Fed and rates in 2022

Still waiting

Impatiently

I wanted to get a discussion started about Fed actions and what it means for 2022 and beyond. In July/August, we had this discussion that touched upon some of the issues:

https://streeteasy.com/talk/discussion/46917-new-purchases-arm-rate-expectations

People seemed mostly sanguine about the possibility of rate increases affecting mortgages, prices, etc. E.g.:

"So we have till 2022 end, fed funds basically zero. Will they take it above 1 percent till 2025? I think it will be hard."

"In my mind, ZIRP is a long term trend driven by demographics in developed countries. That is - we are all turning Japanese (aging society, low growth rates => low interest rates)."

"A cursory glance at the fiscal position of the US makes it quite clear that rates either can never get that high again unless we have some sort of “great reset” scenario in the aftermath of a high and sustained inflationary period, in which case everyone sitting on a mortgage denominate in pre-inflation dollars will be happy anyways."

It's pretty clear that the Fed now sees inflation trends as persistent rather than transitory. It kinda feels like they know the cat is out of the bag, but they don't want to spook the market by indicating likely big changes all at once. I.e., it's a drip-drip-drip of additional tightening / signaling each month.

Case-in-point, only 5 months ago the chatter was maintaining the $120B-per-month purchases of Treasuries and mortgages going through much of 2022 and keeping rates at zero. That has, little-by-little, shifted into a (relative) trickle of bond purchases and talk of actively selling the bond portfolio rather than letting it roll off as they reach maturity. Similarly, chatter is now to have 4 rate increases in 2022 rather than 0, all done little-by-little.

Damn, 300 -- gimme a minute to get my thoughts together!!!

Here's an interesting graph showing mortgage rates over the past several years. I found this provider via FRED:

https://www2.optimalblue.com/obmmi/

An interesting part, to me anyways, is how jumbos tended to have a ~0.1% discount relative to conforming prior to 2020. In 2020, the Fed dropped rates to 0% and started buying massive amounts of treasuries and mortgages. This, and future rate outlook, obviously drove mortgage rates down across the board. But it's interesting how the jumbo-conforming spread flipped, with the ~0.1% discount shifting into a ~0.3% premium as rates were driven down, with conforming rates leading jumbos throughout 2020. By 2021, it had settled to no premium/discount between the two.

These paths are interesting to consider in the context of the fact that the Fed was acting in the conforming market directly (via actual buying of conforming MBS) rather than just indirectly, as was the case for jumbos. I.e., zero rates / outlook, bond/MBS purchases, etc. affect and drive down rates in mortgages broadly. But conforming mortgages also got the kicker / leading indicator from being the recipient of direct Fed purchases to the tune of over $2T. That's probably more than the number of new home originations actually done.

Now that the taper has started (since Nov) and the Fed has increasingly slowed down its pace of buying, it looks like we may be seeing the reverse happening. Conforming loan rates are rising faster, now 0.9% higher than they were a year ago at the bottom in Jan 2021. But jumbos are currently at a 0.3% discount to conforming loans and seem to be playing catch-up.

Was I wrong in my thinking 5 months back that Fed will have hard time beyond 1%!! I have a done a 180 in terms of my thinking in the last few months after seeing back to back hot inflation numbers and anecdotes of people not finding workers. Amazon effect of downward pressure on inflation has run its course in fact, Amazon is not almost always cheaper than local retail any more.

What do I think now without being in the mix at a trading desk? I think 3 rate rises this year and balance sheet roll off for maturing securities 1-2 months after the first rate hike. 10y can go to 2.25-2.5% before FED thinks it is high. There is a soft cap on rates due to ECB, BOJ and possibly Chinese policy actions. NYC real estate market still strong in next year despite 10y yield increase due to pent up demand and wage increases in the range of 5-10%. But quality of life improvements under Adams remains to be seen as he has to manage Manhattan DA.

To me, the biggest indicators on the inflation outlook 5 months ago were:

- People's general willingness to increase borrowing / consumption / leverage / speculation in response to cheap rates.

- People's increasing citing of inflation on the goods they were purchases. This spanned both work-related endeavors (e.g., raw materials) and personal consumption (e.g., furniture, sandwiches, etc.).

The Fed was focused on the supply-side issues and juicing employment to address them. What I think they missed, and I don't see much written about it, is the extent to which the free-money actions had tampered employment. I know more than one friend who stopped working (voluntarily or not) at non-finance jobs and started playing day-trader instead. Maybe they have / will be successful at it, I dunno. But if I know this many people who have left their day-job, or stopped paying mind-share to employment, then that's probably the tip of the iceberg.

