5 ms·

> The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol H

by dvt 4y ago

> The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol Hill. I think this article is a bit of a nothingburger. Of course QT has the opposite effect of QE, that's the entire point. The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year, as long as the labor market is doing well (which it seems like it is[1]) and folks can afford their mortgages. Of course house prices may deflate (~20%?) purely out of demand for such high prices decreasing, but imo it's unlikely we will see mortgages go underwater, and therefore the Fed doesn't really have a problem on their hands. [1] https://www.nytimes.com/2022/05/06/business/economy/jobs-report-april-2022.html https://www.nytimes.com/2022/05/06/business/economy/jobs-rep...

philwelch 4y ago
> as long as the labor market is doing well Which is indeed the last shoe that has yet to drop in the current recession.
aidenn0 4y ago
If housing prices deflate more than 20%, nearly everyone who bought a house with 20% down in the past 2 years will be underwater, no?
- dvt 4y ago
  If we assume that the home-owners have been building equity in their homes for the past 2 years, no, they would be at 0 + equity. This of course stings a little, but still not underwater or filing for bankruptcy.
  - aidenn0 4y ago
    I meant to say much more than 20%; you don't build a whole lot of equity in the first years of a 30 year mortgage due to the amortization schedule.
    - medvezhenok 4y ago
      It depends a lot on the interest rates involved. At 2.6%, 45% of your first payment goes toward the principal, and around 3.5 years into a 30 year mortgage you hit 50/50 split between the principal and interest. At 5% interest, 22% of your first mortgage payment goes toward the principal and you only hit parity at around year 15-16. At 10% interest rate, only 5% of your first mortgage payment goes toward the principal. You hit parity (50/50) around year 23.
ransom1538 4y ago
Agreed. Home buyers 2017+ are pretty leveraged though. Any labor tightening will for sure increase foreclosures in this group. I don't see a run on mortgages. It is funny how people map the past to the future.
qeternity 4y ago
> The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year CDOs did not blow up the housing market. The housing market blew up the CDO market. In 2007, people said the exact same thing, and by every single metric the housing market is far more extended than it was then.
- JumpCrisscross 4y ago
  > CDOs did not blow up the housing market. The housing market blew up the CDO market. Both statements are correct because there was a feedback loop.
  - riskneutral 4y ago
    It was more like dominos falling than a feedback loop. It was poor / fraudulent mortgage underwriting standards which caused a housing bubble and subsequent collapse of house prices and increase in mortgage defaults. The CDO market provided a large part of the funding for those mortgages and suffered as a result. The panic over the CDO market's collapse caused a widespread credit crisis for anyone suspected of having exposures to CDOs, and then the US government decided to allow a major bank to fail due to credit crisis (Lehman Brothers). This was a terrible mistake that nearly caused the cascading failure of the entire financial sector and forced the US government to execute a huge bailout operation. The blame lies with the US government, for first failing to properly regulate the market, and then allowing Lehman Brothers to fail without understanding the consequences. The consequences of the 2008 financial crisis reverberated for over a decade, and then COVID-19 pandemic arose and the government decided that it wasn't going to make the "same mistake" again and started bailing out everyone. However, they overshot, misallocated funds, caused runaway inflation, then failed to recognize the persistent inflation and acted too late to curb it. That brings us to today, where there is ongoing speculation about whether this will be a "soft landing" or a "hard landing." If history is any guide, then I think that this kind of market situation this means we can expect another spectacular crash in the near future. The consequences of the 2008 financial crisis and subsequent rescue operation were still unresolved when the pandemic began, because the Fed had not figured out how to unwind its bloated balance sheet from all those years of Quantitative Easing. Just when the Fed thought it would start unwinding, the pandemic hit, and the Fed balance sheet grew astronomically. Now, for the first time in decades, the Fed is facing the runaway inflation that "common sense" would have predicted, and they have no choice but to initiate a "rug pull" on the economy in order to bring inflation under control. This will only end when the US consumer is bruised badly enough to reduce consumption, which will put the economy into a tailspin which will cause massive wealth destruction for investors. It's hard to see how the Fed can keep kicking this can down the road. Somewhere along the way there will be a black swan event. Perhaps Russia will choose to escalate cyber, kinetic and/or economic warfare against NATO at the very moment that a US market crash is occurring. I sincerely hope that I'm wrong, but my Spidey Sense is tingling like it's 2001 or 2008.
rufus_foreman 4y ago
>> The 2020 housing boom will not blow up like in 2008 This is correct. The current boom will not blow up like in 2008, it will blow up in a new and unanticipated way. Likely due to complex and lightly regulated financial innovations that have grown in size since the last crash.

