The Fed has barely started raising interest rates but the air is already seeping out of the housing bubble.
New single-family home sales plunged by 16.6% from March and were down 26.9% year on year. New home sales dropped to the lowest level since the lockdown in April 2020.
The Federal Reserve has raised rates once – a mere 25 basis points (with another hike on the table today). So, it’s just getting started, but has it already popped the housing bubble? It sure looks that way. The question is how long will it take for the air to really start coming out.
As mortgage rates push up, mortgage applications continue to fall. As of last week, applications were down 17%, and at the lowest level since May 2020 when the economy was shut down for COVID, according to last week’s Mortgage Bankers Association’s weekly Purchase Index. The index has dropped 30% from peak demand in late 2020 and early 2021.
The Federal Reserve launched its fight against inflation earlier this month, but it wasn’t exactly shock and awe. The Fed raised interest rates by just a quarter percent. Peter Schiff called it the most anticipated and least significant rate hike ever. Meanwhile, the central bank continued to expand its balance sheet.
While the Fed’s tiny monetary policy adjustments won’t likely put a dent in inflation, they are already having an impact on the economy. Last week, mortgage rates charted their biggest weekly increase in 11 years.
How long will it take for rising rates to pop the housing bubble?
We talk a lot about how the Fed keeps its big fat thumb on the Treasury market. But it also has its big fat thumb on the housing market. And if the Fed really does follow through with its taper and its plans to shrink its balance sheet, it will have a big effect on the housing market.
If you’ve ever held something under tension down with your thumb and suddenly release it, you know what happens.
Pop!
The government CPI data for August came in slightly under expectations. Nevertheless, a 0.3% month-on-month increase in prices is significant. And a dig into the numbers reveals something wonky. The way the government calculates housing costs drastically understates rising prices and skews overall CPI to the downside.
The Federal Reserve insists inflation is “transitory” and the economy is making “progress.” Yet, it continues with the extraordinary monetary policy it launched at the onset of the COVID-19 pandemic. Meanwhile, we’re seeing all kinds of data hinting that the economy may not be as great as advertised. Despite this, and even as prices continue to spiral higher, the Fed’s only monetary policy is talk.
Here’s the key question: what happens if the markets call the Fed’s bluff?
We’ve been talking about the inflation threat for months. But the markets have been acting as if the real threat is the Federal Reserve trying to fight inflation by tightening monetary policy. With every bit of inflation news, gold has sold off. But after last week’s hotter than expected CPI data, it looks like investors may be starting to see the light and realizing that the central bank can’t fight inflation. Peter Schiff talked about this apparent pivot in a recent podcast.
Millions of Americans remain out of work. The US economy continues to languish, burdened by government lockdowns and other pandemic-related factors. Retail sales have dropped precipitously over the last several months, underscoring the economic malaise. So, how is it that the housing market is booming?
Here is a summary of some of the significant economic data/news that came out last week.
Third-quarter 2019 new orders for durable goods remain on track for a second annual decline. August 2019 Real New Orders for Durable Goods showed a monthly gain of 0.2% [1.0% ex-Commercial Aircraft], but an annual decline of 4.9% [down by 2.1% (-2.1%) ex-Commercial Aircraft].
Pending home sales hit the lowest level in nearly five years in November, a sign that the US housing market will continue to get uglier in the near future.
Not too long ago, we reported that the air was starting to come out of housing bubble 2.0. As just one example, home sales in California hit the lowest level in a decade. And it’s not just California.
Now we’re seeing more signs of trouble. Pending home sales tanked in November, according to data released by the National Association of Realtors last week. The Pending Home Sales Index plunged 7.7% compared to November 2017, the biggest year-over-year percentage drop since June 2014.
