CNBC can’t help itself. A one-week blip upwards in mortgage applications is spun to the claim that “buyers creep back in.” The truth is that the rise in rates has squelched the increase in housing prices, new construction and refinancing, and all of these factors will act as headwinds to GDP growth in the second half.
The growth in the housing market is unsustainable as illustrated in the chart above. From 2007 until today, the Fed has printed money to purchase close to $1.4tr in mortgage bonds which has simultaneously caused bubble while only bringing sales to levels from 2008 and well below healthy levels from the early aughts:
Housing starts seemed to have halted their rise. Each piece of data confirms that Housing Bubble 2.0 is expanding at a slower pace due to the rise in interest rates, but builders and economists believe that prices and sales will continue to rise throughout the year. The market is still at historically unhealthy levels as illustrated by the red line and has growth has turned over as per the green arrow:
Further housing gains require strong income growth from U.S. consumers, but with 11 million Americans seeking work, this growth is unlikely to materialize.
There is a loose money faction within the ECB that wishes to reopen LTRO in order to boost private lending for business expansion. That’s the reason we are being told anyway. In reality, two rounds of LTRO commencing at the time indicated by the green arrow failed to slow the decrease in private lending. The red arrow highlights the inflection point where private loans began contracting at a faster rate at about the same time as the Draghi pledge. Since Eurozone banks are not deleveraging, where could all the cash from LTROs and reduced lending have gone? Isn’t it obvious:
Creaky Eurozone governments led by Italy, Spain and France have added over €400bn to the debt stock and someone needs to purchase this debt so that these countries can continue financing themselves. Banks rather loan to governments a higher yield with cheaper money borrowed from the ECB, which is also functioning as a buyer of last resort, than loan money to the private sector. Loans to businesses are neither guaranteed nor eligible for the same collateral treatment by the ECB; hence government borrowing is crowding out the private.
The PBOC has a choice: It can either tighten money to squelch the burgeoning property bubble and economic growth, or it can loosen money therefore allowing the bubble to proceed to its inevitable conclusion while preserving economic growth until it does. As you can see from the chart of Chinese repo rates, the can has been kicked.