A weekend topic starting with the New York Times. “‘It’s making me nervous that you’ve got this incipient housing bubble, with anecdotal reports backed up by a lot of the data,’ James Bullard, the president of the Federal Reserve Bank of St. Louis, said during a call with reporters Friday. He doesn’t think things are at crisis levels yet, but he believes the Fed should avoid fueling the situation further. ‘We got in so much trouble with the housing bubble in the mid-2000s.’”
“Demand for housing was strong in 2018 and 2019, but it really took off early last year, after the Fed cut interest rates to near-zero and began buying government-backed debt to soothe markets at the start of the pandemic. Mortgage rates dropped, and mortgage applications soared. That was partly the point as the Fed fought to keep the economy afloat: Home-buying boosts all kinds of spending, on washing machines and drapes and kiddie pools, so it is a key lever for lifting the entire economy. Stoking it helps to revive floundering growth.”
“Ideally, officials would like to see the economy return to full employment before lifting rates, and most don’t expect that moment to arrive until 2023. They’re unlikely to speed up the plan just to cool off housing. Fed officials have for decades maintained that bubbles are difficult to spot in real time and that monetary policy is the wrong tool to pop them. For now, your local housing market boom is probably going to be left to its own devices — meaning that while first time home buyers may end up paying more, they will also have an easier time financing it.”
“Reina and David Pomeroy, 36 and 35, were living in a rental in Santa Clara, Calif., with their children, ages 2 and 7, when the pandemic hit. Buying at California prices seemed like a pipe dream and they wanted to live near family, so they decided to relocate to the Boulder, Colo., area, near Mr. Pomeroy’s brother. The pair saw between 20 and 30 houses and made — and lost — six offers before finally sealing the deal, over their original budget and $200,000 above the $995,000 asking price on their new 5-bedroom.”
“‘We felt a little bit more comfortable paying more for the house to lock in low interest rates,’ said Mr. Pomeroy, explaining that they could have compromised on amenities they wanted but didn’t. ‘Interest rates are so low and money is cheap,’ he said. ‘Why not do it?’”
The Union Tribune in California. “Q. Are San Diego home prices approaching their peak? James Hamilton, UC San Diego. NO: The Fed is on a course to keep interest rates below the inflation rate for some time. That’s a cautionary note for holding your money in bonds or stocks, and makes real estate one of the most attractive investments available now. The increase in house prices can’t go on forever, but it’s too soon to call the peak. Don’t sell your home to the first offer because a higher one may be coming.”
“Norm Miller, University of San Diego. NO: We have a runway of increasing prices, driven by low rates, low inventories and modest new construction. Sellers fear not being able to find a new home if they sell. Keep in mind that it is not so much income driving the second and third home prices, but rather equity gained on prior homes and a buoyant stock market that is rolled into the next purchase. The hard part for new home buyers is getting on that carousel.”
“Kelly Cunningham, San Diego Institute for Economic Research. YES: Prices will reach a peak, but San Diego is not there yet. The ratio of median home price in San Diego is currently 7.0 times the median household income. This ratio previously peaked at 8.0 in the fourth quarter of 2005 before collapsing to 3.6 by the first quarter of 2009. Los Angeles’ housing price ratio is currently 10.1 times their median income, while Orange County is already shrinking from recent 8.3 peak to 7.9.”
The Globe and Mail in Canada. “A report from Oxford economics released in May showed Toronto to be one of the least affordable cities for housing in North America, edging out New York, Los Angeles, Seattle and other major cities. The average selling price across the Toronto area in June, 2021, was $1,089,536. While that number has now dropped for three consecutive months, it still represents a 17-per-cent jump from last year’s average price.”
“Agent Nadia Prokopiw said there are still many good housing deals in Etobicoke’s south end. But she herself was surprised the townhouse she listed for $914,900 sold for less than asking price. ‘I think everybody was surprised,’ Ms. Prokopiw said, before pointing to the recent, slight lull in Toronto’s real estate market. ‘Sometimes, it’s the timing of the market. People become tired and worn out.’”
“Ms. Prokopiw said the home was sold in move-in condition – and its finished basement, large kitchen, living and dining rooms made it a steal for the buyers. The bedrooms are small, but she viewed that as a small price to pay for such a deal. ‘If you’re going to get a home under $1-million, you have to accept that there is going to be some flaw,’ she said. ‘You have to put up with some compromise.’”
