we didn't have hyperinflation in the 2000s. peak inflation prior to the Great Recession was 4% floating between 2.5% and the high 3s averaging low 3s before 2007. the Fed target for economic growth of 2%.
Uhmmmm.... Exactly when HAS there been hyperinflation in the U.S.?
@Michael P. Lindekugel
I am guessing the raise it to about the same rate as the 2 yr treasury which is historically where it has been. Even though the FED seems like they are "serious" about tackling inflation I think they will break something and reverse course by dropping rates. They have done this over the past 10-15 years the only difference now is that the CPI is higher. How is raising interest rates going to pump more oil? How will it produce more goods and services and fix the supply chains? The Atlanta FED has already come out with a prediction that interest rates will rise to around the 2yr treasury level and then it will begin dropping. Everyone needs to stop looking to the government or the FED for answers. They are the ones that created the problem. The way to fix the issue is to remove the government/central planners, remove regulations, fees etc.
guvment removed banking regulations in the 2000s and that allowed for audit failures and fraud beginning to end in loan applications to MBS tranches to credit default swaps to derivatives to derivatives of derivatives and caused the meltdown called the Great Recession.
I'd be surprised if it gets higher than 3 or 4% total. Housing and ancillary businesses have become a much larger percentage of the economy than 40 years ago, and keeping rates low for so many years have only exacerbated that trend. The Fed has kind of painted itself into a corner, because rates too high will destroy the housing market, and the US can't deal with that very effectively any more. Inflation has also been hidden for a long time by just moving production around to emerging markets, but once everyone has money that bill eventually comes due - and it's coming due now.
Bottom line is I think we are just going to get used to higher rates of inflation permanently.
housing is 12% to 14% of GDP. federal funds rate has very little to no influence on home mortgage rates. it will influence business loans, credit cards, car loans, other business and consumer loans. mortgage interest rates are influenced by the 10 year treasury yield. the Fed will be engaging in Quantitative Tightening with instead of allowing treasuries to mature and roll off the Fed will sell off treasuries prior to maturity to increase supply, decrease price, increase yield to cause mortgage interest rates to increase to cause buyer demand to slow to cause home price inflation to slow to cause a drag on GDP to slow overall inflation. in anticipation of the Fed's QT the mortgage market and 10 year treasury yields are already reacting.
Their GDP projection for 2022 is 2.8% and 2023 is 2.2%; so, the Taylor Rule would keep fed funds rates somewhat in check...and likely why the fed has been slow to move.
Some would argue that moving up in 1/2 point increments is a captain obvious comment as well.
as far as i know the Fed has never explicitly followed the Taylor rule. Taylor created the rules calculus to describe the actions Taylor believe the Fed should do.
the 1/2 point increase is obvious to everyone but the Fed.
Unfortunately how much/how fast it should be raised and how much/fast it is being raised are not the same thing. The Fed should have been raising rates last year, they are already behind the curve. Nov 2021 we had a CPI of 6.8% and they didn't institute the first increase until last month. And the increase was a measly .25% to bring the fed funds rate to .5%.
Good job bringing a fire extinguisher to a forest fire...
Everyone has been saying the Fed should have started raising the federal funds rate a long time ago.
how high will the Federal Reserve raise the federal funds rate? well, according to the Taylor Rule/Principal for monetary policy Volker and Greenspan monetary policy with inflation at 8.7%, then the federal funds rate should be increased to 7% to 8%. simplified version is the federal funds rate should be increased +1 point for each point increase in the inflation rate.
I would not be surprised to see the increase the federal funds rate in 1/2 point increments instead of 1/4
point increments.
The Fed information is factual. House price over valuation is national from economic research firm Rosenberg Research & Associates.
I provide my economic and financial opinions based on my education and experience to all clients – residential, commercial, investment. A prospective home buyer with a large down payment, significant cash reserves, and long-term employment has very little financial risk when there is home price deflation. If they should or shouldn’t buy a home is complex analysis. Home price deflation is a risk for someone at risk of default. Those are not my clients.
real estate markets are mostly local. Seattle is not boom or bust as is historically Las Vegas, Phoenix, and Miami.
I don’t know what experts you are referring to in your statement “I know the experts that screamed about the 20-30% decline in 2020 and again in 2021”. I don’t know any economic research or credible financial research that was claiming those declines in 2020 and 2021. I told my clients our hot market was going to get hotter. Nationally, the US is short 4 million units of housing of all types. Seattle has had a supply problem since the early 2000s. There is the supply constraint. There is the demand outstripping supply which not the same as the supply constraint. Those two economic problems persisted over the last two years causing home price inflation (not appreciation. Not the same) and rent price inflation.
Each ¼ point increase in 30 year fixed mortgage rates decreases home buyer purchasing power by 2.5% to 3%. When mortgage rates hit 5% the cumulative decrease in purchasing power is 17% to 20%.
The Federal Reserve definitely does not want continued hyperinflation. home price inflation makes up a large part of US GDP.
