Schrödinger’s cat is a (hopefully) unperformed experiment in quantum physics.
Schrodinger’s Equation For A Single Particle In Three Dimensions (Simplified)
We don’t know if the cat in question is dead (due to poisoning) or alive or DEAD AND ALIVE … UNTIL we open the box.
Just like housing prices. We won’t know if housing prices are dead until The Federal Reserve stops pumping accelerant into the housing box.
If we look at the spread between major housing markets (Case-Shiller 20 Metro YoY) and a broader index (FHFA’s Purchase-only Home Price Index YoY), you can see that the major market “bubble” ceased when The Fed stopped QE3.
Another sign is the decline in houses begin flipped YoY.
Since The Fed seemingly is pumping accelerant into the housing market, we can only guess as to the status of Schrödinger’s House Cat.
Since the beginning of the QE unwind — or “balance sheet normalization,” as the Fed calls it — in October 2017, the Fed has now shed $364 billion.
Of course, The Fed still have a long way to go to unwind its $4 trillion balance sheet. But The Fed is, at the same time, raising its target rate (although through confusing messaging).
The S&P 500 index and the NAREIT All Equity (Real Estate Investment Trust) indices are soaring along nicely with The Fed’s balance sheet expansion (aka, low interest rates), but are experiencing rather dramatic volatiity in the face of a shrinking balance sheet and rising Fed target rate.
And yes, volatility is increasing with Fed unwind and target rate increases.
SMART Money Flow Index? The decline coincides with The Fed’s unwinding on its Treasury positions.
Bubble you ask? Instead of “bubble” or “collapse,” the Fed uses “valuation pressures” and “broad adjustment in prices.”
To quote the late, great Isaac Hayes from Reindeer Games, “There are monsters in the gelatin!!”
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!
As Bruce Springsteen once mumbled, financial markets are goin’ down.
Equity market indices like the S&P 500 and the Dow Jones Industrial Average have been pummelled over recent months along with the NASDAQ Composite Index and the SMART Money Flow Index.
And we know that housing in the form of existing home sales have declining YoY for the last 8 months.
But also goin’ down is Markit’s CMBX BBB- index. Note that the CMBX BBB- index started declining back in July. CMBX is a series of indices, designed to reflect the creditworthiness of commercial mortgage-backed securities (CMBS).