Friday Update May 6, 2022
583 single family existing homes on the market today. Not a crazy large jump from last week and in line with the trend of a ramp up into summer.
We've got 203 sales that closed out in the first 6 days of May. Honestly to my surprise we have set another record on median price at a whopping half a mil ticket. $500,000 median, over $570,000 average sold price here in El Paso County. We're seeing houses on the median sell for roughly 3% over list price.
Interest rates are continuing their climb with the 10 year US treasury yielding over 3.10%. Correspondingly mortgage rates are now far off their record lows. I'm not a lender but conventional rates are somewhere around 5.5%. So in an effort to understand how the Fed is fighting inflation let's look and see how the recent interest rate hikes have impacted affordability for housing.
Let's say for the sake of an apples to apples comparisson that the median price for the last 7 months was $500,000 the whole time. It wasn't, but let's say it was for argument. In October it wasn't hard to get a mortgage at like 3.25%. Assuming taxes of $2000 a year, a downpayment of 5% and home owners insurance at $1800 your payment would be something like $2,385/month. Then let's say same house in February of this year, rates closer to 4.25% you're looking at $2,655. And now the same house today at 5.5% your payment would be $3,015. Fun right?
The rule of thumb is for every 1% increase in rates the consumer loses 10% purchasing power. So for the increases we saw in the last 7 months we would need to see the price of housing give up like 25% to offset it. That has not happened and if it did happen I think it would be a tough spin for the Fed to paint that as a good thing. Roughly 65% of Americans own a home and taking a 25% haircut on their home's value would certainly put people into some bad positions. Keep in mind too that with that drop in values and this surge in rates there would be 0 impact on affordability.
So to me it's kind of like our financial overlords are completely detached from reality. And by trying to combat inflation in the housing market through higher rates all they're doing is making home ownership more and more out of reach for everyday people. And if they do succeed in pushing housing prices down significantly then maybe they can cause some pain to current home owners as well who lose their opportunity to move and sell, or refinance, or access equity once it's gone.
I don't personally see prices dropping in any meaningful way but if they did it would not be a good thing. Again I think of so many people that I've met over the years that have this overly simple view of housing prices. "I'll buy when prices fall", etc. No you won't, because you won't be able to handle the interest rate. So quit hoping for a downfall that you won't be able to participate in.
Who would benefit from such a scenario? Investors with a lot of cash. It's that simple and maybe that's the play here by the Fed. Maybe they want to help their rich buddies pick up some more single family rental units while taking away from American people. That kind of checks out in the context of the Fed being a criminal organization run by greedy psychopaths.
As I'm writing this now the consumer credit numbers just came out. This is the report that focuses on how much new consumer debt has been added to the existing 15 plus trillion dollar pile. February's numbers overshot estimate by a factor of about 300% and low and behold March numbers overshot the upward revised estimates by over 200%. What this is saying is what is so painfully obvious to normal people. Americans are borrowing more money to make ends meet as inflation bites and rising rates push them from all angles. And the cost of that borrowing goes up with every Fed rate increase.
Meanwhile the price of natural gas is up over 500% in the last 2 years. Oil is over $110/barrel. Lumber somehow is still lingering at $1,000/1,000 board feet and pretty much every other commodity except for the ones I own is up. Squeeze, squeeze and squeeze.
Also in the news this week as a supplement to last week's news of the economy contracting was a pretty astonishing article. The article talked about how the productivity of the American work force has dropped the most in Q1 of this year since 1947. Think for a minute how astonishingly bad that is. In 1947 American productivity dropped as the entire nation demobilized from World War 2, you're talking an insane machine of moving people, supplies and money all around the globe to fight the war and then spending the better part of 1946 sorting out the foundation for the New World of that era. And in 1947, as the dust settled and people were able to relax they saw a similar drop in productivity to us today. That is unreal, pathetic and truly shameful.
Remember that the GDP of a country is the total number of transactions within it. When the population drops over 7% in productivity in one quarter it's almost impossible to see economic growth. If this pattern continues, which judging by the lack of willing and able labor, by the dropping hours worked per week, by the shortage of basic materials, and by the overall "not my fucking job" mentality it will, well then we can expect another shit quarter of economic news which will put us into a technical recession.
So now you've got the Fed playing with fire. They're jacking up rates in a contracting economy, an economy where the only thing saving the numbers from looking awful is inflation itself. Our fearless leader has authorized the creation of a "Ministry of Truth" aka the Disinformation Governance Board. This fine filth of humanity will be responsible for letting us all know what is true and isn't true taking away the inconvenience of having to think. From the pits of think tanks similar to it we continue to get the spin that we are in an economic recovery and that everything is going great. But I think we all know that's bullshit.
Going forward I'm sticking to my thesis that I've talked about over and over. The Fed will jack the rate up as high as they can get it before the next manufactured crisis comes crashing down our doors. Then it will be time for the old "Fed rates and 0 and money printer on full blast" game plan. I think for the next year or so we will get squeezed tigher and tigher until something awful happens and the Fed comes and saves the day with more easy money and low rates. How fun it must be to gamble with not only other people's money but also with their livelihoods.
How many times they can rinse and repeat this strategy is up to all of us to hopefully live long enough to see.