Another Housing Bubble?

 The Mortgage Corner

“WASHINGTON (July 9, 2026) – Existing-home sales decreased by 2.4% month-over-month and increased 2.8% year-over-year, according to the National Association of REALTORS® Existing-Home Sales report. NAR

FRED30yrmortgage

It’s been months since I last wrote about the housing market, and why it’s had such a slow recovery. FRED’s 30-year fixed mortgage graph tells us why, and why we have a housing shortage.

And the 30-year fixed rate mortgage has hovered above 5 percent since 2023, its longest stretch above 5 percent since 2007 and the start of the Great Recession. Lower interest rates would certainly stimulate more housing construction, especially on the affordable end.

But new Fed Chair Kevin Warsh has been repeating that inflation is too high at his congressional hearings and the Fed may have to make some hard choices and become an inflation hawk to bring inflation back to its 2 percent target rate.

If only we still had Ayn Rand disciple and free market lover Alan Greenspan as the Fed Chair! In a similar situation during the GW Bush 2000 decade, Fed Governors resisted raising the Fed rates to help fund the Bush administration’s wars on terror, despite enacting the large Republican tax cuts that caused the first $trillion in federal debt.

A caveat is to be careful what you wish for, since the last such building surge inflated the housing bubble for mostly the wrong reasons.

And the busted housing bubble that led to the Great Recession of 2008-09 also led to the current housing shortage. Can we ever return to the ‘good old days’ when there was enough housing for those that want to own?

It fueled an earlier housing bubble It was the combination of interest rates being held below rising inflation that caused housing prices to increase by double digits for a couple of years and we were left when a massive oversupply of unsold homes.

Right now we have both a demand and supply problem—how to bring down mortgage rates to lure more home buyers, and kick start more housing construction.

The Trump administration is also attempting to talk down interest rates in the face of its massive tax cuts as it has been waging war on several fronts—from attacking Venezuela to Iran, while again ballooning the federal debt.

The 30-year average fixed mortgage was last at a much more affordable 3 percent rate during the COVID-19 pandemic. It is 6.58 percent at this writing and has remained above 6 percent since 2022 when the Fed last raised interest rates to combat inflation as world economies began to recover from COVID.

And we know both home buyers and mortgage lenders are incredibly sensitive to mortgage rates, in part because mortgage lenders have kept credit standards much higher than they were in the lead up to the housing bubble that caused so many defaults. Anyone remember the no-income verification, liar loans of that time?

The National Association of Realtors remain hopeful that the home buyer market will approve.

"The back-and-forth in monthly home sales activity, driven by mild fluctuations in mortgage rates, shows how sensitive home buyers are to affordability conditions,” said NAR Chief Economist Lawrence Yun. “However, job gains—more than half a million since the beginning of the year—will continue to provide support for the housing market.”

But so much is similar to the housing bubble and bust. Trump’s Big Beautiful Tax Bill and Iran war is raising the costs of everything as did Bush’s tax cuts and war on terror.

Are we seeing a housing revival with the slight uptick in existing home sales? Hope springs eternal, as the saying goes. Sales have hovered around 4 million residential units since the busted housing bubble and 2008-09 Great Recession. There has never been enough supply to satisfy the demand of an increasing population since then because the busted housing bubble restricted new home building for almost 10 years, and 30-year fixed rate mortgages have hovered above 6 percent ever since, per the FRED graph.

Higher interest rates are raising construction costs. Trump’s tariffs on steel, copper, lumber and other materials are lifting construction prices and interrupting some jobs. This is while immigration enforcement is worsening worker shortages and delaying projects.

I said last week,

“We get so many things thrown at us in the construction industry,” said Tony Rader, the chief relationship officer at National Roofing Partners, a commercial roofing company in Coppell, Texas. “It just seems like every time we turn around, we’ve got something else to fight.”

The bottom line is too many resources have been diverted to funding wars, not peaceful enterprises since then, leaving little room for more housing construction, or curing our homeless problem.

When will that change?

Harlan Green © 2026

Follow Harlan Green on: https://twitter.com/HarlanGreen

How Long Must We Wait?

 The Mortgage Corner

Total existing-home sales^[1] – completed transactions that include single-family homes, townhomes, condominiums and co-ops – progressed 4.2% from January to a seasonally adjusted annual rate of 4.26 million in February. Year-over-year, sales slid 1.2% (down from 4.31 million in February 2024).

                                          

Calculated Risk

Will home sales pick up at all this year? They should pick up if the Fed Governors get off their duffs. But everyone seems to be waiting to see what President Trump’s grand plan may be.

