It is interesting to observe how high gas prices, general price increases, falling home prices and sky-high rent are all being blamed on Joe Biden, as if the United States was somehow able to avoid global market trends, if only we would elect Republicans in the mid-terms. The GOP tells us that they will save money by cutting back Social Security and Medicare benefits, reduce support for Ukraine, deny student loan relief to low- and middle-income families. However, somehow scores of GOP adherents had no issue getting massive federal subsidies and loan relief during the height of the pandemic or slorping at the “trough of the rich” from the trillions of tax dollars lost by reason of the massive corporate tax cuts in 2017. We’ll be paying off that deficit debt plus interest for decades. That the GOP still builds it economic model on the very failed “supply-side” (cut taxes for the rich) philosophy that tanked Conservative Liz Truss’ 45 day tenure as UK’s Prime Minister never ceases to amaze me.
We all know that the OPEC+ cutback of two million barrels of oil exports a day combined with the continuing market response to Putin’s war is impacting fossil fuel costs for everyone on earth. Major grain producer Ukraine is barely able to export even 10% of what she did last year, also driving food prices up everywhere. But one phenomenon I have not focused on is how global housing prices have been impacted by the higher interest rates most central banks have imposed on their citizens, all following the lead of the US Federal Reserve (over which neither Congress nor the President has control), to system “inflation.” In particular, the October 20th The Economist thinks the damage to overall economies from these housing anomalies is being undervalued:
“Over the past decade owning a house has meant easy money. Prices rose reliably for years and then went bizarrely ballistic in the pandemic. Yet today if your wealth is tied up in bricks and mortar it is time to get nervous. House prices are now falling in nine rich economies. The drops in America are small so far, but in the wildest markets they are already dramatic. In condo-crazed Canada homes cost 9% less than they did in February. As inflation and recession stalk the world a deepening correction is likely—even estate agents are gloomy. Although this will not detonate global banks as in 2007-09, it will intensify the downturn, leave a cohort of people with wrecked finances and start a political storm.” But Canadians, Brits, Germans, etc. aren’t blaming Joe Biden for this debacle. And they are experiencing vastly more financial damage than we are. So far anyway.
We seem headed for “worse economic times,” whether we hit the formal definition of a recession or not. Supply chain issues (especially in sophisticated computer chips which are not yet made in the US in sufficient volume to matter) combined with an explosion of pent-up demand when COVID numbers dropped to “controllable” left labor shortages and supply-related price increases all over the world. Actually, the United States seems to be weathering the storm better than most, although one more Fed rate hike could flush that progress down the toilet.
But housing mortgage hikes are pushing buyers out of the market, curtailing sales and reducing prices… forcing many to rent instead… which in turn has forced many into a now over-heated rental market. The silver lining in all of this has to be the lack of a tsunami of under-qualified homebuyers driving massive foreclosures as we faced in the 2007 subprime collapse. Institutionally, we are on reasonable ground, even as those with adjustable-rate mortgages or seeking new homes are slammed between their teeth.
“The cause of the crunch is soaring interest rates: in America prospective buyers have been watching, horrified, as the 30-year mortgage rate has hit 6.92%, over twice the level of a year ago and the highest since April 2002. The pandemic mini-bubble was fueled by rate cuts, stimulus cash and a hunt for more suburban space. Now most of that is going into reverse. Take, for example, someone who a year ago could afford to put $1,800 a month towards a 30-year mortgage. Back then they could have borrowed $420,000. Today the payment is enough for a loan of $280,000: 33% less. From Stockholm to Sydney the buying power of borrowers is collapsing. That makes it harder for new buyers to afford homes, depressing demand, and can squeeze the finances of existing owners who, if they are unlucky, may be forced to sell.
“The good news is that falling house prices will not cause an epic financial bust in America as they did 15 years ago. The country has fewer risky loans and better-capitalised banks which have not binged on dodgy subprime securities. Uncle Sam now underwrites or securitises two-thirds of new mortgages. The big losers will be taxpayers. Through state insurance schemes they bear the risk of defaults. As rates rise they are exposed to losses via the Federal Reserve, which owns one-quarter of mortgage-backed securities.
“Some other places, such as South Korea and the Nordic countries, have seen scarier accelerations in borrowing, with household debt of around 100% of gdp. They could face destabilising losses at their banks or shadow financial firms: Sweden’s central-bank boss has likened this to “sitting on top of a volcano”. But the world’s worst housing-related financial crisis will still be confined to China, whose problems—vast speculative excess, mortgage strikes, people who have pre-paid for flats which have not been built—are, mercifully, contained within its borders.” The Economist.
In the big California cities, home prices have hovered under or even over (in San Francisco) the million-dollar average sale price, well north of $600 per square foot. Globally, home prices may have fallen, but affordability is still a global issue. By far, homeownership forms the largest segment of private net worth ($250 trillion) with the total public stock market values trailing (at $90 trillion). “A further problem is concentrated pain borne by a minority of homeowners. By far the most exposed are those who have not locked in interest rates and face soaring mortgage bills. Relatively few are in America, where subsidised 30-year fixed-rate mortgages are the norm. But four in five Swedish loans have a fixed period of two years or less, and half of all New Zealand’s fixed-rate mortgages have been or are due for refinancing this year.
“When combined with a cost-of-living squeeze, that points to a growing number of households in financial distress. In Australia perhaps a fifth of all mortgage debt is owed by households who will see their spare cashflow fall by 20% or more if interest rates rise as expected. In Britain 2m households could see their mortgage absorb another 10% of their income, according to one estimate. Those who cannot afford the payments may have to dump their houses on the market instead.
“That is where the political dimension comes in. Housing markets are already a battleground. Thickets of red tape make it too hard to build new homes in big cities, leading to shortages. A generation of young people in the rich world feel they have been unfairly excluded from home ownership. Although lower house prices will reduce the deposit needed to obtain a mortgage, it is first-time buyers who depend most on debt financing, which is now expensive. And a whole new class of financially vulnerable homeowners are about to join the ranks of the discontented.” The Economist. Indeed, if American voters believe that Republicans can and will lead us out of this global economic quagmire… well, they ain’t seen nuffin’ yet. And the Brooklyn Bridge is still for sale!
I’m Peter Dekom, and even if blaming the incumbent head of state for any and all economic problems does not help solve the issue, sorry Joe, it’s just human nature.
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