A weekend topic starting with Fortune. “In 2005, Fed Chair Alan Greenspan told Congress that a ‘bubble in home prices for the nation as a whole does not appear likely.’ Of course, not only had a housing bubble formed, it was nearing its peak just as Greenspan delivered that message on Capitol Hill. On Tuesday, Fed Chair Jerome Powell told the audience that the run-up in home prices during the Pandemic Housing Boom qualifies a ‘housing bubble.’”
“‘Coming out of the pandemic, [mortgage] rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing prices going up [at] very unsustainable levels and overheating and that kind of thing. So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand,’ Powell said.”
The Orange County Register. “Mary Daly sees the Federal Reserve’s battle with inflation as a fight to reverse a ‘stunning’ trend: Real wages – that’s pay after inflation – tumbled 9% over two years. To the CEO and president of the Federal Reserve Bank of San Francisco, the central bank’s job of chilling 40-year high inflation is more than simply fulfilling a bureaucratic mandate to juggle high employment with a manageable cost of living. Daly, who’s been the San Francisco Fed’s head for four years, sees restoring price stability also as an issue of economic fairness.”
“Why? Because inflation is essentially a regressive tax on those who can least afford the cost. ‘That’s not sustainable for the average worker,’ says Daly, a labor economist whose writings focus on economic equality. ‘It’s like a treadmill speeding up and you’re just falling behind. I call this the indignity of inflation. It literally takes away the dignity of working because you can’t afford the things you could afford last week.’”
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“Q. I think of 2020-21’s sub-3% mortgages. Did the Fed do too much — along with all the other stimulus programs that we had? A. History will be the judge. Think of where we were. We hadn’t had a pandemic in 100 years. If you literally stopped the economy, throw people out at work, and don’t provide a bridge – the economy is going to break. It’s really hard to come back from that level of devastation. So we build a bridge, and if the bridge was too long, we’ll study it to do better next time. But I would rather err on the side of helping as many people as possible than have the bridge be too short.”
“Q. You’ve written throughout your career about economic fairness. What about all the wealth created by the cheap money the Fed helped create? A. I get this all the time: Does Fed policy create inequalities that we regret creating? First, we have a blunt tool, right? We can raise the interest rate, we can lower the interest rate. That’s it. We have two goals (high employment/low inflation) and a blunt tool. When we have periods of accommodative policy – supporting economic expansion – wage inequality falls and wealth inequality rises. Why? Because only a fraction of our population owns assets.”
“But you’ll never build wealth unless you have a job. So a supportive Federal Reserve policy is the way to build wealth. Right before the pandemic, we saw the wealth gap starting to narrow. Why? Because more people had enough income in their pockets to buy an asset, usually a home, and then they started to build wealth.”
From Yahoo Money. “Economists predict rates could land anywhere from 5.2% to 8% — potentially even higher than that — depending on a number of uncertain factors such as how quickly inflation fades and how the economy absorbs the Federal Reserve’s rate hikes next year. ‘Rates had never doubled in a year before,’ Freddie Mac analysts said in their October quarterly forecast. ‘If we can’t get inflation under control, affordability will get even worse,’ Mark Fleming, chief economist for First American, told Yahoo Money. ‘A house price correction will not be enough to mitigate the damage done by a potential 8%-plus mortgage rate.’”
From Reuters. “Blackstone limited withdrawals from its $69 billion unlisted REIT on Thursday after redemption requests hit pre-set limits amid investor concerns it was slow to adjust valuations as interest rates surged, a source close to the fund said. ‘The fact is that most retail investors, and defined benefit scheme investors due to de-risking strategies, are electing to reduce their real estate holdings across the board where they can as values in direct real estate reprice alongside rates normalisation,’ said Chris Taylor, chief executive of real estate at Federated Hermes.”
“Kaspar Hense, a portfolio manager at BlueBay Asset Management, which manages assets worth more than $92 billion, said the REIT news was an example of the risks private markets face in a rising rates environment. ‘If yields are rising, being invested in rather illiquid assets can be a challenge, just for a rather small (return) pick-up going into illiquid markets, which will suffer very significantly if yields are rising,’ Hense said. ‘That is certainly what we’re seeing here and we should really expect to happen again over the next six to 12 months as yields are rising and central banks are keeping rates higher. It will have an impact on net worth, it will have an impact on investors’ losses,’ Hense added.”
