From Bloomberg: ‘Home Sellers Are Slashing Prices in Pandemic Boomtowns’:
‘Redfin found that 70% of homes for sale in Boise, Idaho, had their price cut in July, the highest share of 97 metros.’
The US middle class stores its wealth in its houses. But now termites have gotten into the woodwork. In July, new house sales hit a six-year low. Existing house sales are down 20% from last year. And the median sales price has already dropped 5% since last year.
The housing market is slower to register changes than the stock market. It takes time to match buyers with sellers and for trends to express themselves. The supply of houses for sale has already risen to almost 11 months’ worth of inventory. That is the highest level since 2009. This suggests that house prices will fall a lot more before they find their bottom. And the US’s middle class will be poorer.
But wait. Really? So, what if prices go down? A house is still a house…with the same sagging gutters…the same cracking paint…and the same leaky faucets. What has changed?
Today, let us ramble around in monetary wonderment; maybe we’ll see something useful.
Supply and command
The Fed caused the mortgage finance crisis — 2007–09 — by leaving interest rates too low for too long. In response, central banks lowered interest rates still further…and left them there for even longer.
Naturally, asset prices soared again — including house prices. The median house sold for US$220,000 in 2009. Now, it is about US$440,000 — twice as much.
An asset is a claim on money. And money is a claim on the output of others. If you own a stock of the Ford Motor Company, for example, the stock itself is of no use to you. It’s only because you can convert it to money that it has any value. And the money only has value because it can be exchanged for goods and services.
When the Fed poured US$4 trillion of new money into the asset markets (by buying bonds) after 2009, it multiplied prices for Dow stocks by five times…giving stockholders five times as much buying power (demand).
But the Ford assembly lines didn’t produce five times as many cars and trucks. GDP only rose by 60%, not 400% (five times). The stockholder could buy more cars, houses, or Chinese-made gadgets; he had five times as much money. The poor assembly-line worker did not.
This left an imbalance — and an inherent unfairness — that had to be corrected. Sometime…somehow…the books must balance out. For every credit there must be a debit…every buyer must find a seller…and for every naif with $5 in his pocket, there must be some shyster ready to take it from him.
And then came the COVID shutdowns, supply chain disruptions, mass resignations, and the Ukrainian-Russo war to make the supply situation worse.
More and less valuable
So, near the end of 2021, consumer prices were on the rise. ‘Inflation’ was in the news…and the Fed vowed to do something about it. But the markets were already doing something, matching up supply and demand, by raising consumer prices and lowering asset prices. In the first half of 2022, investors suffered some of their worst losses ever. And consumer price inflation hit levels not seen in the last four decades.
That is where we are now. Like a half-wit defusing a bomb…the Fed is hoping to bring things back somewhere close to ‘normal’. Without blowing up the whole economy.
The Fed is raising rates. This has the effect of driving up mortgage rates…and lending rates generally, with the 10-year Treasury yield back at more than 3%. This is why the dollar hit parity with the euro yesterday; between a 3% yield in dollars or zero in euros, the choice was easy. Investors moved their money to dollars…and the dollar rose. And it’s why house prices are now in decline; as mortgage rates rise, prices must fall.
So, where are we? The dollar is becoming more valuable…and less valuable at the same time. Stocks are going up and down, direction, uncertain. Consumer prices are going up at an 8.5% rate per year…with several countertrends. Interest rates are going up. And the economy is in recession.
But the Fed has barely begun a serious ‘tightening cycle’. At 2.5%, its key lending rate is way below the CPI (consumer price index). And the Fed’s balance sheet is still expanding, albeit very slowly.
Yes, the Fed is tightening…and not quite tightening too.
What to make of it? Stay tuned…
Regards,
 |
Bill Bonner,
For The Daily Reckoning Australia
