Now, it is September 28, so this is a report of happenings two months ago. Well, now you know why The Fed ignores housing despite being the largest asset is most household’s portfolio.
A measure of prices in 20 U.S. cities gained 19.9% in July. Phoenix led the way with a 32.4% surge. New York (17.8%), Boston (18.7%), Dallas (23.7%), Seattle (25.5%) and Denver (21.3%) were among the cities that posted record year-over-year increases.
After re-reading these excellent articles on the housing bubble and crash, I thought I would take the opportunity to present a few charts to highlight the housing bubble, pre-crash and post-crash.
Here is a graph of Phoenix AZ home prices. Note the bubble that peaked in mid 2006. The Phoenix bubble correlates with the large volume of sub-620 FICO lending and Adjustable-rate mortgage (ARM) lending. Bear in mind, many of the ARMs prior to 2010 were NINJA (no income, no job) ARM loans.
What happened? Serious delinquenices at the national levels spiked as The Great Recession set in and unemployment spiked.
Since the housing bubble burst and surge in serious mortgage delinquencies, The Federal Reserve entered the economy with a vengeance. And have never left, and increased their drowning of markets with liquidity.
The Fed whip-sawing of interest rates in response to the 2001 recession was certainly a problem. They dropped The Fed Funds Target rate like a rock, then homebuilding went wild nationally and home prices soared thanks to Alt-A (NINJA) and ARM lending. But now The Fed is dominating markets like a gigantic T-Rex.
Oddly, then Fed Chair Ben Bernanke never saw the bubble coming. Or the burst.
Speaking of pizza, Donato’s from Columbus Ohio is my favorite. Founder’s Favorite is my favorite, but they do offer the dreaded Hawaiian pizza (ham, pineapple, almonds and … cinnamon?)
This is the Steve Urkel economy where The Federal Reserve and Federal government screw everything up with their policies (or follicies) and say “Whoops! Did I do that?”
(Bloomberg) — U.S. consumer sentiment rose slightly in early September but remained close to a near-decade low, while buying conditions deteriorated to their worst since 1980 because of high prices.
The University of Michigan’s preliminary sentiment index edged up to 71 from 70.3 in August, data released Friday showed. The figure trailed the median estimate of 72 in a Bloomberg survey of economists.
Buying conditions for household durables, homes and motor vehicles all fell to the lowest in decades. The report said the declines were due to complaints about high prices. Consumers expect inflation to rise 4.7% over the coming year, matching the highest since 2008.
September’s UMich Buying Conditions for Houses fell to 60 … thanks to superheated house prices.
I can just picture Fed Chair Jerome Powell channeling Steve Urkel and saying “Whoops!! Did I do that?”
It is tough to operate a retail Real Estate Investment Trust (REIT) in the face of the triple whammy that hit retail shopping. First, there was the housing bubble/subprime crisis of 2008-2009. Then there was the advent of on-line shopping, then COVID.
I look at the NAREIT retail index and two retail REITs for comparison: Simon Property Group and Washington REIT. And as a proxy for online shopping, I compare them to Amazon. Both Washington REIT and the NAREIT retail index were at loft valuations at the peak of the housing bubble, but crashed with the onset of the housing bubble burst and ensuing financial crisis. But following The Great Recession, both recovered by 2016 (along with Simon Property Group which actually far exceeded their pre-Great Recession peak.
But then retail mall disaster struck. In the form of on-line shopping. I use Amazon to represent on-line shopping. While NAREIT Retail and Simon fell from their 2016 peak, Washington REIT got clobbered.
Then Covid struck. When combined with on-line shopping and fear mongering by Anthony Fauci, retail REITs got hit hard. But all three have rebounded slightly since their nadir in 2020.
An interesting case study is Glimcher REIT, a formerly privately-held commercial real estate development company from Columbus Ohio. Like other retail REITs, Glimcher was crushed by the financial crisis and Great Recession. Glimcher’s share price fought back to $14.06 per share (down considerably from $29.28 in February 2007).
Washington Prime Group Inc. acquired Glimcher Realty Trust for $4.3 Billion in stock and cash Including the assumption of Glimcher’s debt. Right as on-line shopping took off. And the Covid struck a death blow leaving Washington Prime trading at $0.98. Washington REIT is transforming into a multifamily REIT given the overbuilding of DC area office space and the triple whammy of retail centers.
Retail REITs have almost recovered from Covid, thanks to the massive monetary stimulus from The Federal Reserve. Not to mention fiscal stimulus from DC.
Yup, a triple whammy has hit retail REITs with some faring better than others.
But the NAREIT RESIDENTIAL Index has exploded with Fed stimulus.
