Inflation Joe And Slow-Walking Jay! REAL Fed Funds Target Rate Lowest In History As Bidenflation Crushes Middle Class And Low Wages Workers (REAL Home Price Growth Is Now LOWER Than The Peak Of The 2000s House Price Bubble!)

Inflation Joe and Slow-Walking Jay. The bullies of the middle class and low-wage workers.

As inflation crushes the middle class and low wage workers, we see that the REAL Fed Funds Target Rate (based on headline inflation) is the lowest in history. Notice that the REAL Fed Funds Target Rate tends to hit its lowest negative reading DURING recessions, although The Fed has had a poor track record since the Dot.com bubble burst and the 2001 recession meaning that the REAL Fed Funds Target rate has been in negative territory (that is, the rate of inflation has exceeded The Fed Funds Target Rate for much of the post-2000 era).

The “good” news? Inflation caused by The Fed’s negative interest rate policy (NIRP?) has actually led to REAL home price growth to slow 11.6855% YoY, lower than the peak of the 2005-2007 house price bubble.

With The Fed’s OVERSTIMULATION of markets with historically low REAL Fed Funds Target Rate, we can see that the US unemployment rate is overheated (that is, below the Congressional Budget Office (CBO) Short-term Natural Rate of Unemployment. Yes, it appears that Slow Walking Fed Chair Jay Powell should be raising The Fed’s target rate AND removing (at least) the Covid monetary stimulus.

Inflation Joe is a career politician, so it is not surprising that he is trying to blame Russia for the horrid inflation in the US. However, inflation grew from 1.4% when Biden took office to 7.9% when Russia invaded Ukraine. The latest inflation report was 8.5%, so Russia is only partly to blame for rising prices since February 24, 2022. The rest is due to Inflation Joe, Slow Walking Jay and Congress.

Again, Congress helped drive prices through the roof by massive Federal spending (aka, Covid stimulus “relief”). Hence, the Four Horsemen of the Inflation Apocalypse is appropriate. And now Biden is once again pitching massive government spending (Build Inflation Back Better?).

Here is Joe Biden and his inflation bat, Lucille.

Have a peaceful and pleasant Easter Sunday.

The Big Short 2? Subprime Credit-Driven Bubble Versus Fed Loose Policy Driven Bubble (Will The Fed Burst Yet Another Housing Bubble? Michael Burry Thinks Not)

The book and movie “The Big Short” revolved around the 2005-2007 housing bubble driven by lending to borrowers with subprime credit (and little or no underwriting). As we know, Bear Stearns, Lehman Brothers and other investment banks too large positions in subprime asset-backed securities (SABS) that became highly toxic once the demand for high-yield subprime ABS dried up. The decline in US home prices coupled with soaring 90-day mortgage delinquencies led to the failure of Bear Stearns and Lehman Brothers along with Fannie Mae and Freddie Mac being put into conservatorship by their regulator.

Fast forward to today. Mortgage originations by credit scores of 620 or less have shriveled while home price growth YoY is even higher than the subprime mortgage crisis of 2005-2007. So, is the US facing another “Big Short” scenario? Yes and no.

The answer is no in that lenders have tightened their credit box sufficiently so that investment banks are no longer buying large quantities of subprime credit paper. The answer is yes if we consider that the current housing bubble is fueled by extraordinary monetary stimulus due to Covid (as well as rampant Federal government stimulus spending).

Following the Federal Reserve of Dallas’ lead, here is a chart of REAL home price growth YoY against REAL average hourly earnings YoY. I added REAL Zillow house rents YoY as well.

Look at the affordability gap during the Subprime Bubble of 2004-2006 and then the Fed Bubble of 2020 to today. Both bubbles show a disconnect between REAL home prices and REAL wages. REAL Zillow home rents are not as high as REAL home price growth, but still how a huge gap in rent affordability.

So, what can upset the apple cart? How about Jay and The Gang jacking up mortgage rates making home affordability even worse (unless it slows home price growth).

Thanks to The Fed’s propose quantitative tightening, mortgage rates are soaring and mortgage costs along with them. Mortgage costs, thanks to The Fed driving up housing prices AND mortgage rates, are substantially higher than during the subprime mortgage housing bubble.

The Fed’s whipsaw approach helped crash home prices during the subprime mortgage crisis by dropping rates too fast at first (helping to ignite a housing bubble) then raising rates too fast (helping to crash housing prices).

