanked. I don't spend even a dime on the economy (no restaurants, no entertainment spending, no vacations or such spending). Only necessities, with my newest necessities being gardens, seeds, canning jars, etc. I won't spend a dime because my savings earns no interest and I don't trust the economy. As every year progresses my self-reliance on myself (that I take pride in) grows, so that even when (if) the economy recovers, I still won't spend a dime on the economy. I drive a 23y/o honda civic that won't quit and I want to see how many more years I can get out of it, despite the appearance of some rust. I'm under-employed FT, and old enough to not care at all about a little rust on my honda, and garden dirt on my pants; but I do keep my property looking nice (yet, I do all my own work). So you see, I am benefitting via self-reliance. The economy is not benefitting at all by people who increase the size of their gardens, save their own seeds, can/dehydrate much of their own food, refuse to buy additional cars, and spend only on necessities.

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Kim and Sue Wright
Kim and Sue Wright
7 years ago
Reply to  radarphos

My wife and I decided to save, save, and save more over 15 years ago and it was the best move we made. We retired in 2010 at the age of 57 and all the money we saved is working for us in annuities and CDs. Our home here in the North, and our 2nd home (a doublewide on 65 acres near Baton Rouge on my sister-in-law's property) have been paid for years ago. It was simply the result of living below our means. Ben Franklin was correct in saying "A penny saved is a penny earned. (Today, you may say a dollar saved is a dollar earned.)

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Nancy Fay
Nancy Fay
7 years ago
Reply to  radarphos

Congratulations! I am trying hard to also be self-sufficient. The depression has been hard on my business but I've survived; always frugal, I have learned that you can live without TV (but not books,) movies (but not internet,) meat (but not cheese or eggs!) and a furnace (a "real" Stihl chainsaw was one of our major contributions to the economy last winter) but not air conditioning (give me a break. I live in Florida and I have minnow paws.)
Oh, also I am almost anal in my quest to buy American products and will do without before buying almost anything made in China or lacking a country to origin label. This makes trips to the grocery store particularly grueling.
Have not figured out how to grow anything here in Florida except for ferns and mildew. Trying herbs and tomatoes in pots. Two of the six chickens are laying eggs. Wish me luck.

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Tomm
Tomm
7 years ago
Reply to  Jonathan Rabson

Millions who have saved have seen their income from savings evaporate
This is income that would have been spent and invested
We have been at cost but have not enjoyed a return

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Kim and Sue Wright
Kim and Sue Wright
7 years ago
Reply to  Tomm

I know where you are coming from, interest rates are low, so focus on saving capital.

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Matthew Hall
Matthew Hall
7 years ago

The feds CREATED the housing market with mortgage interest deductions, free highways to undeveloped land, fannie mae, fha and va loan guarantees, etc. in the first place.

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Bob Sogs
Bob Sogs
7 years ago

The real reason new housing is dead is because of excessive government regulation.
I was going to build here in Shasta county California. However, after discovering how expensive it really was, I decided it made NO sense what so ever to build new.
Below are the costs to get permits and connect to power:
building permit with "school tax" $26,300
Impact Fees $5,000
Corp permit $3,500
PG and E Power connection fees $41,000
Water and Sewer assessment charge $10,600
TOTAL $86,400 !!!!!

So, before I even turn over a shovel full of dirt it is $86,400 – REALLY?!?!
Lets not forget new building code (as of 2015) now calls for the home to be fully sprinklered, all tempered glass, and fire proof eves/exterior – further driving up the cost for this home by about $20,000.

This was a rather generic 3 bedroom 2 bath home by the way – nothing special. This is why new construction is dead and housing is so expensive….

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Karen
Karen
7 years ago
Reply to  Bob Sogs

Hey, I'm feeling kind of good now about my 5 acres in the Ozarks. Cost? $10,000. No restrictions, but (despite what you are thinking) the neighbors are actually nice and clean. Taxes when we build our home are around $450 per year, ($6.00 on the raw land) but if you claim the Homestead Exemption, you pay almost nothing. And after age 65, you pay nothing.

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James
James
7 years ago

This is good news! Thanks for the charts in your article.

By one macro indicator, it means the secular bull market in stocks has a ways to go before peaking.

The indicator is peak in the construction cycle (housing market) followed by a peak in the business cycle (stock market).

Brad Thomas' article entitled, "It Was The Great Recession Charlie Brown" which appeared in Seeking Alpha on October 22, 2015 revealed the following: Peaks in Construction Cycle Peaks in Business Cycle

1986 l990

2006 2008

Your charts show the housing market is far from peaking. It means the stock market has a ways to go before peaking.

From your charts, I feel that the stock market is still a safe place to park your money.

The Federal Reserve is doing a great job steering our U.S. economy. Inflation and unemployment are low. By design or not, slow GDP growth of 1 to 3 percent is the best path for the U.S. economy. It is very bewildering to read the media constantly blasting the Federal Reserve.

Zero interest rate policy (ZIRP) can be good and can be bad. You pointed out the bad. However, it is good for the stock market because it encourages people to invest in stocks yielding good dividends rather than putting their money in savings with zero interest.

Raising interest rates would be the worst thing the Federal Reserve can do now. With oil prices low, can you imagine what would happen to oil producers who made huge loans that have to be renewed. The oil patch went on a binge borrowing low interest bearing loans to expand oil production. Raising rates even a little now would tip many of them into bankruptcy. The Federal Reserve is aware of it and it would be engaged in reckless behavior if it raises rates!

What do you think raising interest rates would do to the stock market?

Keep the ZIRP!

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Paul W.
Paul W.
6 years ago

Large home-builders make their earnings not only from selling good quality homes. They also participate in the placement and even the outright funding of the home loans. Thanks to our brillant Fed ZIPR policy, builders can now only make the required profit to stay in business by focusing solely on the 5000-6000 million dollar mansions, which does serve people needed to move to a different city for a job but can find no sensible housing available. Something has to make up for that lost revenue stream from financing. This factor, and the disincentive to save anymore due to zero interest eliminates the accumulation of "small" savings accounts, but that's how normal folks finance things like improvements, education and/or upgrading to a larger nicer home. The FED puts its finger on a lot of places on our bodies where we no longer even show a pulse, and this is why it's measurements are off base and totally misguided. The economy is drifting without any effective leadership, which is how many of us will remember the Obama years.

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