US bank loans and leases are slowing, yet The Federal Reserve has helped keep their stock values elevated thanks to the extraordinary monetary stimulus.
(Bloomberg) — U.S. banks’ loans and leases dropped to 47.15% of total assets in the week to Sept. 1 from 47.24% the week before, according to the Fed
Total assets increased to $22.19 trillion from $22.10 trillion
The share of safe assets — virtually riskless investments such as cash, Treasuries, and securities effectively guaranteed by the U.S. government — increased to 51.2% of total assets from 51.0%
Loans and leases as a percentage of deposits were unchanged at 59.7% Cash was the highest as a percentage of total assets since January 2015 Residential real-estate loans hit a historic low as a percentage of total assets at 10.0% Commercial real-estate loans were the lowest as a percentage of total assets since August 2015 Consumer loans were the lowest as a percentage of total assets since May Commercial and industrial loans were the lowest as a percentage of total assets since June 2012
Only in this deranged, hyper-stimulated market can bank stocks be soaring despite slowing loan and lease growth.
The South Florida housing market is sizzling with hot money from the North East, pushing up homes values sky high over the last year. One example of the mania is in Palm Beach, where a private island was bought in July and was relisted months later for a whopping 41% premium, according to WSJ.
One of Miami’s top real estate developers, Todd Michael Glaser, is taking advantage of the bubble, fueled by Wall Street bankers and other elites who have the economic mobility to leave the Northeast for the Sunshine State.
Glaser purchased 10 Tarpon Way, also known as 10 Tarpon Isle, for approximately $85 million in July and has since relisted the tiny 2.5-acre island for $120 million, or $35 million more than he paid a few months ago. The island was created by dredging crews in the 1930s and is only accessible by bridge. Glaser bought the island from private investor William M. Toll and his wife, Eileen, who paid $7.6 million for the property in 1998.
The real estate developer said potential buyers have two options: pay the $120 million now or wait ten months for a new renovation for $200 million.
Concept Drawing Of New Renovation
He said with all the hot money flowing into the Palm Beach area, “a $100 million house isn’t that crazy anymore, believe it or not,” adding that in the last 18 months, eight $100 million homes have been sold.
If a potential buyer wants to wait ten months and pay an additional $80 million. The developer will completely redesign the mansion by doubling it to 25,000 sqft, with 14 bedrooms, in addition to a hair salon, gym, and spa. A new pool, octagonal tennis pavilion, and a golf practice area will be installed on the outside.
Some ask how long will this speculation fever last as the Federal Reserve could embark on tapering its extensive bond-buying program later this year or early 2022.
One real estate expert believes the peak of the South Florida housing market could be nearing:
Dr. Ken Johnson, a real estate economist with Florida Atlantic University’s College of Business, told local news WPLG that a peak in the housing cycle could have already arrived, but he believes a crash is not in the mix because demand still outpaces supply.
It remains to be seen if some greater fool will pay the $120 million for the island mansion or $200 million tens months later after renovations.
Since the Covid outbreak in early 2020, The Federal Reserve lowered their target rate and super-spiked their balance sheet. Helping to lower bank deposit rates to near zero.
But despite near zero bank deposit rates, we seeing bank deposits are larger than bank credit such as commercial and industrial loans, residential mortgages loans, car loans, etc. Normally, bank credit EXCEEDS bank deposits.
The problem? One of them is negative growth in commercial and industrial lending. It declined 13.5% YoY in August. Of course, The Federal government extended emergency business loans that were counted as C&I loans, hence the spike in C&I loan growth in May 2020. But now we are seeing a real slowdown in C&I lending.
Residential lending is down 2.1% YoY as of September 10 (for August).
Commercial real estate lending? At least it is growing at a 2.9% YoY pace for August.
Credit cards and other revolving plans increase steadily since 2014 and then declined after the Fauci Flu struck. But credit cards and revolving credit has started to rise again.
The Fed’s massive overreaction to Covid caused a storm surge in C&I lending that has subsided. But other bank lending has slowed as well.
Lots of bank assets with nowhere to go.
No wonder M2 Money Velocity (GDP/M2 Money) is at historic lows.
Remember, Federal Reserve Chair Jerome Powell is up for reappointment and President Biden must make a decision on his reappointment.
(Bloomberg) — Orchard, which offers cash to homebuyers upfront so they can purchase a new residence before selling their old one, raised $100 million to fuel growth in an ultra-competitive housing market that’s pushing shoppers to find new ways to stand out.
The fundraising round values the startup at more than $1 billion, making it the latest unicorn company to tackle the challenge of simplifying the process of buying or selling a home. Boston-based Accomplice led the round, with existing investors FirstMark, Revolution, First American and Juxtapose also participating.