Now, Michael Burry of The Big Short fame (portrayed by Christian Bale) thinks that The Fed has no intention of fighting inflation meaning that he doesn’t think The Fed will raise rates all that much. “The Fed’s all about reloading the monetary bazooka. So it can ride to the rescue & finance the fiscal put,” Burry added.

Yikes! Time for investing in cryptocurrencies like Bitcoin and Ethereum?

This scene from the film “The Big Short” won’t be happening again. But I agree that no one is paying attention … again.

Fed’s Fahrenheit 451! Freddie’s Mortgage Rate Hits 5% For First Time In A Decade As Fed Keeps Buying Assets

WASHINGTON (AP) — Long-term U.S. mortgage rates continued to climb this week as the key 30-year loan rate reached 5% for the first time in more than a decade amid persistent high inflation.

The average 5% rate on the 30-year mortgage was up from 4.72% last week, mortgage buyer Freddie Mac reported Thursday. The average rates in recent months have been showing the fastest pace of increases since 1994. By contrast, a year ago the 30-year rate stood at 3.04%.

The average rate on 15-year, fixed-rate mortgages, popular among those refinancing their homes, jumped to 4.17% from 3.91% last week.

Yet The Federal Reserve’s balance sheet keeps on growing.

The Federal Reserve reminds me of the Ray Bradbury novel Fahrenheit 451 where the fireman actually burn books rather than extinguish fires.

Stimulypto! How The Federal Reserve Helped Drive Property Taxes Above $10,000 In New York City (NYC Home Prices UP 26.3% Since February 2020, Chicago UP 21.7%, LA UP 32.5%)

As we are all aware, The Federal Reserve launched its monetary “stimulypto” in March 2020 to combat the Covid virus. Coupled with the surge in Federal stimulus, we have seen home prices rise over 20% since February 2020.

Specifically, New York City home prices are up 26.3% since February 2020, Chicago home prices are up 21.7%, and Los Angeles home prices are up 32.5%. Fed monetary stimulypto is up 113% since February 2020.

Of course, this has resulted in soaring PROPERTY TAXES as well. According to Attom Data Services, “Among 1,481 U.S. counties with at least 10,000 single-family homes in 2021, 16 had an average single-family-home tax of more than $10,000, including 12 in the New York City metro area. The top five were Kings County (Brooklyn), NY ($13,734); Marin County, CA (outside San Francisco) ($13,719); Westchester County, NY ($13,674); Essex County, NJ ($13,116) and Nassau County, NY ($13,095).”

Of course, not all metro areas raised their property taxes. Major markets with the largest decreases in average property taxes included Pittsburgh, PA (down 35.1 percent); New Orleans, LA (down 20.2 percent); Houston, TX (down 18.7 percent); Dallas, TX (down 12.2 percent) and Austin, TX (down 7.7 percent).

States with the highest effective property tax rates in 2021 were Illinois (1.86 percent), New Jersey (1.73 percent), Connecticut (1.67 percent), Vermont (1.55 percent) and Pennsylvania (1.37 percent).

Even if The Federal Reserve removes its massive monetary stimulypto (MMS), property taxes will remain elevated unless cities reduces their property tax rates. But Democrat-controlled cities tend to be addicted to spending much like The Federal government.

You might as well face it, they’re addicted to gov.

Bidenflation SOARS To 8.5%, Real Average Hourly Earnings Growth Falls To -3% YoY, Mortgage Rates Rise To 5.14% (The Four Horsemen Of The Inflation Apocalypse?)

The US inflation numbers were released this morning and they are grim. Inflation YoY grew to 8.5%.

With 8.5% YoY inflation, REAL average hourly earnings growth fell to -3% YoY.

And with The Fed intent on extinguishing their part of the inflation, Bankrate’s 30Y mortgage rate rose to 5.14%.

Energy is the biggest culprit (fuel oil up 70.1% YoY) thanks to the double whammy of 1) Russia’s invasion of Ukraine and 2) Biden’s restrictions on oil and natural gas production. Food at home is up 10% YoY.

Here is a colorful chart of MoM growth in prices.

The Taylor Rule model now says that The Fed Funds Target Rate should be 11.90%. Hence, Fed Stimulypto is still in place with the signal that rates will increase.

How about WTI Crude and Brent Crude soaring over 4% today?

Once again, the Four Horsemen of the Inflation Apocalypse (Biden, Powell, Pelosi, Schumer) overstimulated the economy and financial markets with excessive monetary stimulus (Powell) and excessive Federal spending (Biden, Pelosi, Schumer) where demand soared for products and supply naturally hasn’t caught up.

