Englund

The strong jobs report is prompting financial markets to reconsider the pace of rate cuts.  And that dynamic is pushing the 30-year mortgage rate higher. Mortgage News Daily said the 30-year rate was 7.24% as of Jan. 10, up 9 basis points from the previous day. Aarthi Swaminathan MarketWatch 10 January 2025 https://www.marketwatch.com/story/mortgage-rates-were-expected-to-fall-but-theyre-surging-theres-a-reason-for-that-4d449149 Tillbaka till Rolfs länktips 12 januari 2025 https://englundmacro.blogspot.com/2025/01/rolfs-lanktips-12-januari-2025.html

SvT 8 januari 2025 https://www.svt.se/nyheter/utrikes/forodande-skogsbrand-i-los-angeles-invanare-flyr-i-panik Skogsbränder härjar i Kalifornien SvD/TT 8 januari 2025 https://www.svd.se/a/4B0l5V/30000-ska-evakuera-i-kalifornien Thousands told to abandon homes as huge wildfire rips through Los Angeles suburbs https://www.bbc.com/news/live/c5y81zyp1ext A perfect storm; Los Angeles is burning By January 8th, the biggest fire burned across nearly 3,000 acres in the Pacific Palisades, a wealthy neighbourhood on the coast, causing at least 30,000 people to flee their homes.  Local officials ordered parts of Santa Monica, home to about 90,000 people, to evacuate too.  Until recently, January wouldn’t have been considered part of fire season, even in fire-prone California.  The ordeal reminds Angelenos of their vulnerability.  At any given time Los Angeles is at risk of fire, flood, extreme heat, mudslides and earthquakes.  A county of nearly 10m people The Economist 8 ...

Interest rates also play a big role. Homeownership is the biggest source of both debt and wealth. That makes it central to understanding why economies endure boom-and-bust cycles. Yet housing is often missing in macroeconomic analysis.  High-end real estate often helps hide or launder illicit fortunes, further distorting housing markets and making homeownership a more distant dream for ordinary people. This issue of Finance & Development details how housing markets and the economy interact, the nature of recent challenges—including the property slump in China (see piece by Kenneth Rogoff and Yuanchen Yang)—and the potential solutions that can make real estate markets work for everyone.  Gita Bhatt IMF 4 December 2024 https://www.imf.org/en/Blogs/Articles/2024/12/04/housings-unique-role-in-lives-and-economies-demands-greater-understanding Tillbaka till Rolfs länktips 5 december 2024 https://englundmacro.blogspot.com/2024/12/rolfs-lanktips-5-december-2024.html

  Consumer borrowing costs haven’t tracked the Fed since it cut rates by half a percentage point in September  If the Fed Is Cutting Rates, Why Aren’t Mortgage Rates Falling? The central bank lowered its benchmark rate by a quarter-percentage point Thursday, following its half-point cut in September. But the average rate on a 30-year fixed mortgage has gone in the opposite direction since the Fed’s first cut,  rising by more than half a percentage point to 6.79% this week,   It might keep climbing, tracking the recent rise in the 10-year Treasury yield. Bloomberg 7 november 2024 https://www.wsj.com/economy/housing/mortgages-fed-interest-rate-cuts-7e5345b8 Tillbaka till Rolfs länktips 7 November 2024 https://englundmacro.blogspot.com/2024/11/rolfs-lanktips-7-november-2024.html

Although the world marvels at “unsinkable” US consumers, a growing number are priced out of homes and falling behind on credit-card debt. The bottom 40 per cent by income now account for 20 per cent of all spending while the richest 20 per cent account for 40 per cent.  Discretionary spending is becoming a luxury for the wealthy, and so is optimism. This decade, booming financial markets added $51tn to US wealth and while millennials did especially well, virtually all their gains went to rich millennials.  To a widening wealth gap between the young and old, add this new source of division and anger within the younger generation. Normally booms are financed by rising debt in the private sector.  The government ramps up its borrowing only later, to help dampen the shock after the boom goes bust.  This time, government leads the way Ruchir Sharma FT 4 November 2024 The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’...

  For the first time since the great financial crisis, buyers of top-rated commercial mortgage-backed securities are suffering losses. 1407 Broadway was, as far as the financiers of Wall Street could tell, as rock-solid an asset as could possibly exist. Located in the heart of Manhattan’s storied Garment District, its entrance cut from white marble flecked with a soft bronze terrazzo motif, the 43-floor tower was a money-minting machine with a never-ending roster of well-heeled corporate tenants. https://www.1407broadway-ny.com/our-building So when the owners floated a $350 million bond backed by the building’s rental income in 2019, the bulk of the debt was stamped with a AAA credit rating, the highest grade awarded by ratings firms.  Not even US Treasury bonds, the North Star for global financial markets, are deemed that safe.  But 1407 Broadway, the thinking went, was so impervious to the vagaries of economic cycles that a default was unfathomable — nothing more than a...

