A weekend topic starting with the Financial Post. “The key question is not why inflation has broken out: the monetary expansion since winter 2020 made that inevitable. The key question is why inflation didn’t take off after the monetary expansion in the aftermath of the 2008 banking crisis. That it didn’t may have convinced economists monetary expansion no longer causes inflation. As we’re now seeing, that was the wrong lesson to learn.”
“When the shutdown occurred and federal spending soared the Fed flooded the market and by May 2020 the monetary base had reached US$5.1 trillion. There was a brief pause in the second half of 2020, but then, starting around November 2020, the base began growing again, hitting US$6.4 trillion in November 2021. That’s a 7.5-fold increase in the U.S. monetary base from 2008 to 2021.”
“In March 2020, to encourage more lending, the Federal Reserve enacted a rule change that eliminated reserve requirements. Most people think banks are required to hold a fraction of deposits on reserve in case customers want to withdraw money. That used to be true, but no longer. In Canada we haven’t had reserve requirements since the 1990s. And since March 2020 they haven’t been required in the United States, either. This expansion of liquidity in the U.S. banking system, coupled with the elimination of reserve requirements, is an unprecedented monetary stimulus that makes the post-2008 measures look like chump change.”
From Market Watch. “‘The meaningful impact of rate hikes will likely be felt toward the end of this year,’ said David Petrosinelli, a senior trader at InspereX in New York, which has underwritten more than $670 billion in securities. Meanwhile, the Fed is ‘losing the room,’ or public confidence, ‘pretty quickly because there’s really no light at the end of the tunnel on inflation. We are in the first or second innings of market volatility because it’s not just what the Fed is doing is, it’s what the Fed is not doing,’ he said, referring to the policy makers’ decision to not begin shrinking its portfolio until next month. ‘There’s growing skepticism about Powell and the Fed’s current game plan. The window or corridor for a soft landing is narrowing by the day, and there’s a growing scenario in which inflation doesn’t meaningfully abate during the next few months of Fed hikes.’”
From Geek Wire. “High-tech real estate brokerage Redfin confirmed Friday that it has ‘made the difficult decision to freeze hiring and rescind a small number of job offers’ in an effort to adapt quickly to ‘economic uncertainty and a rapidly cooling housing market caused by the fastest jump in interest rates in history.’ One recent U.C. Irvine informatics graduate wrote that a job offer she signed in December with Redfin was rescinded this week, less than a month before she was to start work as a product designer in San Francisco.”
“Facebook parent company Meta, which employs more than 7,000 people in the Seattle region, also indicated Friday that it’s tentatively tapping the brakes on its growth companywide. Uber CEO Dara Khosrowshahi’s widely cited memo last week was a flashpoint for the tech industry, adding to existing concerns by warning of a ‘seismic shift’ in the markets, signaling tougher times and tighter belts ahead.”
From Better Dwelling in Canada. “Over the past 40 years, economic downturns have been followed by a drop in home prices. The researchers found this decline usually lasts 4 quarters, following an economic shock. During the pandemic, home prices launched higher and completely ignored the downturn. Not even a temporary dip, wrote the researchers — you can almost hear the shocked tone.”
“Another anomaly occurred during this recent recession as well — credit contraction. Or rather, a lack of credit contraction. Typically people reduce the amount of leverage they carry during a recession. Rather than pulling back though, central banks injected mass liquidity. They essentially flooded the market with cheap credit, resulting in rising liabilities. This may have been the only recession in history where households came out even more levered up.”
“To say this was an unusual path for home prices during a recession would be downplaying how unusual it was. In at least 40 years, home prices have never reacted this way.”
The Globe and Mail. “When people think about how high the Bank of Canada needs to lift rates today, the natural comparison is with the late 1970s/early 80s. The typical counterargument to that comparison is that consumers are far more sensitive to rate hikes today than in the 70s because of higher indebtedness, so rates can’t go up as much. And these folks are absolutely right.”
“Canada can’t tolerate the same degree of rate tightening today. The problem is that we don’t know how much it can tolerate compared with the seventies – and neither does the Bank of Canada. ‘The bank hasn’t done these calculations because our model would not capture structural differences [in the economy] between the two periods,’ BoC spokesperson Rebecca Spence wrote in an e-mail.”
“The worst part is the BoC no longer has the luxury of hiking rates slowly, unless core inflation magically subsides, and pronto. That’s unfortunate, because when it comes to housing values and consumer adaptation to higher borrowing costs, fast rate hikes are the absolute worst kind of rate hikes.”
The Ormond Beach Observer. “Florida’s housing market may be showing some beginning signs of cooling in April. ‘ Florida Realtors Chief Economist Dr. Brad O’Connor pointed to the rapid rise in mortgage interest rates this year, particularly in March and April, as a major factor slowing home sales last month, along with still-rising home prices and restricted supply.”
“‘Remember, 2021 was characterized by near-record low mortgage rates that allowed for a huge surge in homebuying demand,’ he said. ‘So it’s simply unreasonable for us to expect that the market will perform just as well this year, now that we are in a higher interest rate environment.’”
The Deseret News. “Home price increases continue to be mind-boggling while high mortgage rates are only starting to cool the market, according to the latest spring data on Utah and the nation’s housing market. Utah is not immune from what appears to be the beginning of a cooldown. Sales slowed down again in April — which was the 11th consecutive month year over year, Dave Anderton, spokesman for the Salt Lake Board of Realtors, told the Deseret News on Friday.”
“‘Sales were down 16%, and I think that’s due to the 5% interest rates, to the higher prices, so we’re hearing people can’t qualify now,’ Anderton said.”
The San Francisco Business Times in California. “San Francisco’s housing market is beginning to show signs of cooling, with accounts of less-crowded open houses and fewer offers on new listings becoming the norm. With two more federal interest rate increases likely coming down the pike in June and July, and rates already way up over pandemic levels, buyers of less expensive homes are feeling the heat, and when hot markets shift cooler, effects are typically first reflected in reductions in multiple offers, overbidding and the number of homes going into contract, said Compass Chief Data Analyst Patrick Carlisle. He added that gradual increases in active listings, time-on-market and slow declines in year-over-year appreciation rates tend to follow.”
“Bay Area real estate tracker SocketSite noted earlier this week that the net number of homes on the market in San Francisco ticked up another 3% over the past week from what was already an 11-year seasonal high with the pace of sales currently down 15% on a year-over-year basis. ‘Even the hottest markets eventually cool,’ Carlisle stated. ‘This does not necessarily imply a large ‘bubble and crash.’”
The Ahwatukee Foothills News in Arizona. “After the past couple of crazy years in the Phoenix Real Estate market, we are finally seeing some significant growth in the supply of homes on the market. The supply of homes is up 45% in the past six weeks! While this is good news, the increase in mortgage rates has slowed down demand for these homes – they are staying on the market longer. Buyers are taking a step back and waiting to see what interest rates do.”
“So, how is this impacting sellers? With buyers stepping back, the crazy multiple offer situation we have been seeing, and offers coming in way over asking price, Sellers are having to take steps to sell their property and in a lot of cases this means price reductions. We have been seeing price reductions in all sectors of the market, from $400,000 homes to luxury homes over $1 million.”
“This is all indicative of a shift in the market for sellers and buyers. Homes are staying on the market longer for sellers, giving buyers more choices and more negotiating power. We are still in a very strong sellers market, but we are seeing a shift away from the insanity of the past few years.”