Addicted To Gov! 40-year Mortgage Proposal And How Government Makes Housing Unaffordable (Declining Real Wage Growth And Rising Mortgage Rates = Bad News)

The housing and mortgage markets are addicted to gov.

MarketWatch had an interesting piece on mortgages entitled “Here’s how much a 40-year mortgage would save you each month vs. a 30-year loan. And the ultimate cost.”

To make a long story short, a 40-year mortgage, by stretching the payment out from 30 to 40 years, means that the mortgage mortgage payment declines from $1,687 to $1,504.

Given that the US Treasury yield curve only goes out to 30 years, lenders (and Fannie Mae and Freddie Mac) will have to use the US Dollar Swaps curve to price mortgages. And since the swaps curve is downward sloping, we could see 50-year mortgages at a lower rate than 30-year mortgages, ceteris paribus.

But with The Fed planning on taking away the monetary punchbowl, mortgage rates are rising making housing even more unaffordable.

But most things are not equal. The 40-year mortgage results in a slower paydown of the mortgage, increasing the lender’s exposure to property value declines. A 50-year mortgage would even be worse.

But the real problem with the 40-year mortgage is that it can lead to even MORE unaffordable housing. Yes, going from 30-year to 40-year mortgages lowers the mortgage payment, but a 40-year mortgage could increase the demand for housing. And since we already have soaring home prices since Covid (thanks to Fed monetary policy AND Federal government stimulus), we could actually see a worsening of the housing bubble). Particularly since REAL average earnings are declining.

What a mess that has been created by the government’s pursuit of “affordable housing.” Ideally, the Federal government could help raise household earnings through lowering of Federal tax rates, but the Biden Administration wants to raise taxes. Alternatively, lenders (and Fannie Mae and Freddie Mac) could lower lending standards (e.g., lowering required credit scores), or reduce downpayments to 0%. Lowering credit standards and reducing required downpayments are also inflationary and pose serious potential problems with default risk.

Not to mention that a 40-year mortgage increases the duration risk for owner’s of the 40-year mortgage.

And don’t forget that local governments frown on multifamily (apartment) construction (the Not In My Backyard [NIMBY] problem contributing to rising housing prices.

Yes, the US has a bad case of unaffordable housing. And the 40-year mortgage will make it worse.

Weekend Update: 2022 A Tough Year For Bonds, Mortgages Tighten, Mortgage Demand Backs Off As Rates Surge (Bond Volatility On The Rise)

2022 has been a tough year for bond investors and the mortgage industry.

Doubleline’s Jeff Gundlach observed that the 2 Year Treasury yield is up 125 bp over the past month or so. I commented that the 2 Year Treasury Yield is up 179 bp since December 31, 2021 and the 30-year mortgage rate is also up 179 bp since the end of 2021. Yes, 2022 has been a dismal year for bonds and the mortgage market.

The ICE BofA MOVE index, a yield curve weighted index of the normalized implied volatility on 1-month Treasury options, has risen in 2022 along with the 30-year mortgage rate as the normally dormant Federal Reserve finally waking-up and trying to fight inflation.

Mortgage demand backs off due to anticipated Fed rate hikes.

The latest Fed Dots Plot reveals that Fed Open Market Committee members are expecting Fed Funds rate increases in 2023, but remaining the same in 2024 (FOMC median projection). Then falling in the longer term.

With home prices and rents soaring with Federal Reserve stimulus, let’s see how home prices and rents react to The Fed raising rates. My models forecast a slowdown in late summer 2022 to 6% home price growth YoY as The Fed actually implements their quantitative tightening.

Inflation? CPI YoY is the highest in 40 years and FLEXIBLE Core CPI is 20% and the highest since … Lyndon B. Johnson was President (the flexible price index only goes back to 1968). Actually, Flexible Price inflation is even higher than it was under LBJ. Perhaps this is one of those accomplishments that Biden staffer are complaining never gets discussed.

On a side note, Sheila Bair has stepped down as CEO of government mortgage giant Fannie Mae.

The Financial House is a Rockin’ … but not in a good way.

Fed Fireball! 30-year Mortgage Rate Breaches 5% As Fed Goes On The Offensive (Minutes Indicate Balance Sheet Shrinking Of $95 Billion Starting In May)

As the US Treasury 2-year yield hits 2.507% (up from 0.128% when Biden was installed as President) and the number of Fed rate hikes over by February 2023 hits 9.6, Bankrate’s 30-year mortgage rate breached the 5% mark at 5.04%.