Housing should be aided by moderating consumer inflation but fixed mortgage rates are still hovering close to 7 percent. Housing construction has picked up to fill the supply void. Homebuilders seem to believe the housing market will improve.

Overall housing starts increased 11.2% in February to a seasonally adjusted annual rate of 1.50 million units, a good number, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

“Despite elevated interest rates and policy uncertainty, ongoing lean levels of single-family existing home inventory helped to boost single-family production in February,” said Jing Fu, NAHB senior director, forecasting and analysis. “NAHB forecasts that single-family starts will remain effectively flat in 2025 as prospects of a better regulatory business climate are offset by uncertainty on the tariff front.”

NAR Chief Economist Lawrence Yun has said the same. “Mortgage rates have not changed much, but more inventory and choices are releasing pent-up housing demand.”

There are simply not enough homes for sale to attract more buyers. The unsold inventory of existing homes sits at a 3.5-month supply at the current sales pace, identical to January and up from 3.0 months in February 2024. An inventory of 5 to 6 months is more usual, but only when mortgage rates are lower.

Homebuilders and sellers can buy down the interest rate. Lowering the 30-year fixed rate ¼ percent adds just 1 point to the price, and buyers can also choose a lower 5-year fixed adjustable-rate loan and then refinance when 30-year fixed mortgage rates ultimately decline to a more normal level, which they eventually will.

We shouldn’t forget that the Fed is still in a tightening cycle, having dropped its Fed Funds overnight rate just one percent from its high of 5.33 percent to 4.33 percent. It was last this high in 2007 at the start of the Great Recession. Its timing was wrong then (i.e., led to Lehman Bros. bankruptcy, which precipitated GR), and the timing is wrong today.

This is because inflation is already down to 3 percent, so it should be easing further to boost further economic growth, which has slowed and is in danger of going negative in Q1 2025. It would be immensely helpful to the housing market where there is a tremendous pent-up demand with homelessness at a record level since the pandemic.

This uncertainty has affected the financial markets and that affects Americans’ overall wealth and health.

The Conference Board’s Index of Leading Economic Indicators (LEI) that attempts to predict future growth is the latest measure of consumer attitudes. It is also stuck, is the best way to describe it.

“The US LEI fell again in February and continues to point to headwinds ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Consumers’ expectations of future business conditions turned more pessimistic…given substantial policy uncertainty and the notable pullback in consumer sentiment and spending since the beginning of the year, we currently forecast that real GDP growth in the US will slow to around 2.0% in 2025.”

It would be nice if Trump understood this, so that he wouldn’t be in such a hurry to precipitate a tariff war, which by its nature creates more uncertainty and maybe higher inflation, and which is stopping the Fed from enacting more rate cuts at the moment.

So, Trump has everyone waiting to find out what his grand plan may be, if he has one.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Will Housing Recover?

 The Mortgage Corner

Total existing-home sales^[1] – completed transactions that include single-family homes, townhomes, condominiums and co-ops – improved 4.8% from October to a seasonally adjusted annual rate of 4.15 million in November. Year-over-year, sales bounced 6.1% (up from 3.91 million in November 2023).

FREDexistinghomesales

The huge jump in existing-home sales on just a brief drop in mortgage rates illustrates the enormous pent-up demand for rental or owner-occupied housing. And Realtors believe it will continue.

“Home sales momentum is building,” said NAR Chief Economist Lawrence Yun. “More buyers have entered the market as the economy continues to add jobs, housing inventory grows compared to a year ago, and consumers get used to a new normal of mortgage rates between 6% and 7%.”

New home sales have surged as well. It may mean that builders also see an uptick in demand. Builder sentiment held steady to end the year as high home prices and mortgage rates battled renewed hope about a better regulatory business climate in 2025, reports the National Association of Home Builders (NAHB).

Builders expressed increased optimism for higher sales expectations in the next months. Sales of new single-family houses in November 2024 were at a seasonally adjusted annual rate of 664,000, up 5.9 percent above the revised October rate of 627,000 and is 8.7 percent (±19.3 percent)* above the November 2023 estimate of 611,000.

“While builders are expressing concerns that high interest rates, elevated construction costs and a lack of buildable lots continue to act as headwinds, they are also anticipating future regulatory relief in the aftermath of the election,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kan. “This is reflected in the fact that future sales expectations have increased to a nearly three-year high.”

