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.
Yale economist and Nobel Laureate Robert Shiller wrote an interesting op-ed in the New York Times entitled “The Housing Boom Is Already Gigantic. How Long Can It Last?”
That’s what she said.
Bill McBride at Calculated Risk already opined on some of the odder aspects of Shiller’s op-ed. So, I am going to focus on a different angle about the gigantic boom in housing prices and how can it can last.
Let’s look at the spread between YoY home prices using the Case-Shiller 20 metro home price index over the Case-Shiller National home price index (includes smaller metro areas). You can see that the CS 20 index spread over the CS National index ballooned during The Fed’ third round of quantitative easing (asset purchases). It slowed dramatically once The Fed stopped QE and is now falling that The Fed is unwinding its balance sheet.
Another spread is between the CS 20 metro YoY and FHFA’s Purchase-only Index YoY. This chart shows that the spread actually became negative after The Fed stopped QE.
The CS 20 Metro index heavily weighs coastal cities like Los Angeles, San Francisco, Seatlle, Boston, etc. The CS National and FHFA PO indices include interior US metro areas like Kansas City. Or more rural areas like Show Low, Morenci, and Three Way Arizona.
Did The Fed help misprice risk assets like housing? Of course!
Mark Calabria, VP Mike Pence’s Chief Economist (formerly at the Cato Institute) is rumored to be the nominee of President Trump to replace Mel Watt as chief Fannie Mae and Freddie Mac’s regulator (as well as other GSEs).
Calabria has long been an advocate of downsizing government’s role in the housing and mortgage market and even shutting down Fannie and Freddie.
What are the options that Calabria (and Congress) face?
- Status qou – leave Fannie and Freddie in conservatorship
- Remove FF from conservatorship and …
Free Fannie and Freddie? Not without a boat load of capital. Remember, FF are not depository institutions (unless Congress does what it did with investment banks during the financial crisis and allow them to be declared depository institions). A change to their charters and the acquisition of a current depository institution like United Bank would do the trick. FF would then be subject to bank captial requirement (which they currently are not).
Shut FF down. While appealing to free marketeers, various stakeholders like the affordable housing lobby will protest.
Of course, the old shut down FF and create a new government insurance company (aside from the fact that FHA, Fannie and Freddie are mono-line insurance ompanies already) is always on the table. This was the Parrot and Zandi plan.
According to Parrot and Zandi, “With a new director at the FHFA next year, we are likely to see a meaningful shift in the role of Fannie Mae and Freddie Mac. This likely means a reduction of both the GSEs’ footprint and the cross-subsidy they provide, and it may also mean an attempt to get the GSEs out from under the government’s wing altogether. If
it is any of these, it will mean higher mortgage rates, less access to credit, and disruption to the housing and mortgage markets and broader economy.”
I once estimated that it would increase mortgage rates by 30 basis points only. Heck, The Federal Reserve can achieve that at their next meeting!
I am guessing that Calabria will take it slow as to not scare markets.
As the late Glenn Frey almost sang, The Heat Is Off.
As The Fed unwinds its $4+ trillion balance sheet, the Smart Money Flow Index and the FHFA Purchase Only Home Price Index YoY are declining.
In other words, the housing asset bubble is Already Gone.
I wonder if it is time for Fed Chair Jerome Powell to emulate Frank Booth from “Blue Velvet” and take another hit of oxygen.
The Dow is falling again. This time on the less-than-awesome jobs report. 155k jobs added versus the expected 198k jobs added.
Resulting in a decline to the Dow.
Yesterday, the Dow sell-off eased after The Wall Street Journal reported that the Federal Reserve is considering breaking with its current approach of steady interest rate hikes, favoring a wait-and-see approach. That was relief to investors worried that the Fed might raise interest rates too fast, which could choke off economic growth.
And the the University of Michigan Buying Conditions for Houses fell to it lowest level since December 2008. Although the might be Michigan getting destroyed by Ohio State 62-39.
In other words, The Fed is signalling “Hard to starboard!!!”
It is definitely October Country!
First, Core Personal Consumption Expenditures (PCE) Prices declined to 1.78% YoY pulling away the Fed’s desired 2% core inflation rate.
And on the housing front, US Pending Home Sales fell 4.6% YoY in October, making it the 10th decline in 11 months.
Yes, it is truly the October Country, a dark feast of wonder and horror. Without the wonder.
The good news? US GDP rose 3.5% QoQ, even though Personal Consumption was lower than expected at 3.6% and lower than September’s growth.
The bad news? New home sales fell 8.9% MoM in October.
New home sales declined 12% YoY, tied for the worst reading since 2011.
Yes, as The Fed withdraws monetary stimulus, homebuilding companies are taking the Nestea plunge.
Another housing indicator bites the dust.
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).
Of course, the business media touts the headline “Existing Home Sales Rise 1.4% in October After 3.4% Decline in September.” Winning!
But on a YoY basis, existing home sales fell 5.1% in October, the 8th straight month of declining existing home sales growth. Higher home prices and higher interest rates?
Photobomb!! Fed Chair Jerome Powell discussing rate hike freeze with former Fed Chair Janet Yellen as the Fed Open Market Committee listens.
Housing and the Blues.
Yes, the hard data for housing has been soft as The Fed keeps raising rates. Today, the National Association of Homebuilders index of homebuilder optimism took a large drop to 60.
But take look at the Real Estate Market Surprise Index. It is now at the lowest level since 2010.
Housing and the blues.