Biden is the opposite of the miserly Scrooge McDuck. He gives billions to Ukraine and spends trillions on various Federal projects without batting an eye as to how and who is going to pay for all the spending. And Biden’s latest election pandering is no different.
Speaker Pelosi claims that Biden’s bold action on student loan forgiveness is a strong step in Democrats’ fight to … make college even MORE expensive and lead to colleges hiring even MORE administrators (aka, apparatchiks) making colleges even MORE bogged-down in red tape.
And Speaker Pelosi, the costs of Biden’s midterm election buy of votes is estimated to be $300 BILLION. And a report from the Brookings Institution observed that one-third of student debt is owed by the wealthiest 20% of households, while only 8% is owned by the bottom 20%.
So, Biden is letting AOC write-off $10k of her student loan obligation. Bear in mind that the $10k forgiveness is taxed by The Federal government as income.
It looks like The Fed will have to expand the M2 Money supply to pay for “Billions Biden’s” spending spree.
At The Fed continues to tighten to fight inflation, pending home sales in July crashed and burned. That is, pending home sales fell -22.5% in July as M2 Money growth slowed
If I was still teaching at Ohio State or Chicago, I would ask the students if they see the relation between M2 Money growth and pending home sales.
US mortgage applications just hit the lowest levels in 22 years, January 2000 as The Federal Reserve continues monetary tightening to combat Bidenflation.
Mortgage applications decreased 1.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 19, 2022. The Refinance Index decreased 3 percent from the previous week and was 83 percent lower than the same week one year ago.The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 21 percent lower than the same week one year ago.
MBA mortgage applications just declined to their lowest level in 22 years (January 2000) as The Fed has begun raising rates to fight inflation caused by 1) excessive monetary stimulus since late 2008, 2) Biden’s green energy policies driving up transportation costs, 3) distortionary Federal spending (e.g., Covid relief, infrastructure bills and now green energy/IRS spending by Biden/Pelosi/Schumer).
Here is the data summary for the latest MBA applications report.
Fed Chair Jerome Powell shrinking The Fed’s balance sheet.
Well, new home sales aren’t coming to the rescue for affordable housing.
July’s New Home Sales crashed and burned. At -32.26% YoY. This is happening as M2 Money growth has declined.
For the month of July, new home sales were down a staggering -`12.65%. However, the average price of new homes rose 19.57% from June. Median price of new home sales were also up 5.91% from June, a large surge.
The supply of new homes? The highest level since the housing collapse of 2008.
The National Association of Realtors’ Homebuyer Affordability Index for fixed-rate mortgages is now at the lowest reading since 2006 and the peak of the 2005-2007 housing bubble that burst catastrophically.
The reason? The Federal Reserve, in their attempt to put out the inflation fire (caused by 1) excessive monetary stimulus since late 2008, 2) rampant Federal spending and 3) Biden’s green energy policies, driving up prices.
If we compare mortgage rates with the US Treasury 10Y-2Y yield curve, you can see that the yield curve remains inverted (historically a bad sign). This may signal an eventual loosening of monetary policy by March 2023.
The phrase “crossing the Rubicon” is an idiom that means that one is passing a point of no return. Its meaning comes from allusion to the crossing of the river Rubicon by Julius Caesar in early January 49 BC.
Indeed, the US crossed the FISCAL Rubicon in Q4 2012. That is when US Treasury Public Debt outstanding exceeded Real GDP. And the gap has been growing ever since.
In case you were wondering why M2 Money Velocity is so low, it is because the US is in constant crisis management mode as an excuse to spend trillions of dollars …. that generates progressively lower real GDP.
They built this nation on MMT (Modern Monetary Theory) which translates to the Federal government and Federal Reserve just wanting to spend trillions and trillions. Since 2005 (the peak of the housing bubble), the US Federal Reserve has increased the M2 Money stock more than real GDP growth in almost every quarter.
I remember when macroeconomists used to say “Everything is beautiful … as long as M2 Money growth is LESS than real GDP growth.” But we have apparently shifted to MMT when Everything is beautiful as long as there is a crisis and Congress can spend trillions.
Now Biden/Congress are spending billions in trying to reduce inflation (seriously, only in Washington DC would they think that massive spending bills would REDUCE inflation).
The Federal Reserve is facing an interesting problem. On the one hand, they vow to fight inflation by raising their target rate. At the same time, the probability of a recession in one year has grown to 50%.
Bankrate’s 30yr mortgage rate rose 31 basis points over the past week as 1) inflation probability increased and 2) Fed Funds Futures point to an O/N rate of 3.523% by the December FOMC meeting (up from 2.50% today). Growing recession probability typically results in Fed intervention and a lowering of rates while growing inflation typically results in Fed tightening. What’s The Fed to do??
Fed Funds Futures point to The Fed raising their target rate to 3.660 by March 2023, then loosening again.