There is at least one elephant in the room, however. What will inflation do with Trump’s tariff and deportation threats? Consumers are already beginning to worry, per the Conference Board’s latest confidence survey.

“The recent rebound in consumer confidence was not sustained in December as the Index dropped back to the middle of the range that has prevailed over the past two years,” said Dana M. Peterson, Chief Economist at The Conference Board. “While weaker consumer assessments of the present situation and expectations contributed to the decline, the expectations component saw the sharpest drop. … Compared to last month, consumers in December were substantially less optimistic about future business conditions and incomes. Moreover, pessimism about future employment prospects returned after cautious optimism prevailed in October and November.”

So who or what will win this battle of expectations? The builders want less regulations in the hope that it can speed up the pace of construction, while tariffs have boosted construction material prices as much as 50 percent during Trump’s last term from such as his Canadian tariffs.

The Fed’s Jerome Powell has signaled that Trump’s threat to tax almost all imports will raise prices, while countries so taxed will retaliate with their own tariffs as happened during Trump’s last administration.

So builders should be careful of what they ask for. This won’t help interest rates, mortgage rates in particular, which are extremely sensitive to inflation.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Will Job Market Recover?

 The Mortgage Corner

The number of job openings was little changed at 7.7 million on the last business day of October, the U.S. Bureau of Labor Statistics reported today. Over the month, hires changed little at 5.3 million. The number of total separations was little changed at 5.3 million. Within separations, quits (3.3 million) increased, but layoffs and discharges (1.6 million) changed little.

Calculated Risk

The above graph of job openings (black line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS report show normal job growth, according to the Bureau of Labor Statistics. But will it recover from the Boeing and east coast strikes that laid off so many workers?

The JOLTS report doesn’t give much encouragement to Friday’s unemployment report for November, as the number of hires equaled the number of separations. The difference usually tells us the total number of job creations.

It’s hard to know what this means for the Trump administration’s next four years. Chairman Powell is still sounding dovish about another -0.25 percent rate cut in December, which will be helpful. But credit card rates are still as high as 30 percent, which is an insane borrowing rate for those using credit cards.

“The Fed’s goal all along has been to bring down inflation without a “painful rise in unemployment,” Powell said in remarks at the annual meeting of the National Association for Business Economics in Nashville,” per MarketWatch. “While the task is not complete, we have made a good deal of progress toward that outcome,” he said.

The Institute for Supply Management (ISM) surveys of both the service and manufacturing sectors were also static, with manufacturing not expanding at all and the service sector barely above its 50-point breakeven level.

“Demand remains weak, said Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®), “as companies prepare plans for 2025 with the benefit of the election cycle ending. Production execution eased in November, consistent with demand sluggishness and weak backlogs. Suppliers continue to have capacity, with lead times improving but some product shortages reappearing. Sixty-six percent of manufacturing gross domestic product (GDP) contracted in November, up from 63 percent in October.”

This is what happens between election cycles. Will the Trump administration carry out on its threats of giant tariffs, or deporting millions of undocumented immigrants who are employed in the service sector that includes professional services and construction? Construction is booming as the CHIPS and Infrastructure Acts pour $Trillions into mostly red state projects such as new computer chip manufacturing factories.

The service sector that also includes leisure activities such as dining and travel will wind down after the holidays. But the financial markets are still rallying on the hopes that further tax cuts will boost both bond and stock prices.

It’s a difficult time to predict what comes next. Further Fed rate cuts are desperately needed to revive the housing market, for instance.

Pending home sales ascended in October – the third consecutive month of increases – according to the National Association of REALTORS®. All four major U.S. regions experienced month-over-month gains in transactions, with the Northeast leading the way. Year-over-year, contract signings increased in all four U.S. regions, led by the West.

"Homebuying momentum is building after nearly two years of suppressed home sales." said NAR Chief Economist Lawrence Yun. "Even with mortgage rates modestly rising despite the Federal Reserve's decision to cut the short-term interbank lending rate in September, continuous job additions and more housing inventory are bringing more consumers to the market."

That gives homebuyers a ray of hope that interest rates will continue to decline, as well as for credit card users.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Housing Market In Recovery

 The Mortgage Corner

The National Association of Realtor’s Chief Economist, Lawrence Yun, commented on the latest and possibly best unemployment report of 2024. We are at the beginning of the next housing recovery. It’s no secret why; interest rates are returning to somewhere near pre-pandemic levels, which will take time.

