As The Fed raises rates in their attempt to wrangle inflation, we are seeing an about-face in the US housing market.
The pandemic-related Fed monetary stimulypto begat a housing boom that is careening to a halt as the fastest-rising mortgage rates in at least half a century upend affordability for homebuyers, catching many sellers wrong-footed with prices that are too high. It’s an astonishing turnaround. Just a few months ago, house hunters felt pushed to make offers within days, waive inspections and bid way above asking. Now they can sleep on it and maybe even shop for a better deal.
It doesn’t mean real estate is heading for a crash on the order of 2008. But when a market reaches these heights, even a drop toward normalcy will feel steep. And of course, a recession could make everything worse.
Dallas, Phoenix AZ and Las Vegas NV are leading in the price-slashing derby.
No, not the Claus von Bülow kind of reversal of fortune where has was accused of killing his wife. But this murder is coming from The Federal Reserve hiking interest rates even when they know that doing so could lead to a recession. And Biden’s anti-fossil fuel energy policies.
The US economy is slowing as inflation ravages consumers. US Regular Gasoline prices, for example, are up 104% under President Biden which helps to slow the economy.
US personal consumption expenditures fell to +0.2% MoM in May as “inflation” or real personal consumption expenditures PRICES rose +6.3% YoY as The Fed’s balance sheet (aka, Master Blaster!) remains.
As I mentioned above, US regular gasoline prices are UP 103% under President Biden, diesel prices (the cost of shipping goods to markets like … food is up 119% under Biden while CRB foodstuffs is up 55% under China Joe.
Now we have mortgage rates in the US falling for the first time in four weeks. The average for a 30-year loan was 5.7%, down from 5.81% last week, Freddie Mac said in a statement Thursday.
This year’s Fourth of July celebration is going to cost 18% more than last year’s celebration.
Lastly, the Atlanta Fed GDPNow real time tracker for Q2 is showing … -1% GDP “growth.”
Financial markets are anticipating what Mester is saying: rapidly rising interest rates. But as you can see from the following chart, gasoline prices (orange line) are driving rising US prices. So it is doubtful that monetary tightening will slow price increases. But Mester and company can only control monetary stimulus.
Mortgage rates have soared as The Fed attempts to crush inflation. And mortgage purchase applications fell -21% WoW in the most recent Mortgage Bankers Association survey.
The Refinance Index increased 2 percent from the previous week and was 80 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 0.1 percent from one week earlier. The unadjusted Purchase Index decreased 21 percent compared with the previous week and was 24 percent lower than the same week one year ago.
It almost seems like Mester is following the Taylor Rule (not really). But using CPI YoY, the Taylor Rule is saying that The Fed Funds Target Rate should be … 22.10%. It is only 1.75% after years of excessive stimulus following the banking crisis of 2008/2009. And Yellen who seemingly never met a rate hike that she liked.
If we use core PCE as our measure of inflation, the Taylor Rule is still high at 13.25%, a whopping 11.50 spread over the current target rate.
A national measure of prices climbed 20.4% in April, down from the 20.6% gain in March, the S&P CoreLogic Case-Shiller index showed Tuesday. Craig Lazzara, a managing director at S&P Dow Jones Indices, noted that April data was showing initial, but inconsistent, signs of a deceleration in price gains.
Mortgage rates have nearly doubled since the end of 2021. The run-up in rates, combined with high prices, are squeezing potential buyers and starting to slow housing markets in some of the most popular pandemic boomtowns.
Covid monetary stimulus remains in place at inflation hits 8.6%.
Washington DC has the slowest growth in home prices at 11.9% with Chicago and Cleveland close behind. Phoenix barely beat Tampa, FL for hottest home prices with both above 30% YoY.
When Lagarde talks about the first line of defense, all I can picture is The Maginot Line in France, a failed defensive line that was easily bypassed by the German Wehrmacht (army).
The European Central Bank will activate the bond-purchasing firepower it’s earmarked as a first line of defense against a possible debt-market crisis on Friday, according to President Christine Lagarde.
Applying “flexibility” to how reinvestments from the ECB’s 1.7 trillion-euro ($1.8 trillion) pandemic bond-buying portfolio are allocated is aimed at curbing unwarranted turmoil in government bonds as interest rates are lifted from record lows to curb unprecedented inflation.
Net buying under a separate asset-purchase program is also set to end on Friday.
In other words, Euro-area inflation has exploded in 2021, just like the USA.
But the US also has an inflation problem caused in part by Covid and the government’s reaction to Covid: economic shutdown and massive Federal monetary and fiscal stimulus. The stimulus is still in play.
The bond market is already anticipating an about-face by The Federal Reserve (implied overnight rate peaking at the March 2023 FOMC meeting, then receding.
Again, nothing has been the same since the Covid outbreak of 2020 and Fed monetary blitz. Here is the US Dollar Swaps curve before Covid (yellow line) and today’s Fed-enhanced curve (green).
Mortgage rates in the US have climbed to 6% then backed-off slightly. The good ole Back-off Boogaloo as The Fed attempts to unwind its monetary stimulypto.
The French Maginot Line, easily bypassed by German tanks. The Federal Reserve is the US’s Maginot Line. The Yellenot Line??
Consumers are healthy? It is true that the US U-3 uemployment rate is low (3.6% versus 14.70% in April 2020 thanks to government shutdowns over Covid). But even though unemployment is low, consumer sentiment is at its lowest point since 1977.
Generally, consumer sentiment is high when unemployment is low, but not this time around. Currently, inflation is at the highest level since March 1980 even though consumer sentiment bottomed-out in April 1980.
Here is my chart showing that REAL average hourly earnings growth YoY is negative and getting worse, hardly a sign of “healthy consumers.”
Of course, rising gasoline and diesel prices have risen dramatically since 2021, but are declining slightly thanks to the global economic slowdown (read “lower demand”).
And a M2 Money Stock (green line) declined, US rents (blue line) declined as well.
As a recession approaches, we are seeing the WIRP implied Fed o/n rate (green line) declining. And with The Fed chickening-out, we saw a surge in equities (NASDAQ composite index in blue).
Gasoline prices are falling too (orange line), but due to rising global economic slowdown. But notice that The Fed’s balance sheet (yellow line) is still growing despite repeated signals that Covid stimulus would be removed (I call this Quantitative Frightening).
As I mentioned above, The Fed has stopped trimming their balance sheet despite signals to the market of getting rid of the Covid stimulus. As Billy Preston sang, “Nothing From Nothing.”
The Atlanta Fed GDPNow Q2 forecast is for … 0% GDP growth despite the massive monetary stimulus and fiscal stimulus from Biden/Pelosi/Schumer.
And yes, the S&P 500 has officially entered a bear market under the leadership of Joe “The Bear” Biden.
So, Biden’s economic agenda (read, just spend more money and inflation declines?) is failing. Hence, The Fed is backing off a bit helping to drive up stock prices.
Thanks to massive Fed monetary stimulus still stalking the housing market, US new home sales rose +10.7% MoM (from April to May), but were down -5.9% YoY (from May 2021 to May 2022) as mortgage rates rose.
Median price of new home sales rose 42% since May 2021, thanks to Fed stimulypto. And Federal government stimulus spending.
Yes, like the predators from the movies, The Fed’s balance sheet is still stalking markets.