by dvt 4y ago

philwelch 4y ago

> as long as the labor market is doing well Which is indeed the last shoe that has yet to drop in the current recession.

aidenn0 4y ago

If housing prices deflate more than 20%, nearly everyone who bought a house with 20% down in the past 2 years will be underwater, no?

dvt 4y ago
If we assume that the home-owners have been building equity in their homes for the past 2 years, no, they would be at 0 + equity. This of course stings a little, but still not underwater or filing for bankruptcy.
- aidenn0 4y ago
  I meant to say much more than 20%; you don't build a whole lot of equity in the first years of a 30 year mortgage due to the amortization schedule.
  - medvezhenok 4y ago
    It depends a lot on the interest rates involved. At 2.6%, 45% of your first payment goes toward the principal, and around 3.5 years into a 30 year mortgage you hit 50/50 split between the principal and interest. At 5% interest, 22% of your first mortgage payment goes toward the principal and you only hit parity at around year 15-16. At 10% interest rate, only 5% of your first mortgage payment goes toward the principal. You hit parity (50/50) around year 23.

ransom1538 4y ago

Agreed. Home buyers 2017+ are pretty leveraged though. Any labor tightening will for sure increase foreclosures in this group. I don't see a run on mortgages. It is funny how people map the past to the future.

qeternity 4y ago

> The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year CDOs did not blow up the housing market. The housing market blew up the CDO market. In 2007, people said the exact same thing, and by every single metric the housing market is far more extended than it was then.

JumpCrisscross 4y ago
> CDOs did not blow up the housing market. The housing market blew up the CDO market. Both statements are correct because there was a feedback loop.
- riskneutral 4y ago
  It was more like dominos falling than a feedback loop. It was poor / fraudulent mortgage underwriting standards which caused a housing bubble and subsequent collapse of house prices and increase in mortgage defaults. The CDO market provided a large part of the funding for those mortgages and suffered as a result. The panic over the CDO market's collapse caused a widespread credit crisis for anyone suspected of having exposures to CDOs, and then the US government decided to allow a major bank to fail due to credit crisis (Lehman Brothers). This was a terrible mistake that nearly caused the cascading failure of the entire financial sector and forced the US government to execute a huge bailout operation. The blame lies with the US government, for first failing to properly regulate the market, and then allowing Lehman Brothers to fail without understanding the consequences. The consequences of the 2008 financial crisis reverberated for over a decade, and then COVID-19 pandemic arose and the government decided that it wasn't going to make the "same mistake" again and started bailing out everyone. However, they overshot, misallocated funds, caused runaway inflation, then failed to recognize the persistent inflation and acted too late to curb it. That brings us to today, where there is ongoing speculation about whether this will be a "soft landing" or a "hard landing." If history is any guide, then I think that this kind of market situation this means we can expect another spectacular crash in the near future. The consequences of the 2008 financial crisis and subsequent rescue operation were still unresolved when the pandemic began, because the Fed had not figured out how to unwind its bloated balance sheet from all those years of Quantitative Easing. Just when the Fed thought it would start unwinding, the pandemic hit, and the Fed balance sheet grew astronomically. Now, for the first time in decades, the Fed is facing the runaway inflation that "common sense" would have predicted, and they have no choice but to initiate a "rug pull" on the economy in order to bring inflation under control. This will only end when the US consumer is bruised badly enough to reduce consumption, which will put the economy into a tailspin which will cause massive wealth destruction for investors. It's hard to see how the Fed can keep kicking this can down the road. Somewhere along the way there will be a black swan event. Perhaps Russia will choose to escalate cyber, kinetic and/or economic warfare against NATO at the very moment that a US market crash is occurring. I sincerely hope that I'm wrong, but my Spidey Sense is tingling like it's 2001 or 2008.

rufus_foreman 4y ago

>> The 2020 housing boom will not blow up like in 2008 This is correct. The current boom will not blow up like in 2008, it will blow up in a new and unanticipated way. Likely due to complex and lightly regulated financial innovations that have grown in size since the last crash.