Mises Wire

Monetary and Fiscal Sorcery Make Home Price Magic

Make the money cheap enough and government intrusive enough, and incongruous headlines appear side by side. For instance, from the Las Vegas Review-Journal comes this head-scratcher: “Las Vegas Housing Market ‘on Fire’ as Economy Limps Along.”

Almost Daily Grant’s reminds us the Federal Reserve is on the job 24/7/365,

There’s more where that came from. Last week’s release of the minutes to the Federal Reserve’s July meeting indicated that the Open Market Committee is unlikely to rest on its laurels, following its move to a near-zero overnight funds rate and 65% expansion of its balance sheet since March. Those exertions have coincided with a thunderous rebound in asset prices, most notably a 53% surge on the S&P 500 over the past five months.

Here on Main Street in Las Vegas, The R-J’s Eli Segall uses Veronica Markowsky to illustrate the dichotomy. Ms. Markowsky is thirty-five years old and co-owns a bridal shop. Her credit is nearly perfect, she says; interest rates are low, she has saved some money, and she has a baby on the way.

On the downside, covid-19 protocols have Markowsky’s Canadian husband stuck north of the border, and the Las Vegas economy is just this side of comatose, with an 18 percent unemployment rate, gaming win down 99 percent, and a dozen major hotel casinos still shut down. And the home buyer’s business? “It’s literally day by day; I don’t know if we’re going to survive,” she said.

But, hope springs eternal, and Ms. Markowsky figures, “What’s the worst that can happen?”

Meanwhile, Tom Blanchard, realtor and president of the trade association Las Vegas Realtors, describes the Las Vegas housing market as being “on fire.” Mr. Segall reports, “All told, the market has gained speed as buyers snap up homes from builders and on the resale market, with sellers fetching multiple bids.” Blanchard says simply, “It’s craziness.”

Crazy indeed when considering the dual Bloomberg headlines of “FHA Mortgage Delinquencies Hit Record High with Economy Rattled” and “Low Rates Boost Homebuilder Optimism to Highest since 1998.”

Federal Housing Administration (FHA) mortgage delinquencies jumped by nearly six percentage points, the biggest hike since 1979, when the survey began. The FHA delinquency rate is now 15.65 percent, the highest delinquency rate in survey history

Remember, FHA purchase mortgages only require 3 percent buyer equity. Department of Veterans Affairs (VA) loans, which require only a single dollar down, have a delinquency rate of 8.05 percent, the highest since the dark days of Q3 2009.


Mortgages which are thirty days past due jumped six hundred basis points in Las Vegas to over 10 percent. “Other smaller metros got hit hard too, with the sharpest increases in metros that are dependent on tourism – such as Kahului, HI, and Las Vegas, NV,” writes Wolf Richter.

Richter concludes,

This mess playing out in the mortgage market has been largely swept under the rug of widespread, government-supported forbearance programs – to where no one really knows what will happen to those mortgages when these forbearance programs end. And the exuberance in other parts of the real estate industry, such as with homebuilders, and even with mortgage brokers and mortgage lenders that arrange refi and purchase mortgages, is a contradiction to what is going on with these swept-under-rug delinquencies that will eventually come to a head.

Just how is this magic created? The spurring of demand in the midst of a covid-created depression. The wizards at the Fed and Treasury have created an intoxicating frothy brew for stock and home buyers alike.

“For the naive mind there is something miraculous in the issuance of fiat money,” wrote Ludwig von Mises in The Theory of Money and Credit. “A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared with that of the government’s Treasury Department!”

How long will the magic last?

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