Whistling Past the Graveyard

Reuters reported “U.S. household wealth fell by a record $6.1 trillion in the second quarter to its lowest in a year as a bear market in stocks far outweighed further gains in real estate values, a Federal Reserve report showed on Friday.”

And now residential real estate is hitting the wall. Liz Ann Sonders tweeted, “Mortgage rate bite: Quite a visual put together by @M_McDonough from ⁦@Bloomberg⁩ … for a $2,500/month payment and 20% down, one can afford a $476k house today; in early 2021, the figure was $759k.” 

So, the average consumer’s home buying power has been cut in half. Two real estate broker friends, one specializing in high end, the other, a notch below, say the market in Las Vegas is dead. 

Home Builders Research says “reported a 17 percent week-to-week decrease in overall new home net sales as the cancellation rate once again increased to just slightly under 30 percent.  Available new home inventory increased for the third straight week and is at its highest level since September 2020.  The chart this week shows the total number of traffic and net sales per week in 2022.”

New home analyst John Burns tweeted on September 26th, “6% mortgage rates should destroy home sales among current homeowners, at least according to a survey the @_NHTI conducted in July. Only 36%+ of current homeowners said they would move if rates were 5%, and only 15% said they would move if rates were 6%+.”

The question now is what happens at 7% mortgage rates?

Christopher Casey wrote in Mises.org questioning the wealth effect. “​​Regardless as to whether or not increased wealth will actually spur increased consumer spending, the most important component of the wealth effect is the assumption that increased consumer spending stimulates economic growth.”

The question now is, will a considerable fall in consumer wealth tank economic growth. Casey, like any good Austrian, wrote that consumer spending does not spur economic growth. It is actually higher savings that spur growth. 

So, stock values have fallen, home values have fallen, are consumers saving more to lead the economy on a growth spurt? According to the always reliable FRED, savings rates have crashed from a 33.8% rate at the beginning of covid, March 2020, to 3.5% in August 2022. 

It appears consumers are whistling past the graveyard spending as if all is, and going to be, well.

Meanwhile the Fed continues to wrestle away the punchbowl like the party is just starting. 

The party is already over.