A weekend topic starting with Fox 43 in Maryland. “The Federal Reserve raised interest rates on Wednesday for the first time since 2018. ‘Just get into the house without paying any extra fees or points if you have to, just get in with the least amount of cash out of pocket as possible as far as your closing costs,’ said Rebecca Foote, vice president of mortgage lending for Foote Capital Mortgage Company. ‘Then we’ll refinance you later down the road for a lower interest rate.’”
From 13 News Now in Virginia. “‘The reality is that interest rate increases and financial conditions hurt the people that can least afford them,’ explained Andrew Root, an assistant professor at Regent University. According to Root, one specific example of the impacts to the housing market goes like this: if someone were to invest $100,000 toward a home equity line of credit, because of increased interest rates, in one to two years, that person could pay $1,000 to $2,000 more to hold the same line of credit balance (on top of the interest they were already paying in the first place).”
“‘It’ll slow down all aspects of the housing market. Current borrowers will feel an increase immediately, new borrowers will apply for loans and will qualify for slightly lower mortgage value than before yesterday,’ Root said.”
The Times Standard in California. “‘February) was the first month since October 2020 that our sales price was under the list price,’ Joshua Cook, board president of the Humboldt Association of Realtors, told The Times-Standard. ‘We are seeing a little bit of a slowdown in demand now,’ Cook said, ‘just because of the interest rates creeping up and the uncertainty in the market with what’s going on in the world.’”
From Yahoo Finance. “The more than quarter-point hike in rates in the last week is a blow to many homeowners who may have waited too long to refinance their loan. ‘The potent fuel that propelled real estate markets to new highs over the past couple of years is evaporating,’ said George Ratiu, Realtor.com manager of economic research. ‘Record-low mortgage rates helped many first-time buyers stretch their budgets in 2020 and 2021,’ Ratiu said. But ‘the days of sub-3% interest rates are firmly behind us, and we have yet to solve the market fundamentals of supply and demand.’”
The Washington Post. “‘Things are so overheated right now — we’re seeing 15, 20 offers on a single house — that the Fed has got to throw some water on the fire,’ said Paul Skeens, a mortgage lender in Waldorf, Md. ‘I expect by fall you’re going to see a very different market.’”
From Market Watch. “David Rosenberg is convinced that the Fed will beat inflation so hard that the U.S. economy will slide into recession as early as this summer. MarketWatch: ‘Demand destruction’ means bursting asset bubbles and that typically means lower valuations for housing, stocks and other cherished investments. You’re on record about residential real estate being at ‘peak housing.’ What convinces you that the U.S. housing sector is in a bubble?’”
“Rosenberg: ‘The housing market is in at least as big a bubble as the stock market. When you look at price action, it’s absolutely incredible. The year-over-year trend in nationwide home prices is 19%. We’ve already taken out prior bubble peaks in the late 1970s, mid-’80s and mid-2000s. Relative to overall inflation, housing is overvalued by 35%, and 27% relative to wages. Home prices relative to residential rents are 25% overvalued by the standards of the past. A single-family home now absorbs more than eight years of Americans’ personal income, which is almost 50% higher than the average going back to 1968.’”
“‘Housing, like equities a long-duration asset and benefitting from years of accommodative monetary policy, is again ensnared in a mess of a price bubble. The price-to-income multiple is just about where it was in 2006 and 2007. Nobody wanted to believe it then, and talking about housing being in a bubble today, it’s as if I told somebody that their kid was ugly.’”
“Rosenberg: ‘Historically, home prices go up one- to two percentage points above the inflation rate. Right now it’s going up 12 percentage points. Residential real estate is a great hedge against inflation. But the excess is practically unprecedented. The laws of mean reversion are telling you that we’re going to have anywhere from a 20% to 30% bear market in residential real estate, and that’s being charitable. And once again, nobody seems to believe it, let alone prepare for it.”’
“‘What ultimately pulls the rug out from under the housing market is the Fed, because housing is the most interest-rate-sensitive segment of the economy. Each Fed-induced pricking of the real-estate bubbles also played a big role in the eventual recession when you consider the importance of this sector and its multiplier effect on the broader economy.’”
The Globe and Mail. “David Rosenberg: Personal wealth in the U.S. has grown to absurd levels – and a reckoning is coming. Everyone talks about how strong U.S. personal balance sheets are, but that is because of the unprecedented inflation in asset values, which have now gone parabolic. Household net worth relative to disposable income surged from 797 per cent in the third quarter to an unheard-of 826-per-cent ratio in last year’s fourth quarter. A year ago, it stood at 760 per cent. When the pandemic started, try 665 per cent. Never before has the net worth-to-income ratio soared this much in a two-year span, and the data go back to 1948.”
“Who could ever have imagined that the most horrible epidemic in a century could have made so many people so rich? Does that make any sense to anyone?”
“Well, of course it does when the U.S. Federal Reserve, since the ‘Powell pivot’ in 2019, eased policy to an extent that it de facto cut rates the equivalent of 865 basis points, 70 per cent of which came via the increasingly bloated central bank balance sheet. What happens now, with the movie reel about to be run in reverse?”
“Putting that 826-per-cent ratio into perspective, it has now far eclipsed the 669-per-cent housing bubble peak in 2007 and the 615-per-cent dot-com mania peak in 2000. We are in dangerous territory because the mean-reversion that lies ahead can be expected to be rather pernicious. Think of the decisions people made on the way up with this ratio, and what happens when it comes down.”
“The power of U.S. central bank policy lies in its ability to generate inflation in assets, which it can do when consumer inflation is below target. But the times, they are a-changin’. We had years (if not decades) of ultralow consumer inflation that co-existed with rampant asset inflation. The tables are soon to be turned. And what happens in this coming period of history is not a ‘wage-price’ spiral but rather asset-price deflation, as the power of mean reversion takes hold, impairing consumer spending, wealth effects and confidence in the process. Even with lingering global supply restraints, this will sow the seeds of demand destruction, leading to a future of deflation.”
From News.com.au. “Melbourne house prices are the fifth-least affordable in the world for those on a median wage, a new report has found. Victoria’s capital had median house price that was a staggering 12.1 times higher than the median household income. Sydney placed second-highest with a median house price 15.1 times higher than median income. Hong Kong was the most expensive city on the list, with an eye-watering median price 23.2 times higher than the average household income. Canada’s Vancouver and San Jose in California, United States rounded out the top five least-affordable cities.”
“Propertyology founder Simon Pressley said a more accurate indicator of affordability was a buyers’ ability to afford the mortgage, not the total property cost. ‘It’s not can you afford the property, it’s can you afford the repayments,’ Mr Pressley said. He added that for many people, the bigger issue was that ‘they can’t afford the deposit or the stamp duty.’ But Mr Pressley predicted internal migration out of Melbourne and economic impacts from the Covid-19 pandemic ‘aren’t going to have a positive impact on Melbourne property prices.’”
“‘Melbourne, for the last 10 years, has been the second most expensive capital city in Australia,’ he said. ‘But it probably won’t hold that title for much longer.’”