The deflationary wave of debt growing within multiple facets of the U.S. economy will stifle yields. That’s the gist of Van Hoisington and Lacy Hunt’s latest third quarter Review and Outlook. As the market was puking on the latest surge in Treasury yields above 3%, I couldn’t help but notice that the publicly traded homebuilders were getting crushed yet again. With the Freddie Mac 30-year mortgage rate touching 4.9 percent this week (levels not seen in 7 years), things were getting even uglier for the housing sector. There was nowhere to hide this week if you were a major U.S. homebuilder because it was pretty much red ink across the sector.
With so much debt throughout they system, it appears we are indeed becoming Japanese. As the Federal Reserve continues to push forward with additional rate hikes, interest bills keep marching higher. That poses some significant challenges for a U.S. budget that is churning out trillion dollar annual deficits. The U.S. debt has already eclipsed $21.5 trillion, and at the current pace of fiscal mismanagement by elected representatives, the Congressional Budget Office (CBO) projection of an additional $5.661 trillion in deficits during the next five years plus an added $1.8 trillion in budgetary “investments” will likely push the total U.S. debt to $28.9 trillion by 2023! And this is assuming we don’t have a recession!
A Dr. Hunt and Van Hoisington explain, future productivity and growth continue to get strangled by ever larger piles of debt and malinvestment. Fiscal and monetary policy are both driving economic growth lower, and that has consequences for yields in the big picture story of the real economy. The yields on both the 30-year and 10-year Treasury bonds may have temporarily breached the supposed 3% line in the sand, but that doesn’t mean we have a sustainable path of inflation in the economy. Quite the contrary. Record stock buybacks, record debt and skyrocketing budget deficits are going to cause myriad problems for policy makers going forward as promises made fall victim to economic reality. Of course there are implications for U.S. home sales and the housing market as well.
The Fed seems to think that yield curve inversion is not necessarily something we should worry about. Funny thing is, I remember Ben Bernanke telling the American public that U.S. home prices had nowhere to go but up, just before a house of cards in mortgage-backed securities nearly blew up the entire world economy. Whatever the Fed is selling, keep one eye on your wallet because for all of their elite pedigrees and economic models, they have demonstrated decades of serial economic mismanagement. Personally I don’t think this is an accident, but that’s another article for another day.
As someone who has been monitoring this glorious echo boom during the past 10 years, there are a lot of things that have surprised me. I probably underestimated the corruption of government officials and the talking heads in the Federal Reserve. As much as the D.C. and Wall Street mouthpieces will proclaim otherwise, I believe quantitative easing will go down in history as an epic fraud foisted on American taxpayers.
After listening to some talking head “expert” on Mortgage News Daily trying to spin higher interest rates as a good thing for first-time home buyers I had to simply laugh. There are plenty of shills for the mortgage and housing industry, but this was a whopper. I dont’ need the CEO of Lennar to tell me that higher mortgage rates are a challenge for potential home buyers. Anyone can see this rather easily by looking a chart of the Dow Jones Home Construction Index which is now down 31% year-to-date after this week’s mauling.
If you are in the market to buy or sell a home these longer term dynamics of fiscal and monetary policy have important implications. There is certainly no shortage of mortgage professionals or Realtors who will tell you that locking in at these higher rates is a prudent strategy or that now is still a great time to buy a home because mortgage rates are still historically low. But are they? I suspect rates are eventually going to go lower, and I wouldn’t be surprised to see home prices do the same. If we need any context, Japan provides a perfect example.
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