“There is no national economic recession on the horizon”, said Dr. Yun. “The net payroll job addition in September strengthened to 254,000 after adding much lighter job gains in the previous months. The annual wage gains also accelerated to 4.0% after softening to 3.6% just two months earlier. More jobs mean more real estate demand, from retail spaces to apartment leases. Home buying will also increase, provided the conditions are right, and more inventory choices and lower mortgage rates will help.”

Calculated Risk

The red line in Calculated Risk’s graph of this year’s single-family for-sale inventory, which is the best indicator of better choices. It is up 34 percent in just one year and 48.3 from the February seasonal bottom, says Calculated Risk.

Inventories were lower in 2021-23 (yellow, purple, blue lines) because of the Fed’s rate hikes but this year’s red line is approaching the 2020 black line, which was the huge sales surge before the Fed began to raise interest rates.

So, what are prospective homebuyers or renters to do who looking for better interest rates? It should not depend on the election outcome, for starters. No party wants to rock the boat on interest rate reductions that the Fed has penciled in for the rest of this and next year.

FRED30yearfixed

That could be at least another 2.0 percent rate drop—from the current 8.0 percent to 6.0 percent Bank Loan Prime Rate. Bankrate.com is predicting the 10-year Benchmark Treasury yield that determines fixed mortgage rates will dip to 3.5 percent in a year. It would bring the 30-year fixed conforming mortgage rate to around 5.5 percent from its current 6.3 percent.

That is being conservative. Fixed 30-year mortgage rates averaged between 4-5 percent after the Great Recession (2008-09) when the Fed succeeded in keeping the inflation rate close to 2 percent for almost two decades. This is what buyers have tolerated in the past and kept existing home sales close to the 5-6-million-unit longer-term average it reached before the Great Recession and briefly after the COVID-19 pandemic.

At least one million new housing units built annually are needed as well, just to house the one million new households being formed each year.

One reason why so many homeowners have been reluctant to sell is the record low interest rates in 2020 because the Fed wanted to counter the effects of the pandemic.

That has resulted in the vast majority of outstanding mortgages carrying an interest rate below the current average of 6%, making those mortgage holders reluctant to sell. “In fact, one in five homeowners with a mortgage has a rate of under 3%, according to an analysis by Realtor.com” that was cited by MarketWatch.

How long can home buyers afford to be patient? If this decade will turn out to have record job and wage growth, as I believe, which so much government spending has stimulated, and housing prices are still rising at least 5 percent annually, if not more in coastal enclaves, it doesn’t pay to wait too long.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Economy Has anded--Part II

 Popular Economics Weekly

Fed Chairman Powell finally admitted the U.S. economy has made a soft landing at this year’s Jackson Hole Federal Reserve Conference. “The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic,” he said in his speech.

FREDunemployment

It’s a very soft landing. The unemployment rate dropped back to 4.2 percent from 4.3 percent in July and just 142,000 nonfarm payroll jobs were created in August U.S. job gains in July were also lowered to 89,000 from 114,000, and in June revised down to 118,000 from 179,000.

The Fed is now playing catchup in the opposite direction. They waited too long to begin to restrict credit when the inflation rate first shot up in 2020 and perhaps waited too long to cut interest rates, since the downward momentum of lower job creation has begun.

This doesn’t mean a looming recession, however. It’s possible that third quarter economic growth will remain positive. Most estimates for Q3 growth are in the 2 percent range, down from the 3 percent Q2 GDP growth rate.

The Atlanta Fed estimate of Q3 growth said, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 2.1 percent on September 4, up from 2.0 percent on September 3,” because consumer spending has slowed but there was an increase in domestic investment.

The New York Fed’s ‘Nowcast’ growth estimate for Q3 is 2.6%.

The Fed’s tools to ‘brake’ inflation have always been crude since they must look in the rearview mirror for data to buttress their policies. They must convince the financial markets as well as the public that their moves are credible with data that measures past months to spot trends—mainly consumer spending and employment.

Better news is that the so-called yield curve (the relation of 2-year bond yields to 10-year bond yields) is no longer inverted. The 2-year bond yield has plunged to 3.67% and 10-year bond yield is 3.87% at this writing.

It has been a credible recession indicator when yields are inverted because banks can’t lend at a lower rate than their cost of money.

The yield curve is steepening again, in other words, because conditions are looking better for investors so that long-term yields are higher than short-term bond yields, which is where they should be in more normal times.

Consumers must now adjust as well—and save a bit more for any future uncertainties. But they are still solvent and fully employed. And the fact that the Fed is now poised to loosen the credit tourniquet that has stifled growth in many sectors (such as housing and manufacturing) should mean several years of rising prosperity for most Americans.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Whose Inflation Is Too High?

