Fed/Powell - "It will become necessary to accelerate MBS/other balance sheet liquidations"

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Explain like I'm 5

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Recession is coming.

Mortgage-Backed Securities.

But I have no idea what any of the other shite means

So he’s suggesting that financial institutions and investors need to ditch MBS?

Can you give us a link?

Reddit thread mentioning the other times MBS have received no bids:

LINK

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The previous four times this has happened:

1979, Saturday of Columbus Day Weekend, Paul Volcker announced that the Fed would allow the cost of money to float as high as necessary. Mortgages 11% on Friday, on Tuesday after the holiday 13%. However! That was 15 years into entrenched inflation, oil ten times as expensive in 1979 as 1972, and our economy just beginning energy conservation and new supply. All incomes ramped right along with inflation. The US economy was a “things” economy, with little overseas competition for union-heavy US labor.

1994, February... the cost of money coming out of recession 1.00%, by year-end 1994 to 5.25% -- but in a disinflationary world, the cost of money was one-half the cycle peak four years before. 1994, February to May, mortgages from 7% to 9% -- that magic two-point rise flattened housing, and the Fed had to cut in 1995 to dodge recession. The new mortgage peak, stabilizing near 8% was down from 11% in 1990, and we enjoyed a genuine and rare soft landing.

2007, July... you had to be deep in the mortgage racket to understand the first collision. Subprime and Jumbos went no-bid, and stayed there. The Fed was slow to understand the credit panic, began frantic cuts the following winter from 5.25% to 2.00%. But mortgages did not respond, stuck above 6.00%.

2008, July... the no-bid expanded to all mortgages, even government guaranteed. The 10-year T-note anticipating recession and worse fell to 3.50% while retail mortgages rose to 7.00%. That 350bps spread is the closest comparable to today’s 300bps.

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REITS may also indicate investors expect decreased real estate valuations in the near future

Also of note - Powell looks worn the frick out. He may not survive this recession

I don't think they can artificially bust prices like this when there is a literal housing shortage. We've had over a decade of anemic new home construction and that can't be fixed with the stroke of a pen.

Economics 101 - Supply/demand

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You are only discussing 1 side of the equation, isn't he talking about the other?

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The demand will still be there, but there will be fewer available dollars to offer the seller because more has to go to the bank. I get that, but typically those spikes are transitory and prices stabilize fairly quickly.

What happens is, higher interest rates make it more expensive to invest in new housing which will exacerbate the shortage and prolong it.

I don't know why more new homes weren't built in the past 15 years, but I suspect it is government regulation.

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literal housing shortage

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This is a well-worn myth that won't die. I've posted these graphs several times. This is not a "news" article from a housing market shill that is too lazy to look at near-time inventory data. These are simply data graphs from the Federal Reserve. The inventories will continue to increase in the coming months.:

This first graph is NEW Housing supply for the US. Between 6-9 months is the historical average (w/ population normalization). Tight inventory existed Q3 2020- Q32021, & Q1 2022, but doesn't exist now. In fact, the inventory delta from April to May was the largest increase in HISTORY.


Next is EXISTING Home Inventory. Historical normal (w/ population normalization) is 1.0mm to 1.4mm. Again tight inventories existed in Q4 2021 - Q1 2022. Not any longer. These number will continue to increase in the coming months.


Last is a frame of reference and comparison to 2008. The inventory J-curve is more vertical this time around. Will that continue? I don't know, I can't predict the future. But I speculate that it will because the divergence between incomes and housing costs is so high and you have the FED chirping about bringing this back in line.


Stop reading articles from housing market evangelists who repackage the same editorial playbook every market cycle. Look at the raw, near-time data. You can get this info directly from the FED.

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How much of that open inventory is in places people don't want to live in anymore?

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Detroit and Baltimore come to mind.

And, "housing evangelists" or not, the fact that prior to that last bubble bursting, there were over 5 MILLION starts for the 3 years 2005 through 2007 and that was on a slight decline for 2007.

In the 15 years since, there have been barely 13 million (through 2021) starts, only getting back to pre-2008 levels in 2021. Roughly 1.5 million a year is a reasonable estimate of a median year going back decades.

The last 15 years has us roughly 9 to 10 million short.