Will The Fed consider that Public Debt grew from $7.84 trillion at the peak of the previous housing bubble in June 2005 to a whopping $30.7 trillion in August 2022? That is a 290% growth in Federal government debt since June 2005. With The Fed fighting inflation, the 2yr Treasury yield is smoking, making it more expensive to fund Federal government operations.
Under President Biden, inflation has soared and The Federal Reserve claims that they want to extinguish the inflation fire by tightening monetary policy … resulting in rising mortgage rates. Under Biden, mortgage purchase applications are DOWN -41.5% while mortgage rates are UP 96%.
(Bloomberg)The US mortgage industry is seeing its first lenders go out of business after a sudden spike in lending rates, and the wave of failures that’s coming could be the worst since the housing bubble burst about 15 years ago.
There’s no systemic meltdown coming this time around, because there hasn’t been the same level of lending excesses and because many of the biggest banks pulled back from mortgages after the financial crisis. But market watchers nonetheless expect a string of bankruptcies broad enough to trigger a spike in layoffs in an industry that employs hundreds of thousands of workers, and potentially an increase in some lending rates. More of the business is now controlled by independent lenders, and with mortgage volumes plunging this year, many are struggling to stay afloat.
Please note that mortgage purchase applications are DOWN -41.5% under Biden while mortgage rates are UP 96%.
Margin Calls Many other lenders have seen the value of their loans drop, said Scott Buchta, head of fixed-income strategy at Brean Capital, an independent investment bank. The Federal Reserve has tightened rates by 2.25 percentage points this year in an effort to tame inflation, and 30-year US mortgage rates have surged above 5% for government-backed loans. That’s close to their highest levels since the financial crisis, from around 3.1% at the end of last year.
That’s beaten down the value of home loans made just a few months ago. A mortgage made in January and not eligible for government backing could have traded in early August somewhere around 85 cents on the dollar. Lenders usually try to make loans worth somewhere around 102 cents to cover their upfront costs.
For a lender whose loans dropped to 85 cents, the losses can be debilitating, even if they aren’t realized yet. On top of that, business is broadly plunging. Overall mortgage application volume has plunged by more than 50% this year, according to the Mortgage Bankers Association. These business conditions are spurring banks that provide lines of credit known as warehouses to make margin calls and cut credit.
“The warehouse lenders in this industry seem to be extremely on top of things in this downturn, unlike in ‘08,” said bankruptcy attorney Mark Power, who is representing creditors in the First Guaranty bankruptcy. “They are making margin calls quickly.”
Banks have emergency funding they can tap in times of crisis, which can often allow them to stay afloat in hard times. But not always: emergency financing from the Federal Reserve is usually only available for solvent institutions with a chance of recovering. In the last downturn, so many banks had so many soured loans and struggling assets of all kinds that hundreds failed. Nonbanks went bust as well.
In honor of Wolfgang Peterson who passed away yesterday, the Director of the classic WWII movie “Das Boot!” …. ALARM!
Sales of previously owned US homes fell for a sixth straight month in July in the latest indication of how high borrowing costs and waning demand are propelling the housing market’s rapid decline. In fact, existing home sales fell -19% YoY in August.
Contract closings fell 5.9% in July to an annualized 4.81 million, the weakest since May 2020, figures from the National Association of Realtors showed Thursday. The median estimate called for 4.86 million in a Bloomberg survey of economists. Sales fell 22.4% from a year ago on an unadjusted basis.
The nearly 26% decline in previously owned home sales since January marks the steepest six-month plunge in records back to 1999 and underscores a housing market that’s reeling from elevated mortgage rates and prices. The industry is also experiencing a slowdown in construction, and more buyers are backing away from deals.
Weaker demand has led to a pickup in inventory, which may help to cool home prices in coming months.
The median price of existing home sales growth fell to 10.55% YoY as M2 Money growth slows.
The US housing market is sensitive to Fed “catch-up” monetary tightening. For example, the NAHB’s traffic of prospective homebuyers declined rather dramatically in August as The Fed tightened rates and the 30yr mortgage rate rose. That is what I call a “Nestea Plunge.”
How are mortgage rates impacted by Fed monetary policy? While The Fed began really “sloshing” markets with excess stimulus (QE in late 2008), the latest round of QE (or asset purchases) came with the US Covid shutdowns (what genius thought of that??) and that stimulus has NOT been withdrawn yet. Only the Fed Funds Target rate has tightened.
The 30yr mortgage rate rose with Fed rate tightening, but the Fed’s System Open Market Holdings (SOMH) of Treasury Notes and Treasury Bonds has come down a bit. But not the pare-down The Fed has hinted at. The 30yr mortgage rate is cooling as the prospect of future Fed rate hikes declines.
As of this morning, The Fed Funds Futures market points to rates rising until March 2023 … then easing again.
One reason The Fed has been slow to sell assets off its balance sheet is that a large chunk of T-Notes and T-Bonds are maturing shortly. It will be a matter of whether The Fed reinvests the proceeds or lets the balance sheet wind-down.
Confounded Interest - Anthony B. Sanders 
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