“When the Audacity and Mendacity of HOPE (and HARP and HAMP) Meet the Audacity and Mendacity of the Fed”
The mendacity being used by the Obama Administration to launch another economic stimulus programme by stealth, to avoid the partisan politics in Congress, through the various housing stimulus programmes was introduced in Housing Smoke and Mirrors “The Mendacity of HOPE (and HARP and HAMP)”. Its successful execution was also seen to be dependent upon the complicity of the Federal Reserve to provide monetary stimulus through its balance sheet. The nomination of Sarah Bloom Raskin to Treasury Deputy Secretary was a key signal in this process; 1 as is the creation of a sympathetic Fed through the nomination of a new Chairman and replacements to various vacant Fed positions coming up in the near future. This strategy was put into the overall context of the Administration’s attempts to focus economic policy on the Middle Class; which was covered by a related discussion in Terminal Velocity “Gatsbied”. 2
The audacity with which the Administration has subsequently launched its stealth campaign through “HOPE NOW” and the FHA’s “Back to Work” initiatives was time-stamped in Housing Smoke and Mirrors “The Audacity of HOPE (and HARP and HAMP)”. This report ended with the observation that these programmes and the Fed’s complicity were running out of steam. This loss of momentum was assumed to be associated with the growing expectation that the “Taper” is coming. The market discounting mechanism, which has caused mortgage interest rates to rise, has therefore put a brake on the housing market. The inference is that this loss in momentum has rippled throughout the domestic economy, in addition to the enforced arbitrary fiscal tightening of the Sequester. The US Economy is once again approaching stall speed; which implies that either the Fed or the Federal Government must step in to sustain it. Mendacity must therefore beget Audacity; and/or vice versa.
In the time since “The Mendacity of HOPE (and HARP and HAMP)” was written, a litany of signals have been reported, in the public domain, which suggest that the housing recovery stalled out somewhere in July; after the deceleration began in January 2013:
- The Existing Home Inventory started to diverge from its improving trajectory and converge on the disappointing trajectory witnessed back in 2010 3
- Weekly Home Inventory appears to have bottomed in January 2013 4
- Experian notes the First Mortgage default rate started to rise in July 2013 5
- Existing Home Sales spiked in July; but the inventory spike suggests that this indicates panic amongst sellers wishing to take advantage of high prices before interest rates rise further. 6
- The weakness in July New Home Sales even prompted the headline “Now Can We Talk About Rising Rates Hurting Housing?!” 7
July is now being acknowledged as the tipping point in the housing market. This tipping point is accepted as being caused by the “Taper”. It is ironic (and important) to observe that in the week that the markets became convinced of the “Taper” the evidence suggested that the impact of the “Taper” had already occurred. The “Taper” has thus become a self-fulfilling and fully discounted prophecy. It has also become the opportunity for the Federal Government and the Fed to be audacious and mendacious (not necessarily in that order or respectively). As Montaigne opined, nothing is so firmly believed in than that which is least understood.
Evidently the housing sector has weakened; but by how much?
Some perspective on the Existing Home Sales weakness, using the rise in inventory, suggests that in year-on-year terms the slump is great; but in absolute numbers terms of houses this is still small in comparison with the great improvement since 2012.Existing inventory is running at roughly five months of supply. This is slightly above the levels seen back in 2002 before the great bubble and crash in housing occurred. There is cause for concern right now. This concern should only turn to panic if the Federal Government and the Fed cease to be audacious and mendacious.
The perspective adopted by Fannie Mae, clearly signals the audacious and mendacious intentions and capabilities of the Obama Administration and the Fed. Fannie Mae’s latest economic forecast concluded that the back-up in interest rates would not stop the recovery in the housing market. The housing sector is predicted to return to its normal contribution to GDP by 2015.
If one stops and thinks about this date, it seems to resonate very strongly with the projections of the FOMC for end of QE. Clearly the Fed and Fannie Mae are on the same “sheet” in terms of economic projections. This implies that they are both on the same (Fed’s) balance “sheet” in terms of the scale of MBA purchases that are still required to hit the 2015 target date. Fannie Mae’s projections suggest that the housing sector will have to double in size to return to its former normal contribution to GDP.
If the Bond Bears are correct about interest rates, it is impossible for the housing sector to return to its former state by 2015. It is therefore impossible for the economy to hit the 2015 target that the Fed needs to exit QE. It seems much more likely that the Bond Bears have been abused into discounting 2015 Fed exit conditions prematurely.
The current term structure of interest rates therefore negates the 2015 exit target conditions; and is now working to undermine them through the current behaviour of the housing market. The abuse will continue so that the Bond Bears become Bulls; and cause the fall in interest rates that will create the recovery in housing that Fannie Mae and the Fed are predicting for 2015. If it all goes to plan, the bond buying will be done by private investors and banks.
If you believe this scenario the Fed’s balance sheet doesn’t have to do the heavy lifting that it has been doing thus far.
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