The Fed Is Running Out Of Bullets

“The latest University of Michigan consumer confidence report noted that its index tracking those who think it’s a good time to buy a home has fallen by a hefty eight points in the past two months even as mortgage rates have dropped.” – Danielle DiMartino Booth, “The Fed Can’t Help Housing Or Autos At This Point

I’m not the only analyst who has concluded that lower rates likely will not re-stimulate housing market activity. As I’ve argued in my Short Seller’s Journal, the “pool” of potential homebuyers who can qualify for a mortgage has greatly diminished. In fact, mortgage delinquencies are rising because many who stretched to buy a home in the past several years are struggling with the all-in cost of home ownership. Stagnant wages and the rising cost of necessities are largely the culprits.

“Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers.” – NAHB Chief Economist Robert Dietz. That quote accompanied the NAHB’s release of its Housing Market Index, which used to be called the Homebuilder Sentiment Index because it’s a “how do you feel?” survey.

The Housing Market index fell to an index level of 64 in June from 66 in May. Wall St’s finest were looking for a consensus 67. All three sub-indices declined: current sales conditions, buyer traffic and expectations for the next six months. Buyer traffic has been below 50 for two months in a row. This is despite more than a 1% decline in the average rate on a 30-year fixed rate mortgage during the last 7 months.

At the end of the day, it doesn’t really matter how homebuilders “feel” about the sales environment now or in six months, declining foot traffic translates into decline sales volume. The quote above reinforces my theory that the “pool” of potential homebuyers, especially first-time buyers, who can qualify for a mortgage and afford the monthly cost of home ownership is drying up. Lower interest expense somewhat offsets high prices relative to income. However, the general cost of home ownership other than debt service is rising beyond the spending budgets of many potential home owners.

Quant-oriented perma-bulls, like Josh Steiner at Hedge Eye, understand the extent to which easy credit has fueled the housing market since 2010. You can’t necessarily call it a “housing bull market” because the until sales level is not even remotely close to the previous peak in 2005. New single family home sales peaked at a seasonally adjusted annualized rate of 1.39 million in July 2005. The current SAAR is 673,000.

Furthermore, the Government “pulled forward” future demand when it began to lower the bar to qualify for a FNM/FRE mortgage. The demand pool Steiner probably imagines is out there for starter homes has mostly already bought OR can’t qualify. This is why that huge drop in the 10yr has not stimulated housing sales.

The rate on a 30yr fixed mortgage has dropped over 100 basis points since November, yet housing sales have been declining. It would be interesting to know to what extent home sales would have have declined over the last few months if rates had not fallen over 1% in 7 months.  Just look at the big gap down in mortgage purchase applications reported this week despite a 10yr yield that has fallen relentlessly.

It doesn’t really matter what the Fed does today with the Fed Funds rate policy decision. To be sure, if the FOMC postures toward take rates to zero if necessary it might juice the stock market temporarily.  But it won’t take long for brains to take over from the algos and interpret the message that would be transmitted by the FOMC  as extraordinarily bearish.

Any attempt at holding off the economic catastrophe creeping into view would require massive money printing.  But given that some FOMC members consider a $3 trillion balance sheet to be “normalized,” I’m not sure at the margin to what degree more money printing  will save the economy.  Perhaps a Debt Jubilee for all households…

The above commentary includes excerpts from my Short Seller’s Journal, a weekly newsletter  ideas for those looking to short stocks – including options strategies – based on fundamental analysis. You can learn more or subscribe using this link:  Short Seller’s Journal information.

7 thoughts on “The Fed Is Running Out Of Bullets

  1. It does look like this is the beginning of the end, including the end of the now five-years-long suppression of precious metals. The latter has been especially infuriating for me (and for many or most others like me, holding positions similar to mine, mainly in physical metal), because the incessant and interrelated market-distortions have made it impossible to “time” the breakout of precious metals, which by any rational measure ought to have happened no later than 2015. Consequently those of us (among the residue of the middle class) whose wealth AND future income depend mainly on our capital – those of us who have put our capital mainly into physical precious metals, have for the past five years been forced to live with Spartan discipline to preserve as much physical metal as possible WHILE constantly being pressured to sell some of it just for living expenses: And so for five years the pattern for the likes of us has been, to constantly (and objectively reasonably) stay heavily invested in physical metal IN the reasonable expectation that its price will correct upward – and then incessantly some twerp at a keyboard “creates” thousands of kilos of paper gold and silver out of thin air – over and over…
    …but I’m more fortunate than most in my situation, because I’ve been able to retain MOST of my physical metal, despite the depredations of the past five years. So now that the cartel is on the threshold of being broken, now I still possess more precious metal than were in any Viking hoards. But lots of – and perhaps MOST? – other middle class people in my position, have had their physical metals wiped out by necessity, from the constant price suppression. THEREFORE (and AS a man who believes in the Biblical Prophets and in God’s ultimate justice!), I WISH THIS UPON all of those “Muenzschneiderer” (German for “Coin-clippers”, shavers of metal from coins), beginning with Steve Mnuchin (whose ancestral language was Yiddish, a barbarous form of Pidgin-German, therefore he ought to know what a Muenzschneider is), and upon all of their enablers:

  2. Two more thoughts:

    1. The prophet Ezekiel (Ezekiel 7:19, King James version for general agreement although I’m a Catholic): “They shall cast their silver in the streets, and their gold shall be removed: their silver and their gold shall not be able to deliver them in the day of the wrath of the Lord: they shall not satisfy their souls, neither fill their bowels: because it is the stumblingblock of their iniquity.”…

    2. A death-song for The Federal Reserve:

  3. There is an important video with macro trader Paul Tudor on Bloomberg (from 0.40) https://www.bloomberg.com/news/videos/2019-06-12/gold-is-paul-tudor-jones-s-favorite-trade-for-next-12-24-months-video . He says something that is worth chewing on, turning it from side to side and and analyse thoroughly: “Remember, we ‘ve had 75 years of expanding globalisation and trade… And we ‘ve built the machine around the belief that that was the way the world ‘s gonna be. Now all of a sudden it has stopped. And we are reversing that. And so, if you do something like that, when you break something like that, a lot of times the consequences won’t be seen at first.”

    He is talking about the end of the world as we know it. He announces the end of the present economic model that rules this world. A world that is staggering under the biggest debt load in history. Try to imagine the consequences if its legs are kicked away.

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