• Posted on June 13, 2024
  • by MI2 Research

Buddhist teaching holds that all things are in a constant state of flux, implying that we should be prepared to let go of even our most cherished hopes. The John Burns affordability index seems to confirm this, suggesting that, at least for the time being, the American dream of home ownership is out of reach for new buyers. John Burns’ index includes the costs of a 30-year fixed-rate mortgage, amortization, insurance, and property taxes (naturally, it’s in the small print).

This might explain the recent evidence of deterioration in housing market conditions (compare this Redfin report on “stale” listings against this week’s mortgage application data). While we might reasonably be described as cynical, even the most optimistically inclined would likely agree that insurance and property taxes are not coming back to earth anytime soon. That would leave the ball in J Powell’s court but also presents a wonderful “Catch-22”. Central bankers would like unambiguous evidence of inflation returning to its previous ranges, which is at least partially dependent on the shelter components of inflation. But some folk appear to be losing their faith that shelter disinflation is coming, in part reflecting the limited rental inventory in Acela-land.

Notwithstanding the ideas of Marie Kondo and some WEF folk, all of this is electoral poison. Does this mean JP should cut? Not necessarily. Mr. Kashkari, our favorite Fed official (on account of his never being intentionally right), has recently made the case that inflation is worse than recession because it affects all of us, while unemployment affects only a proportion of the workforce. The argument reminded us of the argument that cars are a better purchase than homes because you can sleep in your car, but perhaps Neel is better placed to judge. Either way, while it looks like bad welfare economics, it might still be good politics, which sheds some light on Biden’s plan to “Lower Housing Costs for Working Families”. Destroying the “American Dream” has never been a good look for those seeking reelection, hence the long political preoccupation with US housing (see the pre-2008 American Dream Downpayment Act).

While elections are very important, our primary focus is on markets, and with this in mind, it’s hard not to wonder what the recent deterioration in US real estate markets might mean for those exposed to it. Pimco evidently shares our concerns about collateral damage. Policymakers have a difficult choice: whether to focus on the concerns of bond markets or worry about the wider asset markets. You could argue that in the long run, both markets have the same interest in sustainably low inflation. But in the short run?

As for JP himself, we were lucky enough to be able to hear his and the Fed’s thoughts on inflation. While the CPI release was ecstatically greeted (market relief?), Powell’s Q&A and the dot plot took some of the gloss off, ending the day pointing to just the one 25bp cut this year. JP described CPI as “encouraging” and chose to downplay the FOMC’s higher inflation forecast as conditioned by “conservatism”. Once bitten, twice shy? But what struck us as most interesting were further dated dots creeping higher. Is the FOMC trying to tell us something?