“We can say we’re a unicorn, which feels good for about five seconds, and then it’s back to the real world of building a business,” Chief Executive Officer Court Cunningham said in an interview. “We’re trying to create a modern way to buy and sell homes, and that’s capital intensive.”
Cunningham, previously CEO of online marketing company Yodle, started Orchard in 2017 to take on what he viewed as a ripe opportunity: Consumers were frustrated with the traditional way of buying and selling homes, and the $1.7 trillion U.S. housing market was big enough to make tackling the problem worthwhile.
Orchard focuses on people who are trying to buy their next home while selling an existing one, a nerve-wracking process that can cause a transaction to collapse or result in households carrying two mortgages. In addition to offering cash to help clients buy their next home, the New York-based company provides funds to make light repairs before listing the existing home on the market. Orchard seeks to profit by operating as a brokerage and earning commissions.
There have always been services that purchase homes from you. Typically, there firms simply pay off your mortgage, so if you have a higher mortgage balance relative to you home value, you may not like what you are offered. But Orchard is not that model.
If you “List with Orchard,” and your home doesn’t end up selling on the open market, Orchard will buy your home. Sellers in some markets also have the option to sell immediately to the company. Orchard wants you to list for 30 days before selling to them for their backup cash offer price. If you sell directly to Orchard, you’ll also pay an additional 1% convenience fee on top of the 6% you’re already paying commission.
When home prices have been rising at a 17-18% YoY pace, this seems like a good model. But what if The Federal Reserve removes it massive monetary stimulus and/or The Federal Government slows down it fiscal stimulus? Then Orchard, if they purchase your home, will likely lose considerable amounts. Being aware of this possibility, Orchard is likely to buy homes at a considerable discount.
But there is still worries about inflation. Here is the Citi Inflation Surprise index.
Publicly traded companies known as iBuyers are pioneering a high-tech approach to home-flipping intended to make selling properties easier. Those firms include Opendoor Technologies Inc., Redfin Corp., and Offerpad Solutions Inc. A fourth, Zillow Group Inc., recently raised $450 million by issuing bonds, backed by the homes it buys and sells.
At the annual Jackson Hole (aka, J-Hole) Economic Symposium, Federal Reserve Chairman Jerome Powell reiterated that the Fed is in no hurry to either taper asset purchases immediately or aggressively. Additionally he made crystal clear that even when the Fed does eventually start tapering asset purchases (likely November or December), it should not be taken as signaling interest rate hikes will follow on some preset course. Indeed, Fed Chairman Powell continues to claim that inflation is transitory. Finally, he said that part of the mandate (employment) is still far from being achieved. So, expect more SNAKE JUICE.
The shape of the yield curve has been highly influential recently in relative performance trends between various areas of the market. From last summer through May of this year, the steepening of the yield curve coincided with healthy outperformance of cyclical stocks. Since May, the flattening of the curve has coincided with more defensive (or at least high quality) leadership out of the tech and health care sectors. The logic goes, therefore, that a re-steepening of the curve should coincide with a shift back to cyclicals. Indeed, that shift may be in the early innings.
Let’s take a look at the US Treasury 10Y-2Y curve slope over the past twelve months against the Citi Economic Surprise Index for the US. You can see curve fatigue starting in April 2021 as the Citi Economic Surprise Index turns negative.
The the more cyclical and smaller skewed S&P 500 equal weight index has started to outperform the S&P 500 again, right on queue with the yield curve re-steepening.
Industrial stocks are under-performing the broader S&P 500 index as the curve flattens.
Real estate stocks? They are outperforming the broader S&P 500 index.
Mining stocks like gold mines? They are underperforming the broader S&P 500 index.
Financial stocks? Not surprisingly, The Fed’s dovish behavior is causing financial stocks to outperform the broader S&P index.
Likewise, information technology stocks are outperforming the broader S&P 500 index.
So, by Powell delaying any balance sheet slowdown and rate increases, we have clear winners (real estate, financials, information tech) and clear losers on a relative basis (industrials, retail, metals and mining).
The Others! Due to volatility differences, I wouldn’t over-interpret this chart. But Bitcoin as a ratio of the S&P 500 index is “kicking ass!” Gold and housing as a ratio of the S&P 500 index seemingly can’t keep up with the S&P 500 index.
Looks an awful lot like 2005 before the housing price crash, financial crisis and Great Recession. US home prices, HOUSING inflation, is growing at 16.61% YoY, GDP Price index QoQ (annualized) is growing at 6.10%, and average hourly earnings is growing at 4.20% YoY.
Let’s see what happens in Jackson Hole this weekend!