Tuesday, September 3, 2019

Housing appears to be one bubble the Fed isn't re-inflating through lower interest rates

While the first decade of this millennium saw the economy pumped up by the central bank through the asset class of housing, post 2008 became a watershed moment as the Fed went all in on the Everything Bubble.  And through their use of artificial stimulus in stocks, real estate, and massive loans to emerging markets, they were able to coax Wall Street into the longest bull in U.S. history.

Unfortunately for the Fed however, their programs of NIRP and QE have long reached the point of diminishing returns and this is being seen right now in the Housing market as their latest drop in interest rates has failed to re-inflate a bubble that has been rapidly bursting for the past 13 months.

All regions fell in July:

  • Northeast fell 1.6%; June rose 2.7%
  • Midwest fell 2.5%; June rose 3.3%
  • South fell 2.4%; June rose 1.3%
  • West fell 3.4%; June rose 5.4%
Pending Home Sales retreated back into contraction YoY (by 0.3%)...

Fitch Ratings suggests in a new report that declining interest rates won't be enough to spark a rebound in housing market activity for 2H19, with affordability concerns and a lack of supply remaining as a significant constraint. 
Almost 40 weeks of declining mortgage rates haven't led to a jump in housing market activity in the US, but rather a decline in home price growth across the country, as per data published via S&P CoreLogic Case-Shiller's 20-City Composite price index.

  • An estimated 243K borrowers defaulted on first lien mortgages in Q2 2019
  • While the quarter ending on a Sunday certainly played a factor in the rise in defaults, a noticeable overall slowdown in the decline in default activity has been observed.
  • The national default rate rose by 3% compared to Q2 2018, the first such annual rise since the financial crisis (adjusting for the 2017 hurricane season)
In the end, no amount of interest rate alchemy will do much to keep the Housing Bubble afloat because what the Fed fails to recognize is that the American consumer is completely tapped out with a non-mortgage debt accumulation of over $4.1 trillion.


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