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Housing: Addicted to Fiat Money

Written by Gary North on March 22, 2013

It is now over  five years since the recession began. We are told that the housing recovery is strong. Then why is the best-performing new home building stock losing money?

KB Homes lost $12 ½ million from December through February of this year. This was down from a loss of $46 million during the same time period a year ago. This was heralded as good news by the financial media. The stock has risen by almost 50% this year. The problem is, if this recovery is good for housing, why isn’t this company making a profit?

The Federal Reserve is buying about  $40 billion worth of Fannie Mae and Freddie Mac bonds every month in order to sustain the present housing recovery. The difficulty is this: how is this market going to be sustained when the Federal Reserve finally stops creating half a trillion dollars a year worth of fiat money in order to goose the housing market? This is clearly the most manipulated market in the history of the United States. Bernanke and his associates have decided that it is the Federal Reserve’s job is to subsidize housing in the United States.

When the central bank has to subsidize housing to the extent of half a trillion dollars a year, and one of the nation’s largest and supposedly most successful new home building companies suffers a loss of $12.5-million during one three-month period, it is safe to say that this recovery is not on solid ground. Any market recovery that  is dependent upon half a trillion worth of fiat money every year is going to face a problem when the central bank decides that it is time to return to a stable money policy.

When the largest retail market in the United States, which is housing, becomes dependent on an annual increase of half a trillion dollars in new money, everything in that market becomes dependent on an ever-increasing quantity of new fiat money. The market will adjust to half a trillion dollars a year worth of the new money. Interest rates will begin going up. Consumer prices will begin going up, and mortgage rates will go up with consumer prices. This market will have a moment of truth. At that point, whoever is the new Chairman of the Board of Governors of the Federal Reserve will have to persuade his colleagues, or her colleagues, of the necessity and wisdom of taking up the subsidy to maybe three quarters of $1 trillion a year.

If the Federal Reserve ever stops buying the bonds of Freddie Mac and Fannie Mae, mortgage rates will begin to climb even faster. The only thing holding them down today is fear of commercial bankers on the one hand, and on the other hand, the increase of Federal Reserve purchases of the bonds. The United States housing market is now completely dependent upon the Federal Reserve System. It is a nationalized market. We are now living in something comparable to socialist housing. The government does not control the price of housing, but the government controls the direction of housing prices by means of monetary inflation.

Will we ever see the restoration of a private housing market in the United States? Anyway, will we see its restoration within a decade? I don’t think this is likely. This is a subsidized market, and it is going to remain a subsidized market. The Federal Reserve System is now trapped. If it doesn’t want to create another recession, it must continue to inflate. The public wants this. The policy will  not change for long.

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