Posted on 08/13/2024 10:51:08 AM PDT by SeekAndFind
The Fed has grossly distorted the housing market and no fix is in sight. A couple of images will explain...
Chart data from Case-Shiller, mortgage calculation based on Fannie Mae 30-year mortgage rates, chart by Mish
Home Price Calculation Notes
Case-Shiller measures repeat sales of the same home over time.
Case-Shiller is a much better, but less timely measure than median or average home price. However, the measure lags. Recent data is through May representing sales in February, March, and April.
The price above reflects the increasing value of the Case-Shiller index over time.
The above chart represents the mortgage payment of the same house as the lead chart reflecting the changing price and interest rate over time.
The $150,000 home purchased in January 1988 had a mortgage payment of $1,076 reflecting a mortgage rate of 10.38 percent.
In 2006, the home was worth about $403,634 up and the mortgage payment was $2,086 reflecting a mortgage rate of 6.52 percent.
If you bought at the end of 2020 when the Fed clobbered interest rates to a record low of 2.68 percent, that same home that cost $150,000 in 1988 would have cost $502,649. However, due to Fed “affordability” magic, the mortgage payment was only $1,605. Thank you Fed!
However, if you want to buy now (May 2024) that $150,000 1988 home will set you back a mere $707,499. Your mortgage payment would be $3,662 at a mortgage rate of 7.06 percent. Oops and Ouch!
Mortgage rates are slightly higher in practice.
Also, prices do not include property taxes or insurance.
This is a mess entirely of the Fed’s making. And it’s what happens when the Fed, and economists in general do not count home prices as inflation.
Home prices are not directly in the CPI or PCE. The latter is the Fed’s preferred measure of inflation.
Economists consider home prices a capital expense not a consumer expense. The problem is simple: Inflation is not just a consumer price concern!
The Fed ignored obvious inflation in the Great Recession and did so again in the Covid recession.
Existing-home sales declined 5.4 percent in June. It was the 23rd decline in 29 months. But the median price hit a new record.
For Discussion, please see Existing Home Sales Drop 5.4 Percent But Median Price Hits New Record
Existing-home sales are about where they were in December 1995 and May 1979!
Only price-insensitive buyers, the newly rich, or those who just sold their previous house, can afford to buy.
All-cash sales accounted for 28% of purchase transactions in June.
Housing: 212 to 323, +52.4 Percent
Rent 187 to 231, +23.5 Percent
CPI: 153 to 185, +20.9 Percent
Existing homeowners who refinanced near or perhaps even under 3.0 percent have extra money in their pocket every month to spend. And they do.
Those who spend every penny then have an unexpected expense or a big rent increase are in trouble.
The group of people who were doing OK but now aren’t is expanding. Also the unemployment rate is rising and small business employment is in a serious nose dive.
Data from ADP, chart by Mish
For discussion, please see Small Business Employment Growth Is Now Negative (and What It Means)
ADP data shows year-over-year payroll growth is negative 88,000 for small corporations sized 20-49. Trends are negative in all but very large corporations.
On July 26, I commented Expect the BLS to Revise Job Growth Down by 730,000 in 2023, More This Year
At the heart of these revisions is a horribly flawed birth-death model used by the BLS. My calculation closely matches an estimate by Bloomberg’s chief Economist.
In addition to the birth-death model, or perhaps explaining the birth-death model errors, small business employment is declining fast.
On August 2, I commented Unemployment Rate Jumps, Jobs Rise Only 114,000 with More Negative Revisions
The headline jobs number was much weaker than the consensus estimate of 180,000 and the unemployment rate rose 0.2 percentage points.
On July 8 I commented Weak Data Says a Recession Has Already Started, Let’s Now Discuss When
I did an update on August 2 using a tighter trigger.
Also on August 2, I commented The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered
Recession with rising unemployment rates and 15,000 Layoffs at Intel is not the best environment to be buying a house even if mortgage rates have declined.
I had a 6.375% mortgage rate for my final refinance, back in around 2007. Today a 30 year rate > 6% is considered to be criminal by these spoiled wokesters.
Borrowing money at no charge is not good.
Most property reevaluations only occur every 7 years or so.
Many homes are still valued at a valuation before this madness occured.
Those new property owners are in for a rude surprise when their properties get repraised based on these new market values.
I bought a 2000sf Victorian in downtown Atlanta for $199,000 in July 1998. It sold for $805,000 April 2024.
The wife and I sold it for $322,000 in 2007.
The two white lawyers who bought it from us in 2007 put up a big ‘Black Lives Matter’ sign in the front yard after the George Floyd troubles, translation “Please Don’t Burn Our House”. The black hoods are never that far away in downtown ATL.
Not at all… it was a rent to own house with fresh carpet and paint that I made a deal with the owner and just bought with the owner carrying it. In 30 years everything has been redone once and a couple bathrooms twice. I put a roof on it 20 years ago now which was when I refinanced to do the roof, but we did a 20 year loan then. It was the neighborhood that was a fixer-upper and now we are 4 miles away from the Cardinals stadium and new houses being built in the 750-mil range.
In ‘09 during that collapse…. There were numerous properties within a square mile of me that went for $10K, they were already gutted by thieves…
1400 SqFt condo in SoCal bought in 1988 for 150k. Yep, Zillow says it is now worth $700k. It is STILL the same POS it was back then, except the crime, traffic and taxes have all gone up.
Inflation targeting wasn’t official until 2013, I believe, and then it was targeted to 2%. A little less theft at 2% as opposed to 3%, but still ultimately destructive. Now we got the Wall Street slime wanting a 3% target, unreal
They sure screwed that one up for the average person, didn’t they? I’m beyond seeing how any average person can afford their own home anymore. Bought mine MANY years ago or I’d be living in a cardboard box by now.
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