September 26, 2022 | Getting Aligned

Another massive week in the rates market with the US Federal Reserve jacking rates up another 75bps. While this was expected, it was the stark comments from Jerome Powell that really shook markets. Powell basically, in a polite way, said Americans need to endure some economic pain, including job loss, to slow demand and get inflation down. Furthermore, he wants to see a correction in the housing market.

“WHAT WE NEED IS SUPPLY AND DEMAND TO GET BETTER ALIGNED SO HOUSE PRICES GO UP AT A REASONABLE LEVEL, AT A REASONABLE PACE, SO THAT PEOPLE CAN AFFORD HOUSES AGAIN, SO WE PROBABLY IN THE HOUSING MARKET NEED TO GO THROUGH A CORRECTION TO GET BACK TO THAT PLACE.”

How much of a correction does the Fed need to see?

In the US, Home sales have declined for seven months in a row. New family home sales are down 30% year-over-year.

Pending home sales are approaching pandemic lows.

The Monthly Supply of New Homes just exploded to 10.9 months. Builders are screwed and prices are heading lower.

The wheels are in motion for a deepening housing correction. This is exactly what the fed wants, but once it starts how do you stop it?

Of course the same dilemma can be applied to Canada, only worse. Not that you need reminding but our household debt levels are much higher, house price to income ratios are worse, and we don’t have fixed rate mortgages for 30 years. There’s a lot more interest rate sensitivity up North. Speaking of interest costs, they’re poised to hit their highest levels in at least twenty years as a percentage of disposable income.

I remain of the view that housing is much weaker than policy makers are aware of. The knock-on effects are also likely to be deeper than we are being led to believe. The gap between what sellers are asking and what buyers are willing to pay continues to widen. In other words, liquidity is getting worse. This is already the steepest national housing market correction on record, according to CREA’s home price index which dates back to 2005.

Policy makers are starting to get nervous. Per the always insightful Rob Mclister, there are ongoing discussions about allowing borrowers to re-amortize at renewal. OSFI is also pondering the easing of the mortgage stress test at their December update. This is not a sure thing but the probabilities increase as the housing downturn deepens.

While this could ease a housing correction, the reality is that mortgage rates are still running at 14 year highs and are now back at their twenty year long run average.

In other words, J Powell is about to get his much desired housing correction, the only problem is it won’t be contained to the US- it never is. The US dollar wrecking ball is about to break a lot of things. Which leads me to believe we’ll be talking a lot less about inflation a year from now. Central banks are always fighting the last war. Let’s see.

Steve Saretsky September 26th, 2022

Posted In: Steve Saretsky Blog

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