Tuesday offered an amusing juxtaposition of housing headlines across various media outlets, all vying for the most compelling way to characterize a red-hot market that’s poised to cool.
The starting point for every story was the nationwide S&P CoreLogic Case-Shiller index, which showed property values rising 11.2% YoY, the largest increase since early 2006 (red line in the figure below).
The 20-city gauge, meanwhile, logged an 11.1% gain in January, which was actually a touch below consensus.
At heart, it’s the same story over and over again. Pandemic dynamics triggered a flight to the suburbs and record-low mortgage rates helped accelerate the process. The durability of work-from-home arrangements and the possibility that some companies will make those arrangements semi-permanent nudged more buyers into the market.
By the end of 2020, housing was arguably in a new bubble. The Case-Shiller data is stale, by definition, but it provided an opportunity for mainstream mainstays to vent about the Fed.
Take Peter Boockvar, for example. If you need a quote, Peter’s always around. On Monday, for example, he blamed the Fed not just for creating the conditions for the Archegos blow-up, but also for the broader market’s refusal to selloff. Fast forward to Tuesday and you could find Boockvar asking CNBC rhetorical questions. “Why is the Fed still buying MBS?,” he (didn’t) wonder. “[They’re] just afraid to change because they don’t want it to be seen as a form of taking their foot off the pedal.”
That’s correct. But, it really doesn’t matter. Because the market is doing the tightening by itself. Mortgage rates have risen six weeks in a row to a nine-month high (figure below).
Of course, that isn’t reflected in the January gains for home prices, which Craig Lazzara, global head of index investment strategy at S&P Dow Jones, noted were “broadly-based [as] all 20 cities rose, and all 20 cities gained more in the 12 months ended in January 2021 than they had gained in the 12 months ended in December 2020.”
This is all distressing for folks like Boockvar. Or at least that’s the way it comes across when they’re quoted for boilerplate articles aimed solely at generating the maximum amount of eyeballs (CNBC’s piece carried the ridiculous title “Critics slam the Fed as home prices rise at a historic rate”). To read these headlines, you’d think everyone was sitting around fuming about Jerome Powell and a two-month old read on property values Tuesday.
There was, however, an interesting story on Bloomberg which documented a sudden halt in refis. Thanks in part to the jump in mortgage rates, “the number of homeowners who could benefit from refinancing has dropped by close to 40% to 11 million in about one month,” the linked article said, citing Black Knight. It also noted that “less than 61% of mortgage applications last week were for refinancing, down from 75% in January.”
“The 30-year fixed mortgage rate… has now risen 50 basis points since the beginning of the year, in turn shutting off refinance incentives for many borrowers,” the MBA said last week, noting the link with the Treasury selloff.
“Mortgage rates have moved higher in tandem with Treasury yields, as the outlook for the US economy continues to improve amidst the faster vaccine rollout and states easing pandemic-related restrictions,” Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting remarked.
In their piece, Bloomberg painted a particularly dour picture for refis and mortgage brokers. If rates keep rising, standards will be loosened in order to artificially expand the borrower pool. That naturally leads to riskier loans. If that doesn’t work, companies will see their margins dwindle before ultimately firing everybody and turning the lights off absent an acquisition. “It’s already starting,” the piece warned.
As for first-time buyers and renters, Boockvar did pose a couple of worthwhile questions Tuesday, in the same remarks to CNBC. “As home price changes are not included in either CPI or PCE, the question is when and how this filters into imputed rent,” he said. “But inflation is real for those looking to buy a home.”
Rent is messy, it is lagging home prices, and perhaps it is logical to believe it should go higher, yet at the same time there is forebearance on mortgage and rent payments, which is some kind of collosal number, which to my recollection was around 60bn, but that may not be accurate. Anyone who knows, I would be interested in an updated number. How this shakes out, impact on consumption, lender earnings, credit quality ect is an unknown.
After twenty years in business, my local dry cleaner is shutting its doors on Friday. Everyone is wearing torn jeans to their home office, and the landlord refuses to budge on the rent (which is why 50% of the commercial space in my neighborborhood is empty — a problem that predates the pandemic). The point, as H. notes, is not complicated: the Fed doesn’t have to do anything to cool down the economy or tamp down the “irrational exuberance” we’ve been seeing in various asset classes; the market will do it for them. (Capitalism, go figure.)
Provided the fed let’s the market do it for them but that hasn’t been the case for some time.
It is basic supply and demand. Not being funded with liar loans this time around. American dream is is to pay the bank and not the landlord.
K-recovery.