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.
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.
As fears of the Covid Delta Variant sink in, we are seeing a flight to quality. The 10Y-3M Treasury curve slope is declining.
But the US Treasury actives curve remains upward sloping as does the on/off the run curve.
While the US Treasury curve (green) is upward sloping and all yields above zero, Japan’s sovereign curve is negative in tenors of less than 10 years. Germany has negative sovereign yields for tenors less that 25 years.
The big three Central Banks are expanding like crazy.
The Dow in down > 900 points
Graphically, the Dow is dropping alongside 10Y Treasury yields as investors flee to quality.
Paging Fauci for a lecture of Covid and more “go big” talk from Treasury Secretary Yellen.
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.
The famous Buffett Indicator is signalling a massive stock market bubble or serious overheating.
Here is your first assignment for class. Plot the Buffett Indicator (Wilshire 5000 Total Market Full Cap Index/GDP *100 against The Federal Reserve Balance sheet). It should look like the following:
If we look at global market cap / global GDP, all stocks now worth equal to 133% of global GDP, meaning Buffett indicator screaming BUBBLE! But maybe this time is different in an era w/negative real yields & upcoming exponential earnings growth in the tech sector.
How about Robert Shiller’s cyclically-adjusted price-to-earnings (CAPE) ratio? It is climbing rapidly and is above Black Tuesday’s spike in 1929 but still below the peak of the dot.com bubble.
In terms of price-to-book ratio for the S&P 500 index, the P/E ratio is rising rapidly and it just below the dot.com bubble level.
The S&P 500 dividend year is at its lowest point since the dot.com bubble and considerably below Black Tuesday (1929) and Black Monday (1987).
Speaking of Robert Shiller, the Case-Shiller National Home Price Index keeps rising rapidly along with The Federal Reserve’s balance sheet.
What will happen if The Fed stops flooding the markets with liquidity? I don’t think they can stop the fire.
Here is a chart of various asset prices since the Covid virus struck in March 2020 when The Federal Reserve massively increased their balance and lowered their target rate to 25 basis points.
The Case-Shiller National home price index (HPI) is up 13.2% since Covid and Fed intervention. The Russell 2000 index is up a staggering 123.2% and the MSCI US REIT index is up 79.6%. Commodity prices are up 48.8%.
Notice that before Covid struck and The Fed intervened with a massive increase in M2 Money, commodity prices were falling and the Russell 2000 was pretty flat. Home prices were increasing, but not at a 13.2% clip.
Is this inflation, economic growth and/or a massive asset bubble produced by The Federal Reserve? The economy is growing and Washington DC is doling out money like there is no tomorrow. But if the economy is so hot, why is The Fed holding off on rate increases given that inflation is heating up?
Housing is hot in Russia, Turkey, Portugal and, of course the USA. New Zealand too.
The USA, Canada and Colombia (along with the UK, the EU, Sweden, Norway, Finland and Saudi Arabia) are at zero or near zero. Throw in Australia at 0.05 and Japan at -0.1% and we have the makings of a global bubble.
Inflation may be transitory if Washington DC somehow can’t keep spending and slows down.
Washington Prime Group, a mall REIT, has filed for Chapter 11 thanks to 1) online-shopping trend and 2) Covid fear.
(Bloomberg) Washington Prime Group Inc., a real estate investment trust that operates enclosed malls and strip centers across the U.S., filed for bankruptcy after the Covid-19 pandemic drove away shoppers.
The Chapter 11 filing in Houston lets Washington Prime stay in business while it restructures its debts in a deal that it reached with certain creditors, according to the bankruptcy petition. The company, with assets estimated at $4 billion and debt of almost $3.5 billion, secured a bankruptcy loan of up to $100 million to fund operations during court proceedings.
Rent collections dried up and tenants filed for bankruptcy or went out of business as the pandemic spread around the nation in 2020. The Columbus, Ohio-based company, which has about 100 locations, began negotiating with its creditors last year and skipped a $23 million bond interest payment in February. Creditors had been extending a forbearance agreement amid the debt talks.
Still, Washington Prime’s share price surged in recent weeks as it was whipped into the frenzy of trading around meme stocks popular among retail investors and on Reddit message boards. The stock rose as high as $6.98 last week, from a price closer to $2 earlier this year. Trading was halted on Monday as investors digested news of the bankruptcy.
Washington Prime aims to deleverage its balance sheet by nearly $950 million, according to a company statement. The plan includes swapping unsecured notes for equity, a $190 million paydown of its revolving credit and term loan facilities and a $325 million equity rights offering.
The plan has support from creditors that hold about 73% of the principal outstanding of secured corporate debt and 67% of the unsecured notes. Bloomberg News previously reported that Washington Prime was weighing a bankruptcy filing as talks faltered.
The case is Washington Prime Group Inc., 21-31948, U.S. Bankruptcy Court for the Southern District of Texas (Houston).
Washington Prime, which has absorbed Columbus Ohio’s Glimcher Realty Trust in 2015, has been devastated by the Covid epidemic and fear-mongering. Hence, shopping mall foot traffic crashed and mall retailers have gotten burned. Sears is an example of a retailer killed by 1) on-line retail shopping and 2) Covid. Macy’s has done surprisingly well.
WPG’s 4 week change in Funds From Operations (a variant of earning per share) has fallen 35.50% while operating profits has tanked -33.23% over 4 weeks.
FFO has tanked since Covid … on top of the online shopping crushing of mall retailers. Reddit