Yale economist and Nobel Laureate Robert Shiller wrote an interesting op-ed in the New York Times entitled “The Housing Boom Is Already Gigantic. How Long Can It Last?”
That’s what she said.
Bill McBride at Calculated Risk already opined on some of the odder aspects of Shiller’s op-ed. So, I am going to focus on a different angle about the gigantic boom in housing prices and how can it can last.
Let’s look at the spread between YoY home prices using the Case-Shiller 20 metro home price index over the Case-Shiller National home price index (includes smaller metro areas). You can see that the CS 20 index spread over the CS National index ballooned during The Fed’ third round of quantitative easing (asset purchases). It slowed dramatically once The Fed stopped QE and is now falling that The Fed is unwinding its balance sheet.
Another spread is between the CS 20 metro YoY and FHFA’s Purchase-only Index YoY. This chart shows that the spread actually became negative after The Fed stopped QE.
The CS 20 Metro index heavily weighs coastal cities like Los Angeles, San Francisco, Seatlle, Boston, etc. The CS National and FHFA PO indices include interior US metro areas like Kansas City. Or more rural areas like Show Low, Morenci, and Three Way Arizona.
Did The Fed help misprice risk assets like housing? Of course!
For those technical analysis lovers, the S&P 500 index has entered the dreaded death cross. Meaning that the S&P 500 index has fallen below the 50 and 200 days moving averages.
However, the Hindenburg Omen is NOT flashing red.
Analysts forecasts for S&P 500 profit growth in 2019 is pretty Hindenburg-ie.
We are in Castle De’ath. But The Fed, China, Brexit or any of the current uncertainties can send the S&P 500 index flying over the moat into golden cross territory.
Mark Calabria, VP Mike Pence’s Chief Economist (formerly at the Cato Institute) is rumored to be the nominee of President Trump to replace Mel Watt as chief Fannie Mae and Freddie Mac’s regulator (as well as other GSEs).
Calabria has long been an advocate of downsizing government’s role in the housing and mortgage market and even shutting down Fannie and Freddie.
What are the options that Calabria (and Congress) face?
- Status qou – leave Fannie and Freddie in conservatorship
- Remove FF from conservatorship and …
Free Fannie and Freddie? Not without a boat load of capital. Remember, FF are not depository institutions (unless Congress does what it did with investment banks during the financial crisis and allow them to be declared depository institions). A change to their charters and the acquisition of a current depository institution like United Bank would do the trick. FF would then be subject to bank captial requirement (which they currently are not).
Shut FF down. While appealing to free marketeers, various stakeholders like the affordable housing lobby will protest.
Of course, the old shut down FF and create a new government insurance company (aside from the fact that FHA, Fannie and Freddie are mono-line insurance ompanies already) is always on the table. This was the Parrot and Zandi plan.
According to Parrot and Zandi, “With a new director at the FHFA next year, we are likely to see a meaningful shift in the role of Fannie Mae and Freddie Mac. This likely means a reduction of both the GSEs’ footprint and the cross-subsidy they provide, and it may also mean an attempt to get the GSEs out from under the government’s wing altogether. If
it is any of these, it will mean higher mortgage rates, less access to credit, and disruption to the housing and mortgage markets and broader economy.”
I once estimated that it would increase mortgage rates by 30 basis points only. Heck, The Federal Reserve can achieve that at their next meeting!
I am guessing that Calabria will take it slow as to not scare markets.
As the late Glenn Frey almost sang, The Heat Is Off.
As The Fed unwinds its $4+ trillion balance sheet, the Smart Money Flow Index and the FHFA Purchase Only Home Price Index YoY are declining.
In other words, the housing asset bubble is Already Gone.
I wonder if it is time for Fed Chair Jerome Powell to emulate Frank Booth from “Blue Velvet” and take another hit of oxygen.
As the late Albert Collins once sang, he has a “Cold, Cold Feeling.”
Or feeling hot, hot, hot, depending on which measure you are looking at.
Take NAIRU, the natural rate of unemployment for the USA (white line). Historically, when the U-3 unemployment rate (orange line) falls below the natural rate of unemployment, the economy is growing “hot, hot,hot” and The Fed raises their target rate. Check out the green boxes.
What is happening now? The U-3 employment rate has fallen below the natural rate on unemployment (see pink box). But this time around, The Fed began raising their target interest rate BEFORE this happened.
The Fed is raising rates as US Average Hourly Earnings All Employees Total Private Yearly Percent Change SA exceeds 3% for the first time since 2009.
While wage growth is relatively hot, hot, hot, housing is getting that cold, cold feeling.
How about corporate debt growth (blue line)? Cold.
Getting cold enough?
Nick Timiraos from the Wall Street Journal has an interesting article entitled “Fed Shifts to a Less-Predictable Approach to Policy Making.”
Federal Reserve officials are moving into a more unpredictable phase of policy-making after two years of removing economic stimulus in regular, quarterly intervals.
They will be deciding whether and when to raise interest rates more on the basis of the latest signs of economic vigor—such as in inflation, unemployment and growth—and less on forecasts of how the economy is expected to perform in the months and years to come, they’ve indicated in interviews and public comments.
Less predictable???? One possible rule is the Taylor Rule. But The Fed kept their target rate at 25 basis points from late December 2007 to December 2015, far below the TR rate.
Here is the Fed Funds Target rate.
Its not that The Fed will be less predictable, Its just that they aren’t following any model that is visible to the marketplace. So in a sense, they like to surprise the marketplace!
Its near the end of November and S&P/CoreLogic just released their US home price indices for September. The good news (for some)? Home prices rose 5.15% YoY. The bad news? Home price growth continues to slow. And home price growth continues to slow along with The Fed’s Balance Sheet.
Please note the YoY rise in home prices with the surge in the Fed Balance Sheet known as QE3. The rapid growth ceased once The Fed declared an end to QE3.
The biggest gainer again is Las Vegas a6 13.5% YoY. The slowest gainer in New York City at 2.6% YoY. The second slowest growth rate is in Washington DC followed by Chicago. Of course, New York, Washington DC and Chicago love their high tax rates.
Viva Las Vegas!
Of course, the business media touts the headline “Existing Home Sales Rise 1.4% in October After 3.4% Decline in September.” Winning!
But on a YoY basis, existing home sales fell 5.1% in October, the 8th straight month of declining existing home sales growth. Higher home prices and higher interest rates?
Photobomb!! Fed Chair Jerome Powell discussing rate hike freeze with former Fed Chair Janet Yellen as the Fed Open Market Committee listens.
Housing and the Blues.
Yes, the hard data for housing has been soft as The Fed keeps raising rates. Today, the National Association of Homebuilders index of homebuilder optimism took a large drop to 60.
But take look at the Real Estate Market Surprise Index. It is now at the lowest level since 2010.
Housing and the blues.