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?
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?
I was reading the usual pundits talking about massive increases in housing coming onto the market, then I saw today’s existing home sales numbers from the National Association of Realtors.
US existing home sales were up 1.38% in June from May, but up 22.85% YoY.
But the scary numbers were median price of existing home sales YoY printing at +23.4% while EHS inventory increased to the highest level … in 2021 but 2021 is sill lower than anytime since 2000. Maybe July’s numbers will show that incredible spike.
Existing home sales were largely in the South, then Midwest, then West and finally the Northeast.
But look at distribution of EHS prices. Houses in the $100K-$250K range (green line) are rapidly vanishing while houses in the $500K-$750K (pink line) are rapidly increasing.
U.S. housing starts increased in June by more than forecast, suggesting residential construction is stabilizing despite lingering supply-chain constraints and labor shortages.
Initial home construction rose 6.3% last month to a 1.64 million annualized rate, a three-month high, according to government data released Tuesday. The median estimate in a Bloomberg survey called for a 1.59 million pace.
Both 1 unit and multifamily (5+ unit) starts for June increased over 6% from May.
So, 1-unit housing starts are back to 2000-2003 levels prior to the housing bubble.
You can see the housing bubble of post-2001 recession in terms of single-family home construction, the peak in January 2006 then the demise of SF housing starts until 2009, then the upswing in starts following The Great Recession. Housing starts have increased following the ultra-short Covid recession of 2020.
Existing home sales inventory remains low (orange box) despite rising new home sales.
Once again, why all the monetary stimulus since the Covid recession ended in April 2020?
The spread between home price growth and wage earnings is back to the days of the US housing bubble that peaked in 2005. But this time it is different. The 2005 housing bubble was driven by shoddy credit and limited documentation lending. This time the housing bubble is driven by The Federal Reserve.
(Bloomberg Businessweek) — Why, again, is the Federal Reserve adding $40 billion a month to its holdings of mortgage-backed securities when the mortgage market does not seem to be in need of federal assistance?
After all, the national average for 30-year fixed-rate mortgage loans is 3.02%, according to the latest survey by mortgage buyer Freddie Mac Corp. That’s up only a bit from its historic low of under 2.7% in January and February. Cheap loans are fueling a historic rise in home prices that’s making homeowners rich on paper but crushing would-be first-time buyers: The S&P CoreLogic Case-Shiller index of U.S. property values climbed 14.6% in April from a year earlier, the biggest gain in data going back to 1988.
When you get a loan from a bank or a non-bank lender, there’s a good chance it will be packaged into a mortgage-backed security and sold to investors, and there’s a good chance that the ultimate holder will be the Federal Reserve. Which means the Fed could be financing your mortgage. In the week ended June 23, the Federal Reserve owned $2.35 trillion in mortgage-backed securities, according to the Fed’s H.4.1 statistical release. According to the Securities Industry and Financial Markets Association, there were $8.44 trillion in MBS guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae at the end of 2020, so the Fed owns more than a quarter of the MBS market.
The Fed bought 47% of the net issuance of MBS in the fourth quarter if you go by the Fed’s $120 billion quarterly increase in holdings and the SIFMA figures showing that the total of outstanding MBS grew by $257 billion. True, not all mortgages are packaged into agency MBS that the Fed buys. The government-sponsored enterprises’ share of first-lien mortgage originations in the third quarter of 2020 was 61.9%. That share fluctuates, as does total issuance. Back of the napkin, though, multiplying 47% by 62% gives you around 30% of the overall U.S. mortgage market that’s financed by the Federal Reserve.
On June 29, Federal Reserve Governor Christopher Waller said it might be time to start cutting back on the Fed’s support for housing. “I think it’s an easy sell to the public,” he told Bloomberg Television. “The housing market is on fire. We should think carefully about doing MBS purchases, and if we were to taper those first that wouldn’t necessarily be a big issue.”
Fed Chair Jerome Powell is trying to keep the Federal Open Market Committee united behind continuing to buy mortgage-backed securities and Treasuries as a way of holding down interest rates to promote economic growth. The recovery, he says, is incomplete. The U.S. still had 7 million fewer people employed this May than in February 2020, before the pandemic struck.
But Powell hasn’t done a wonderful job of articulating why buying MBS is the right medicine for the economy. It is not, he says—not—a way of supporting the housing market. Read this somewhat confusing excerpt) from the Fed’s official transcript of the FOMC press conference in April, where Powell responds to a question from Greg Robb of MarketWatch:
CHAIR POWELL. Yes. I, I mean, we’re—we started buying MBS because the mortgage-backed security market was, was really experiencing severe dysfunction, and we’ve sort of, sort of articulated, you know, what our exit path is from that. It’s not meant to provide direct assistance to, to the housing market. That was never the intent. It was really just to keep that as—it’s a very close relation to the Treasury market and a very important market on its own. And so that’s, that’s why we, we bought as we did during the Global Financial Crisis; we bought MBS too. Again, not, not an intention to send help to the housing market, which was, which was really not, not a problem this time at all. So—and, you know, it’s, it’s a situation where we will, we will taper asset purchases when the time comes to do that, and those, those purchases will come to zero over time. And that time is not yet.
A better argument might have been, “Look, we’re a big player so we try to spread our money around. Yields on Treasuries and MBS are linked because investors choose between them. Buying MBS helps hold down interest rates on Treasuries and vice versa. All kinds of other interest rates that consumers and businesses pay are pushed down when we buy Treasuries and MBS.”
Or something like that. A market intervention as big and enduring as the Fed’s intervention in housing finance requires a strong and understandable justification.
The various Federal Reserve Presidents like to say that they are in favor of raising rates a pinch … next year or the year after. Meanwhile, the house price bubble grows.
“Inflation has increased notably in recent months. This reflects, in part, the very low readings from early in the pandemic falling out of the calculation; the pass-through of past increases in oil prices to consumer energy prices; the rebound in spending as the economy continues to reopen; and the exacerbating factor of supply bottlenecks, which have limited how quickly production in some sectors can respond in the near term. As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.”
Fed speak 101. Aka, “Things got so bad, that of course prices are rising from the pit of despair.” No mention of M2 growing like a bat out of hell or Fed Mission Creep.
But how about existing home sales for May 2021? Median price for existing home sales are up 23.6% year-over-year with surging M2 money supply.
On a month-to-month basis (MoM), existing home sales median price rose 2.8% on slightly higher available inventory.
I want to think that the Congressional Oversight Panel will ask insightful questions, but that is wishful thinking. It is all Kabuki Theater.
Here is the Congressional Oversight Panel questioningFed Chair Powell.
And the expected change in rent over the next 12 months is 9.5%.
On the homeownership side, the two month change in consumer home buying attitudes has plunged to the lowest on record.
Of course, national home price growth (ignored directly in the inflation numbers) is 13.16% YoY according to Case-Shiller.
Rent growth is highest away from traditional mega coastal cities like Seattle, San Francisco, Boston and New York City, and is highest in interior cities like Spokane WA, Gilbert AZ, Knoxville TN, Durham NC, and … Cleveland???