If all these people took themselves out of the workforce, lured by speculation in an environment of easy money, how is productivity supposed to pick up to solve the supply-side problems on inflation?

300, your current predictions are definitely what the Fed is currently signaling. I get the sense that actuality will be tighter than that, and they probably know it, but they just need to signal it incrementally so as not to spook the markets.

Case-in-point, I think the signaling from the Fed was that when the taper started in Nov, they'd likely taper treasuries and mortgage purchases proportionally to how they had been purchasing. The reality, which I had to dig up from the data directly because I could not find it in news stories, seems to be that they cut MBS purchases first and then started to taper the treasuries.

Note how total purchases slowed down starting Nov 2021, as they said they would:

https://fred.stlouisfed.org/series/WALCL

But mortgage purchases went to zero more or less starting Nov 2021:

https://fred.stlouisfed.org/series/WSHOMCB

This is kinda in line with conforming loans now coming in at a ~0.3% premium over jumbos. The buyer of record for the last ~2 years disappeared from the market entirely.

I think day-traders will come back into work force. Highly speculative segment of stocks has already crashed and perhaps have more to go. Checks from the govt have stopped which mattered at the lower end. Then Covid certainly put some people not wanting to take risks involved in going to a job. It remains to be seen how many people come back into work force and that is probably going to be the deciding factor on inflation along with port bottlenecks which are on the mend but slowly due to Omicron. But for the next 3 months, I think we see high inflation prints YOY.

https://finance.yahoo.com/news/jamie-dimon-takes-high-view-172241475.html

“I expect more interest rate increases than is in the implied curve,” Dimon said Friday on a conference call with analysts after JPMorgan released its fourth-quarter results. “My view is a pretty good chance there will be more than four. It could be six or seven.”

>> I think day-traders will come back into work force. Highly speculative segment of stocks has already crashed and perhaps have more to go.

They will eventually, but I think that'll be a slow go. Perhaps something like this:

- Spend first year making X via speculation (stocks, cryptos, RE, whatever)
- Spend second year making X again. Clearly, now you are a player.
- Spend third year losing X. Tough market, whatever. You're still up X, which is more than you'd make working for 3 years.
- Spend fourth year losing X again. This is impossible. Uh-oh, I need money.
- Spend fifth year working a job again, committing to employment over speculation, etc. as a means of earning money.

If I'm reading this correctly, I think 1-year treasuries are at +0.5% while 1-year TIPS are at -3%, meaning market expectation of inflation is 3.5% over the next year:

https://www.wsj.com/market-data/bonds
https://www.wsj.com/market-data/bonds/tips

If we look to the market again for 3 expected rate increases in 2022, the market seems to be saying that with 3 rate increases Fed will be able to hold inflation down to a mere 3.5%.

All-in-all, this viewpoint seems less and less likely by the day:

"A cursory glance at the fiscal position of the US makes it quite clear that rates either can never get that high again unless we have some sort of “great reset” scenario in the aftermath of a high and sustained inflationary period, in which case everyone sitting on a mortgage denominate in pre-inflation dollars will be happy anyways."

I.e., the Fed sure doesn't seem like they will keep buying bonds forevermore with rates at zero, despite high inflation, to "solve" debt.

And from the political side, I think we can all see high inflation grinding on peoples' psyche much more than the benefits of wage increases, cheap money, etc. People complain about inflation all the time now. No one ever says "But whatever, it has been offset by my wage increases / investment gains / cheaper mortgages!" Human nature and all, "falling behind" feelings are stronger than "getting ahead" feelings. That's why inflation seems like political dynamite: no one likes it.

Inflation is indeed a political dynamite as it hits lower/middle income people, who don’t get made whole by the govt from transfer payments, the hardest.

Regardless of who gets hit the hardest, it just generally rankles everyone. Moreover, I get the sense that it’ll take more monetary tightening to get it under control than people think. I see / hear a lot about wage inflation across the board. News articles, people on this board, big law pay scales, entry-level pay for the work I do, etc. The expectations seem to be getting pretty baked-in, and it seems like it’ll require greater action to break them.

Take my own case, for example. Over the past couple of years I have been happy to concentrate 2/3rds of my net worth in investments with high expected returns, and I parked the remainder in cash due to the relative lack of other attractive options. It was good enough for me, and even though I was parking a third in cash, between the returns and employment I was expecting ~20% compounding increases in net worth annually, so ~45% overall over 2 years.