 The Mortgage Corner

Declining inflation has stalled in the first quarter, which is hurting prospects for any Fed rate cuts, and causing consumers to buy less. The inflation rate is currently stuck in the 3 percent range, though much lower for goods earlier in the supply chain, so large retailers like Walmart and Target are having to cut prices.

Monthly retail sales didn’t increase at all in May, after two consecutive months of 0.8 percent growth and almost 3 percent annual growth.

Walmart said on May 16 that it has rolled back prices on nearly 7,000 items in its stores, reports CNN, noting deflationary trends in general merchandise.

“Our combination of everyday low prices plus a large number of rollbacks is resonating” with consumers, Walmart CEO Doug McMillon said on a call with analysts.

CNN also reported that Target slashed prices on more than 1,500 items, ranging from laundry detergent to cat food to sunscreen, with thousands more price cuts expected over the summer.

It’s a sign that’s made Federal Reserve Governors more hopeful inflation will continue to decline, and prices even begin to fall, rather than continue to rise more slowly.

Federal Reserve officials at their last policy meeting indicated they still had faith price pressures would ease, if only slowly, according to the minutes of the central bank’s April 30-May 1 session.

"Participants ... noted that they continued to expect that inflation would return to 2% over the medium term," the minutes said, but "the disinflation would likely take longer than previously thought."

AtlantaFed

Inflation trends seem to be in the eye of the beholder. Businesses are now seeing much lower inflation, according to recent surveys. Year-ahead inflation expectations had fallen to 2.3 percent in May 2024 from as high as 3.8 percent in March 2022 for businesses, according to the Atlanta Federal Reserve.

Whereas the Federal Reserve Bank of New York’s Center for Microeconomic Data today released the April 2024 Survey of Consumer Expectations, which went in the opposite direction.

It shows that inflation expectations increased at the short-term and longer-term horizons, while decreasing at the medium-term horizon: to 3.3% from 3.0% at the one-year horizon (remaining below its 12-month trailing average of 3.5%).

The main culprit seems to be housing prices. “Median home price growth expectations increased to 3.3% after remaining unchanged at 3.0% for seven consecutive months. This is the highest reading of the series since July 2022,” said the NY Fed.

Year-ahead consumer commodity price expectations also rose across the board in April for gas, food, medical care, and college education.

Why aren’t consumers seeing the lower inflation expectations of businesses? Target and Walmart are telling us why. Simply put, retail prices are much higher than the raw cost of goods and services charged to businesses for several reasons. There’s the transportation and distribution costs, for starters, and profit margin that retailers must retain to stay in business.

The truth is that consumers are seeing higher costs than businesses and are beginning to rebel by choosing cheaper products. It also refutes an economic maxim about consumer behavior that higher inflation expectations will cause consumers to spend more, not less.

There is some good news for consumers. New-home prices are falling as the supply of new homes has increased.

Sales of newly built, single-family homes in April fell 4.7% to a 634,000 seasonally adjusted annual rate from a downwardly revised reading in March, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The pace of new home sales in April is down 7.7% from a year earlier.

The median new home sale price in April was $433,500, down 1.4% from March, and up 3.9% compared to a year ago. This is because of the increased supply. There’s a 9.1-month supply of new homes for sale.

Dear US Fed Governors, please pay attention to this. Shoppers can act rationally when their pocketbook size is at risk!

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Q1 GDP Better Than Estimate

 The Mortgage Corner

The initial estimate of first quarter 2024 Gross Domestic Product (GDP) growth was lower than expected, causing financial markets to panic, even though economic growth is better than the initial estimate is reporting.

The lower GDP estimate happened because Americans bought more imports than sold exports overseas. So consumers are still spending, which is the mainstay of growth, and even continued to invest in factories and infrastructure.

First quarter GDP growth was 1.6 percent, below expectations, after 3.4% growth in Q4 and 4.6% growth in Q3 2023.

Why the decline in Q1? Imports were higher that subtract from GDP and product inventories were down, as nobody was restocking their shelves yet, which is common while wholesalers and retailers wait to see the demand for their products in the New Year. But consumer spending held up (+2.5%).

That’s because the job market is still hot, with jobless claims in the latest week down to 207,000 from the more average 215-220,000. But the markets are seeing danger signs that the Fed may be less likely to lower interest rates.

Why? The product shortage is raising inflation as consumers must pay more because of the depleted inventories.