Couple things on this Michael. I appreciate your concern, but we are not experiencing HYPERINFLATION. By definition, hyperinflation is 50% inflation PER MONTH. Next, higher overnight rates means fewer profits for banks. It does nothing in an environment which inflation is caused by money flooding the system. "Prices rise when governments print too much money." This is essentially what is happening. The FED and OTHER Central Banks are continuing to print money through asset purchases including MBS and Treasuries in our case. This was extended through Summer essentially. So rate hikes, meh. Means little. In order to curb this they are going to have to contract the money supply. They are going to have to reduce their balance sheet. This will contract the M2 money supply. The action is actually deflationary.
The Fed is walking a tight rope. They are trying to buy assets and then sell it again on the overnight market. It is not a safe game to play. Again, contracting the money supply is really the only way out. However, they do not want to collapse the market at the same time. This means the stock market and the housing market. We have the largest and wealthiest generation in history. If they suddenly lost that wealth, it would be a disaster.
So will housing prices fall, probably. How much? Hard to say. People have lots of cash right now. I'm getting offers on listings where people are putting 700k on a 1.5M house. And the amount of equity in homes right now is unprecedented. Almost 50% of homeowners own their homes outright. So no, no crash. People learned their lesson after 2009.
As for supply and demand imbalance, not going to normalize any time soon. Supply is held up by boomers who are not downsizing, they are staying put and going out on a stretcher. Part of the reason the builders are not creating more supply.
I will post two videos separately on my complete thoughts on the subject just incase BP tries to take them down.
In the technical definition created by Cagan in 1956, yes, it is 50% and described as created by money supply. Hyperinflation or high inflation for that matter is not always from money supply anymore. from behavioral economics we know inflation can be demand driven as described by Khan in 1975 called adaptive expectations which is what happening today. consumers expect higher prices, so consumers buy more now in anticipation driving up prices and companies charge more knowing consumers expect higher prices and will pay higher prices. That is upward spiral of demand driven price inflation.
Higher federal funds rates won’t eat into bank profits for while because banks will increase interest rates to customers until customers decide those interest rates are too high to borrow. Banks are flush with cash and have no incentive to pay higher interest on deposits.
The Fed is ending QE in March and beginning QT in May. Instead of letting assets mature and roll off the Fed will sell off assets prior to maturity to increase supply, decrease prices, increase yields and increase mortgage interest rates to directly target demand driven house price inflation part of GDP.
I have never said crash. That is your words. A correction or a bear market does not equal collapse or a crash in housing. We don’t have the same over leverage problem or unemployment loss of income that existed prior to the Great Recession that could lead to a lot of default.
@Michael P. Lindekugel "Housing on a national level is overvalued relative to inflation by about 35%" - A 35% correction in the housing market would be a crash when compared to and with previous 'corrections' so yes while you didn't say it, the implication you are making is as such. Case-Shiller Index fell ~27% during the housing crash as a reference. I fully agree with your comments on over leveraging. Second, you did use hyperinflation in reference to the 1970's which inflation did not happen as the 1979 rate did not exceed 14%. I do agree there is a potential correction, pricing will adjust to new cost of ownership. However, people and buyers are still flush with cash (albeit that is dwindling). I think we both can agree that the Money Supply and printing is out of control. Inflation does feed on itself with higher expectations. The continued printing of money is facilitating massive spending in Congress exacerbating the problem combined with really bad policy. More money in the system leads to more spending for fewer goods with higher COGS.
if there is devaluation of around 30% and there is not a lot default as homeowners have income and cash reserves, then the housing market is not necessarily crashing. i am specifically not using "crash" or similar words because there wouldn't likely be massive default. yes, i refer to inflation in the 1970s as hyper inflation relative to other periods of time where the economy experienced high inflation.
The Fed information is factual. House price over valuation is national from economic research firm Rosenberg Research & Associates.
I provide my economic and financial opinions based on my education and experience to all clients – residential, commercial, investment. A prospective home buyer with a large down payment, significant cash reserves, and long-term employment has very little financial risk when there is home price deflation. If they should or shouldn’t buy a home is complex analysis. Home price deflation is a risk for someone at risk of default. Those are not my clients.
real estate markets are mostly local. Seattle is not boom or bust as is historically Las Vegas, Phoenix, and Miami.
I don’t know what experts you are referring to in your statement “I know the experts that screamed about the 20-30% decline in 2020 and again in 2021”. I don’t know any economic research or credible financial research that was claiming those declines in 2020 and 2021. I told my clients our hot market was going to get hotter. Nationally, the US is short 4 million units of housing of all types. Seattle has had a supply problem since the early 2000s. There is the supply constraint. There is the demand outstripping supply which not the same as the supply constraint. Those two economic problems persisted over the last two years causing home price inflation (not appreciation. Not the same) and rent price inflation.
Each ¼ point increase in 30 year fixed mortgage rates decreases home buyer purchasing power by 2.5% to 3%. When mortgage rates hit 5% the cumulative decrease in purchasing power is 17% to 20%.
The Federal Reserve definitely does not want continued hyperinflation. home price inflation makes up a large part of US GDP.