Reality was even more kind at ~90%, and I’m talking about from Jan 2020, not some Mar 2020 bottom. At my level of income and net worth, with a third parked in cash at all times, this is remarkable. It’s not that I’m subject to crazy degrees of risk, betting it all on black and getting lucky. I have no question the headwinds of easy money helped both income and investments.

Now, I’m staring at even more cash and wondering if I’m up for staying 1/3rd in cash. It’s not like I really find other investment options broadly attractive. Overall, I believe in the Fed and believe they’ll do the right thing and bring this under control. But they sure seem to constantly be a day late and a dollar short. I am generally fine with having that cash lose 2% a year in real terms if the Fed is on top of it, but their slowness pushed me to hedge that risk. So I decided to scour the earth for investment options for half the cash, reducing my cash to 1/6th of net worth. I found some options / paid some prices I’d be happy with even if interest rates were broadly / significantly higher by full points — no 1-3% cap rate RE for me.

So here I am a Fed-believer, flush with extra cash, working hard to deploy more cash than I otherwise would had the Fed been more vigilant, knowing the Fed needs to raise rates and perhaps be more aggressive than they are publicly planning. That will only make the Fed’s job harder, and I am probably not alone.

Wow! From Jan 2020, SPX has gone up roughly 40%. I'm not fully indexed, but I'm still quite pleased with my investment performance ... until I see numbers like 90% and I feel comparatively like a sap. The phrase "Matthew effect" floats into my mind here...and I wonder what financial expectations I should have. Is college going to cost a million dollars in ten years?

Ali, "between the returns and employment "

Gs, goog, Ms, xle, nvda, xom.... Just a handful of stocks that doubled post COVID outbreak... These are all stocks I would have never bought, had I not put the Burkhardt fortune ; ) in the hands of professionals.

Nada: let's pretend I'm your cousin. What advice would you give me? Stay with active management at a major bank, five person team with an excellent track record and a lot of experience in various parts of the market. They're currently outperforming there benchmarks in both portfolios. However, I know that 2 years doesn't even qualify as a blip on the radar.

Or just put the same amount of money in VBIAX ( 11% return over the last 10 years), set it and forget it? I understand this isn't professional advice, just curious where your head's at?

FP, it was indeed investment + employment income as 300 says. Don’t worry, everyone feels like a sap — me for keeping the 1/3rd in cash instead of riding the 40% gains in SPX.

I hadn’t heard the “Matthew effect” before so I read up. I suggest you all read the parable of the talents from the Book of Matthew from where it gets its name.

https://en.m.wikipedia.org/wiki/Parable_of_the_talents_or_minas

I particularly like this part:

>> And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth.

Fuuuuckkkk, that’s pretty harsh. The servant didn’t even lose any money, just merely didn’t grow it….

Reading the full text:

https://www.biblegateway.com/passage/?search=Matthew%2025%3A14-30&version=ESV&interface=amp

The servant buried it rather than even collecting interest at the bank.

“Then you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest.”

Yeah, that servant has no place managing money…

Ali, I’m not so sure how much the “Matthew effect” per the sociologist interpretation, that those with more will get / risk more (fractionally) simply by virtue of having more to begin with. Certainly, this is true at levels of high poverty. But for most people in the developed world, I’m not so sure.

For me personally, I could always risk more because I wanted less. As a young person just starting to work, it was easy to spend a small fraction of my income and invest the rest because I had spent so much time spending so little. I had no problem risking what I saved because the pool was only, say, 1 year’s worth of income. So what if it all went away, I’ll just make it up in a couple of years. After some years of work, at a time when peers were taking chips off the table to (say) buy a home, etc., I didn’t because it didn’t matter to me. To a lot of people, once they make that first $X, then in their head they can finally relax and purchase Y to satisfy whatever need they had in their mind for many, many years. E.g., a BMW, “stability of a home”, whatever. Just not how I’m wired. Even now, I’m willing to risk — not because I want more, but because I need less. If I lost 90% or 100% of my money, I’d still enjoy life just as much. I’d feel like a sap, but day-to-day I wouldn’t much care. The things I really enjoy doing don’t require much money.

Money buys peace of mind. Not having to worry about unexpected expenses makes a huge difference.

