Dems only know politics & they remember how much they weaponized the phrase “Great Recession” for their own gain.  Right now they are getting crushed in polling re:  inflation & are using the fed to try to curb it.  As soon as they deem they are getting beat up more because of something else they will reverse course.  Unfortunately for us in the real world, the entire country is between a rock & a hard place.

I know someone who nearly maxed out their dti in order to buy an overpriced home during this nonsense. They have a high 2% loan and if either one of them loses their job, they can’t make payments.

I suspect they share that boat with many many families.

I think that’s the kicker.  If the economy completely tanks and we start to see jobs being shed by the 100,000’s then it won’t matter how low a rate a home was financed at.  

As for consumer spending, I think we’re seeing some interesting trends.  Purchase of goods seems to be down but purchases of services seems to be up.  Every AirBnb where I live (admittedly a lot of them) has been slammed for weeks.  Restaurants are packed. People are spending money.

https://threadreaderapp.com/thread/1529570587961606144.html

What are your thoughts on that?

It's not really a question of foreclosure, it's about the Fed unwinding (selling out of) a $3 trillion dollar position.



They can't hold until expiration since these mostly 15/30 year notes and they need to unwind (sell) now.  And as you said, most of these were purchased within the last 2 years at low interest rates, presenting a conflict with rising interest rates.

Here's a quote from a former senior trader at the Fed's open market desk -

And finally, when the central bank sells MBS, it's likely to do so at a significant loss. Who will eat it?
 

I agree with what he is saying.  If you look at the psychology of a market cycle, I think we are in the panic stage heading headlong into capitulation.

My definition of capitulation - the VIX heads towards 50 and everybody says fuck it I can't take it anymore and I'm out of the market.  I keep waiting and watching for this every day.  We'll know when it happens and just like every other cycle I fully expect it to happen.

I mean, if I lost my job we couldn’t make the mortgage payment either…
ETA: I guess I cash out the 401k and it’s “fine”

You're directly on the crux of the issue.
The FED has maintained a position that their asset purchases wouldn't be inflationary by either holding to term or selling at cost.
If they have to dump low interest MBS's back on the market at higher interest rates then their only choice is to sell at a loss.
The result of that sale at a loss means the FED bought at a higher price and sold at a lower price.
This is the important part - that means the dollars the FED spent (which they printed out of thin air) stay in the economy and become inflationary.
Which makes them lose more on subsequent sales and even more inflation - a literal doom loop.

All of the FED's machinations over the past 14 years to fend off collapse in 2008 has put them behind an eight ball that's bigger than anyone can conceive how to avoid.
They've put us into an inflationary environment that is now pretty well entrenched.
They can't unwind their balance sheet without impacting market liquidity and goosing inflation.
They can't begin to fight inflation when their only tool is interest rate raises without pushing us into a real depression like we haven't seen since the '30s.
Any rise in interest rates pushes the economy over a cliff.
And now they face the worst kind of inflation which is supply driven. The completely fucked up global supply chains are one of the largest drivers in the current inflation.
The FED can't print goods or services out of thin air.

In short, the economy is completely fucked in coming years thanks to the FED.
Pick any combination of raging inflation, higher interest rates, shortages on the shelves, lost jobs, housing market down the toilet and all with the background of famine in third world countries and uncertainty about WW3.
In my opinion we're far past the point where anyone can do anything; I believe the die has been cast.

Adding to the above, I fear an exacerbation of the MBS complication from 2006-2012 that didn't exist in the 70s/80s with that level of inflation:  When foreclosures start to pop, financial institutions will start sitting on them to show market value on their books.  When a bank/mortgage company forecloses, that property gets marked to market value at the time of foreclosure - the foreclosure "resets" the value of the house against the debt owed and those RMBSs go past the dangerzone and into the shitter.  There were plenty of instances late 2000s where people stopped paying their mortgages and banks put them into forbearance or just didn't move on them because they were hoping to ride out the dip in the market to avoid marking them to a worse market than could be expected a year later.  Back then, banks could afford to "drip"  foreclosures into the market to minimize the damage to the market, and subsequently, to themselves.

I don't see that as a possibility this time.

