A weekend topic starting with WBZ-TV. “Rates on a 30-year mortgage are now more than double what they were at this time last year. It’s just the latest impact Americans are feeling from inflation levels not seen in 40 years. WBZ-TV’s Paula Ebben spoke with Warren Group CEO Tim Warren about what you should do if you’re in the market to buy a home. Q: There will be a lot of baby boomers watching this who will think to themselves ‘Boy, I remember back in the early 80s my interest rate was 14%.’ But is the big difference in the average price of the home now? Especially in Massachusetts?”
“A: I think so. My first mortgage was in 1976 at 9%, but the house only cost $35,000. So we’re talking about some much bigger baseline numbers here for the house itself, so every point this interest rate goes up, it is significant.”
From Benzinga. “The already sky-high home prices in those markets (which were at or near $1 million) was a major factor in motivating people to move to sunbelt cities like Orlando, Tampa, Phoenix and Houston. These cities experienced a housing boom during the COVID-19 crisis, which drove their home prices through the roof. That was when the Federal Reserve was still keeping interest rates low to keep the economy moving during the COVID-19 crisis. The unintended consequence of such a prolonged period of low interest rates was that a $500,000 mortgage stopped seeming like a whole lot of money. The reality is that $500,000 was always a lot of money. It still is.”
The Washington Post. “Mortgage rates topped 7 percent this week, the highest level in 20 years. Through 2020 and 2021, sales prices exploded in the Hudson Valley, as transplants from New York City and elsewhere clamored for the few homes available. But as mortgage rates soar now, the number of homes available has more than doubled in the last three months, jumping from around 150 units to about 380, said Ryan Basten, an associate broker at Berkshire Hathaway.”
“But with the Fed poised to hike rates two more times before the end of the year, Basten said he and others in the industry are left ‘wondering if there is going to be a real downturn in the market.’ ‘We can only deal with what we’re dealing with now. I can’t see that mortgage rates are going to go to 10 [percent]. If they did, then that would feel like a recession,’ Basten said. ‘Eight [percent] feels bad. Ten percent would be like, ‘Wow, where we do go from here?’”
From Money.com. “What seemed unthinkable just a few months ago has come to pass — Freddie Mac’s benchmark mortgage rate has surpassed 7%. Rather than seeing the slowdown as a negative, Ralph McLaughlin, chief economist at real estate start-up Haus sees it as a necessary step toward bringing the market back into balance. ‘The housing market the last two years has been way out of whack and was never sustainable,’ he says. The longer an unsustainable market lasts, he explains, the more severe the inevitable correction will be. ‘If it takes 7% mortgage rates to help get to a more normal level, then so be it.’”
From Reuters. “The world’s top central bankers are beginning to fear that an already weak global economy will stall if they keep pressing on the brakes, unnerved by plunging commodity prices, turmoil in emerging markets and potential flashpoints at home. ‘Over the last two weeks, several G10 Central Banks came across as ready-to-pivot,’ said Alfonso Peccatiello, author of the Macro Compass financial newsletter. ‘Why such a sudden change of heart? Because all these jurisdictions have something in common: inherent fragilities.’ He singled out high mortgage debt in Canada and public debt in southern Europe, which can’t count on a bailout from across the Alps due to the euro zone’s lack of a common backstop.”
From KELO in South Dakota. “The last year of the Sioux Falls housing market has been ‘tumultuous’ to say the least, according to Fisher Sisters Real Estate co-owner Dana Fisher. At the start of the year, high demand mixed with a low supply of homes created a highly competitive market that left buyers over bidding to secure a home. ‘So, there just wasn’t a lot to choose from. And so the market was just so competitive. I mean, buyers were really having to waive a lot of their contingencies and pay well over asking, just to get their offer accepted,’ Fisher said.”
“Now, Fisher says inventory is up with up to 300 homes available in the Sioux Falls market. ‘And we only have 31 pending contract, so only about 10% of homes that are on the market are under contract right now,’ Fisher said. In the Sioux Falls market where homebuying has been incredibly expensive and competitive, Fisher says the lower interest rates weren’t sustainable.”
“‘So, you know, [now] you’re not having to pay $50,000 over asking,’ Fisher said. ‘The options are actually there, they’re actually available. And so, it wasn’t sustainable for interest rates to stay at 2% and for houses to inflate every year– 17%, 18%, 19%. That’s not sustainable.’”
