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Good Morning. Again, I could not bear to write about the protocols of the Federal Reserve. James Political wrote beautifully news But on them. Most experts seem to have thought they were touch pigeons. At Unhedged we think the data that has come down in the next two months is far more important than another microanalysis of the Fed’s ‘response function’.
Safe as homes?
Yesterday we Look In the chart of a drop in new home sales in the US, one of several examples of a slowdown in consumer activity. Sales are down 40% from their peak month in 2020. This is noticeable, but still more interesting to look at the decline in transactions in the context of stable prices. US vs. Median Selling Prices:
Even when the fixed-rate mortgage for 30 years rose from 3% to more than 5% in just five months (!), Prices did not move.
Suppose in December you were going to buy a house for $ 425,000 with a 20 percent drop. But you did not get a deal for any reason. The change in rates means that the monthly mortgage payment on your dream home has now increased by about 30%, from $ 1,442 to $ 1,877. That’s $ 5,220 in additional payments a year. More importantly, if your mortgage budget was fixed at about $ 1,442, you are now buying a home for $ 325,000. It really is a different house.
And so, unsurprisingly, many buyers say this to hell. Mortgage applications (i.e., no refinancing) are down one-third from the peak of the Corona epidemic:
Tell me another market where a large chunk of demand is leaving the market and prices are not moving? This is even more impressive when the median prices have risen by 47 percent (I repeat:!) Within two and a half years. This seems absurd to me.
However, what my infamous belly is unreliable tells me, almost every economist and analyst I read says the same thing. Even if we go into a recession, house prices in the US are not going down. This opinion remains a solid consensus in the rock even when the economic picture has faded. before, But when the macroeconomic picture darkens and the cost of money skyrockets, it’s worth fixing. Falling prices, and the accompanying loss of economic security among homeowners, could turn a shallow recession into a deep slump.
Nancy and Nedan Houten of Oxford Economics formulated the consensus neatly in a note last week:
We do not anticipate a complete decline in prices at the national level, which occurred only during the Great Recession and the Great Depression. We are still seeing halted demand among younger households that may be sidelined, and investors are likely to continue to halt the market as well.
Ian Shepardson of Pantheon Macroeconomics is the rare economist who says a short drop in prices is possible – but he says any decline will not continue:
The lack of a large inventory of adjustable-rate mortgages means that the market will not be hit by a wave of forced sellers as interest rates rise. [as in 2008-09]. This, in turn, means that continued absolute declines in apartment prices are unreasonable, but a short-term decline is entirely possible as the market adapts to the drop in demand and inventory rises.
The argument against falling prices, which we have talked about before, has four legs. The supply of houses is very weak; Demand for homes is unusually strong, driven by demographic prominence; Strengthening consumer demand is a demand for investment from rental investors, from start-ups to public companies to private equity; Finally, consumers’ scales are strong so they can afford to pay.
The supply leg is uninterruptible. Here is what has happened to the stock of homes for sale since the global financial crisis:
The demographic argument activates the idea that during the epidemic, household formations were delayed, and the gap needed to be closed. Young people did not leave their parents’ homes or continue to live with roommates. Now they are looking for their own homes.
In anticipation of the epidemic, somewhere about a million new households in the U.S. were created in an average year. By 2020, the number of new households in fact Fell a bit. This was probably true in 2021 (we do not yet have the data). So this year, we may very roughly estimate that we have a million standard new households looking to be formed – and maybe another million or two million more who postponed it during the plague.
It is difficult to find data on the demand for purchase for rent, but Vanden Hauten thinks it absorbs about 5% of the supply of new homes. Here is her chart, which shows a noticeable trend:
As for the consumer balance, we turn to the favorite table of every economic optimist of all time, of debt payments as a percentage of disposable income. This shows the beneficial effect of lowering interest rates:
What, if any, arguments are there? The Xanders housing market (and there are plenty) points to the high inventory of new homes built by a party stuck in the supply chain:
The number of new homes allowed for construction or under construction is even higher now than in the bubble years. Indeed, 1.9 million new homes in the pipeline look like a lot compared to the 1.5 million homes currently included for sale (new and existing). On the other hand, Freddie Mac Pegs The US housing crisis in 3.8 million homes.
My argument against the confident consensus on U.S. house price stability would be that in a recession, things always seem to go wrong faster than you think. Specifically, it always turns out there is more leverage in the system than you thought there is. So this chart of household debt burden may prove misleading This will be especially true in a recession where interest rates are rising, and if inflation does not cool down soon, this is the recession we are going to get.
But I’m not really ready to make that argument. We will continue to monitor housing closely.
One good read
In America today, Dylan Thomas is great A poem About a British boy seen in time.
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