Going Japanese on Housing

Posted: May 24, 2013 12:01 AM

What do the Nikkei and the recently released April new-home sales report have in common?           

It appears they both fit the criteria regarding the minutes that were just issued by the Federal Open Market Committee (FOMC) which stated “that a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant.”  Translation: Bubbles, bubbles, everywhere.      

Since last November and the advent of Abenomics, the Nikkei has appreciated approximately 85%.  Even if that rapid rise was based solely upon solid fundamentals, it shouldn’t be questioned that the parabolic move was definitely due for a pullback.  However, since the fundamentals have given way to central banking manipulation, the pullback was not in the cards — but a crash certainly was. 

Yet, the citizens of the Land of the Rising Sun are currently being told “all is well,” and “please don’t worry, it’s just a little profit taking.”  Nevertheless, the main supporters of the Nikkei’s rapid escalation — the hedge funds — have all started hitting the exit doors and are no longer around to savor the so-called soothing words of the government.  As the locals were buying, the westerners were selling. 

Isn’t that always the way?  In fact, according to the mainstream media, the recent one-day 1,100 point drop on the Nikkei was “simply a hiccup” that will have no impact whatsoever on the Nikkei’s retracement back to the glory days of the 1980s and a stock market level of 40,000.   

The U.S. Census Bureau just announced that the average new-home sales price has reached an all-time high (yes, even greater than the prior pre-crash peak), up 15.4% to $330,800.  Yet, this increase, according to the trio — that’s realtors, brokers, and bankers (plus radio folk) — is totally justified. 

What’s their rationale?  More jobs (think Walmart), less supply (think shadow inventory) and low interest rates (think dwindling mortgage applications) make a house-for-rent the one asset to put into your IRA since it can’t lose, according to the trio.  And of course, we’ll all ignore the outright collapse of real disposable income. 

In addition, keep in mind that the hedge funds and the private equity buyers have already departed the scene, or are preparing to leave very soon.  If they’re not selling homes outright, they’re wrapping houses into IPOs funds in order to sell to the eager public. 

When home prices ultimately plummet, and just like the situation regarding the Nikkei, I’m sure we’ll hear the same mantra of “don’t worry, it’s OK, this is a real buying opportunity.”  But this time the words will be in English, not Japanese. 

Maybe the Federal Reserve officials were onto something when they said, “Markets were becoming too buoyant,” or perhaps Ben Bernanke and his pals were just listening to the illustrious Don Ho singing “Tiny Bubbles.”