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e month moving average and will now going forward start to capture price dynamics reflecting the increasing mortgage interest rates that began to surge in earnest during march 2 we are very near the maximum year on year yoy percent change which i estimate will reach about 1 5x the maximum yoy percent change seen in the last cycle 14 5 at 21 23 and will come later this year at which point all subsequent monthly yoy reads will trend continuously lower till they ultimately turn negative into the depth of the decline 3 the general downtrend in prices will play out similarly to the great housing bubble cycle with the exception that the monthly declines will be a bit more intense given the more aggressive price run up and the abrupt reversal in mortgage rates i will continue to update this projection as new s p corelogic case shiller data settles as well as revise my overall thesis and key assumptions but at the moment it appears to me that the strongest monthly mtm change was seen in march we are closing in on the largest annual yoy change coming likely this november and that the peak in prices will probably be some time next year based primarily on the effects that increasing mortgage rates have on market activity posted by soldatthetop at 12 31 pm email this blogthis share to x share to facebook share to pinterest wednesday july 06 2022 the real great recession like this post consider subscribing to my substack for additional insights and content today it s time to face the facts recession is here not officially of course since it takes the nber with a boat load of highly revised and settled macro economic data to officiate that fact but technically and in a fashion that is widely felt q1 2022 registered a first negative real gdp print for this cycle i e the cycle that started after the covid pandemic induced mini recession and only the third but most significant time a quarter turned negative if you leave off the covid debacle since the end of 2008 s great recession add to that the fact that the fed itself is now forecasting a second negative print for q2 2022 and its becoming pretty evident that the economy is in the middle of a significant down shift that is only going to get worse with the full realization of the impact of each major headwind the data visualization below click for larger dynamic version is displaying the real gdp percent change from the preceding period in blue on the left axis the atlanta fed s gdpnow real gdp estimate annualized rate in red on the left axis and the chicago fed s brave butters kelly bbki leading sub component of gdp green on the right axis in summary q1 saw an actual 1 6 contraction in real gdp from the preceding period the fed is currently estimating 2 0 annualized contraction in gdp while one of the fed s high frequency models is forecasting nearly a 3 0 going forward the economy is currently contending with rising consumer prices primarily coming from general monetary inflation stimulated by the fed s own easy money policies over the last 13 years exploding food and energy costs with notable product shortages an evolving stock market rout with an ever looming crash out end game a quickly souring national housing market fragilized by speculation and loose lending and now traumatized by the abrupt reversal of interest rates global uncertainty coming from the now obvious quagmire that is the war in ukraine and a stymied supply chain from a china unwilling or unable to return to a post covid normal order that would be a sufficient array of challenging issues for even the most competent government and economic order to face up to but one gets the sense that our current leadership is woefully out classed and simply incapable of even waging the most modest of effective responses to even just one of those many issues with all of that stated gloom where do we go from here the answer is pretty simple doom or in other words down and not just a little down mind you way back down to 2008 and beyond as genuine fact finally catches up with the fed s economic fiction and yields the compounded negative real return on the massively appalling mal investment that was the mop up of the great financial crisis the real great recession is now looming as the reckless policy response on the part of the fed and the federal government in the wake of the 2008 great recession endlessly pumping priming and backstopping in an effort to simply kick the can down the road thereby softening the blow for that era s legion of weak hands is now realized to have come at an enormous expense of today s totally fubar ed bag holders but this doom does not have to represent only misery and depression an epic economic reckoning will bring enormous opportunities as fundamental bouts of creative destruction run roughshod over a cornered economic system with no escape and the only path forward leading through the pain business will go crash out households will go bust and paper wealth will vaporize and fade from memory taking with it the rampant fever for easy money fueled speculation while local state and the federal governments severely constrained will be unable to do much more than simply attempting to manage keeping the peace bleak outlook indeed but as that famous stoic philosopher seneca the younger put it nothing lasts forever few things even last for long all are susceptible of decay in one way or another moreover all that begins also ends or as semisonic more optimistically put it a little more recently every new beginning comes from some other beginning s end posted by soldatthetop at 11 51 am email this blogthis share to x share to facebook share to pinterest tuesday july 05 2022 a real mean reversion like this post consider subscribing to my substack for additional insights and content today one of the major differences between our current housing boom and the epic housing run up and associated crash that ultimately led to the great recession is in the supposed quality of buyers or more precisely the underwriting standards lenders use when making home loans as well as the soundness of the loan products and features they offer without a doubt lending standards by 2005 06 07 had become completely detached from reality with 100 loan to value no interest reverse amortization no income verification sub prime being some of the various means by which the housing finance system kept the party going loan volume even after prices had risen well out of reach for many prospective home buyers in the aftermath of the epic financial meltdown that ensued there was a notable effort by federal regulators to understand what went wrong and further to take measures to prevent such egregious activities in the future the dodd frank wall street reform and consumer protection act had as a provision the mortgage reform and anti predatory lending act which sought in part to tighten up the process of mortgage origination in order to it is the purpose of this section and section 129c to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair deceptive or abusive to that end there are the following two important sub sections note dodd frank is an enormous act with many provisions these are just two small samples of items focused specifically on mortgage origination standards subtitle b minimum standards for mortgages in general in accordance with