  Americans are sitting on more than $35 trillion in home equity after a 75% surge since early 2020 thanks to booming home prices.  Homeowners often get itchy fingers to tap the equity like a personal ATM, and a rush to do so could pose an inflation risk for the Federal Reserve considering the massive pileup in value.  But many homeowners today are reluctant to use it as a source of cash. Wall Street Journal 22 October 2024 https://www.wsj.com/articles/pro-take-americans-home-equity-surges-to-over-35-trillion-d8eafc05 "Balance Sheet Boom" https://englundmacro.blogspot.com/2024/10/balance-sheet-boom.html North Dakota voters could end property taxes; Klas Eklund mest korkade ekonomisk-politiska beslut https://englundmacro.blogspot.com/2024/10/north-dakota-voters-could-end-property.html

  The chart shows quarterly HUD data for actual selling prices For sales in Q2 2014, the average price was $288,000. Ten years later in Q2 2024 it was $426,800, a 48.2% increase.  That was actually down a bit from the Q4 2022 peak, when the average selling price was $442,600, a 53.7% increase in 8½ years.  Notice, however, when most of the gains occurred. Home prices zoomed higher in the COVID era, gaining 39.6% in the 2½ years from Q2 2020.  I think the COVID-driven monetary and fiscal stimulus was a much bigger factor. The Fed’s easy policy made borrowing cheap while other programs put cash in people’s pockets.  Consumer goods spending boosted profits at many businesses. This led to higher salaries, bonuses, and stock prices. A small number of business owners and executives ended up with a lot of extra money, some of which went to buying new homes.  Naturally, prices rose. A similar trend unfolded in rental properties.  Homeownership became “the Amer...

Are home prices in some areas being driven down by people fleeing the parts of the Sunshine State most prone to flooding and high insurance costs?  Or are developers snatching up storm-ravaged land to build new — and more expensive — homes in those same places?  Or are people moving just in from the shore, displacing those on higher ground and making housing there less affordable? The answer to all these questions is yes. Finally, everybody needs to accept that part of this process will inevitably involve giving up the dream of a single-family mansion on the beach or in a lovely wildfire zone. Climate change is increasingly turning such dreams into nightmares. “We don’t let people build on crumbling cliffs or active volcanoes. Why do we let them build in other risky places?” Siders asked.  “The debate is over the right level of risk. But right now we’re not even willing to engage in that debate.” Mark Gongloff Bloomberg 17 October 2024  https://www.bloomberg.com/opin...

After two decades working in housing policy, Priscilla Almodovar is intimately familiar with the challenges the U.S. faces when it comes to housing. The Brooklyn native took the reins of the New York State Housing Finance Agency in 2007 amid a financial crisis that was fueled by a crash in subprime mortgages.  Today, buyers are facing the opposite problem: Demand for homes is so insatiable that even as mortgage rates remain elevated and home-insurance costs soar, home prices keep inching up to new record highs. Aarthi Swaminathan MarketWatch 16 October 2024 https://www.marketwatch.com/story/fannie-mae-ceo-says-she-has-never-seen-a-housing-market-like-this-before-5b3d360f  

  ... the bank’s monetary policy during and after the pandemic will distort the housing market for years to come. In the spring of 2020, as the world was in full pandemic panic and the US economy was in free-fall, the Federal Reserve turned to the emergency playbook from the financial crisis:  It cut interest rates to zero and restarted quantitative easing, buying up longer-dated Treasuries and mortgage-backed securities, known as MBS.  This time, however, it went much bigger — expanding its balance sheet to $8.9 trillion in 2022, compared to $2 trillion in 2009. The result was record-low mortgage rates and $8 trillion worth of mortgage originations in 2020 and 2021, as people bought homes and refinanced at the historically low rates. Because the US has 30-year fixed rate mortgages, many Americans are still benefiting from the low rates.  More than half of homeowners now have mortgage rates below 4%.  They will not be moving anytime soon. That means less invento...

  In the first half of this year  lenders originated more than 333,000 new home-equity loans totaling about $23.6 billion With home values soaring over the last few years, homeowners who have built up equity are turning to home-equity loans to cash in on their gains.  Homeowners are tapping into their home equity to cover expenses such as home renovations or to consolidate debt. They’re taking on a second mortgage rather than refinancing because they want to avoid giving up the relatively low rate on their primary mortgage.  Aarthi Swaminathan MarketWatch 12 October 2024 https://www.marketwatch.com/story/homeowners-havent-drained-cash-out-of-their-houses-this-fast-since-2008-2e080b36 U.S. Home Prices Hit Record in June - Sverige har en liknande utveckling https://englundmacro.blogspot.com/2024/07/us-home-prices-hit-record-in-june.html Housing Bubbles in America https://englundmacro.blogspot.com/2024/06/housing-bubbles-in-america-wolf-street.html Why the bulls are run...

