130 bps Rate Hike Throws Cold Water on US Housing Boom

All it took was a 130 basis point rate hike to put a brake in the US housing market boom.

Writes David Stockman at his Contra Corner:

the domestic headwinds are already evident in the stunning roll-over in the housing market during the last several months. Now that the “flash” boom in housing prices is over owing to the hasty retreat of the big LBO funds from the short-lived “buy-to-rent” market, the underlying weakness of organic demand has become starkly evident.

Sales are now down significantly from year ago levels in major markets all across the country, and, as the following list makes clear, it was not the weather that did it. Instead, it was 130 basis points of interest rate normalization—-and that is just the beginning.

The salient fact of the matter is that the decades long era of “refi madness” is over. During the first quarter, gross mortgage originations totaled just $235 billion—the lowest rate in 14 years. Stated differently, the mortgage issuance run rate is now about $1 trillion on an annualized basis—-a level that represents just 30% of the normal volume since the mid-1990s.

And the stalled-out housing finance engine is not unique. Its just the leading edge illustration of what happens when credit-fueled rebounds no longer happen. Indeed, the crash of Q1 mortgage finance volumes shown below demonstrates that the very notion of “escape velocity”, or what in truth is really a euphemism for a credit fueled growth surge, is an obsolete relic of a bygone era.

March  sales volume remained the slowest since July 2012, when it was 4.59 million.

Major metros with decreasing sales volume from a year ago included:

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   San Jose (down 18%)

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   San Francisco (down 15%)

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   Los Angeles (down 14%)

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   Rochester, N.Y., (down 14%)

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   Sacramento (down 13%)

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   San Diego (down 12%)

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   Orlando (down 12%)

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   Las Vegas (down 12%)

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   Providence, R.I. (down 12%)

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   Phoenix (down 11%)

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   Riverside-San Bernardino, Calif. (down 11%)

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   Hartford, Conn., (down 10%)

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   Boston (down 8%)

In short, this time is different. The debt party is over. The era of financial retrenchment and living within our means has begun. It might even be that “selling the dip” is about to become the new normal.  Even this morning’s Wall Street Journal could not powder the pig.

The Zero Hedge also exhibit how the current real estate slowdown are being reflected on homebuilder stocks (including lumber)

And according to the US BEA data, finance, insurance, real estate and leasing accounts for the largest share of US GDP (in 2013 19.67% of Gross Value added) add construction’s share 3.6%, finance and housing accounts for one fifth of the statistical GDP. So a sustained slowdown in real estate industry will materially weigh on US GDP.

Add to this have been growing signs of strains in the technology sector.

Some have been banking on manufacturing to offset the above. Manufacturing has a 12.4% share to 2013 GDP. But the $64 trillion question is, manufacturing sold to whom? 

In early March I noted that the EM contagion has materially slowed down external trade which implies lower global growth. From the trade aspect my projection has been confirmed by the Netherlands Bureau for Economic Policy Analysis which noted that global trade in early 2014 registered its “first negative reading since October 2012”. 

Now we will see how this plays out with world’s statistical GDP

So far, the periphery-to-the-core feedback mechanism has been in progress as seen globally and within specific economies.