regulations prescribed by the board no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that at the time the loan is consummated the consumer has a reasonable ability to repay the loan according to its terms and all applicable taxes insurance including mortgage guarantee insurance and assessments this section goes on to detail tighter rules for regulating multiple loans borrowers has subordinate loans on same property income verification no interest options negative amortization options and other lending phenomena that contributed to the mortgage mania of that era subtitle f appraisal activities in general a creditor may not extend credit in the form of a subprime mortgage to any consumer without first obtaining a written appraisal of the property to be mortgaged prepared in accordance with the requirements of this section this section goes on to detail tighter rules for regulating the appraisal process of a property that will be financed using a high risk subprime loan taken together these two sub sections point to one major flaw in the legislative financial regulatory process in that it is at best always backward looking specifically addressing practices that occurred in the past that had led to financial crisis whether there is any sense to even trying to regulate future financial activities is not the topic of this post but suffice to say the dodd frank mortgage origination related provisions focused heavily on the activities that led to the great recession and didn t attempt to regulate other novel methods that might be employed in future speculative episodes one area that i have taken an interest in is in the non conforming jumbo loan market and particularly in my own market of boston where throughout 2020 2021 and on into 2022 i have witnessed some truly reckless behavior on the part of borrowers and lenders following up on my prior post on the subject i dug a little deeper into the homes that i have highlighted previously to better understand the nature of the debt that financed these reckless purchases from a traditional mortgage lending perspective these purchases appear pretty sound given that the average loan to value ltv was about 70 i e 70 loan 30 deposit all mortgages were simple 30 year fixed rate loans no risky options or even a single arm and i assume that all incomes were verified but considering that each of these buyers over bid the listing price by on average a whopping 30 one might draw a different conclusion first below is a simple average model for pricing the boston housing market that i developed using the s p corelogic case shiller home price index csi for boston this model superimposed on a zillow price history simply uses the csi to calculate the price trend line with 2016 2019 based on actual annual price changes and 2020 2022 based on an average annual price change from the trailing eight 8 years my general premise with this model is that 2020 through 2022 represented an absurdly anomalous period where lending rates were exceptionally low and buyers as a result of covid 19 hysteria were simply not acting prudently as you can see from the model there is a significant risk of mean reversion for the nation s severely overheated housing markets as interest rates rise and prices fall meeting a more fundamental balance that once materialized will call into question the financial soundness of the loans backing up these properties if given the emerging headwinds for the macro economy and housing specifically we see a 25 pullback in home prices in boston not inconceivable given the ferocity of the price appreciation in just the last two years as well as the scale of prior pullbacks of about 16 after the late 80s s l crisis and 18 after the great recession then these homes would all have an average ltv of about 92 a much less sound financial footing for these buyers and lenders further many of the homes could fall even more sharply given how far off the simple average price trend the model the buyers pushed the purchase with their manic bidding the following is a selection of three homes from my original post annotated with the simple average price model as well as the mortgage details to illustrate the point note that i calculated the ltv as they stood on the day of settlement as well as what the ltvs would be after both a 25 pullback in prices as well as with respect to the simple average price model forecast of the more fundamentals based value the loophole in the lending standards for this cycle appears to have been that home appraisals were either unable to accurately account for the outlandish price appreciation occurring in the market or were simply roundly ignored given the fact that borrowers came to the table with 20 30 down payments and had good credit histories prudent lenders would have evaluated the appraisal to determine a more fundamental valuation and either demanded more down payment from the bid happy borrowers to account for the additional risk or simply rejected the transactions outright for example for the first property above the fundamental value of the home at the time of purchase was probably closer to about 1 300 000 but it was bid up to 1 720 000 or about 420 000 over its fundamental price if the lender had been more prudent they would have either walked away from the transaction or demanded that the borrower come up with about 800 000 for the deposit instead of the meager 400 000 that the borrower actually paid this would have resulted in a loan of about 920 000 against an 800 000 deposit for a very healthy 53 ltv which would have been well fortified against any oncoming economic crisis driven home price decline obviously the lender didn t perform this level of due diligence because the borrow could not afford the additional deposit and all parties involved lender broker lawyers buyer and seller simply wanted to stack up another closed transaction i suspect that my small sample is clearly demonstrating something important about the housing market dynamics this cycle namely that there is real yet to be fully realized systemic risk coming from the prime lending market particularly for the performance of privately funded jumbo loans posted by soldatthetop at 6 12 am email this blogthis share to x share to facebook share to pinterest wednesday june 29 2022 reflecting on rates like this post consider subscribing to my substack for additional insights and content today for the last few months now i have been suggesting that the fed needs to move the fed funds rate up much faster than they have been arguing that they are not only behind the curve given their failed transitory position but that they have totally lost the narrative as far as taking a hawkish stance is concerned my suggested approach to rate hikes has been for the fed to move in the range of 100 to 125 basis points at each scheduled meeting of 2022 as well as implementing random emergency intra meeting rate hikes and setting an overall target of at least 8 5 by as soon as conceivably possible obviously this may seem a bit extreme from the standpoint of the recency bias of our current distorted economic times as well as the current level of debt carried widely by households firms and the federal government but historically this approach is actually very modest the following chart displays the annual rate of change of the consumer price index i e the inflatio...