The Marina Times in California. “‘September was the start of a correction in our market,’ said David Cohen, founder of City Real Estate. ‘Some people might say it started earlier, but in September the stock market really began to fall, there was a big seasonal jump in inventory, interest rates started to climb, and home values really began to drop.’ According to the San Francisco Association of Realtors, the median price for a home in San Francisco in September was $1.4 million, down from $1.6 million — the all-time high recorded in April of this year. That’s about a 13 percent decline in just six months.”
“‘This decrease in home values could last a minimum of six months, or a maximum of 18 months, probably somewhere in between,’ said Cohen. ‘And when I say decline — it’s not a straight line. You’ll have three months of price decline, and then one month of up, but the overall trend will be negative. In fact, right now, we’re selling condos at 2014 and 2015 prices.’”
The Salinas Valley Tribune. “What a difference four months can make in the property world! When I look back to the summer, it is ridiculous to think of where we were then to where we are now! In the summertime, it was a strong seller’s market, the homes were flying off the shelves with multiple offers over list price. There was a horrible lack of inventory that made most of us crazy. We knew it couldn’t last, especially with the kick up in interest rates, but by late June things were swiftly changing.”
“I recall a convo with a potential seller that went something like this. ‘So, if I don’t list in the next month or so, when will the next peak of market be?’ Of course, I’m no economic genius or crystal ball reader, but these markets do come in cycles and, as an old dog of real estate, I would say you are likely looking at 10 to 12 years for another boom town to come around, is what I told him. He looked at me incredulously. ‘That long?’ I quickly diverted him to another ‘expert’ in the field, because no one really knows about these things, do we; even when we kinda do.”
“I was shocked to see a foreclosure home coming up on the active market. My buyers wanted to go and see it. Oh no! We didn’t even cross the threshold of this funky teardown and the old memories came rushing back — and not in a good way. Treading through disgusting carpet and cockroach-ridden doors in the old days of REO, never knowing what you might find and hoping that it wasn’t going to be something dead.”
“A few of us old dogs have agreed that we will struggle to do that work again, but here we are — they are starting to pop up again and the buying public sometimes imagine that a foreclosure means a deal! Oh, there are deals to be had out there, but you don’t need to visit a fixer-upper to find them. I recently showed seven houses in Greenfield — they were all on the active market with no current offers on them. That stopped me in my tracks — such unfamiliar territory! Not only that, but the listing agents contacted me after my showings for feedback. That hadn’t happened in a while either.”
“The buyers were certainly now moving into the driver’s seat, except that the seat wasn’t super occupied. Buyers, where are you?”
Yahoo Finance Canada. “The surge in net wealth that many Canadians enjoyed during the pandemic as the value of their homes skyrocketed and high-flying stocks bolstered their investment portfolios is reversing course, RBC Economics says. The downturn in the real estate and financial markets means Canadians could see a total of $1.6 trillion in net wealth erased in the coming quarters, the bank said in a report. While that won’t wipe out all of the estimated wealth gains made during the pandemic, it’s already having a chilling effect on consumer spending.”
“From peak to trough, RBC estimates it would represent a 41 per cent decline in collective net worth. ‘Still, for the most part, the sharp decline in net wealth is starting to hit home,’ the report said. ‘Households can finance spending either out of current income or by drawing from their net wealth. As a result, when their net worth declines, so does their confidence about spending.’”
The Vancouver Sun. “Mortgage holders without a fixed rate, homeowners with mortgages about to expire and homebuyers shopping for a home will be hardest hit by Bank of Canada’s inflation-fighting interest hikes. But local mortgage experts say there are steps they can take with their lender before they have to sell or face foreclosure. ‘For the roughly one-in-four mortgage holders with a variable rate who have watched their equity position drop, it’s very easy to feel you’re in a bad position, but you’re not if you have job security and you can weather’ a downturn in the market, said broker Dustan Woodhouse, also a board member of the Canadian Mortgage Brokers Association of Canada.”
“‘The longest stretch (for a real estate bust, in the 1990s) lasted seven years,’ he said. ‘Is this really going to last seven years? Maybe.’”
“The mortgage holder with a variable rate that’s adjustable has been hit the hardest because ‘they have had six punches to the gut,’ said Marci Deane, also of Mortgage Architects. But those who signed variable rates with static payments are also facing possibly higher payments, according to the two brokers, something neither has seen in their years as a broker. ‘Hey, we’re making history,’ said Deane, who said she has worked as a broker for 15 years and has never seen it happen.”