The most recent data from on existing home sales show YoY sales in negative territory as The Fed begins in monetary fireball tightening.

St Louis Fed’s Bullard said The Fed is “behind the curve.” Ya think??

The Fed’s minutes from the most recent meeting indicates that The Fed will shedding $95 billion a month from it swollen balance sheet. At almost $9 trillion mostly populated by Treasuries will be the first asset to run-off the balance sheet (there is almost $1 trillion of Treasuries maturing in 2022 and $856 billion maturity in 2023, etc), The Fed plans to shrink the balance sheet while, at the same, raising The Fed Funds target rate from it near zero levels.

The Federal Reserve has ignoring rules like the Taylor Rule since the financial crisis of 2008-2009, but seemingly are paying attention to the Taylor Rule because of 7.9% inflation. The Taylor Rule is suggesting a 20.42% Fed Funds target while the current target rate is 0.50%. Now THAT would be a real shock to the economy.

Powell: “Unleash the Fed Fireball on the 99%!”

Euphoria! CoreLogic February Home Price Index UP 20% While Real Hourly Wages Decline (Wine Prices UP 25.1%, Foodstuffs UP 52.7 Under Biden)

Euphoria!

CoreLogic’s Home Price Insights revealed that home prices rose 20% YoY in February despite REAL average hourly earnings declining -2.678% YoY. THAT is euphoria! Or Stimulypto, as I like to call it.

No, The Federal Reserve still hasn’t removed its staggering monetary stimulus. Notice that M2 Money Stock is still growing at a torrid 11% pace.

20% YoY home price growth in February? CoreLogic has increased their forecast of home price growth to 5%, likely because The Federal Reserve is imitating a sloth in removing its monetary Stimulypto.

Of course, there are other assets growing at lightning speeds. US Regular gasoline prices are UP 75.4% under Biden. Foodstuffs are UP 57.2% since Biden was installed as President. At least ground beef is only up 16.8% while the fine wine index is up 25.1%.

Speaking of wine, Hitching Post II in Buellton, CA must be suffering from rising food and grape costs too (I highly recommend eating there and using their HP Magic Stuff at home). Not to mention their spectacular wines. Roast artichokes anyone??

Now A Warning? Dallas Fed Warns That A Housing Bubble Is Brewing (Too Late, Its Already Here!)

This clip from the Bruce Willis and Meryl Streep film “Death Becomes Her” perfectly represents the predicament surrounding The Federal Reserve’s loose monetary policies and housing prices: “Now a warning” after Meryl Streep ingests The Fed’s magic monetary elixir.

The Dallas Federal Reserve issued a warning recently that a housing bubble is brewing … after the economy drank its magic monetary elixir. We can see the housing bubble clearly (defined as the spread between REAL home price growth and REAL average hourly earnings). Notice that the current housing bubble looks similar to the infamous 2005 housing bubble. And the US is seeing several months of the spread between REAL home price growth and REAL hourly earnings be even higher than the peak of the 2005 bubble.

The Federal Reserve is starting to slow down its asset purchases, so we should see a cooling of the housing bubble. Unless, of course, The Fed changes its tune from quantitative tightening (QT) back to quantitative easing (QE) … again.

The Dallas Fed has a measure of housing “exuberance” which shows a bubble forming, but not there yet. I like the spread between real house price growth and real hourly earnings better.

The Dallas Fed also has a price-to-rent chart also showing growing exuberance.

But if we look at the Case-Shiller National HPI YoY to US CPI Urban Consumers Owners Equivalent Rent of Residences YoY we see that the US is currently experiencing a price-to-rent ratio higher than the peak of the 2005 house price bubble. What is the culprit? The vast expansion of monetary and fiscal Stimuylpto surrounding the Covid outbreak in early 2020.

So, the Dallas Fed thinks that is a house price bubble is brewing, but it has actually been in the works since QE3 in 2013 (bubble 2), but really took off with The Fed’s stimulypto and Federal COVID spending surrounding the COVID outbreak in early 2020.

Here is a rare video of Fed Chair Jerome Powell at the recent Fed Open Market Committee meeting deciding on removing the toxic monetary elixir from the system.

Here is a video of Jordan Spieth at the Valero Open engaging in putting errors like The Fed’s policy errors.