The reckoning awaits for the hyper-financialized north Texas real estate market. It may take a few months for reality to sink in, but the writing is on the wall regardless of the efforts of housing industry pundits and professional economists to downplay the damage. The hopes of a v-shaped recovery are vanishing faster than the toilet paper on the shelves of your local grocery store.
Many of the supposed experts, like the PhD economists employed at the Texas Real Estate Center at A&M, have turned a blind eye to the artificial inflation in Texas real estate prices. They were virtually silent on the Fed’s constant interjections into the markets as stock values rose roughly 300 percent from the 2009 lows and $trillions in new liquidity from the Fed sparked a massive reflation of real estate prices across the U.S.
While home prices were juiced to new highs, declining mortgage interest rates helped to offset the carrying costs of homes, keeping those monthly payments below the peak of the previous housing bubble. The economists at the Federal Reserve, and even those at the A&M RECenter were looking for a continued extension of the economic cycle, even though yield curve inversions and a host of other warning signs were suggesting that a recession was a distinct possibility. The unvarnished truth is that the U.S. economy was already fragile before the coronavirus pandemic arrived. The market developments of the past few weeks have just exposed that fragility to a larger extent that many imagined.
In America’s fairy tale economy advertised in Hollywood and the main stream media, everyone is a millionaire or at least an aspiring applicant. The major newspapers talk about the record deals of industry titans and developers while parading the latest luxury property from some essentially irrelevant parasite who has profited from America’s rigged economy and the everything bubble facilitated by a decade of trickle-down fiscal and monetary policies.
Do not be confused into believing that the Covid-19 pandemic is what caused the current crash. It was merely the trigger event that broke the floodgates. Rampant greed, speculation and leverage is a dangerous combination. It doesn’t matter who is occupying the oval office, gravity is still one of the laws of nature. The egomaniacs at the Fed have been trying to convince us otherwise, but the liquidity trap in which they now find themselves is a mess of their own making. Trump just poured some gasoline on the burning building.
We have now had two emergency rate cuts taking the Fed Funds rate to the zero lower bound. This week the Federal Reserve added over $300 billion to the balance sheet, ramping it to over $4.6 TRILLION. Despite all of the recent efforts by inept and corrupt leadership, the markets still closed red at the end of the week taking Trump’s glorious stock market bubble to the woodshed.
“Highest Stock Market In History, By Far!” Donald J. Trump, February 19 2020
And to think it only took a month to wipe out the last three years of market gains. The Dow Jones average is now lower than when Trump took office. If the S&P and Nasdaq follow suit, the hat trick will be complete.
Unemployment claims are going parabolic as the country shuts down to deal with a pandemic that the current administration tried to brush off as a nothingburger until it blew up their market-focused party. There were more than 37,000 unemployment claims filed in Texas during the first two weeks of March. There were 19,000 unemployment claims filed with the Texas Workforce Commission on Tuesday March 17th alone!
Along with the Covid-19 pandemic, the all-out oil price war looms large for the Texas economy. If you had asked any of the professionals at the beginning of the year if $20 oil was in their forecasts, they would have laughed at you. Well, it’s here. The Texas Railroad Commission is now contemplating what was previously unthinkable…cutting back on Texas oil production.
The double whammy of an entire economy at a standstill and an oil price war is going to have ripple effects for Texas real estate prices and sales volumes. You can rest assured that virtually every oil company executive with a pulse is sweating bullets at this point. I lived through the 80’s boom & bust and the S&L crisis, so I can appreciate the concerns. Those concerns are well warranted.
Those looking to buy or sell a home are probably wondering how this plays out. The simple answer is that no one really knows for certain. My prediction of a top-down correction looks to be taking shape, but we shall see. Mortgage interest rates actually spiked up a full percentage point in the past few weeks due to all of the bond market volatility and huge demand for refinances. Talk about a kick in the head!
One can only hope that we make some effort at self-reflection and correct the policy mistakes that brought us to this point. We failed miserably the last time around in 2008. Will we do any better this time? Will we fix our patchwork quilt of sickcare profiteering? Will we finally bring the banks to heel? Wall Street and their corporate lobbyists are already lining up to the troughs for another massive round of bailouts…after they lined their pockets during the last decade with $trillions in stock buybacks and ludicrous executive compensation. Mark Blyth offers some really good advice on how to turn this crisis into an opportunity.
“Think beyond the immediate crisis to fix the underlying fragilities that made this crisis so severe in the first place.”