Federal Reserve Late Again
News out this week from the Dallas region of the Fed. The report calls the Federal Reserve late again in continuing bad policies. But this time it focuses on a potential housing bubble building for which the Fed bears substantial responsibility. In news from CNN covering the research done by the Federal Reserve Bank of Dallas, it outlines the bubble aspects, some of which were seen in the 2006-2008 time frame.
CNN: US home prices have soared to new heights and keep on climbing, and now some researchers and economists are saying they have seen signs of a housing bubble brewing. Home prices are rising faster than market forces would indicate they should and are becoming “unhinged from fundamentals,” according to a new blog post written by researchers and economists at the Federal Reserve Bank of Dallas. Until recently, the possibility of a bubble wasn’t widely supported. But after looking at housing markets across the US, the Fed researchers said new evidence is emerging.
We noted this a year ago and recommended the Fed alter its 0% interest rate strategy. It failed to do so for a year. Now one branch of the Federal Reserve targets the Federal Reserve policies in bubblemania and FOMO.
Abnormal Housing Market
Dallas Fed: “Our evidence points to abnormal US housing market behavior for the first time since the boom of the early 2000s,” the researchers wrote. “Reasons for concern are clear in certain economic indicators … which show signs that 2021 house prices appear increasingly out of step with fundamentals.”
Researchers noted the behavior of home buyers and sellers over the past two years has been abnormal. Other factors played a role in pushing the market into bubble territory – pandemic-related stimulus programs and Fed/government associated policy responses. The US housing market has been showing these signs for more than five consecutive quarters through third quarter 2021, they found.
Pick up Winning Mortgage, Winning Home for better insight into winning in this type of market.
Slowing Home Sales
As predicted by this site in March of 2021 (and updated multiple times since), the advantageous purchase window forecast was for early 2022 to start to see market changes. Slowing home sales (yes, slowing the last two months so far) are now predicted by a wide range of mortgage and real estate experts. Why? Mortgage rates on March 23 hit 4.72% for the 30 year mortgage (source: Mortgage Daily News), up 2.00% or more from the 2.50% to 2.75% of late 2020/early 2021 rock bottom rates. Is the the first stage of bubble popping?
Our forecast expected the Federal Reserve and US Treasury to recognize its problem policies of holding rates too low, buying vast amounts of mortgages and other bonds, and printing vast quantities of money. That didn’t happen in 2021, despite all signs that inflation was spiking. Is there still an advantageous purchase window? We will need to re-calibrate. Be careful not to jump into overbidding tens of thousands of dollars on a property in the current market. You may regret that rather quickly this year.
New Mortgage Rate Forecasts
Home sales of both new and existing homes have been slowing. However, much of this has had to do with limited numbers of homes for sale in the last 6-9 months. But new signs of slowing sales, lower offering and negotiation prices, and lower buyer expectations have been noted recently. Many forecasts (not ours) had interest rates hitting 4.50% by the end of 2022. In spring/summer , we forecast 5.00% to 6.00% mortgage rates (or higher) by year end 2022. Inflation was the obvious problem. Since rates have already blown past “expert” predictions, these experts now doubt rates will stop at 5.00% and may hit 6.00% in 2022. Nice to see they have begun to align with our forecasts, about a year late though.
Not only are slowing home sales expected, homes sales according to the chief economist of the National Association of Realtors will fall in 2022. That is expected to be a 6-8% drop in number of homes sold. Asking prices actually fell on average during the week of March 14. The chief economist of Realtor.com notes sellers see more buyers facing limited budgets and competition dropping for homes.
Stay tuned. Pick up or gift a copy of Winning Mortgage, Winning Home to be prepared or help another to be prepared. You only need an Amazon account and an email address of the recipient for a gift. Be prepared to take advantage when the selling panic hits and prices fall. We are looking for a price drop of home of up to 15% by the end of 2022/early 2023. But bubbles always go longer than expected as it takes a while for momentum to recede, Sales have already slowed more than 16% in 4 months.
Pending Sales Fall For Fourth Month in a Row
On March 25, February data marked the fourth consecutive month that the National Association of Realtors’® (NAR’s) Pending Home Sales Index (PHSI) has lost ground. For the month, it fell 4.1% and is more than 5% lower than a year ago. The index peaked at 125.2 in October 2022 and has now fallen to 104.9, a drop of more than 16% in 4 months. All measures of home sales fell in February 2022; new homes, existing homes, and pending sales.
As of February 2022, higher mortgage rates and sustained price appreciation has led to a year-over-year increase of 28 percent in mortgage payments. And property tax increases have not yet fully kicked in for the higher home prices.