“For investors who piled into private markets and riskier assets in a bid to boost returns during years of low rates and easy cash, this could now prove even riskier. ‘The prolonged period of very cheap money and abundant liquidity encouraged some asset managers to offer relatively liquid products that invest in relatively illiquid assets. These products behave differently in a world of patchy liquidity,’ said Mohamed El-Erian, an advisor to Allianz.”
The Colorado Springs Gazette. “Colorado Springs-area home sales tumbled by more than a third in November from a year ago. This week, after months of interest rate hikes by the Federal Reserve in an effort to get inflation under control, the 30-year, fixed-rate mortgage rate stood at 6.49%. Combined with home prices that had escalated by more than 10% each of the last five years, the rapid spike in mortgage rates has priced many homebuyers out of the market and led to plunging home sales, said Rick Van Wieren, a real estate agent with Re/Max Properties in Colorado Springs.”
From Money. “When Chad L.’s Atlanta home lingered on the market for a couple of months this fall, he took a drastic step to get it sold: He paid $50,000 in closing costs on behalf of his buyers. ‘The buyers wanted the house, but they didn’t have a big enough down payment to qualify for the loan they wanted,’ says Chad, a homeowner and real estate investor who asked to be identified only by his first name and last initial because he prefers to keep his real estate holdings private. ‘My covering their closing costs allowed the deal to go through.’”
“Sellers can typically contribute up to 3% to 6% of the loan amount toward the buyers’ closing costs, depending on the loan program. The concessions can never exceed total closing costs. ‘The down payment must come from the buyer,’ says Eric Mullis, branch manager for CMG Home Loans in McLean, Virginia. ‘Contributions to closing costs can be a mix coming from the sellers, the agent and the lender.’”
The Union Tribune in California. “If you know where to look, there are some big home price reductions in San Diego. The median home price in San Diego County has now dropped five months in a row to $775,000 — a reduction of $75,000 since since May. That means for-sale homes are sitting longer and, in the last two months, 42 percent have had their price reduced at least once, said Reports on Housing. An analysis of price reductions over the last 30 days by The San Diego Union-Tribune found several ZIP codes that stand out. This list contains all home types, such as single-family, condos and townhouses.”
“One group of buyers selling at considerable losses are the iBuyers, companies that started buying up as many properties as possible during the pandemic without seeing them. The idea was the market was so strong you could buy a home and turn around and sell it in a month and make a profit. It didn’t work out for many of the companies, especially Zillow. It reported a loss of $881 million in February before the market even started its downturn. It has since shut down its iBuying business. Here are some examples of homes purchased in the last year by OpenDoor, which is still the most active local iBuyer.”
12 News in Arizona. “Months after home prices in Phoenix hit record highs, the city is now entering its first buyers market in more than a decade, according to The Cromford Report. ‘It’s one of the biggest rollercoasters in the industry’s career,’ The Cromford Report senior analyst Tina Tamboer said. In November 2021, the median home sold for around $425,000. For the first half of the year, Arizona saw rapidly rising prices. The metro area was short on housing supply, and cash buyers were helping fuel home prices upward. In May, the median home in the Phoenix metro area sold for $480,000.”
“However, interest rates started to rise quickly, and housing prices dropped. Investors tried to sell, and some big-name iBuyers lost millions of dollars. Last month, the median home sold for around $425,000. ‘The median house price in 2021 was $425,000. Today, it’s $425,000,’ Tamboer said. ‘Essentially, what has happened in the last six months is the appreciation from the first six months has been erased.’”
“Most home sellers continue to make money, except those who bought a home within the last year. ‘It’s become a pretty different feeling,’ West USA Realty realtor Jeremy Fierstein said. Fierstein has been in the business for the past ten years. He says potential sellers should not worry about what they may have missed out on. ‘You can’t look in the past and think what you should have done,’ Fierstein said. To react to current conditions, sellers are offering more concessions to entice buyers. Such as buying down part of the potential interest rate. ‘Without a lot of those concessions, a lot of the buyers would not be able to afford that mortgage payment,’ Fierstein said.”
