With renewed talk of yield curve inversion during the past week Denton County real estate prices are going to be interesting to watch. Some people are wondering how low the Federal Reserve’s balance sheet will go as the try to unwind/reverse years of quantitative easing. As I was commenting earlier this morning, that balance sheet probably won’t go as low as Fed officials originally planned. For all of the collective PhD economic talent employed at the Fed, they still can’t forecast their way out of a paper bag. The Fed has barely rolled off 10 percent of the QE that juiced markets to new heights, and they are already looking for excuses to stop the interest rate hikes.

The Fed’s first mistake was initiating QE to begin with, but Fed officials are bankers. If your only tool is a hammer, every problem looks like a nail. If you are Wall Street bankers (which they are), what better way to enrich your real constituents than throwing free, or virtually free money at them. The Fed is suddenly waking up to their gross miscalculations, and thus the backpeddling and doublespeak will likely just intensify going forward as the markets wobble lower. When I watched Jerome Powell’s interview here at the Dallas Fed a few weeks ago, it became crystal clear that FOMC officials haven’t learned a damn thing. Why should they, when the continued policy errors pay so well.

As we are finding out, the inflection point where damage to the housing market gets real is closer to 5% mortgage rates, not 6% as some have suggested. The Freddie Mac weekly survey results, not the puffed up retail survey rates, still haven’t hit 5 percent. If they do, home sales will likely continue their slump/rollover because the housing market is now similar to the other speculative bubbles the Fed created.

The Fed’s most recent mistake was in underestimating the degree of tightening they were/are actually doing. That $50 billion per month balance sheet unwind has a similar effect to a quarter point Fed Funds rate hike, so in effect the Fed has been tightening more than they realized. This is why you now see those FOMC officials doing their best impression of a Belgian waffle in the press. The economy is either good or shaky depending on which official is speaking on which day and how close the S&P 500 Index is to breaking critical trend support to the downside.

Getting to the yield curve inversion, bond traders are usually the more disciplined adults in the room. The fact that the spread on the 5-year Treasury and the 3-year Treasury inverted this week is concerning, but certainly not a catastrophe. The fact that the 10-2 spread is also near inversion should warrant careful consideration. Fed officials have continued to downplay the bubbles in the system while overestimating their own abilities to manage complex systems. Yes, shocking isn’t it.

The market internals in Denton County real estate are already deteriorating, and we haven’t even seen 5 percent mortgage interest rates. We came pretty close on the Freddie Mac weekly survey a few weeks ago, but the markets were about to take a nosedive when it happened. Sales tax revenue in the City of Denton has declined year-over-year for the second month in a row. I am not surprised, because that trend will likely continue if interest rates go any higher. Texas sales tax receipts are certainly susceptible if interest-rate-sensitive consumers decide to cut back on spending.  If you are in the market to buy or sell a Denton County home, the yield curve can give you some important clues about the underlying strength of the real economy. Fed officials may be willing to ignore the messages the yield curve is sending, but Denton County real estate values will eventually get the message loud and clear.

To those who think this just a temporary slowdown, I would offer the reminder that The European Central Bank (ECB) hasn’t yet turned off their printing press. The ECB’s “Expanded Asset Purchase Programme” is winding down this month. I can almost smell the volatility in the air.