Couple things on this Michael. I appreciate your concern, but we are not experiencing HYPERINFLATION. By definition, hyperinflation is 50% inflation PER MONTH. Next, higher overnight rates means fewer profits for banks. It does nothing in an environment which inflation is caused by money flooding the system. "Prices rise when governments print too much money." This is essentially what is happening. The FED and OTHER Central Banks are continuing to print money through asset purchases including MBS and Treasuries in our case. This was extended through Summer essentially. So rate hikes, meh. Means little. In order to curb this they are going to have to contract the money supply. They are going to have to reduce their balance sheet. This will contract the M2 money supply. The action is actually deflationary.
The Fed is walking a tight rope. They are trying to buy assets and then sell it again on the overnight market. It is not a safe game to play. Again, contracting the money supply is really the only way out. However, they do not want to collapse the market at the same time. This means the stock market and the housing market. We have the largest and wealthiest generation in history. If they suddenly lost that wealth, it would be a disaster.
So will housing prices fall, probably. How much? Hard to say. People have lots of cash right now. I'm getting offers on listings where people are putting 700k on a 1.5M house. And the amount of equity in homes right now is unprecedented. Almost 50% of homeowners own their homes outright. So no, no crash. People learned their lesson after 2009.
As for supply and demand imbalance, not going to normalize any time soon. Supply is held up by boomers who are not downsizing, they are staying put and going out on a stretcher. Part of the reason the builders are not creating more supply.
I will post two videos separately on my complete thoughts on the subject just incase BP tries to take them down.
In the technical definition created by Cagan in 1956, yes, it is 50% and described as created by money supply. Hyperinflation or high inflation for that matter is not always from money supply anymore. from behavioral economics we know inflation can be demand driven as described by Khan in 1975 called adaptive expectations which is what happening today. consumers expect higher prices, so consumers buy more now in anticipation driving up prices and companies charge more knowing consumers expect higher prices and will pay higher prices. That is upward spiral of demand driven price inflation.
Higher federal funds rates won’t eat into bank profits for while because banks will increase interest rates to customers until customers decide those interest rates are too high to borrow. Banks are flush with cash and have no incentive to pay higher interest on deposits.
The Fed is ending QE in March and beginning QT in May. Instead of letting assets mature and roll off the Fed will sell off assets prior to maturity to increase supply, decrease prices, increase yields and increase mortgage interest rates to directly target demand driven house price inflation part of GDP.
I have never said crash. That is your words. A correction or a bear market does not equal collapse or a crash in housing. We don’t have the same over leverage problem or unemployment loss of income that existed prior to the Great Recession that could lead to a lot of default.
@Michael P. Lindekugel - residential housing inventory was definitly overbuilt between 2000 and 2007 by every possible metric, housing starts, vacant inventory, inventory under construction, and months of supply. I don't know why you keep insisting that was not the case?
Further, let's not forget about the funny mortgage money that fueled the whole thing.
We will probably see an economic recession, but if you look at historic data, every single recession has seen home prices go sideways or up - except the mortgage crisis in 2007 that eventually turned into a recession. It will be no different this time and as a real estate investor an economic recession does not concern me.
Real estate prices are downward sticky and predicting home prices will fall 20-30% because of an economic recession is a conclusion that is hard to substantiate both on data from histroic recessions and also a practical considerations. Home owners will just not sell and stay put for a few quarters until the recession is over, before they start to discount their home; there is simply no reason to.
We are nationally about 5 million housing units short and given supply chain, labor and material shortages it will probably take us 8-10 years to dig out of that hole. I realize you work in an insane market, but look at what happened to home prices in the Bay Area between 2007 and 2012 - they held up much better than the rest of the country.
@Michael P. Lindekugel
Are you making the case that you believe housing prices will go down in real terms or nominal terms (or both)?
And do you really believe the Fed would continue rising rates even in the midst of a recession?
I also believe we have challenging economic times ahead but as soon as unemployment increases and inflation trends down the Fed is more likely to pause their interest rate hikes. Can you imagine the pain of increasing rates in the middle of a recession? It's unlikely.
Personally, I remain cautiously bullish on real estate in comparison to other assets because the debt is such an incredible asset to hold right now. Interest rates are still so extremely negative and becoming even more negative. The 1% increase in mortgage rates since the beginning of the year pales in comparison to the 3% increase in the annualize inflation rate over the same time period. This makes the change to real interest rates negative 2%! Furthermore, unemployment is still low - granted it always is right before a recession. But we don't see unemployment going up just yet.
If real interest rates get close to turning positive again my tune will change.
Alas, the everything bubble continues! Let me go back to sipping champagne in my confiscated Russian Yacht.
House price inflation almost always outpaces overall inflation from supply shortage and demand out stripping supply. National house price inflation is far outpacing overall economic inflation since 2012? nominal. there would have to a very big house price devaluation to impact real values.
The pandemic recession only lasted two months ending in April 2020. In the US a recession is a broad decrease of activity usually in GDP for more than a few months. The Fed declared the recession over a year ago.