Mortgage rates are rising in part thanks to The Federal Reserve trying to control inflation (caused by Biden’s energy policies and spending). But mortgage rates are down slightly today.
Bear in mind that REAL wage growth is negative, thanks to Bidenflation.
The US is short on supply of housing for a myriad of reasons (high costs, Not-in-my-backyard (NIMBY) local zoning laws, etc), but The Fed’s cranking up interest rates isn’t helping.
US housing starts, a measure of supply, declined -6.3% YoY in June as The Fed cranked up rates.
1-unit (aka, single family detached) starts dropped -8.05% MoM in June while 5+ unit (aka, multifamily) starts rose 15% MoM.
1-unit permits dropped -8% MoM in June while 5+ unit starts were up 13% MoM.
The reason? REAL weekly earnings growth declined -4.4% YoY in June thanks to Bidenflation.
The Federal Reserve has behaved like buckaroos! Why? Since the financial crisis, The Fed has left its enormous monetary stimulus outstanding for too long.
The Fed initiated asset purchases in a series of moves (aka, QE) culminating in Covid QE that has been barley removed. With The Fed’s stimulypto (and Federal spending), we have seen the S&P 500 index soar along with home prices.
Of course, this begs the question as to whether the stock market and housing market can withstand The Fed’s tightening plans.
A closer look at the S&P 500 index and the Case-Shiller National home price index under Biden. The S&P 500 has been declining since The Fed started their monetary tightening. But the Case-Shiller National home price index as of April ’22 was still soaring.
With inflation at a 40-year high, the Taylor Rule suggests a Fed target rate of … 23.30%. It is currently at 1.75%. That is an unrealistic target rate that The Fed will never do. It is, in fact, a Bridge Too Far.
How about the Taylor Rule using Core PCE? It is still 12.71%. Still a bridge too far!
Markets are conditioned to massive Fed stimulypto, so how will markets react to stimulus reduction?
While The Fed is intent on withdrawing SOME of the enormous monetary stimulus, they are still buckaroos. And Biden/Congress still want to distort markets by Federal spending such as the Build Back (Inflation) Better bill that Manchin has blocked … so far.
Housing in the US is simply unaffordable for the middle class and low-wage workers. Combine rising food costs and gasoline/heating costs, and we have an economic disaster on our hands.
US existing home sales for June will be released on Wednesday. But can The Fed kill-off home price inflation?
A preliminary analysis of existing home sales for June is for a seasonally adjusted annual rate of 5.1 million, down 5.4% from May and down 14.2% from last June. As The Fed cranks up its target rate (green line) and eventually shrinking its balance sheet, we will see further shrinking of existing home sales this summer.
But home price inflation remains high (Case-Shiller National home price index at 21.23% YoY, Zillow’s rent index at 14.75% YoY) while the Consumer Price Index YoY is at 40-year high of 9.1% YoY. In other words, home price inflation is 233% of the stated inflation rate from Uncle Sam.
May’s existing home sales report was … sobering. There is still historically low levels of available inventory and median sales price of existing home sales was 14.64% YoY. Of course, the alternative to ownership is renting which is growing at 14.75% YoY. Simply unaffordable.
The gap between REAL home price growth (12.13% YoY) and REAL average hourly earnings (-3.95% YoY).
Consumer sentiment for housing is near the lowest level since 1982.
The Fed seems determined to remove the punch bowl in its efforts to crush inflation. But will The Fed’s efforts also crush the housing and mortgage market?
One measure of how bad things are in the US for the middle-class and low-wager workers ix consumer sentiment from University of Michigan. The latest University of Michigan survey of consumers remains depressed at 51.1.
The consumer sentiment index was at 80.7 at the beginning of 2021, but has plunged dramatically with rising gasoline, food and inflation in general. Biden’s popularity has sunk from 55.8 in January 2021 to 38.1 today.
How about housing sentiment? Housing sentiment was 134.0 in January 2021 but has plunged to a depressing 45 with inflation and rising home prices (and rent). And with declining sentiment about housing, Biden’s popularity has plunged.
Bear in mind that a strong dollar is a two-edged sword. The US Dollar Index has risen 16% year-over-year, presenting a big hurdle for US firms with business overseas.
That strength of the greenback will rise until the Fed makes a dovish policy pivot.
And that pivot is forecast to occur at the Feb ’23 FOMC meeting.
Copper, one of the economic measures of a growing economy, is down -27% since March 3, 2022 as recession looks more likely.
Let’s compare copper with another famous asset, Bitcoin. Bitcoin, a cryptocurrency, is down 70% since November 9, 2021.
As I discussed yesterday, The Fed’s five-year forward breakeven inflation rate has plunged to its lowest levels under Biden as the global economy is slowing.
Notice that copper prices fit pretty well with The Fed’s 5-year breakeven inflation rate.
It looks like The Fed is killing-off the economy in their quest to tame inflation.
US inflation is the highest in 40 years, yet inflation may be slowing as 1) The Fed cranks up interest rates and 2) the global economy is slowing.
US inflation data in the coming week may stiffen the resolve of Federal Reserve policy makers to proceed with another big boost in interest rates later this month.
The closely watched consumer price index probably rose nearly 9% in June from a year earlier, a fresh four-decade high. Compared with May, the CPI is seen rising 1.1%, marking the third month in four with an increase of at least 1%.
While persistently high and broad-based inflation is seen persuading Fed officials to raise their benchmark rate 75 basis points for a second consecutive meeting on July 27, recession concerns are mounting. There are signs, though, that price pressures at the producer level are stabilizing as commodities costs — including energy — retreat.
But the expectations of inflation, as measured by The Fed’s 5-year forward breakeven inflation rate, just crashed to 1.8437%.
The breakeven inflation rate is a market-based measure of expected inflation. It is the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.
The USD Inflation Swap Forward 5Y5Y is also falling like a rock as The Fed hikes their target rate (green line).
Could it be that inflation is cooling with Fed rate hikes (but not the shrinking of their $8 trillion balance sheet)?
Currently, Fed Funds Futures are pointing to a Fed target rate of 3.552% by February 2023. And with that, Bankrate’s 30-year mortgage rate rose to 5.75%. Once again, like velociraptors from Jurassic Park, The Fed’s balance sheet is still out in force.
Fed Chair Jerome Powell and Atlanta Fed President Raphael Bostic are keeping The Fed’s balance sheet at near $9 trillion as they hunt assets to inflate.
Confounded Interest - Anthony B. Sanders 
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