Similar events THIS time will act as a signal for EVERYONE in the know to to dump/unwind them because of a spiraling fear of loss of market value.  The market could possibly REALLY shit the sheets quick - I don't know if they have the stomach this time.  No one on Main Street, USA will have liquidity to buy even while higher interest rates drive the property prices lower.  Right now, most are selling that property values will not go back down that much.  All I know is that if they do a mule dive off the tower while foreclosures start popping AND major holders start dumping RMBS holdings irrespective of ratings or tranches:  It's going to be "Katie bar the door."

Banks/Mortgagers have theoretically built in firewalls between "investments" and assets, but that's going to be a lot of wealth that will have to be eaten by a LOT of people from all walks.  Bail out/Bail in - big unhappiness.

Let's not even TALK about CMBS holdings and the pandemic causing moves away from B&M stores along with internet shopping.  Add the inability for folks to have discretionary spending and my pea-brain can't comprehend it.

In 2006 everyone thought that residential housing values only went up. Yes, there were occasional minor corrections or regional aberrations; but there had not been a wholesale destruction in value across the board in living memory.
Today it's in everyone's recent memory; and your point about there being a lot of institutions with itchy trigger fingers to avoid the pain of 2008 is spot on.

I don't place all the blame on the Fed.  Yes they are a key player but we've had scumbags running treasury (Rubin, Paulson, geithner, etc), an SEC thats been asleep for DECADES, banks like wells, jp Morgan and BofA run by criminal vampires, politicians selling out our workers and industries for DECADES and all of the pillars of our economy turned into predators (housing, education and health care are the biggest).

The fktards that want to chant everything is awesome in their little corner of legoland and "buy the dip bro" are apparently quite happy with their role as a hamster on a wheel but for sentient beings the ultimate solution  involves a whole lotta CoC.

Well stated, I agree the Fed shouldn't be directly blamed; they are but pawns.
I wish we could do something; but then we cope with what we're given or gained.

Good Post.   I wish more people would take the time to understand it.

More than anything, I wish the people who Do understand what you’re saying, and are dismissive of it, would chime in with a logical and believable rebuttal.      Something more than just “LoL”, or “Buy the dip, keep Buying!”

Any counterpoint, really.   Something to hang your hat on besides; “History shows that recessions only last for 18-24 months at most, so just keep buying!”

"Investors will focus on a heavy load of economic data on Friday, with the Fed’s preferred inflation gauge, the core personal consumption expenditure index deflator, in the spotlight. The core PCE is expected to have gained 4.9% in April annually, a drop from 5.2% in March, according to economists polled by Dow Jones Newswires and The Wall Street Journal."

https://www.marketwatch.com/story/u-s-stock-futures-inch-higher-ahead-of-feds-favorite-inflation-gauge-11653642699?siteid=yhoof2

Investors believe the worst of the inflation is behind us and we can resume our bullish market gains.

Translation, They need to sell off some shit to suckers.

$400+ mo prop taxes.... gah!!!

When I was looking this last winter, anything over $350 was an instant "nope"....

@HDGator - one of the best explanations I've read in a long time - excellent post and analysis.  Match this up to what we are seeing in the charts and you really can't argue with it.

I wish to subscribe to your newsletter. Best summary I've ever seen on arfcom about our current state of monetary affairs.

Excellent post.

Before I retired this year, I worked a full time job and flipped houses for close to 30 years.  My way of flipping houses was to buy a larger distressed home and live in it for a few years while I remodeled it.  Sell for a nice tax free profit and move on to the next one.

To show I've put my money where my mouth is take a look at this chart of the value of my last house (and yes I bought the dip)-



I put it on the market earlier this year at a ridiculous price right when the Fed announced they were going to start raising rates.  I had multiple sight unseen offers the first day it hit the market.  I accepted a 7 figure offer that was $55k over ask the second day on the market.  Now my point is - does anyone really believe this is sustainable?  The amount of FOMO going on with this sale was something like I've never seen before.

I planned the sale for over a year - watching and waiting for my trigger to sell.  As part of my plan I had a new house lined up to rent before I sold, in fact I paid a month's rent before I signed the rental agreement just to have it held for me (cost of doing business).

