December 20, 2015

A QE Only Economy

A weekend topic around three articles. Builder Online, “Last year, many economists predicted that 2015 would be a turnaround year for first-time buyers, who would be encouraged to enter the market due to stable job growth and the return of mortgage options that allow buyers to put as little as 3% down on a home. However, that prediction has largely fallen flat. It’s an ongoing sluggishness among both first-time buyers and a portion of entry-level buyers that can be largely attributed to one key factor: affordability.”

“Demand for new homes is strong across all buyer segments, and demand scores from Metrostudy regional directors show positive gains year over year. However, while higher demand increases production, builders are still missing the mark for potential buyers who would like to purchase a home but cannot afford the product that builders are selling. The reasons for the lack of lower-priced housing vary by region, but are mostly due to the usual suspects.”

“In Chicago, construction costs are the biggest impediment, while tight lot inventory and high property values continue to plague markets like Seattle, Denver, Northern California, Salt Lake City, and South Florida. According to regional director David Cobb, ‘New-home prices remain well out of reach for many buyers, with the median new single-family detached home sales price [in South Florida] now at $517,000.’”

“Even townhomes have become too expensive for some buyers in markets like Charlotte, N.C., where townhome prices have increased by double-digit percentage points year over year. This is likely also the case in the New Jersey-New York suburbs, where condo and townhome projects are receiving increased interest from first-time buyers, but traffic isn’t converting into sales.”

“In higher-value markets, only first-time and entry-level buyers with high budgets are able to buy. According to Philadelphia regional director Quita Syhapanya, ‘Builders can’t find the margins they need marketing to [first-time and entry-level buyers with low price points], so they continue to market, sell, and build for the move-up buyers.’”

Bryan Crabtree at Townhall Finance, “The Housing Market has been in the unfettered hands of the Fed since 2008. And, the looming Fed rate-increase may be the end of the recovery. If you bought a home in the last four years, you’ve likely seen your equity grow. And that has created blind-optimism about the future of housing. But if you look at those same values a year from now, it’s not likely to be that optimistic.”

“First, the fundamentals tell us that interest rates, presently lower than at almost any point in the last forty years, have created a short-term housing stimulus that has increased demand and allowed buyers to purchase homes that, historically, would have been out of their price range. Second, builders are building spec-homes again (homes where there is no buyer yet). This skews the numbers, and therefore the perception of the housing market, because these properties in builder-communities are not included in the homes listed for sale.”

“Third, as many as a million homes have been purchased by institutional investment-companies for the sake of generating short-term rental income. Their intention, however, is to sell these homes once the market has recovered (likely, they will be too late). In other words, we still have to clear that inventory through the market in the near future. This means that the numbers being reported by Realtors are missing hundreds of thousands of unlisted spec-homes and lots, as well as shadow-inventory that will reappear in the future (when it’s needed the least).”

“And, because of extremely low mortgage interest-rates, the exciting 2015 sales numbers are misleading. Median home-price is rising (while transaction volume is rising), but actual home-price appreciation is stalling or even declining. The main reason that median-price is rising is that interest rates are low, which affords most buyers more purchasing power.”

“On my housing radio show, we talk about how home-buyers seem to be buying the maximum of what they can afford (part of a growing trend of irresponsible consumer decisions). They’re generally putting as little down as possible, to such an extent where the following holds true: a 1% rise in mortgage interest rates would reduce the home-buyer’s purchasing power by 11%.”

“The overwhelming majority of all new mortgages are backed by the Federal Government through HUD/FHA, VA, Fannie Mae or Freddie Mac. Unlike previous eras, where we saw volatile mortgage-interest rates, we have new and unprecedented control by the Government. Combine this with the Dodd-Frank legislation (and QRM, Qualified Residential Mortgage), requiring much stricter scrutiny on lenders, and the housing-industry is simply not capable of enduring much of a rise in rates.”

“We’re about to learn that this ‘housing recovery’ has really been nothing more than a Government-sponsored stimulus of ridiculously low interest rates and trillions of dollars in Fed-printed money.”

From Swarajya Magazine. “In what history will judge as an extraordinary period, for the last 84 months the US Federal Reserve has held onto a policy of ZIRP (zero interest rate policy) and it’s almost a decade since the last rate hike happened in 2006. In other words, we have been on an easing cycle for almost a decade, though technically the withdrawal of QE (quantitative easing) could be seen as a tightening move – at least in the relative sense of the word.”

“Some economists have, however, pointed out that the US economy might already be in a recession and so the rate hike was the last thing that the US economy needed right now. And that the Fed would be forced to embark on an easing cycle soon. So how does all this really play out?”

“In fact, Janet Yellen had to abandon her ‘incoming data dependent’ approach to effect the hike yesterday (16 December). For much of the year, she had insisted on seeing an improvement in the ‘labour force participation rate’ before she embarked on a hiking cycle. But just a fortnight back, she had changed her tune to speculate that it might automatically improve in the months ahead despite a hike. Why the sudden shift?”

“Maybe Yellen is well aware that the US economy is already in a recession as almost all of the leading indicators (factory orders, thanksgiving sales, inventory data, etc) show and it’s only a matter of time before she has to embark on an easing cycle. So it might well have boiled down to choosing between making obvious to the world that the US is a ‘QE only economy’ or giving the world a reasonable sounding excuse about the interest rate hike being the cause of the recession, even if it happens to inflict a certain amount of self-damage to her reputation as a forecaster (not that the public has any memory of the forecasting track records of these central bankers. Yellen’s forecasting on the housing bubble or the 2008 credit crisis was abysmal, though President Obama credited her for the same when she took office).”

“This long period of easy credit has led to tremendous malinvestments and capital misallocation decisions worldwide – most notably on the side of government finances, leading to bloated balance sheets. The US cannot sustain any meaningful increase in interest rates. At a mere 4 percent interest rate, the share of net interest payments in federal outlays would jump to more than 20 percent – a clearly unsustainable level.”

“There might be technically no way out of the situation today although, much like a near-dead patient can stay on ventilator support, the US economy can totter along under conditions of A-ZIRP (Almost ZIRP). As far as Yellen is concerned, she will continue to give speeches about normalising monetary policy for a few more weeks. That there is no way for the Fed to shrink its balance-sheet will never be brought up (who is there to buy the trillions of near junk bonds it holds?)”

“Perhaps by the end of Q1 of 2016, it would be obvious to everybody that the US is indeed in a deep recession. And Yellen would be forced to come out with interest rate rollbacks and loaded helicopters to fill the economy with free cash.”

Bits Bucket for December 20, 2015

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