Richard Koo chief economist of Nomura Research Institute in Japan is famous, at least among economists, for coining the term “balance sheet recession”.  I now claim to coin the term "balance sheet boom". When shares och house prices rise many, but not all, are, or at least feel, richer. They feel free to choose and free to spend. That may go on longer than you can stay solvent.  Rolf Englund 7 October 2024 Why the bulls are running and the consumers are buying Englund blogg 28 June 2023 https://englundmacro.blogspot.com/2023/06/why-bulls-are-running-and-consumers-are.html Richard Koo is famous, at least among economists, for coining the term “balance sheet recession”.  https://englundmacro.blogspot.com/2024/10/weakening-dollar-is-good-idea.html Tillbaka till Wall Street och Stockholm 7 oktober 2024 https://englundmacro.blogspot.com/2024/10/wall-street-och-stockholm-7-oktober-2024.html

The U.S. housing market is sharply divided between those who own and would-be buyers who can’t afford a home The housing divide underscores the wealth gap between homeowners, who have benefited from several years of robust home-price appreciation, and renters, who are facing one of the least-affordable housing markets in decades. Home prices have climbed more than 50% since 2019, helping homeowners build wealth.  Homeowners with mortgages had $17.5 trillion in equity in July, according to Intercontinental Exchange.   About 90% of homeowners with mortgages could borrow against some of the equity in their homes while keeping a cushion of 20% equity, according to ICE. Nicole Friedman Wall Street Journal 14 September 2024 https://www.wsj.com/economy/housing/interest-rate-cut-housing-mortgage-prices-8c12464b

  provided US consumers with an extra $600 billion in spending cash since 2022, blunting the impact of the Federal Reserve’s interest-rate hikes, according to analysis by the Swiss Re Institute. The effect has been to mute the impact of monetary policy transmission, as consumer demand proved resilient to Fed hikes.  The same mechanism will likely counteract the effectiveness of rate cuts that the Fed is now planning, and make it harder to stimulate consumer demand if the economy slows. The median home price has risen some 60% since early 2020 and credit card delinquencies are above pre-pandemic levels, pointing to larger household debt burdens that will only see limited relief from lower borrowing costs. Bloomberg 26 August 2024 https://www.bloomberg.com/news/articles/2024-08-26/us-consumers-got-a-600-billion-boost-from-locked-in-mortgages Most US Mortgage Rates Were Locked in During Pandemic Lows   https://englundmacro.blogspot.com/2023/03/m-10-and-house-prices.html

Stocks, bonds and other assets are near record highs to GDP A measure compiled by Bank of America pits stocks, bonds, deposits, loans, private-equity and pension fund reserves versus gross domestic product. The S&P 500 has gained 16% this year, after a 22% surge in 2023. That said, the Bank of America measurement ignores the largest source of American household wealth, real estate. The Federal Reserve has a separate survey, including real estate, which finds that household net worth is nearly 8 times that of disposable personal income. Steve Goldstein MarketWatch 19 August 2024 https://www.marketwatch.com/story/wall-street-is-six-times-the-value-of-main-street-says-bank-of-america-ad084e50

 Some bank stocks are the functional equivalent of ticking time bombs. That’s because many have significant holdings of commercial real estate (CRE) properties that, if valued at current market rates, would wipe out the banks’ net worth.  Many vulnerable banks have been able to avoid this fate—up until now—by conspiring with their mortgage lenders to engage in a practice known as “extend and pretend.”  This practice involves simply extending the original loans while pretending that the properties’ market prices haven’t plunged significantly. This practice will become increasingly difficult to pull off, however, as more CRE properties come up for sale and their true value is revealed for all to see.   Mark Hulbert MarketWatch 12 August 2024 https://www.marketwatch.com/story/banking-stocks-for-those-who-worry-about-a-banking-crisis-bfd39f9b The World’s Empty Office Buildings Have Become a Debt Time Bomb The ‘Extend and Pretend’ Real Estate Strategy Is Running Out of Ti...

  The national median existing-home price in June rose to $426,900, a record in data going back to 1999 and a 4.1% increase from a year earlier Prices aren’t adjusted for inflation. Wall Street Journal Updated July 23 2024 https://www.wsj.com/economy/housing/u-s-home-prices-hit-record-in-june-for-second-consecutive-month-cbe00c76 https://www.ekonomifakta.se/sakomraden/makroekonomi/bostader/bostadspriser_1208975.html

The facts have changed, so I’ve changed my mind.  The Fed should cut, preferably at next week’s policy-making meeting. Waiting until September unnecessarily increases the risk of a recession. Fed’s efforts to cool the economy are having a visible effect.  Granted, wealthy households are still consuming, thanks to buoyant asset prices and mortgages refinanced at historically low long-term rates.  But the rest have generally depleted what they managed to save  Fed officials don’t seem particularly troubled by the risk that the unemployment rate could soon breach the Sahm Rule threshold.  The logic is that rapid labor force growth, rather than a rise in layoffs, is driving the increase in the unemployment rate. This isn’t compelling Historically, deteriorating labor markets generate a self-reinforcing feedback loop. When jobs are harder to find, households trim spending, the economy weakens and businesses reduce investment, which leads to layoffs and further spendi...

San Francisco, Seattle, Phoenix, Portland, Denver, Dallas, Las Vegas still below 2022 Peak Wolf Street 25 June 2024 https://wolfstreet.com/2024/06/25/the-most-splendid-housing-bubbles-in-america-june-2024-update-san-francisco-seattle-phoenix-portland-denver-las-vegas-dallas-below-2022-peak-new-highs-in-miami-los-angeles-san-diego-boston/