From New Orleans Public Radio. “When Dora Whitfield bought her house in 2014, she and her husband were so giddy they invited a caravan of family members over to see the place. It was a hard-earned present she was able to afford because of her job as a uffet waitress at Harrah’s Casino. The job also gave her a steady income with enough money left over to play the penny slots.”
“The tips were enough to make paying bills like a matching game. If a $100 light bill arrived on Tuesday, she could cover it with Wednesday’s tips. Her Mortgage? Combine a couple of mimosa weekends and it was paid in full. She took pride in never being behind on a bill. The game changed when she went on unemployment. Whitfield was surprised that Louisiana offered $240 a week — a little more than a third of what she earned in tips.”
“Now, the additional federal unemployment benefits that helped her will soon disappear. Louisiana is ending the $300 weekly payments on July 31. As she weighs these decisions, she cannot help but think about the risk of losing the house she loves so much. It is a fear that keeps her up at night. It is even more likely she will lose her car. She is willing to accept the loss of her Buick if it means holding onto her home. ‘I’m not giving this house up,’ Whitfield said. ‘I will take that 2017 Buick Verano and take it away from here. We had it for three years. Time for it to go if it had to go.’”
From Bloomberg. “The safe-asset shortage is over. Should we worry? A safe asset is any asset that you can sell at any time and be sure to get your money back. That often means short-term government bonds or bank deposits. Hence, when demand for government-issued securities outstripped supply, economists called it a ‘safe-asset shortage’. The phrase ‘safe asset’ may sound boring—more speculative assets like Bitcoin and derivatives on Tesla stock seem sexier—but safe assets are the most important and in some ways the riskiest assets available.”
“And they touch everything. They appear in nearly every asset-pricing model, they’re used as collateral and are necessary for regulation and for managing currencies. They influence how much your bank pays in interest, your mortgage rate, how much debt the country can issue and where the US Federal Reserve sets interest rates.”
“For decades, economists argued there was a shortage of safe assets in America, which may have caused the financial crisis and depressed growth. Now it appears the shortage is over.”
“Two decades with shortages means a generation of policymakers have come to take low rates for granted. An insatiable appetite for bonds meant the government could issue as much debt as it wanted for very low rates. This explains why the US is now considering a $3.5 trillion spending package when we aren’t even in a recession.”
“But if we’re now facing a safe-asset glut, rates will rise, and so will the cost of all the new debt, and the obligations we already have will suddenly turn much more expensive.”
The Journal Record. “Farce (noun): a comic dramatic work using buffoonery and horseplay and typically including crude characterization and ludicrously improbable situations. ‘Mortgage-backed security purchases really work a lot like Treasury purchases. They are not especially important in what is happening with housing prices.’ – Federal Reserve Chair Jerome Powell, July 2021.”
“I couldn’t agree more with the first sentence, while the assertion in his second sentence is laugh-out-loud funny. The most important benchmark in the bond market is the interest rate on the 10-Year U.S. Treasury Note. Bonds of all sorts, including mortgage-backed securities, are priced by traders based on a spread relative to the U.S. Treasury yields. Therefore, if Treasury yields decline in the market, mortgage rates are primed to decrease as well.”
“According to Bloomberg, the Fed has purchased a net $2.6 trillion of new U.S. Treasurys since mid-March 2020. Treasury.gov shows that to be over half of the total new debt issued by the Treasury in that time frame. Do you think that having one buyer in the market soaking up half the supply just might raise prices (and lower yields)?”
“The Federal Reserve has also purchased a net $1.055 trillion of mortgage-backed securities from mid-March 2020 through July 21, 2021 according to Bloomberg data. The latest data available from SIFMA.org shows that the total value of all agency mortgage-backed securities outstanding increased by just $900 billion from the first quarter of 2020 through the first quarter of this year. The Fed is essentially buying up the entirety of newly available supply in the mortgage market. If the Fed wasn’t spraying newly printed dollars into the mortgage market, do you think interest rates might be higher?”
“The lower the interest rate paid by the average American mortgage borrower, the higher the price they are willing to pay. Indeed, prices are up 16.61% year-over-year through May per the S&P CoreLogic Case-Shiller U.S. National Home Price Index, an increase that Chair Powell describes as ‘too much.’”
“Certainly, we are living through a time of great dislocation and upheaval, which undoubtedly contributes to housing price increases, along with unprecedented fiscal stimulus from the federal government. But to suggest that the Fed’s asset purchases are unimportant to housing prices is truly a farcical assertion.”