BEA.gov

“The increase in real GDP primarily reflected increases in consumer spending, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by a decrease in private inventory investment, said the US Bureau of Economic Administration (BEA). Imports, which are a subtraction in the calculation of GDP, increased.”

The U.S. trade deficit in goods widened 1.7% to $91.8 billion in March, according to the Commerce Department’s advanced estimate released Thursday. That’s the largest deficit since last April.

Wholesale inventories fell 0.4% in March after a 0.4% gain in the prior month. Nonauto retail inventories fell 0.1% after a 0.3% rise in February.

Inflation has stalled, as there is now a supply shortage because inventories are not being replenished. But that will be cured soon enough as producers gear up production once again.

The price index for gross domestic purchases increased 3.1 percent in the first quarter, compared with an increase of 1.9 percent in the fourth quarter, said the BEA. The personal consumption expenditures (PCE) price index increased 3.4 percent, compared with an increase of 1.8 percent. Excluding food and energy prices, the PCE price index increased 3.7 percent, compared with an increase of 2.0 percent.

In fact, there’s a drop in exports because of the strong US Dollar in relation to other currencies, which makes exports more expensive. And that’s due to the sky-high interest rates the Fed is not yet reducing.

But despite soaring mortgage rates, pending home sales rose 3.4% in March from the previous month that reflect transactions where the contract has been signed for the sale of an existing home, but the sale has not yet closed. It’s another sign that consumers are still spending.

“March’s Pending Home Sales Index – at 78.2 – marks the best performance in a year, but it still remains in a fairly narrow range over the last 12 months without a measurable breakout,” said NAR Chief Economist Lawrence Yun. “Meaningful gains will only occur with declining mortgage rates and rising inventory.”

The temporary inflation boost what is worrying the markets, but Treasury Secretary Yellen was reassuring markets today that it is temporary.

Thursday morning’s GDP report showed the Fed’s preferred measure of inflation, core PCE, rising to 3.7% in the first quarter of 2024, up sharply from 2% in the prior period that is mainly due to lagging rental rates based on annual rental contracts that aren’t yet reacting to growing supply of rental housing.

“When we look at the market for new rentals or for rents on single-family houses, what we see is those rents have stabilized, in some cases fallen,” Yellen said. “Ultimately that is what, over time, will govern increases” in the inflation statistics.

So it’s really a temporary supply shortage of everything this time of year that has boosted inflation, and the markets will soon realize this.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Q4 Growth Prospects Improve

 The Mortgage Corner

Prospects for better fourth quarter economic growth are improving. Why? Interest rates are declining along with inflation rates.

In fact, I mentioned last week that the rate of U.S. inflation based on the Federal Reserve’s preferred PCE index became negative in November for the first time since 2020 indicating that price pressures continue to subside. The PCE index actually dipped – 0.1 percent last month, the government said Friday, and was unchanged in October.

The Atlanta Fed’s GDPNow Q4 estimate of economic growth that I like just picked up steam after several downward revisions.

AtlantaFed

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 is 2.5 percent on January 3, up from 2.0 percent on January 2. After this morning’s release of the ISM Manufacturing Index from the Institute for Supply Management, the nowcasts of fourth-quarter gross personal consumption expenditures growth and fourth-quarter gross private domestic investment growth increased from 2.4 percent and -0.4 percent, respectively, to 2.9 percent and 0.5 percent,” said its report.”

Boosting growth is consumer spending holding up with robust holiday shopping, and soaring construction spending, up 11.3 percent annually.

FREDconstruction

Why? It’s mostly the Infrastructure and Inflation Reduction Acts pairing with private industry in modernizing the American economy that is creating high-paying jobs and producing more things, which also brings down inflation.

There’s more spending on highways and bridges, while private residential construction rose 1.1 percent in November, with single-family construction up 2.9 percent and multi-family construction rising 0.1 percent. These are longer term investments which should mean longer term growth prospects.

On the inflation front stocks and bonds have been rallying because Chairman Powell sounded dovish for the first time at his December press conference following their last FOMC meeting of the year.

“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at our meeting today,” Powell said. The Fed is “likely at or near the peak rate for this cycle.”

Plunging interest rates are best illustrated by the 10-year benchmark fixed rate Treasury note yield that sets mortgage rates. It had dropped below 4 percent for the first time since the pandemic.

And the 30-year fixed-rate mortgage fell for the seventh week in a row, averaging 6.61 percent as of Dec. 28, according to data released by Freddie Mac on Thursday. A year ago, the 30-year fixed-rate mortgage was averaging at 6.31 percent.

