Yes, US home price growth continues to slow as The Federal Reserve continues to unwind its bloated balance sheet.862767_cshomeprice-release-0129
(Bloomberg) — Home prices in 20 U.S. cities rose in November at the slowest pace since early 2015, decelerating for an eighth straight month as buyers balk at the ever-receding affordability of properties.
The S&P CoreLogic Case-Shiller index of property values increased 4.7 percent from a year earlier, down from 5 percent in the prior month, and below the median estimate of economists, data showed Tuesday. Nationally, home-price gains slowed to a 5.2 percent pace.
Sure enough, US housing has gotten quite expensive (although not Singapore, Hong Kong or London expensive). But the interesting story is … look at house price growth when The Fed enacted QE3, their third round of asset purchases. Then look at house price growth when The Fed began unwinding its bloated balance sheet.
Let’s see what happens if The Fed continues its unwind.
On a metro level, Las Vegas (still recovering from the horrid collapse in house prices in the late 2000s) was the YoY leader … again. Followed by Phoenix, rising from the housing ashes of the housing bubble of the 2000s.
The slowest growing metro areas? Once again, Washington DC has the slowest growth rate followed by Chicago. And then New Yawk (or New York).
Back in 2010, bank analyst Chris Whalen wrote this piece for Zero Hedge entitled “The Sanders Polynomial or Why “Esto se va a poner de la chingada””.
Yes, things got ugly for the residential mortgage market following the mortgage purchase application bubble that peaked around 2005. If you fit a non-linear curve to MBA Mortgage Purchase Applications, you can see a polynomial peaking in 2005.
Here is the updated chart. Mortgage purchase applications have started to rise again since 2010, but at a much slower pace. And there is no polynomial since 2010, just a nice linear increase.
But the mortgage market has fundamentally changed since 2005-7. First, the volume of adjustable rate mortgages (blue line) has declined to under 10% of all mortgage applications. Second, the number of mortgage originations under 620 (also known as “subprime” is far below the levels seen in 2003-2007. Also, the number of non-vanilla ARMs (like pay-option and Limited Documentation ARMs) have reduced greatly.
So when the narrator at the end of the movie “The Big Short” said that nothing has changed, that was fundamentally incorrect. As you can see, ARMs and subprime have essentially vanished. Here is a chart of The Big Short period (in red) and notice that mortgage lending truly did change.
Also, a non-banker lender, Quicken Loans, is the second lending originator after Wells Fargo. My how times have changed.
But are lender credit standards too high? Or are lenders and investors low riding credit?
How about a spoonful of extra credit box expansion?
But let’s not turn back the credit clock too far!!
First, the expectations for furthering tighening of The Fed Funds Target Rate are near zero, at least according to WIRP.
Now, according to Nick Timiraos at the Wall Street Journal, Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight.
The Fed indeed may slow the unwind of its balance sheet which is primarily allowing Treasury Notes and Treasury Bonds to mature. Agency MBS are expected to mature at later dates.
So, The Fed may, at their next meeting, adjust their redemption schedule.
And alter their redemption caps.
Clearly, The Fed is trying to keep interest rates from rising too quickly. Good luck with that! It could be that The Fed has run out of ammo.
Case in point? Recent Fed Balance sheet reductions correspond to LOWER 10-year Tteasury yields and 30-year mortgage rates.
Here is The Fed’ image of itself and “the savior” Ben Bernanke. But here is the reality.
The good news? US initial jobless claims chimed in at 199k, the lowest since 1969.
Beating the expectation of 218k jobless claims.
The bad news? Despite the excellent employment news, M2 Money Velocity (GDP/M2) still has not recovered from The Great Recession and global financial crisis.
The Clinton/Gteenspan “miracle” was a combination of reducing M2 Money stock growth to near zero while GDP boomed after the 1990 recession. Unfortunately, such a miracle is unlikely in to today’s over-stimulated low-interest rate world.
To use a Clue analogy, Greenspan/Bernanke/Yellen/Powell did it with a printing press on Wall Street. Perhaps Fed Chair Jerome Powell is REALLY Colonel Mustard!!
One day it looks like China and the US are making progress in trade talks, the next day there is no progress. Just like Brexit — on one day, off another. Then there is the Federal Reserve: will they continue raising their target rate and unwinding their balance sheet? Will the Democrats controlled House try to impeach Trump for putting ketchup on his steaks? And “The Wall.” Same old, same old. So many uncertainities.
Hence it is not a surprise that the US Treasury yield and US Dollar Swaps curve remain “kinked”. That is, inverted in the short-end of the respective curves.
It is difficult to keep one’s head on straight with all the uncertainties in the global markets.
There is a lot of fear and uncertainty in financial markets: the US Federal government shutdown, May’s Brexit defeat, trade anxiety with China, postponement of Nancy Pelosi’s entourage 7-day excursion to Brussels, Egypt, and Afghanistan, the Mexican border wall, etc.
But given all the fear and uncertainty in financial markets, the VIX 1-year implied volatility has actually been declining … and its decline coincides with The Fed’s Quantitative Frightening (QF) or the shrinking of The Fed’s balance sheet.
Quantitative frighening or numbness?
China’s central bank, the People’s Bank Of China, now has the world’s largest balance sheet topping even the European Central Bank (ECB). Only The Federal Reserve is shrinking its balance sheet … for now.
The PBOC has injected almost $1.1 trillion in the market over the past two days.
One of the impacts of the balance sheet expansion and repo injections is a reduction in the volatiilty of Chinese stocks. Better known as “numbing volatility.”
On the sovereign side, China’s yield and swaps curves are kinked.
Central bank interfernce in markets seem to be never ending.
The Federal Reserve’s zero interest rate policy (ZIRP) and quantitative easing (QE) helped to rebuild US household net worth. But it was rebuilt with asset bubbles that invariably burst.
And courtesy of Kevin Smith at Crescat Capitalm here is a chart of asset bubbles and household/corporate debt as percentage of GDP. The most vulnerable? Canada, China and Australia.
Canada, Australia and China represent 3 of the lowest 5 countries in terms of % of stocks with negative annua free cash flows.
Shrimp on the barbie, mate?
For the first time since the New York Federal Reserve began its monthly Survey of Consumer Expectations more than five years ago, respondents see parity between short-term home-price growth and overall inflation. U.S. housing-market expectations one-year ahead worsened for the sixth straight month in December, edging down 0.05 point to a median 3 percent, while that for inflation remained about unchanged at 3 percent. The bank’s internet-based survey uses a rotating panel of approximately 1,300 household heads.