Speculative U.S. Housing Bubble Surges Back in Full Force
Jan. 8, 2017 (EIRNS)—Years of Federal Reserve quantitative easing, with the U.S. federal funds rate today still at less than 1%, have deliberately reproduced the Wall Street U.S. housing bubble, complete with all its key features, that dominated from 2000 to 2007, until its failure helped trigger the derivatives crash of 2007-09, which melted down the world economy.
Home flipping, in which speculators buy a home at foreclosure or at a low price, do some fixing up, and then resell it a substantial mark-up, is surging ahead. According to the Dec. 28 Wall Street Journal article, "As Home Prices Rise, Flippers Make a Comeback," speculators are making on average of about $61,000 on each home flip sale. Wall Street firms, even though technically restricted from directly lending to home-flippers by the Dodd-Frank law, have had no problem circumventing that purposely ineffective law: they extend loans to companies that specialize in lending to home-flippers, and these companies in turn, make the loans to home-flippers. The banks offer credit lines of from $5 to $150 million with interest rates of between 3% to 6% to the companies specializing in lending to home flippers, and these companies, such as 5 Arch, then make seven-month loans to the flippers at 7% to 12%. The big lenders in this market are Wells Fargo, Goldman Sachs, and JPMorgan Chase, the same banks that directed the 2000-07 bubble. The home flipping pushes up home prices, and can only survive if home prices keep rising.
The SP Core Logic Case-Shiller index for prices for new homes, a composite index of prices in 20 large American cities, hit its highest level ever in October 2016. Prices rose 5.1% over October 2015, but prices in Seattle, Portland, and Denver rose by more than 8.7%. The average price of a new home in the U.S. was $359,000 in November 2016, according to the U.S. Census Bureau, which is above the 2007 peak.
The volume of mortgage-backed securities is currently above $8.5 trillion, not far off from its 2007 level. These MBS derivatives involve all the mega banks, and provide the crucial liquidity to keep the bubble moving. Under quantitative easing, the U.S. Federal Reserve illegally purchased $1.2 trillion of these MBS to prop up the market.
This speculative home bubble of the derivatives-laden Wall Street banks, is unsustainable, in a setting in which families’ real income is falling. The bankers never learn. To stop a second housing bubble collapse, and related crashes, Glass-Steagall and LaRouche’s Four Laws are necessary, which would generate revolutionary world economic growth.