What’s not to like about prospects for growth in the New Year? Would congress be so foolish as to close down government because so much is on the line? I don’t think so.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Where's the Inflation?

Financial FAQs

What if there’s too little inflation? That’s actually the definition of a recession. It seems unlikely at the moment and inflation is still a major upset for consumers. But it could happen if the Fed doesn’t ease up on its hawkish position that inflation has yet to be tamed.

It hasn’t happened yet, but if inflation should drop below the 2 percent Fed target, it has generally meant recession. The CPI plunged to -1.96 percent annually in July 2009 at the end of the Great Recession and dropped to +0.22 percent in May 2020 (gray bar in graph) at the end of the short-lived COVID recession.

Economists are becoming alarmed that the Fed has boosted interest rates too high and too fast. The Fed has raised short-term rates a record 11 times since early 2022, from effectively 0 percent to around 5.25 percent.

Another Nobel Laureate, Joseph Stiglitz, is now added to the list of major economists giving warning. In a study co-authored by Ira Regmi, he believes the Fed is in danger of precipitating another recession if it holds its interest rates too high for too long.

“The pandemic-induced inflation was exacerbated further by Russia’s invasion of Ukraine, which caused a spike in energy and food prices,” said Stiglitz. “But, again, it was clear that prices could not continue to rise at such a rate, and many of us predicted that there would be disinflation — or even deflation (a decline in prices) in the case of oil.”

 

FREDcpi

And that is happening. The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis, after increasing 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. It dropped to 3.2 percent from 3.7 percent in August. It was as high as 8.9 percent in June 2022.

In fact, the consensus of 34 economists surveyed by the Philadelphia Fed and released Monday is that there may not be any soft landing of the economy at all, but economic growth continuing into next year.

The Survey of Professional Forecasters is the oldest quarterly survey of macroeconomic forecasts in the U.S., having started in 1968.

“The outlook for the U.S. economy looks somewhat better now than it did three months ago,” the survey found, according to a MarketWatch article.

On an annual-average over annual average basis, the forecasters expect real GDP to increase at a 2.4 percent rate this year and slow only marginally to a 1.7 percent rate in 2024.

So the din is growing for the Fed to begin to cut rates early next year, though we wouldn’t know it from Fed Chair Powell’s remarks that the falling inflation numbers might be a ‘head fake’.

Why would Powell want to spoil the party celebrating continued growth? He must still have the 1970’s wage-price inflationary spiral in mind. It was a time of the Arab oil embargo and long lines at American gas stations, with unions attempting to keep up with the wildly fluctuating energy prices.

But Siglitz and Regmi addressed that as well in their study.

“We conclude that with nominal wages already tempered, this does not seem likely. Moreover, declining real wages are typically not a sign of a tight labor market. Weak unions, globalization, and changes in the structure of the economy provide part of the explanation for why wage-price dynamics today may be markedly different from 50 years ago.”

Stocks and bonds are rallying because of today’s good news on inflation, especially REITs (Real Estate Investment Trusts). This is a sign that the real estate market and housing in particular may be on the mend as well.

It also says there is growing optimism among investors that the Fed is done and will not want to obstruct future growth

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen 

Where's the Recession?

 Popular Economics Weekly

Is waiting for the next recession becoming a useless guessing game? Maybe even the event itself has less meaning these days when conditions can change so quickly.

We have declining existing home sales yet surging new-home sales in September. And the first ‘advance’ estimate of third quarter economic growth made a huge jump to 4.9 percent, up from 2.1 percent in Q2.

 

BEA.gov

Economists and pundits have been calling for a recession since the beginning of this year. Yet the Fed’s rate hikes haven’t dampened consumer spending, which grew 4 percent in Q3. It highlights the fact that American consumers power more than 60 percent of economic activity.

And inflation continued to decline, contrary to the Fed’s expectations, which is a growth booster. The personal consumption expenditures (PCE) price index increased 2.9 percent, compared with an increase of 2.5 percent in Q2, per the GDP report. Yet excluding more volatile food and energy prices, the PCE price index increased 2.4 percent, compared with an increase of 3.7 percent.

So where is the recession? It doesn’t have to be two consecutive quarters of negative GDP growth. The US economy began to expand again in the third quarter of 2022 after two quarters of negative growth per the above BEA graph.

The technical definition of a recession is when basic growth indicators such as nonfarm payrolls, retail sales, and industrial production have peaked and begin a prolonged decline.