The Globe and Mail. “Politicians do have a significant role to play in controlling inflation, with decisions about spending and taxation influencing overall demand in the economy. Former Bank of Canada governor Mark Carney told a Senate committee meeting last week that fiscal discipline will be imperative in a new era of higher interest rates, slower growth and more persistent inflation. ‘Sound money and credible fiscal policy will be rewarded. But mistakes will be punished and no one’s really going to be exempt,’ he said.”
“Until recently, most critiques of the central bank have come from the Conservatives, who argue the bank’s government-bond-buying program during the pandemic was a key driver of inflation. Mr. Poilievre has championed this position, calling the bank an ‘ATM machine’ for the government and saying he would sack Mr. Macklem if the Conservatives form government.”
From ABC Business. “Treasurer Jim Chalmers said his first budget was one of ‘hard decisions for hard times.’ But like Chalmers, Australians — especially those on lower incomes — are having to make their own hard budget decisions. The cost of bills are up, groceries are up, fuel is up, housing costs and instability are up, and something has to give. Meet Miriam. She’s the ‘typical Aussie,’ according to last year’s census: aged 38, female. Let’s say she has two kids, a husband, a rental property in a Sydney suburb, a part-time job and a growing stack of bills.”
“Because Miriam is part-time at the moment, let’s assume the couple’s gross weekly income is around $2,700 — or about $2,150 after tax. She has her own balancing act. For Miriam, and millions like her, the juggle is real. To make matters worse, the biggest price rises have been largely concentrated in non-discretionary items. This means food, petrol, housing, medication — basically the needs, not wants. The price of these things has risen at an annual pace of 8.4 per cent in the September quarter, compared to 5.5 per cent for the fun stuff. When Miriam goes to the supermarket, it’s becoming harder to afford fresh fruit and vegetables for her growing children. Meat has already become an occasional luxury.”
“The budget included some measures aimed at bringing bills down, like $65.7 million extra for the Australian Competition and Consumer Commission to regulate the gas industry. Chalmers has also said the government is considering broader regulatory interventions. But the reality is, it’ll take some time for any measures to translate into relief for families. ‘The problem with direct handouts is it would feed straight into inflation,’ Prime Minister Anthony Albanese said this week. ‘That’s the problem here. So, what we had to do was target investment into ways that didn’t add to inflation.’”
The Pasadena Star News. “This is not the first debate we’ve had recently about inflation and Fed actions. The lesson we should learn, and I fear we won’t, is that government officials and those advising them from inside or outside the government don’t know as much as they claim to about the interventions they design to control the economy. As a reminder, in 2021, the dominant voices including Fed Chairman Jerome Powell asserted that the emerging inflation would be ‘transitory’ and disappear when pandemic-induced supply constraints dissolve. That was wrong.”
“When this fact became obvious, the messaging shifted: Fed officials could and would fight inflation in a timely manner by raising rates to the exact level needed to avoid recession and higher unemployment. Never mind that the whole point of raising interest rates is precisely to soak money out of the economy by slowing demand, which often causes unemployment to rise. Lessons from the past should have made everyone more suspicious of this ‘soft landing’ argument.”
“As someone who never had faith that the same central bankers who created and missed the biggest inflation in 40 years could guide our complex economy back to health with only the crude tools at their disposal — asset tapering, interest-rate hikes and backward-looking models — I’m baffled by the debate. We were told for years that the mighty Fed had not only conquered inflation but could now use its powers to produce inclusive economic growth, control the climate and reduce inequality.”
“Where did the confidence go? In truth, the idea that the Fed (or anyone) possesses the knowledge necessary to fix, control or grow the economy with perfectly calibrated top-down policies was always an illusion. That bubble just burst.”
“Over at Discourse Magazine, my colleague Thomas Hoenig — a former president of the Fed’s Kansas City branch — explains how Fed officials faced similar pressures during the late 1960s and 1970s. Unfortunately, he writes, ‘Bowing to congressional and White House pressure, (Fed officials) held interest rates at an artificially low level. … What followed was a persistent period of steadily higher inflation, from 4.5% in 1971 to 14% by 1980. Only then did the FOMC, under the leadership of Paul Volcker, fully address inflation.’”
“Hoenig urges the Fed to stay strong today. He writes, ‘Interest rates must rise; the economy must slow, and unemployment must increase to regain control of inflation and return it to the Fed’s 2% target.’ There is a cost in doing this; a soft landing was never in the cards. After this string of failed predictions, slow response and admitted ignorance, will politicians finally learn what F.A. Hayek meant about ‘how little they really know about what they imagine they can design?’”