Friday, March 19, 2010

Dick Bove: Housing Market Will Fall 10%-15% When Fed Stops Subsidizing Home Prices

More Illusion versus Reality

Infinite QE, or subsidization of home prices, is an important component to the management of economic perceptions. In other words, the definition of what Jim calls Management of Economic Perceptions (MOPE). This tactic comes straight from the how to manage a depression playbook.

Housing prices are no longer falling; Interpreted for the masses by the media as the worst of the economic decline is over. Just like the stock market, goosing up the nominal prices through devaluation is as easy as debt and money issuance.

Unfortunately, MOPE tells only one side of the story. While debt and money issuance goose up the stock and real estate market to varying degrees, it also devalues the currency against hard money. When the public invariable screams "save me", the axiom of no free lunch always applies. Infinite QE might put some money into one pocket, but it also simultaneously pulls from another in the form of reduce purchasing power (I can no longer afford to buy this). This is the other side of the story that MOPE neglects to tell.

The median home price to gold ratio illustrates the other side of the story quite well.

Mediam Home Price to Gold Ratio (MHPGOLDR) And YOY Change: