Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Despite Powell’s confusing messaging on inflation, the market is pricing in an 80% chance of a rate cut in March 2024.
The Fed’s dots plot shows the same thing: Fed target rate falling like a paralyzed falcon.
As gold soars to an all-time high.
The difference between California governor Gavin “Toothsome” Newsom and Leave it to Beaver’s Eddie Haskell is that Eddie Haskell was more sincere.
The US middle class has the Down Payment Blues! Or a case of housing being simply unaffordable.
Median home prices are up a whopping 20% under Biden and his signature Bidenomics, growing the economy from the inside-out (?) instead of top-down. Excuse me Joe, Bidenomics is pure top-down Soviet-style economic planning. Markets be damned! The end result? Housing is far more expensive under Biden as are down payments.
If we look at year-over-year (YoY), we can see the burst of Covid-related spending and M2 Money growth (green line) that surged in 2020/2021. And rising home prices followed shortly thereafter. But as M2 Money growth slows, median home price growth declined into negative growth. The only factor that is positive is real hourly compensation (red line). But that is barely above 0%.
If we look at The Fed’s balance sheet surge (much like a storm surge), you can see the 2020/2021 overreaction to Covid and the various government shutdowns (along with school shutdowns).
The problem is that The Fed is shrinking their balance sheet like Biden shuffles. Maybe The Fed is following Biden’s lead: slow walking, incoherent messaging. And with the Fed storm surge of 2020/2021, Case-Shiller national home price index is up 33.2% under Bidenomics. Good luck with that down payment if you are renting and want to become a homeowner.
Pending home sales crash is showing why government usually fails to deliver sensible outcomes.
After all, Biden (and his overlord Obama) are truly addicted to gov solutions. Which means they are doomed to fail, as most government policies do.
Bidenomics is America’s Highway To Hell!
Unrealized losses on securities held by US banks exploded by 22% in the third quarter.
Of course, unrealized losses don’t really matter — until they do.
This is yet more evidence that the financial crisis that kicked off last March continues to bubble under the surface.
Unrealized losses, primarily on US Treasuries and mortgage-backed securities rose by $126 billion in Q3 and now total $684 billion, according to the FDIC’s quarterly bank data release.
Current unrealized losses are only slightly below the record set in the third quarter of 2022. This reflects the fact that the FDIC took over three failed banks earlier his year and ate their unrealized losses when it sold the banks’ assets, thus wiping them from the books.
Unrealized looses on securities are divided between two accounting methods.
It’s important to understand these are only paper losses. Ostensibly, the banks will hold these bonds until maturity and then will be paid their face value. If it plays out this way, there won’t be any real losses.
The problem is that these unrealized losses drastically decrease a bank’s liquidity. If it has to sell bonds in order to raise capital, the bank will experience significant losses. This is exactly what took down Silicon Valley Bank last March.
Here’s what happened.
SVB sold a large portion of its bond portfolio at a $1.8 billion loss. At the time, SVB CEO Greg Becke said the bank made the sale “because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients.”
The bank bought the bonds when interest rates were low. As a result, the $21 billion available for sale (AVS) bond portfolio was not yielding above cash burn. Meanwhile, rising interest rates caused the value of the portfolio to fall significantly. The plan was to sell the longer-term, lower-interest-rate bonds and reinvest the money into shorter-duration bonds with a higher yield. Instead, the sale dented the bank’s balance sheet and caused worried depositors to pull funds out of the bank.
WolfStreet explained more generally how these “irrelevant” unrealized losses can suddenly become relevant.
Banks, via a quirk in bank regulations, don’t have to mark these securities to market value, but can carry them at purchase price. The difference between market value and purchase price is the ‘unrealized gain or loss’ that the bank must disclose in its quarterly financial filings, so that we the depositors can see them and get spooked by them and yank our money out, us billionaires and centimillionaires first, on the two fundamental principles of investing: 1, he who panics first, panics best; and 2, after us the deluge.”
The Federal Reserve set up a bailout program to allow banks to deal with this problem. Instead of selling bonds at a loss, cash-strapped banks can go to the Fed’s Bank Term Funding Program (BTFP) and borrow against them “at par” (face value). This allows banks to use these undervalued assets to raise cash (at least temporarily) without realizing big losses on their balance sheets.
As unrealized losses rise, banks continue to tap into this bailout program more than nine months after the crisis kicked off.
Total outstanding loans in the BTFP program jumped by just over $5 billion in November alone.
In effect, the Fed managed to paper over the financial crisis with this bailout program.
It basically slapped a bandaid on it. But it has not addressed the underlying issue – the impact of rising interest rates on an economy and financial system addicted to easy money.
Remember, the US is on the cusp of a REAL recession, thank to Bidenomics.
The spread between real GDP and real Gross Domestic Income (GDI) just hit an all-time high. Even higher than The Great Recession of 2009.
Might as well have AC/DC’s Angus Young as US Treasury Secretary instead of tone-deaf Janet Yellen.
Yellen singing “Highway To Beijing.”
The US housing and mortgage markets are thunderstruck by The Fed’s attempts at cooling inflation down to 2%.
After a small bounce last month – following the puke in August – pending home sales dropped 1.5% MoM in October (better than the 2.0% MoM decline expected). This left YoY sales down 6.6% (negative for the 23rd straight month)…
The Pending Home Sales Index dropped back to a new record low…
By region, only the Northeast saw an increase in pending sales last month.
Sales fell the most in the West, down 6%, while contract signings in the South and Midwest slipped 1.9% and 0.4%, respectively.
Home sales are rising in places with more inventory, Lawrence Yun, NAR’s chief economist said, noting that purchases of new houses are up so far this year because of builders’ ability to create inventory.
“During October, mortgage rates were at their highest, and contract signings for existing homes were at their lowest in more than 20 years,” Yun said in a statement.
“Recent weeks’ successive declines in mortgage rates will help qualify more home buyers, but limited housing inventory is significantly preventing housing demand from fully being satisfied.”
The trend in pending home sales is following the mortgage rate (with a one month lag) and is set to fall further still…
The pending-home sales report is a leading indicator of existing-home sales given houses typically go under contract a month or two before they’re sold.
How long with Powell and his pals be able to keep this ‘higher for longer’ stress up as Americans’ largest source of wealth evaporates?
Mortgage rates have fallen recently, but are still up a staggering 156% under Biden.
And mortgage purchase applications keep falling.
Here is The Fed keeping a close eye on the housing and mortgage market.
US Real GDP grew at a whopping 5.2% (revision) in Q3.
But was it organic growth or simply The Federal Government funding the defense and green energy industies with trillions in spending?
One factor has been government spending which grew an unsustainably 4.7% in real terms over the last year. Outside the pandemic, this is one of the fastest rates in decades and works at a cross purpose with monetary policy objectives.
Bidenomics is code for massive Federal spending (and debt) to fund Federal priorities: wars in Ukraine, Israel and likely involvement around Taiwan. And the costly switch to green energy (but not nuclear, for some reason).
If the US economy growing simply to function as a war machine and wealth transfer mechanism from the middle class to the 1%, we are on the Highway To Hell. Personal consumption contributed 2.44% to the bottom line GDP print in Q3, down from the pre-revision number of 2.69% but well above Q2’s 0.55%.
Where has all the GDP gone? Not to wages.
As expected, Q3 Real GDP was revised upwards to 5.2% annualized. Of course, this shatters JKP’s talking points that Biden inherited a train wreck of an economy from Trump. Q3 2020 Real GDP grew at over 30%.
And on a year-over-year (YoY) basis, US real GDP grew at 3.0% in Q3. Unfortunately, real hourly compensation grew at a measly 0.6% YoY.
Meanwhile, home prices have hit an all-time high. Too bad real wages are so low.
Why is growth so strong? One factor has been government spending which grew an unsustainably 4.7% in real terms over the last year. Outside the pandemic, this is one of the fastest rates in decades and works at a cross purpose with monetary policy objectives.
Despite Biden/KJP’s ridiculous lies about about this Thanksgiving being the 4th “cheapest” in history, inflation while cooling is still way up under Biden. In fact, food prices are up 25% since 2020.
Since 2020, US groceries are up 25%, used cars climbed 35% and rents roughly 20%. In 2020, a survey showed a 4-person household spent an average of $238.32 in a week on food at home. A similar survey in 2023 showed that figure had jumped 32% to $315.22.
Notice that food CPI peaked at 11.33% in August 2022 and has been declining since as M2 Money growth dies.
Of course, Biden blames high prices on … anyone but himself and big spending Congress. “Biden admits prices ‘too high’ but blames sellers for 18% inflation.” Sure Joe, the big spending bills you championed as part of Bidenomics that helped surge M2 Money supply (green line) has nothing to do with price increases, just the evil private sector.
