I wonder if the US House of Lords (aka, the US Senate) is paying attention to anything other than how much money that can spend … that we don’t have. Ah, the magic printing press! But printing that much money has negative effects … like inflation.
Yes, we are seeing inflation in the US economy. US REAL personal consumption expenditures rose to 4% YoY in June as the University of Michigan Buying Conditions for Housing (Good) dropped like a rock.
Here are the numbers. My favorite is the PCE Core Deflator MoM that rose 0.4% for an annual run at of 4.8% (0.4% x 12).
My favorite measure of inflation that the Federal government and The Federal Reserve ignore is housing. And house prices are growing at 16.6% YoY, 4x Core PCE growth YoY.
Any wonder why the UMichigan survey is so negative for buying as house?
Or could it be that Ohio State usually crushed Michigan in football in all but two seasons since 2001?
The good news? Only 3.6% of all active mortgages remain in forbearance. The bad news? The mortgage foreclosure moratorium comes to an end on July 31st. The good news? The Biden Administration rode to the rescue with a new mortgage relief program. The bad news? The Biden Administration rode to the rescue with a new mortgage relief program. And today, FHFA announced an extension of the COVID-19 REO eviction moratorium through September 30, 2021.
Forbearances rose most significantly among loans held in bank portfolios or private label securities (+35K), with FHA/VA mortgages seeing an uptick as well (+1K) The 5K decline among GSE loans offset just a small share of the total weekly rise.
There are still some 179K plans are still scheduled to be reviewed for extension/removal in July, which provides some substantial opportunity for improvement next week.
While still low, new forbearance plan starts hit their highest weekly level since late March, with restart activity also remaining elevated. Roughly 2/3 of all starts over the past week were restarts.
Removal volumes were the lowest since late May given the low volume of review activity at this time of month.
But with Covid Delta Variant and the Biden Administration saying that they are considering the return of the economy-destroying lockdown that will result in MORE deficit spending, MORE Covid relief programs, all of which will require MORE Federal Reserve spiking of the monetary punch bowl.
This is the never-ending mortgage crisis that started in late 2007 (partly due to the Federal government pushing affordable housing and homeownership so hard the it broke). Then it was the foreclosure crisis, this is a Covid-related government-shutdown crisis.
Government housing policies (push for homeownership and the Covid economic shutdowns) require The Federal Reserve to spike the punch bowl perpetually.
(Bloomberg) While U.S. homeowners may be celebrating their good fortune as home prices surge higher at a blistering 17% year-over-year clip, history suggests the end of quantitative easing will cool things off. A healthy housing market wouldn’t exhibit the out-sized price increases seen of late. No mature market behaves this way unless an unusual exogenous factor is at work. In the case of housing, there are two of them.
First is the Federal Reserve’s massive QE4 program, which in size and pace is a behemoth compared to the mortgage bond purchase programs seen during QE1 and QE3. This current QE alone now accounts for almost $2.3 trillion in mortgage bond purchases since March 2020, while the previous two QEs combined took down $2.75 trillion. The Fed now holds about 31% of the entire agency mortgage market on its balance sheet.
The situation is reminiscent of QE3, which ran from Sept. 2012 through Oct. 2014 and saw the central bank purchase $1.4 trillion in mortgages. Home prices, as measured by the S&P home price index, rose 6.9% in 2012, then exploded 13.4% higher in 2013 and jumped a further 4.4% in 2014. They had dropped 5.8% in 2011, before the Fed buying.
Home prices displayed much the same pattern during 2009 and 2010 after the Fed instituted QE1 from Nov. 2008 to Aug. 2010, purchasing $1.35 trillion during that time. While the cost of a home in 2007 and 2008 fell 9% and 18.6%, respectively, during 2009 and 2010 they dropped just 3.1% and 2.4%. In this millennium, including the housing boom years of the early oughts, the average annual home price growth has been 5.2%. During the years with active Fed mortgage purchases, it has averaged 7.6%, compared to 4.2% during the years without.
The second outside force is the collapse in home building since around 2010, which has left the U.S. housing market desperately short of supply.
During the decade of 2010 to 2019, just 683,000 of new single-family homes were built on an annualized basis, the lowest level of any decade since the 1950s. Considering that the U.S. population of about 330 million is far larger than it was in the 1950s, this has had consequences.
The supply of existing homes for sale hit a record low of just over 1 million units in January, helping fuel the rise in prices. It has since moved higher to 1.25 million as of last month, yet this is still about half the trailing average of 2.4 million seen since 2000.
But developers can’t build new homes as quickly or as painlessly as the Fed can create credit. Once the Fed brings QE4 to a close, a home price downturn, let alone a price collapse, amid such a scarcity of supply seems to be out of the question.
