A housing market correction is coming to North Texas. Don’t say you weren’t warned. The data points have been piling up for months. The only question remaining is how this all plays out, or more specifically how much pain the Fed is willing to tolerate.
Inflation Rages
Today’s headline print for CPI inflation came in at a red-hot 7.5%. Despite many experts’ assumptions that inflation would be moderating, core inflation has actually been increasing in each of the last three month’s readings from the Bureau of Labor Statistics. Jerome Powell and the FOMC decided to punt at their January meeting. Even after several months of 7 percent inflation readings, the Fed still has rates on the floor and they are still doing QE. Apparently American workers weren’t sufficiently buried so the Fed has decided to smother them with a blanket six feet deep. They’re on break until their March meeting. Hooray for asset inflation!
As a reminder the Federal Reserve has not even raised the Fed Funds rate yet. They are still buying treasuries and mortgage-backed securities to juice the market until the middle of next month when those asset purchases come to an end. Now they are faced with the prospect of multiple rate hikes this year and a significant balance sheet reduction on top of that. All of the liquidity that poured into U.S real estate is set to go in the opposite direction. If you don’t see how that is going to affect North Texas home prices, you haven’t been paying attention.
Here’s the problem for the Fed in a nutshell. The CPI actually understates real inflation by a significant margin. The way the BLS measures shelter inflation centers around a series of survey questions, not actual shelter prices. Here’s the 12-month change in shelter inflation for the various CPI components:
Shelter up 4.4%
Rent of primary residence up 3.8%
Owners’ Equivalent Rent (OER) up 4.1%
The CPI is just starting to capture the inflation percolating in the U.S. housing market for the last 18 months. You may remember that the government (FHFA) raised the conforming loan limits for 2022 by 18 percent! That was as close as you would see to an outright admission that housing inflation was a huge problem.
Real single-family rents provide additional confirmation that the BLS is completely clueless. The median January rent for a home in Denton County Texas rose by over $350 from last year. That translates to a 14 percent increase. Apartment rents in North Texas are also up by double digits.
Want Transparency? The Fed Says Go Fly A Kite
Reuters reports that the Federal Reserve has flat out refused to provide documents involving the personal trading activity & communications during the pandemic of current and previous members. After Reuters submitted a Freedom of Information Act (FOIA) request to the Federal Reserve to get more details on pandemic profiteering by Fed officials, the Fed essentially told Reuters to eat cake.
“Fed FOIA officer and deputy board secretary Margaret McCloskey Shanks responded to Reuters that staff had identified “approximately 47 pages of information” involving Fed board members and around 13 pages involving either Kaplan or Rosengren. However release of the documents was denied.”
This should tell you everything you need to know about the Powell Fed’s commitment to transparency and accountability.
Reckoning Awaits for North Texas Housing Market
Buyers were still busy gobbling up homes in North Texas last month, many no doubt unware of the ramifications of a monetary policy shift. Sellers were cashing as prices remained near record highs and inventory dipped to record lows. The number of homes for sale in the Dallas-Fort Worth area dipped to less than a month of supply in January. Inventory in Denton County plunged to just two weeks supply. It was slightly less than that in Collin County.
To put things in perspective, there were over 3000 homes for sale in Denton County prior to the start of the pandemic. Last month there were only 642 homes for sale in a county with a population of roughly one million people. The entertaining part is that Jerome Powell seriously wants the public to believe the Fed is concerned about price stability and the well being of American workers while they bury them alive in inflation.
Average home prices in Denton County hit a new high in January, just edging out the previous record set in August. February could conceivably see more records, but spiraling mortgage interest rates are already putting a dent in mortgage purchase applications. Home affordability is getting absolutely destroyed as rates spiral higher to start the year. The latest survey from Fannie Mae showed home buyer sentiment has plunged this year, particularly among younger buyers.
“In January, a survey record-low 25% of respondents reported that it’s a good time to buy a home, compared to the 69% of consumers who reported that it’s a good time to sell.” Those prospective buyers are likely even less enthusiastic now that mortgage rates have blown past 4 percent. The Freddie Mac mortgage rate survey generally reflects the lowest rates available for prime borrowers. These rates would be closer to par or wholesale. Most major lenders are already quoting retail rates of 4 percent or higher.
This the reality prospective buyers are now faced with.
Don’t Cry for me Argentina
Sellers and new home builders are still raking in the cash from this inflated housing market. The January stats from North Texas show that median and average new home prices hit fresh all-time highs. The median price of a new home hit $388,900 in the DFW area. That was a 19.9 percent yearly increase. Average prices for new construction rose 15 percent to a record $442,436. The real inflation for new homes is actually worse than that. Looking at prices per square foot, new home prices in the Dallas-Fort Worth area were up 23 percent in January! Real new construction prices were up 27 percent and 30 percent in Denton and Collin counties.
These are the kind of insane price distortions you get when your central bank goes completely unhinged pouring $trillions in monetary stimulus on top of trillions in fiscal stimulus in a trickle-down feeding frenzy. These ridiculously unsustainable price increases are only possible in a ridiculously distorted market. Builders are charging outlandish prices for new home because they have been able to get away with it. Most of the resale market has been sidelined. Investors and speculators have been falling over themselves chasing what inventory is available.
Here’s where things start to get interesting. Builders are finally waking up to the reality that the gravy train is coming to end. As home affordability gets crushed, it will be interesting to see cancellation rates for 2022. I was talking to a guy at the gym this week who has been trying to build a new home for the past 15 months. He was still two months out from closing and hadn’t locked in his mortgage rate yet. Oops! Imagine locking in record high prices and enjoying a mortgage rate that’s more than 50 percent higher than when you started the process.
Supply is Waiting in the Wings
Builders are sitting on a lot of backlogged construction. There were over 1.5 million units under construction at the end of 2021. These are sunk costs based on development that could be years in the making. All of the agents and housing economists parading the ridiculous notion that we have an undersupply problem may see their supply problem solved sooner than they imagined. A lot depends on how far the Fed goes in correcting their previous policy errors. As the excess liquidity is drained from the system, supply-demand distortions have a funny way of correcting themselves. It will be interesting if existing owners who were sitting on the fence finally decide to sell. That could coincide with a fresh supply of new homes from builders who were banking on an endless liquidity.
Be safe out there.
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