Perfect Storm For Markets: Employment, Real Estate Market, Fed Tapering, Debt-Ceiling Battle And Syria
Commentary: Watch out for the Fed meeting, debt-ceiling battle and Syria
Syria, next week’s Fed meeting and the upcoming debt ceiling battle set up a perfect storm for global financial markets.
Syria remains a fast-moving and fluid situation, as first the “fear” trade took hold, sending equity markets lower and gold and oil higher. Then, virtually overnight, a diplomatic solution is now on the table and the “fear trade” is currently unwinding, at least for the time being, as world governments explore the Russian proposal for disarming Syria of its chemical weapons. Expect the twists and turns of this drama to continue whipping financial markets over the next few weeks.
Sept. 17-18 brings the long-awaited Federal Reserve meeting, Bernanke press conference and the anticipated beginning of the end for quantitative easing. The latest noise from Wall Street Journal columnist John Hilsenrath points to a “dovish taper” after last week’s nonfarm payrolls report came in weaker than expected.
Finally, another round in the debt-ceiling battle is set to start with the government potentially running out of money sometime between mid-October and mid-December when its extraordinary funding measures reach their limits.
The last debt-ceiling battle occurred in the summer of 2011, and from late July to September, the S&P 500 shed more than 15% as Congress and the White House wrangled over a settlement. With the House seemingly intent on tying a lift in the debt ceiling to limits on Obamacare, this round of debate could be even more rancorous.
Employment: Trending Down
The growth rate of employment is declining over time, as positive growth weakens and recessionary declines deepen.
Charts and data provided by longtime correspondent B.C. reflect what many know from first-hand experience: employment is trending down. The growth rate of employment is declining over time, as positive growth weakens and recessionary declines deepen.
Though the 3-year average annual change has improved to near-zero, the 5-year (i.e. longer-term trendline) is still solidly negative.
Housing Bubble In Full Bloom, Zany Price Increases, And Now A Sudden Slowdown
Cities have seen dizzying home-price increases that are giddily reported and fuse with pandemic housing hype and trillions from the Fed into a self-propagating force. And it has become accepted wisdom that the housing market would recover all the way to where it was in 2006, which would represent a complete recovery, a sign that the Fed has done its job, that it cured at least one of the ills that has been dogging this economy for so long.
Alas, not too long ago, everyone had called 2006 “the peak of the housing bubble,” the apogee of all craziness, one of the causes of the disaster that followed, and everybody had tales of just how crazy it was back then. All this is forgotten. The prices of 2006 are suddenly no longer the peak of the housing bubble, but a goal to get back to.
Electronic real-estate broker Redfin covers 19 metro areas with its Real-Time Price Tracker. It’s based on sales contracts that are reported to the MLS data bases upon signing, and thus far timelier than other gauges. It measures prices per square foot, thus eliminating the issue of larger versus smaller homes. In its report at the end of August, home prices in San Francisco soared 27.3% from a year ago; in Riverside, CA, 29.6%; in Sacramento, CA, 38.8%; and in Las Vegas a cool 39.1%.
Toxic Mix: higher prices and higher mortgage rates
Price increases that make the last bubble appear boring! So in San Francisco, the median list price, according to Redfin, is $832,000. The median sales price is 7.5% higher.
Mortgage rates have jumped too. Combined with higher home prices, they make a toxic mix. So if our homebuyer in San Francisco pays $16,000 down on his median home and finances $816,000 for 30 years, with a fixed-rate mortgage at the average rate of 4.80%, the payment will set him back $4,281 a month.
If the price on that unit was up 27%, it would have cost $655,000 a year ago. Back then, rates on equivalent mortgages were about 3.5%. With the same amount down, he would have financed $639,000. The payment would have been $2,736 a month. In the course of a year, for exactly the same unit, the mortgage payment jumped 55%.
Insanity. Homes weren’t cheap last year either. Have incomes jumped 55% to make up for it? Um, no. In other cities, such as Las Vegas, it would be even worse. In other words, the new housing bubble has been beautifully inflated – and is approaching full bloom. Thank you halleluiah, Fed.
What’s next? Repeat of 2007-2009?
“The price increases are crazy,” real-estate agent Amy Downs in the Dallas suburb of Garland echoed to the Wall Street Journal. And it’s not good for business; a lot of her clients stopped searching for a new home.
Homebuilders have pushed to the max. But after raising prices for well over a year, they’re suddenly feeling the heat – suddenly being in August. Builders are normally able to raise prices in August, on average by 2% from July, according to John Burns Real Estate Consulting. But in its survey of 273 builders, covering about 16% of the new-home sales across the country, 47% of the builders raised prices in August, 48% kept them flat, and 5% lowered them.
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