I felt like a turn to an unfamiliar topic this week that was both long overdue and I’m still feeling the effects of the Trump Tariffs and Politico talk that I want a break from. I want to talk about housing as the 10-year interest rate has dropped about 50 basis points driving mortgage rates down to about 6.6%. That is a nice reprieve from the above 7% level where they had been, but it is still far from affordable.
This from Hugh Smith via OfTwoMinds blog via ZeroHedge, “The choice is simple: housing is either shelter for citizens, or it’s just another interchangeable speculative asset in the global financialization casino. It can’t be both. The generations who bought homes 25 or more years ago have accumulated most of the wealth. When houses increase in value ten-fold while wages rise by a third, this is the result:…Here’s the National Case Shiller Housing Index. A return to the upper trendline would require a 40% drop in current valuations, and a return to the lower trendline would require a 50% decline.”
That’s right folks and he is just talking about a return to the mean, the long term average. A sell off of that magnitude would harken back to the great financial crisis. He has charts as well, in fact he shows the Goldman Sachs housing affordability index just hit the lowest level on record. Wages aren’t keeping up with prices at the grocery store, the car lot, or the real estate want ads. Now combine this with the next shoe about to fall. Biden’s reign of ignoring laws and bills is over.
The FHA crisis is upon us. The Wall Street Journal’s Allysia Finley showed a chart from the FHA that showed 64% of FHA borrowers had a debt to income ratio over 43% up from 25% during the turn of the century. The FHA is a government program that allows low credit scores and as little as 3% down payment getting into these highly unaffordable homes. However, Nick Gerli has a YouTube video that shows something extremely frightening. 14% default rate meaning past due which is more than 1 million borrowers past due on their current mortgage payments. That is bad, but in prolonged program from Covid, the Biden administration didn’t allow the government to foreclose on past due borrowers. Only 9 out of 52, 531 resulted in foreclosure last year. The government either paid the mortgage or just tacked the payment onto the back of the mortgage and let the people stay in their home that they weren’t paying for.
It is tough to run for re-election when you have to kick a bunch of people out of their house evidently, so they didn’t. I will tell you about cleaning house, that is what Doge is trying to do right now and if this program gets cut and people start getting evicted from their homes, it is going to unleash another flood of inventory on the market. 400,000 delayed foreclosures are set to be reviewed. Housing prices with the increased supply will fall. That is a good and necessary thing so future buyers can afford to buy a home within their means. That 43% debt to income ratio is truly mind-boggling. Most banks wouldn’t lend past a 28% ratio with excellent credit historically so when you hear that the real estate borrower is in good shape and a housing correction can’t happen again, think again or start thinking. This is a great video to watch to see why the housing market hasn’t crashed yet. Truly stunning what the government was and has been doing.
Florida and Texas are already starting to see price decline, but up next is Tennessee. This from Nick Gerli at Twitter, “The typical mortgage payment for a homebuyer in Tennessee is now 35% of the state’s median household income. You can see from the chart below that there is no historical precedent for affordability being that bad. The long-term average mortgage payment in Tennessee to income ration is 21%. That means a 40% price drop just to get back to the historical average. I wonder how people will like having their houses lose 40%? The flip side is that they could get a 40% raise? Here is to hope.
Hope is not a strategy though, especially in the face of data. This from ZeroHedge, “Last month, the supply of new homes for sale increased 0.8% to 500,000 — the highest level since 2007. Meantime, the median sale price of a new home decreased 1.5% from a year ago to $414,500. “Consumers are working through affordability concerns and uncertainties related to macroeconomic and geopolitical issues, which are causing them to move slowly in their homebuying decisions,” KB Home Chief Executive Officer Jeffrey Mezger said Monday in a press release announcing the company’s earnings. KB Home missed its first-quarter sales goals and cut its fiscal 2025 revenue guidance.”
They certainly did. KB Homes was trading at $89 a share in September and now it is below $58. That is not a correction, that is not a bear market, that is a catastrophic 30% plus meltdown in 6 months. Don’t take my old Quaker Oats eating word for it, this is the stock price of a publicly traded home builder. The market is seeing storms clouds ahead.
Credit spreads are usually the canary in the coal mine, meaning that usually in a healthy economy the spread between corporate bond yields and US Treasuries widening is seen as the best sign that the economy is turning recessionary. Well, they just widened to their widest since December of 2023. The Nasdaq just brushed up against its low from a couple weeks ago and the S&P 500 is now trading under its 200-day moving average. What was a correction is beginning to look like the beginning of an extended move lower in equities.
A housing selloff will acerbate an equity sell off. The lower 80% of this country are feeling the pinch. The pinch left over from Covid, that serious flu epidemic, the ensuing shutdowns, and Trump and Biden’s government spending that led to inflation. The top 20% got wealthier during this time. PPA loans, housing prices went up, stocks went up as we were at record highs just weeks ago. If that cohort starts to cut back on spending then Katie bar the door. The main reason that they are doing as well as they are and spending as much as they are is the wealth effect. Their portfolio is healthy, their house has equity, they want some avocado toast and a mimosa. If these two stores of wealth should all of a sudden not be worth so much, then perhaps the floodgates on spending will get shut just a bit.
Let’s combine this with the federal government spending slowdown that is accelerating as the Doge boys work their way through the bloated morass known as the Federal government. We have already chronicled how the Mid-Atlantic states around DC are going to be going into recession from the layoffs. We have Florida in a housing crisis right now with the HOA fees, special assessments, and home insurance rates being so high that Governor Desantis is trying to reduce or eliminate property taxes. Tariffs are starting at the price of lots of things are about to go higher. This is what happens in a recession. People spend less. That’s the key takeaway. Not because they want to, oh no these are the world’s best spenders these Americans. They will spend less because they will have less money and more importantly less credit with which to buy. Good thing that 0% down payment housing mortgages are back. That’s right, rising inventory, shaky stock market, and 0% down. Sound familiar?
Sincerely Yours,
C Thomas Printer
Also born on this date… former undisputed middleweight champion of the world, Carmen Basilio.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.