Denton Texas home prices jumped to record highs in January, defying typical seasonal weakness that would accompany a normal real estate market. Today’s real estate markets are anything but normal, but we’ll get to that in a moment. The median price of a Denton TX home rose 4.7 percent to a record $273,706 in January while the average price jumped 5.5 percent to $288,441. The average price per square foot of a Denton home spiked 9.4 percent to a record $140 per square foot…in January!

Denton TX Average Home Price Per Square Foot January 2020

While the local real estate industry is celebrating these numbers (see here) in a clueless worship of fake economic “fundamentals”, the inconvenient reality is that the latest reflation of the DFW housing market is first and foremost a consequence of the Fed tilt and endless liquidity being thrown at the markets.

North Texas home sales spiked 18 percent in January, while sales in Denton County rose 26 percent. Median and average prices were higher across the board in January as the Fed’s liquidity fire hose continued to levitate asset prices, including the local Dallas-Fort Worth Real estate market. The recent swan dive in mortgage interest rates in 2020 means the housing reflation we saw last year could continue to drive area home prices higher, despite prices already being detached from long-term fundamentals like wage growth.

Affordability is already a problem in the DFW housing market, but Federal Reserve policies are making the situation even worse. As the Fed continues to fan the flames of asset price inflation, they are encouraging continued speculation in real estate markets while facilitating the depletion of affordable home inventory. The supply of homes in the Dallas-Fort Worth are dipped to 2.6 months. Available home inventory dropped 24 percent in Denton County to only 2.2 months of supply. The supply of homes in the City of Denton fell 18 percent to just 1.8 months of inventory.

While many Realtors will no doubt cheer the latest numbers as fantastic news, that would be a rather short-sighted view of the picture. What we just experienced with DFW real estate in January was a facsimile of a normal housing market. It was another reminder that U.S. housing markets are undeniably attached to Federal Reserve monetary policy. The current housing market is as warped, flipped and manipulated as the latest Iowa Caucus results for the Democratic primary.

The good news is that low rates are providing a buffer to affordability issues with the local housing market. Single-family mortgage debt is not the giant world-ending bubble we saw prior to the GFC. Mortgage interest rates are dramatically lower, helping to make those monthly payments more manageable.

SF Mortgage Debt Securitized Q3 2019

The bad news is that U.S. consumers are not very healthy. The myth of the deleveraging U.S. consumer is just that…a myth. This also means that rates have to stay low to keep the dream alive. Any attempt by the Fed or the market to raise rates is going to be met with some rather unfortunate consequences.

U.S. Consumer Credit vs GDP Q4 2019

Despite endless central bank liquidity, the velocity of the money supply (the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period) continues to fall. This should not be surprising, because Federal Reserve policies operate under the false premise of trickle-down theory. Fed officials don’t care what happens to average Americans, because working people are not the Fed’s primary constituents. Wall Street, and particularly Wall Street banks, continue to drive Fed policy.

Velocity of M2 Money Stock Q4 2019

There is a reason the Federal Reserve is funneling $billions each day through Wall Street banks to prop them up. Without the endless liquidity and artificially low rates, the strong “economic fundamentals” narrative gets exposed for the mirage it really is. The entire growth story is now dependent on continued stimulus to support elevated (aka inflated) asset prices.

This is the nature of the liquidity trap created by the Federal Reserve, and exacerbated by the Powell Fed. If you are in the market to buy or sell a home, an extra dose of caution is certainly warranted. Each passing day the Fed refuses to let markets function in a normal manner simply creates even more imbalances in the markets. The real estate market will eventually have to pay for the Fed’s continued policy errors. How that translates is anyone’s guess. It’s not a question of if, but when those consequences rear their ugly head.¬† That’s the nature of a liquidity trap.

Fed Balance Sheet Liquidity Trap February 5 2020