Now here is the interesting thing.  The person I'm renting from only wanted a 12 month lease because this is intended to be one of his Airbnb homes.  He is now carrying well over $1m in debt building homes for his Airbnb empire.  He started building them right as material and labor prices skyrocketed.  So we have two completely different interpretations of where the market is heading.  Time will tell which one of us made the right decision.

   
 

Even if the dip bros did understand what he’s saying, there is no financial rebuttal because he’s stating a solid case of fundamentals.

But fundamentals aren’t everything, or even the biggest thing in the direction of markets and economies. Politics overpowers finance often, and is why we are here now.

So, the best rebuttal is: the Fed is likely to reverse course again and do QE infinity because that is most politically expedient.

Whether markets/economies keep faith in the fed (and therefore dollar) at that time will remain to be seen.

Click To View Spoiler

Similar but different . I sold 6 rental properties last year and they all brought over asking
My tax bill was terrible but the balance of the money paid off the majority of my other rentals debt
so my free flow cash is fantastic. I now have a surplus of funds to re buy cheap(er) real estate in 2024 or so
when things get really ugly.

We are all going to be millionaires.  

Same here

It's currently at 25, looking at the chart when it spikes to 50+ it does so quickly.  Is there any signs to look out for when it will spike?

Wife's told me her companies going rate is now 5.0%, possibly down to 4.875%

ETA: 800+ credit and 20% down conventional

Glad I wasn't the only one thinking that.

We dropped auto loan rates on Monday too

Here is a chart I watch that goes back to 1990.  The blue line is the S&P 500.  The yellow line is the DJIA and the orange line is the NASDAQ.  Overlaid on these in white is the VIX.  The horizontal line is 50 on the VIX.

One thing I watch is when it puts in a series of lower lows following a spike as the market sentiment calms down.  Then it heads back up as panic starts up and bounces around for a bit then takes off into capitulation.
 


And since the VIX is a 30-day forward looking projection based on index options I always watch the call/put ratios (below is SPY).

https://fortune.com/2022/05/27/housing-market-correction-peak-mark-zandi-moodys-home-prices-outlook/?utm_source=facebook.com&utm_campaign=fortunemagazine&utm_medium=social&xid=soc_socialflow_facebook_FORTUNE&fbclid=IwAR0zCMI-o5cfAt2CddTLegXMRjmEYptQJnOL0bk1CWXyI3twg9O8ExLDU68

So 2% of buyers, lol

I’d that sarcasm or actual data? I’d love to see a breakdown of buyer qualifications actually

Figured the next rate increase would already start being built into the current rates.

Guess not.

Once it drops biggly, dems will swoop in to “ help “, and do another rent payment cock block and fuck landlords hard again. At least if things crater, it’s happening with dems in full control, should be really bad by 2024, with dems taking the blame. Unless idiot liberals still think trumps responsible after being out of power for 4 years.

Point being, hopefully we get a rep controlled gov and someone like desantis as president, might not get anything fixed but it will keep dems away from the controls for awhile at least.

Sucks all around though, and Repubs suck too.

https://www.reuters.com/markets/us/fed-carrying-330b-unrealized-losses-its-asset-according-q1-financial-statement-2022-05-27/

$330B in unrealized losses so far...

Not that you guys care, but I fought my PVA this year.  Tons of comps, pictures, etc. professional appraisal that I paid for, etc. No property valuation increase.

Assessment stays the same as 2020. Fuck taxes.  

I say this because you don’t have to just take what they value your property. You can dispute. But it’s like fighting the DMV, it ain’t gonna be easy. They want you to give up.

Congrats on extrapolating a single data point into the entire RE market?

So in the end how much net did you save? I ain't jumping through a ton of gov hoops to save a few hundred bucks.  My time has a certain value attached to it

About 2k per year. This year and every year until next valuation.  About 6 hours of work/correspondence. 333 bucks an hour.  For this year alone. Next year 2k/0

At 4 years till next valuation 1333 bucks an hour.

Random thought.
Consumer confidence drops normally occur due to employment softness. Today we have the opposite problem: not enough workers.
Suggests (at least from a consumption point of view) that a recession isn't close, but inflation is just getting going.

Peter Zeihan  (@PeterZeihan) May 27, 2022

Interesting comment at the bottom which makes sense given many Central banks are negative interest rates right now.  

