Juggling Dynamite

Danielle was a guest with Rubina Ahmed-Haq and host John Northcott on the CBC Weekend Business Panel today. You can watch a video clip of the segment here.

Yesterday, Fed chair Jerome Powell reiterated his commitment to combating inflation (lagging indicator) at the expense of economic growth, employment and asset prices (leading indicator). Stocks didn’t like the message. In an abrupt reversal, every market sector tumbled into the close, with 474 of S&P 500 members ending in the red. There’s a point of financial pain at which the Fed will pause; evidently, we aren’t there yet.

The persistent hawkishness of central banks is a new paradigm for a world of market participants who’ve been trained to presume unending monetary bailouts. Most are incredulous that gambling isn’t winning and lack the discipline to do otherwise.

Meanwhile, the most abrupt tightening cycle on record is moving through the economy faster than average. With interest rates the highest since 2007, home sales are already down 49% year over year in Toronto and 45% in Vancouver. US mortgage applications (a leading indicator) were -40.8% year over year for the week of October 28. Used car prices in October were -10.4%, the weakest since the 2008 recession.

Ex-oil and gas, S&P 500 earnings per share were -5.1% year over year in the third quarter, following a 4% contraction in Q2, registering the first successive quarterly decline since the 2020 recession.

Public company profits benefited from pandemic-era fiscal and monetary support while they were able to pass on higher input costs to consumers. But that is all in the rearview mirror. Now, consumers are tapped out and focused on how to cut spending just as excess inventories, higher borrowing costs and worsening productivity prompt companies to cut overhead/workers.

On the upside, collapsing demand and a profit recession will force liquidation selling and finally help bring inflation back to target. The policy-enabled inflation of 2021 is mean reverting through deflation in 2023.

Eric’s presentation illuminates the components of housing supply and how it impacts prices.

The Housing Shortage has been one of the most popular stories in real estate and the economy over the last year. You see headlines about the lack of inventory driving up home prices everywhere you look. Many said home prices would not fall because the inventory situation was so tight. But now, with many indications that home prices are already falling, the housing shortage narrative is feeling a bit shaky.

In this video, I will explain the true inventory situation in the US housing market and what it means for home prices over the next 6-12 months.

Given the abrupt increase in mortgage rates this year, the possibility of a buyer assuming a seller’s lower-rate fixed mortgage could be appealing. This would only be possible on existing (not new) homes and where the seller is not wanting to port (transfer) their mortgage to a next home. The buyer also needs enough cash to make up the difference between the existing mortgage and the purchase price, or they will need to increase the loan size at current rates.

A negative is that the seller can be held responsible if the buyer defaults in the first 12 months. You can read more about the options in Canada here and in the US here.