Housing and financial stability
August 24, 2021
–Fairly quiet day in rates, treasury yields unchanged to down 1.3 bps with tens ending a smidgen lower at 1.253%. As the Jackson Hole event was forced to go virtual due to the delta variant, many think the Fed will defer to the virus and delay any moves toward taper. Asset markets are jumping on that bandwagon with stocks closing at new record highs. If delta is such a threat to the economy, why are stocks surging? While the Fed may indeed abandon financial stability objectives, it’s interesting to see this Reuters article:
SEOUL (Reuters) – South Korea is expected to raise interest rates on Thursday, making it the first major central bank in Asia to do so in the pandemic era as surging household debt and home prices threaten financial stability.
–Take a quick look at US housing data: Existing Home sales a solid 5.99 million yesterday. This release includes yoy price increases:
Median yoy Single Family +18.6%. Condo 14.1%. Average Single Family +12.5% and Condo +9.9%. These are blazing numbers, spurred by artificially low mortgage rates, such that prices will HAVE to adjust down if rates ever move higher again…or…maybe we’re at a permanently high plateau.
–Here’s David Rosenberg on twitter: “It now takes >8 yrs of wages to buy a used home, 20% above the 50 yr norm. If this excess gets resolved via the numerator, we’ll have a housing bubble burst that could rival 2008. This is the Black Swan. If rates do back up, they’ll come crashing right back down again.”
–I personally think that’s an overly dour outlook by Rosie, but the gist of it is not lost by some on the Fed who had expressed a desire to trim MBS right away.
From the latest weekly Mauldin piece, there’s this snippet from investor Ron Baron:
So my dad, in 1948, we buy our first house, and it’s $5,000. And before that, we were living in a garage apartment in Bradley Beach, New Jersey, just outside of Asbury Park… 1948, we buy a house. It was $5,000, I’m five years old, and he sells it in 1955 for $10,000. I went to visit that house, I don’t know, two years ago, three years ago, $350,000. 1122 Grismer Avenue, $350,000… and that’s not because he was such a brilliant investor in houses. It’s just because the value of your money falls 3% or 4% a year. And in real estate, it probably increases an average of 4% or 5% a year. And 1955, that’s 65 years ago. So there’s a bunch of doubles in there that you get.
[ I checked Zillow and a google map and did not find this address, but I did see several houses in Bradley Beach that seem astonishingly expensive].
–The Fed, unlike others, has carefully charted a path to withdrawal. The longer it’s delayed, the messier it will be. Powell should follow-through.