Another random thought: an inverted yield curve screams recession, in the normal interpretation. But if you are right, Peter, the Fed will push up the short rate while foreign money will drive down the long rates, with no recession in sight!

BabbleBee  (@ThankElon) May 27, 2022

The long and short of it is, at least from what I can tell, we have no historical perspective for any of the data we're seeing now.  Sure certain data points taken in isolation look like trends from past economic cycles but taken in totality.  It's really uncharted, no pun intended, territory.  

Could it be possible we run high inflation and low unemployment?  The fact we're running out of places to support wage arbitrage says it's possible.  Strange times indeed.

Might not be the min, but it's what I'm bringing.

Market has calmed a bit here, but the neighbor two doors down just went under contract. List was $1.2M with two weeks on market.  We moved in at the same time 15 years ago and their purchase price was $600k.

Identical floor plan to mine, but I have more space in the basement and a bigger lot.

So by March they took a $165B hit to their $3T MBS nut.  Guess they aren't mind readers either although simple math would have worked in this case.  The real fun starts when the unrealized losses start turning into actual losses.   Unwinding this mess is going to be very interesting.

Anyone up for a group buy on some discounted tranches?

By the time this is over it will be spun to make them look like financial geniuses with the MSM declaring them our saviors.

We didn’t raise rates with the fed 3 weeks ago
We dropped this week

Clown world

Unless the loan product is directly tied to prime, the fed rate doesn’t control mortgage rates, car loan rates, etc. the lender does.

My SBLOC is not tied to prime rate
My car lease is not tied to prime rate
My mortgage is not tied to prime rate
My CRedit cards may be, but don’t care
My HELOC is however tied to prime, but that doesn’t happen for another 18 months.

i agree with the gators and say there's a better than even chance of their doom scenario.   however...

there are a few other things to take in for context.

1. people have been predicting economic doom for a long time and through manipulation, fraud, etc TPTB managed to "kick the can down the road" for a couple decades.  like many doomer boomer scenarios, from the population bomb and famine stuff in the 60s, to the predictions of a new ice age, to prediction of an ice free north pole by 2015, peak oil, etc...something always seems to save us.  and betting against the US economy long term has always been a bad bet.  

2.  our current mess is 100% political.   I think a lot of us understood intuitively that we could fix obama's disaster of a "jobless recovery" economy with the policies trump implemented, but were shocked at just how quickly everything turned around.  i mean, if you look at consumer sentiment, manufacturing sentiment, the stock market, etc, it all went up like a rocket starting the day after the election and we hit month after month after month of record low unemployment and labor participation at the same time despite super negative press.   if americans start voting with their pocket books again, (a big if), we could experience a tremendous recovery pretty dang quick.   in other words, just because biden has f'd it up, doesn't mean we have to be in a depression for 10 years or turn into mad max.  we can fix it pretty fast.   of course, some things, like refineries and nuclear plants take longer to bring online than others.

3.  the damage the fed and congress are doing to cause inflation has to be taken into context.  yes, $3T is a lot to unwind.   but in the context of being already $20+ T in debt, if we stop the bleeding now, it's really just another 20% to absorb.    I mean, if inflation goes up another 20% it's painful but it's not the end of the world.  it's not 1000% and 1000000% venezuela/zimbabwe stuff.   what will well and truly be the end of our republic is if congress' reaction is to keep passing $T spending bills giving away money and causing us to hyper inflate.

4.  inflation has some negative feedback mechanisms internationally that will help us.  theoretically, if the dollar dropped a lot, that would cause foreign goods to be more expensive, and thus manufacturing and service jobs to move back to the US, which long term would be good for us.    now, the current reality is other economies are even more f'd up than we are, so despite record inflation, the dollar is shockingly strong right now.

to summarize, Jacob at Rifles Only has an appropriate saying... "believe the bullet".  meaning, if you calculate the wind and elevation etc and take a shot and the bullet goes somewhere completely unexpected, your theories, calculations, observations were wrong and the bullet is right.   and some retard named Keynes, who got it 80% wrong, at least got this right:  "the market can remain irrational longer than you can stay solvent".   so.... despite the based explanation and prediction from the gators above, if they turn out to be wrong, don't let it bankrupt you.  manage your risk.  one last quote from a retard, "don't fight the Fed"