Denton County’s real estate market is going to post some very soft numbers again for October. Both closed and pending home sales are going to be down year-over-year while pending home sales are likely going to post a double-digit decline not just in Denton County, but for the entire Dallas-Fort Worth housing market. OUCH! Available home inventory is shooting higher across the DFW area. While notable economists at the Federal Reserve, local real estate “professionals” and even the “experts” at the RECenter at Texas A&M have been dismissing recent developments as just a cooling off period getting us back to normal conditions, reality suggests that is highly unlikely.
As I have been explaining for years here on this site, a bubble created by central bank and government intervention will eventually deflate. Bubbles always pop. The hype artists calling themselves real estate professionals, along with the economists who often do their bidding (see the Fed and RECenter for examples), continue to dismiss obvious dislocations in the market and the destructive policies which facilitated the boom seen in the DFW area during the last decade, particularly the inflationary period from 2012 to 2017. It’s not a coincidence that the Case-Shiller home price index for Dallas just declined in the most recent reading for August. The DFW housing market will likely remain in correction mode as long as the Fed is shrinking its balance sheet.
As I was explaining to someone the other day, it is not big news that the Federal Reserve has rolled off over $300 billion of that massive balance sheet. The big news is that the Fed’s bloated, asset-levitating balance sheet is still over $4 trillion! The Fed is taking its sweet ass time “normalizing” the balance sheet. The Fed still holds over $2.1 trillion in Treasury securities and over $1.66 trillion in mortgage-backed securities. While they are predatory capitalist scoundrels for sure, the folks at the Fed are not stupid enough to think they could shrink the balance sheet as fast as they ramped it up during QE1, 2, and 3. The Fed knows that removal of that sea of liquidity, the same liquidity keeping the stock market from from completely collapsing when valuations are off the charts, would be the death of our supposed economic “recovery”. Wall Street would not react kindly to real market forces intervening in their plans, so the slow unwind continues.
Former Fed Chairman Paul Volcker publicly rebuked the failed policies of Ben Bernanke and Janet Yellen, who effectively destroyed the U.S. housing market as we knew it and caused a cornucopia of asset distortions in markets across the globe. As Volcker put it, “The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets.” While Bernanke and Yellen were busy patting themselves on the back for reflating asset markets, the public PR was telling us Fed polices were going to help the housing sector recover. What we received instead was a zombie apocolypse of unaffordability where housing is now just another hyper-financialized asset and Wall Street mega-landords are buying up new homes to rent them out to people who might not otherwise qualify to buy.
It doesn’t surprise me that the current Fed/FOMC doesn’t want to discuss the damaging effects of QE and Operation Twist on the housing market. As Christopher Whalen explains, thousands of people in the mortgage industry have lost their livelihoods because of the Fed’s failed policies creating continuous booms and busts. The same can be said for real estate agents. I suspect there a lot of Realtors who will again be looking for a career change as the next correction takes shape. Very few of the real estate agents I talk to truly understand the deep connections of the Fed in the current housing market. They will likely be led sleepwalking into the next recession along with the readers of the local paper.
Unlike housing industry pundits and economists calling for a rebound in the home construction industry next year, I am not that naive. The proverbial goose has been cooked, and it appears housing has likely peaked in this current economic cycle. As long as interest rates continue to rise, prices will have to decline or sales will suffer. What comes next is likely more consequences of failed policies. Record debt levels will likely continue to put a strain on the economy, economic growth, and consumer demand. Mortgage rates just hit another 7-year high with the October employment report numbers showing positive (though highly manipulated) job gains. This will likely foam the runway for another Fed rate hike in December.
As the numbers for the Denton County housing market are showing us, something is going to give. For the time being, home sales are definitely pointing toward a market correction. All that’s left for prices to join the party is a continued rise in inventory. Judging from the October numbers and the trend during the last few months, the odds of ZERO home price gains in many DFW submarkets is becoming an increasing probability. I would add that this is before we get a significant stock market correction. If the S&P were to drop by say 20% or more, you don’t have to be a rocket scientist to understand what will happen to the bid for expensive homes.
Volcker is being way too kind in his remarks directed toward Bernanke. A few of Bernanke’s more memorable quotes demonstrating mind-boggling incompetence…
“We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.” Ben Bernanke – May 2007
“It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.” Ben Bernanke – Oct 2007
“The Federal Reserve is not currently forecasting a recession.” Ben Bernanke – Jan 2008 (This was about 2 months before Fannie & Freddie collapsed. Lehman filed for bankruptcy in September 2008)
Bonus Material: The Dallas Morning News is still apparently holding out hope that Amazon’s second headquarters has a possibility of landing in Dallas. As we found out this weekend, that’s NOT GOING TO HAPPEN! Professor Scott Galloway nailed it in a recent video post. “The shitshow circus of H2Q for Amazon has finally drawn to a close…Where Amazon has gameified a process to transfer funds from municipal school districts, fire departments and police departments to the shareholders of Amazon, is over.”