US President “Vigorous” Joe Biden. Quick Jill, wake him up before you go, go.
Detroit?? Or Devil With A Blue Dress??
Home prices in America’s 20 largest cities rose for the 7th straight month in September (the latest data released by S&P Global Case-Shiller today), up 0.67% MoM (slightly worse than the +0.8% MoM expected).
That pushed the YoY rise in prices up 3.92% – the fastest pace since Dec ’22 – but as the chart shows the MoM gains are slowing rapidly.
Source: Bloomberg
“On a year-over-year basis, the three best-performing metropolitan areas in September were Detroit (+6.7%), San Diego (+6.5%), and New York (+6.3%),” according to Craig J. Lazzara, Managing Director at S&P DJI.
“We’ve commented before on the breadth of the housing market’s strength, which continued to be impressive. On a seasonally adjusted basis, all 20 cities showed price increases in September”
But, judging by the resumption of the rise of mortgage rates since the Case-Shiller data was created, we would expect prices to also resume their decline…
Inventory is increasing (as homebuilders dump new homes on to the market), but existing home-buyers and -sellers are stuck still (affordability for the former and the mortgage cost gap for the latter), and – despite the market’s hopes – The Fed isn’t cutting rates any time soon (unless the economy utterly collapses). Be careful what you wish for…
Odd that 4 metro areas with 6% or higher home price growth are all cities with larger illegal immigrant migration: Chicago, Detroit, New York and San Diego (all blue cities). This is what is called housing displacement, A surge in immigration leads to rent stock being absorbed and housing prices rising.
With existing home sales collapsing to their lowest SAAR since 2010, new home sales are the only pillar left holding up any hope in the US housing market. However, with housing affordability at its lowest since at least the early 1980s, (and homebuilder sentiment slumping as mortgage rates rose), it’s no surprise that analysts expected new home sales in October to tumble 5.0% MoM (after their unexpected 12.3% surge in September).
As a reminder, The Mortgage Bankers Association’s index of home-purchase applications tumbled to 120 – the lowest level since 1995 – as mortgage rates hit 8% for the first time in 23 years in October.
Source: Bloomberg
So, it should be no surprise that new home sales were even worse than expected, plunging 5.6% MoM (and making it even worse, the 12.3% MoM jump in Sept was revised down to +8.6%)…
The trend of downward revisions continues…
The New Home Sales SAAR of 679k is flat from April (that was below all economists’ forecasts)…
It appears the homebuilders finally hit their wall eating the gap between these two lines was just not sustainable…
And as we noted previously, homebuilders can’t be filling this gap either – between the current 30Y mortgage rate and the effective rates that borrowers are currently paying on their home loans – (i.e. subsidizing new home sales) forever…
The median new home price fell 17.6% y/y to $409,300; average selling price at $487,000
That is the lowest median price since Aug 2021, catching back down to existing home prices…
Is Powell winning his war on affordability? Or crushing the middle class’s main source of wealth? Or is it Hammer Time??
Is it sundown for the US commercial real estate market?
According to Trepp, the volume of CMBS delinquency increased 49.4% during 10 months through October.
Looking for more? This piece has been taken from Trepp and Commercial Real Estate Direct’s Q3 2023 Quarterly Data Review. Access the magazine here.
The volume of CMBS loans that are classified as delinquent increased by 49.4% during the 10 months through October to $27.91 billion. That volume amounts to 5.07% of the $601.98 billion universe tracked by Trepp. In contrast, delinquencies at the end of last year amounted to 3.03% of the $616.15 billion universe then extant.
Office Sector Drives Increase in Delinquency Volumes
The driver of the increase was the office sector, which had a 261% increase in delinquency volumes over the 10-month period through October. A total of 199 loans with a balance of $9.59 billion, or 5.91% of all CMBS office loans were at least 30 days late with their payments, as of the end of October. At the end of last year, 115 loans with a balance of $2.65 billion, or 1.63% of office loans, were delinquent.
The sector’s prospects are unlikely to improve as office occupancy rates have declined in most of the country’s major markets. That’s been driven by a substantial pullback in demand from office-using tenants.
Hit especially hard have been loans with floating coupons that are maturing and need interest-rate cap agreements in place before they qualify for term extensions. Those rate caps have skyrocketed in price in lockstep with interest rates.
On the residential side, The Fed is helping drive mortgage payments through the roof!
I wonder if Fed Chair Jerome Powell likes it like that!
Confounded Interest - Anthony B. Sanders 
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