The Star Phoenix in Canada. “This is where inflation and the associated rising interest rates have really come home to roost. In the third quarter of 2022, there were 257 new home sales in the Saskatoon region, down 48.4 per cent over last year and a 63.3 per cent decrease from the 10-year average. ‘Deals collapsed as multiple buyers were not able to secure financing, even those pre-approved by the banks,’ said the report. ‘Lenders were not anticipating interest rates to rise as fast as they did, forcing them out of honouring pre-approvals and mortgage rate commitments.’”
“In other bad news, first-year interest payments on an average new single-family Saskatoon home soared to more than $17,000 (assuming a new 25-year mortgage with a 10 per cent down payment). That’s the third highest amount ever, and an 88 per cent increase compared to the same period of last year. Insert emoji of a shocked face here, because I can’t find the words. But here’s the situation in a nutshell. ‘Sales have come to a halt,’ Nicole Burgess, CEO of the SRHBA, told me. ‘Deals are collapsing. No one is buying because there is so much uncertainty. But if the population is going to grow, we need housing.’”
The Edmonton Sun. “Edmonton and most real estate markets across Canada have become more affordable in recent months, despite fast-rising borrowing costs, a new study shows. A local realtor is skeptical buyers are feeling housing has become more affordable — even in Edmonton, which is a far less costly market than Toronto and Vancouver where average home prices exceed $1 million.”
“‘The study kind of sugar-coats conditions a little bit,’ says Mashal Muhammad, realtor with Royal LePage Noralta Real Estate. ‘Sure, we’ve seen a drop in prices, but the stress test remains a challenge.’ For example, other costs — like property taxes and utilities — that factor into qualifying have not decreased, he adds. ‘So the approval process has just gotten a lot harder for many buyers.’”
“James Laird, co-chief executive officer of Ratehub.ca. agrees qualifying at nearly 7.5 per cent is a ‘major hurdle,’ especially first-time buyers. Yet he notes if interest rates plateau, affordability could see a sweet spot as prices continue declining before sales pick up and create a floor off from which prices could grow once again. ‘As we get to the spring market, if rates stay where they are, it will be interesting to watch if activity jumps and prices along with it,’ Laird says.”
From The Street. “In a 2016 blog post written for the think-tank Brookings Institution, Ben Bernanke admitted that his helicopter money reference gave him some bad PR. In fact, he said that their media relations officer, Dave Skidmore, had warned Bernanke against using the term, saying ‘It’s just not the sort of thing a central banker says.’ But Bernanke insisted, and the moniker stuck.”
“To this day, Bernanke continues to believe in the practice of helicopter money as a tool the Fed could use in response to a slowdown in the economy. His successor at the Federal Reserve, Janet Yellen, agreed, stating that helicopter money ‘is something that one might legitimately consider.’ Other central bankers support the concept, particularly in Europe.”
“The biggest drawback of helicopter money is the inflation it tends to ignite. And since inflation is notoriously difficult to manage, once the inflationary fires have been stoked, what’s to prevent them from growing out of control—and fostering hyperinflation? That’s what happened in countries like Argentina and Venezuela, when their central banks printed money and gave it to their governments, who in turn gave it to the people. Inflation surged.”
“Helicopter money also leads to weakened currencies, because as more and more money is printed, its value decreases significantly. It could also deter currency traders from making long-term investments if the practice is prolonged. Clearly, helicopter money is not a practice a central bank should undertake lightly.”
The New York Post. “From the left: Don’t Trust Mainstream Media: ‘I mourn’ for the news business, writes TKNews’ Matt Taibbi. ‘It’s destroyed itself.’ After the internet arrived and flooded the market with new voices, some outlets found that, ‘instead of going after the whole audience, it made more financial sense to pick one demographic and dominate it. How? That’s easy. You feed the audience news you know they will like.’ Yet when you ‘decide in advance to forego half of your potential audience, to fulfill the aim of catering to the other half, you’re choosing in advance which facts to emphasize and which to downplay. You’re also choosing which stories to cover, and which ones to avoid, based on considerations other than truth or newsworthiness. This is not journalism.’”