That could still happen next year if long-term interest rates remain high. Yet who does that really affect? Companies like to plan ahead so corporations can cut back investing in future growth. but our federal government is spending $trillions on modernizing the economy as well as fighting both hot and cold wars.

And retail sales keep expanding. Seasonally adjusted sales came off ground zero (+0.4 percent) in June 2023 and expanded 3.0 percent in September.

Now is a good time for Fed Chairman Powell to announce that inflation has been conquered, as so many economists are doing. For instance, Nobel Laureate Paul Krugman said recently:

“Growth, both in gross domestic product and in jobs, has remained solid. But standard measures of underlying inflation are now under 3 percent and falling. Fancier statistical models maintained by the New York Fed tell the same story, and say that underlying inflation has fallen by half since its peak last year.”

The reason? The Fed’s anti-inflation policies are working. But there is a time lag for higher interest rates to fully affect consumers and investors. Household wealth as well as incomes continue to stay ahead of inflation.

The Federal Reserve recently announced that the average family's net worth jumped 37 percent between 2019 and 2022. That's the largest three-year increase since the Fed began conducting the survey more than three decades ago, according to its latest Survey of Consumer Finances.

It's not only due to consumers being fully employed but a massive increase in housing values during the pandemic when mortgage rates bottomed.

Both the Great Depression and Great Recession were catastrophic times but how often do such events happen? It doesn’t look like we have as much to fear given the current economic recovery.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Inflation is Now Tamed?

Popular Economics Weekly

FREDcpi

Has Chairman Jerome Powell’s Federal Reserve been suffering from a giant inferiority complex, from the fear that its actions are not being taken seriously enough and so it tends to overreact to crises?

That seems to be the case today. As the Federal Reserve of St. Louis (FRED) graph that dates from 1950 and WWII makes plain, the inflation rate had been on a steady downward trend since its 1980 peak of 14 plus percent and five subsequent recessions (gray bars in graph) since then.

Each Fed nudge of higher rates when inflation spiked since then caused those subsequent mild recessions, until the COVID-19 recession that lasted just two months. Instead of plunging after the COVID-induced recession as had the others, inflation soared because the whole world’s economies were shut down while still growing at full throttle. Yet with the aid of governments’ largesse demand returned to pre-COVID levels, but supply-chains had dried up.

Hence the sudden rise in inflation, which is subsiding as supply-chains have begun to play catch up. So it’s easy to see from the graph how unique has been this pandemic-fueled inflation surge that panicked the Fed to raise interest rates so quickly, and is only know easing off the credit brakes with several bank failures.

Wall Street markets rallied this Wednesday with heartening news. Retail inflation dropped to 4.9 percent, the lowest in two years. The Consumer Price Index inflation rate was last at 4.9 percent in May 2021.

“The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in April on a seasonally adjusted basis, after increasing 0.1 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 4.9 percent before seasonal adjustment.”

It is still high and consumers’ main concern while weathering the pandemic with its shortages of everything. But FRED’s graph shows clearly it was caused by the pandemic and two-month recession of April 2020, but will continue to abate as we recover from the longer-term effect of COVID-19.

It has now become the concern of the housing industry as well, with a very extreme housing shortage. The NAR’s chief economist Lawrence Yun explained in a recent interview that the Fed’s aggressive rate hikes have hurt regional banks and the housing market. He noted that inflation has already started to calm, but rents on apartments and single-family homes remain elevated that comprise 40 percent of the CPI inflation index.

“Inflation will not reignite – inflation will come down closer to 3% by the year’s end,” Yun stated. “Inflation has calmed down while rents are still accelerating.”

Yun said apartment construction has reached a 40- to 50-year high.

“Rent growth will decrease because apartment construction – entry units coming on the market – is already in the pipeline,” Yun added. “We are already moving in the right direction towards consumer price inflation.”

The inflation rate reached its 9 percent high in June of 2020, when markets began to begin to replenish what was lost with the supply-chain disruptions to food supplies, available housing, and resources in general.

Why does the Fed still think its actions aren’t being taken seriously enough? Wall Street is taking it seriously, which is why financial markets have lost so much value over this year as the Fed continued to raise short-term rates.

With financial markets back in line, the Fed is now picking on the rest of the economy—consumers that make up two-thirds of all economic activity. Consumers don’t seem to be taking the Fed seriously, because they haven’t substantially cut back their spending way, so must be punished by targeting their wage increases as too excessive.

Maybe if the Fed took itself more seriously, believed that its actions have real consequences for all Americans, it might instead pat itself on the back and say it was a job well done.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen