New Home Sales Surge Could Cause Second Housing Bubble

A new home sales surge, which jumped to a nine-year high as a result of stagnating low mortgage rates and a lack of monetary policy change by the Federal Reserve, may not be as rosy as it is being portrayed. The Census Bureau released this bit of faux-optimism for the United States economy in their latest construction report, but this phony number reeks of another bubble in the making.

If folks will recall, the previous home sales surge caused a bubble that burst in 2008 and caused a massive fallout in the financial markets. In October of 2007, the Dow Jones Industrial Average had broken the 14,000-point threshold and seemed like a rocket destined for outer space. After the carnage had finished in March of 2009, the Dow had settled around 6,600, losing a little more than half of its value.

Financial institutions were obviously the hardest hit during the so-called subprime lending meltdown caused by a similarly artificial home sales surge. While the teaser mortgage rates are not what’s leading to the current uptick in new single-family homes in July that clocked in what U.S. News calls an impressive annualized rate of 654,000 — up 12.4 percent over the month and 31.3 percent over the year — the current near-negative rates in the mortgage market may actually destroy banks more quickly than consumers this time around.

Following the technology bubble of the early 2000s, the Federal Reserve came up with the ingenious idea of jump-starting the economy again by cutting interest rates to historically low levels—sound familiar? This caused the housing market to have a boom the likes of which had never been seen before, but once these consumers who signed off on mortgages they could never afford in the long run stopped making payments and were foreclosed upon, the entire house of cards came falling down.

Previously sound banking institutions were the victims of this collapse from 2007-09 as well, with large lenders like Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, and Wachovia either being forced to dissolve or be swallowed up by bigger competitors. This consolidation of the banking industry was sold to the public as a good thing, as these lenders had clearly gone beyond their means and overextended themselves. However, the reality was that centralizing the banking power makes it easier for government intervention and eventual government takeover of these institutions.

With these previous lessons in mind, it seems clear that the motive behind the current new home sales surge may be more sinister than it appears on paper. But if you believe the rhetoric of those pulling the strings, this new home sales surge is a sign of consumer confidence and brighter days ahead.

“July’s surge in new home sales continues to support the sentiment that demand for homes is strong despite homebuyers facing low existing inventory,” Ralph McLaughlin, chief economist at real estate hub Trulia, said, according to U.S. News. “This is a continued sign that demand for new homes remains solid in a low interest rate, low unemployment environment.”

But what inquiring minds should be asking is how the near-negative interest rates and continued government overreach will result in anything other than a surge in home sales. It only stands to reason that people will spend money they don’t have like it’s going out of style when the consequences are so small.

Also, this number doesn’t take into account the fact that a surge in home sales could be attributable to lower prices as well.

“Fortunately for those that have been priced out of the market over the past six years, there was an improvement in the rate of sales of homes priced less than $400k with a particular increase in those priced below $300k,” Peter Boockvar of the Lindsey Group told Barron’s. “This mix shift lowered the median home price by 5.1 percent sequentially and down 0.5 percent year-over-year.”

Lower home prices mean more people are able to purchase homes, but what it also means is that current homeowners, who likely paid that price or more several years earlier, are not even making up for the yearly rate of inflation in the sales. In essence, the biggest takeaway from this home sales surge is that not everything is as it seems, so it pays to look behind the curtain once in a while.

[Photo by Justin Sullivan/Getty Images]