The agency mortgage sector on Tuesday saw higher-coupon UMBS 30-year coupons outperform their lower-coupon counterparts despite a five-basis-point bull-flattening of the U.S. Treasury curve. This was all done on light volume, as most investors seem content to hold onto their cards prior to today’s FOMC rate announcement.
Trade desks were said to have remained relatively quiet for a second day, though the market saw more of an up-in-coupon move than on Monday, with the 3.5% through 4.5% coupons all displaying robust flows compared to their trailing five-Tuesday averages.
This week’s economic data releases include the FOMC rate decision today and pending home sales on Thursday.
“Effective July 29, 2021, the Federal Open Market Committee directs the Desk to:
Undertake open market operations as necessary to maintain the federal funds rate in a target range of 0 to 1/4 percent.
Increase the System Open Market Account holdings of Treasury securities by $80 billion per month and of agency mortgage-backed securities (MBS) by $40 billion per month.
Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities.
Conduct overnight repurchase agreement operations with a minimum bid rate of 0.25 percent and with an aggregate operation limit of $500 billion; the aggregate operation limit can be temporarily increased at the discretion of the Chair.
Conduct overnight reverse repurchase agreement operations at an offering rate of 0.05 percent and with a per-counterparty limit of $80 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair.
Roll over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS.
Allow modest deviations from stated amounts for purchases and reinvestments, if needed for operational reasons.
Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions.”
While the Fed’s Jackson Hole meeting is going on, the Mortgage Bankers Association released their weekly applications data. Mortgage purchase applications fell -1.6% from the previous week. But look at the following chart.
With smokin’ home price growth, we are seeing a decline in mortgage purchase applications.
But at least mortgage refinancing applications are up 9.27% from the previous week as the MBA contract rate fell from 3.11% to 3.01%.
Is The Fed paying attention? Or riding jackalopes in Jackson Hole?
It is not surprising that the REAL German Pfandbriefe 10-year rate is negative, since the NOMINAL rate is also negative. Especially since the NOMINAL German sovereign yield is negative.
When we subtract German inflation from the Pfandbriefe 10-year rate, we get a REAL Pfandbriefe rate of 2.365%.
A Pfandbriefe is a type of covered bond. A covered bond is a debt security that is common in Europe. It issued by a bank or mortgage institution and collateralized against a pool of assets that, in case of default of the issuer, can cover claims at any point of time.
On the short end of maturity, the REAL 1-2 year Pfandbriefe rate is -2.55.
Then we have negative REAL 30-year mortgage rates in the US.
Housing prices? Germany looks positively tame in terms of house price growth compared to the US, although the Eurostat data for German house price growth is lagged behind the already lagged Case-Shiller data.
Like the US, there is a considerable gap between house price growth and income growth.
Here is a chart for the US pointing to unsustainable house price growth.
How is the ECB impacting German house prices? Much like the USA.
Normally, we see the US Treasury yield curve slope rise dramatically after a recession. Except for after the shortest recession (2 months) in US history. Why?
With the Covid outbreak in early 2020, The Fed chose to repress interest rates with a vengeance by lowering their target rate to 25 basis points (yellow line) and massively expanding their Treasury and Agency MBS purchases (orange dotted line). As a result, the US Treasury yield curve slope had an anemic post-recession surge and has declined again to 103.39.
Oddly, The Federal Reserve overstimulated their balance sheet for the Covid epidemic which created the shortest recession in US history. .
But the stimulus remains. As does inflation and home price growth and rents.
This is indeed monetary Stimulypto.
Will this be acknowledged at The KC Fed’s Jackson Hole Monetary conference?
Here is my concern that I mentioned in Benzinga. When home prices are growing at record highs (+16.61% YoY) and hourly wage growth is a paltry +2.28% YoY), were have serious affordability problems. That will eventually lead to a slowdown in home price growth.
The spread between home price growth an hourly earnings for workers is also at an all-time high.
How hot is the US housing market? All 20 metro areas in Case-Shiller’s 20 index are in double digits. Chicago is the slowest at +11.1% YoY. Phoenix AZ is the hottest at +25.9% YoY.
Here is Fed Chair Powell trying to tame home price growth at the Jackson Hole meetings.
The real yield on U.S. 10-year debt fell to a record low as concerns mounted over the outlook for economicgrowth.
The rate, which strips out inflation, fell almost six basis points to minus -1.269%. The move was compounded by a lack of trading liquidity, with the 10-year breakeven rate — a market proxy for the average annual rate of consumer prices over the next decade — edging higher at 2.36%.
Still, it points to souring investor sentiment amid the rapid spread of the delta variant that threatens to derail the economic recovery. And it comes as investors piled into haven assets after a surprise hit to Germany’s business confidence.
That is much better than my chart that shows the REAL 10-year yield t -3.92% and the REAL Freddie Mac 30-year mortgage rate at -2.61. Based on headline CPI YoY.