Yes, I was feeling exactly that way for quite a while! Then I fell in love In the second act of my life, and the woman I fell in love with suddenly decided, 'I would like just 1 kid'. There went the easy, not worried about money lifestyle : )

But in the end it all worked out fabulously. I just had to go back to being a responsible adult! And along the way, it also created a new level of discipline in me across various aspects of my life that I had never known before.

Keith, I think over the long term most active managers add no value and simply cost fees. I.e., the Boglehead view. There are a small fraction that do add value beyond their (possibly very high) fees, but they tend to work at places that are more interesting / lucrative that a bank’s wealth management division. So knowing nothing about your team, their full long-term track record, and the ability to run the stats on it, my default would be to assume they are not adding value but rather randomness (which can often look like outperformance) and fees. So roughly, I model them as (say) VBAIX + randomness + fees. So given those options and no additional info, I’d prefer VBAIX myself.

That said, I think you could consider other passive index options beyond VBAIX. My long-term views are inline with Vanguard’s, per their market perspectives / capital markets model that I’ve linked before. Best outlook according to them at this point in time is, I believe, developed market stocks ex-US. They (and others) offer such index funds.

FWIW, that’s what I did with the (small fraction) of my net worth that is locked into Vanguard indices via a 401k . The remainder of what I deployed went into a few individual stocks where I saw value. Interestingly, after-the-fact I saw that 2 of the stocks I had shortlisted overlapped the portfolio of just 5 managed by a celebrated value investor. Shows my investment biases, I suppose. Of course, I am buffeted by an even larger portfolio of investments elsewhere that are hugely diversified and uncorrelated, not to mention the cash and little in the way of future spending obligations. Generally, I wouldn’t recommend what I’ve done with concentrated individual stocks unless you know what you’re doing. And from what you have said on this forum, I think you view yourself as not knowing what you are doing ;).

Getting back to the main topic of this thread, what are you as brokers seeing on the ground with the recent spike in rates, inflation worries, and rate increase concerns? Has it been getting mind-share from buyers & sellers, or is it business as usual?

3 rate hikes in 2022 and then a pause to see how it shakes out
Run off of Treasurys helps Fed to lessen their need to sell the debt they've bought. The Fed portfolio drops by $600B in 2022 on runoff

@nada that last part gave me a very good laugh. And of course you are correct. And thanks for your thoughts.

Here's what we're seeing and hearing from our clients. So far not much about rate hikes, at least not in any meaningful way. Which quite frankly, as I write this, I find a little bit surprising.

After what I would consider a slow/normal start to January, we are suddenly seeing a lot of activity. Signed a contract Friday on a Lincoln square unit, and have a contract out on a new development deal in Greenpoint. We are suddenly extremely busy, at least making appointments. We have quite a few clients that have been actively looking, and having a very difficult time getting offers to stick, even very strong offers. That should change in the near future..

It is them fat bonuses.

Four rate hikes are coming this year.
Many people worried that the Fed is so behind the curve.
Henry Kaufman, the Dr. Doom of the seventies just spoke out this week:
https://www.bollyinside.com/news/henry-kaufman-wall-street-dr-doom-of-the-1970s-criticizes-powell-for-inflation
Bill Ackman the other day has urged the Fed to raise rates immediately by 50 basis points
Lawrence Summers has been saying for six months that the Fed is behind the curve.

I think 3 vs 4 will make less of a difference vs if they decide to outright sell some 5y plus maturity bonds rather than just letting them roll off.

Nada, "wanting less" is certainly one of the keys. I wanted a sous-chef, and the R&D on those is an infinite sinkhole!

300, of course I can't read, but you knew that about me.

Keith, you were a "responsible" adult before, you just became an "establishment" adult.

I'm seeing a higher level of interest in purchasing real estate than in January, but so far the comments all seem to be "well my rent's being going up and I got a bonus." Not hearing anything yet about "I want to get in while money is still cheap."

ali r.

@ali if you knew me, you wouldn't say that : )

Well the 10y is basically at 1.8 which we had seen last year as well and affordability is higher due to increased pay and bonuses. So we shouldn’t really see much impact yet to real estate. I would think below 2 percent, buyers wouldn’t care that much.

Many pundits are surprised the 10y yield isn’t higher.
Tech stocks are taking a beating and according to Bloomberg today, they are still pretty expensive.

As far as rates go, higher rates make it more expensive to pay interest costs for US debt. Trump alone contributed seven trillion.
It seems like there are so many wildcards, but the days of easy money are over.

I would have never known
"Tech stocks are taking a beating and according to Bloomberg today, they are still pretty expensive."

@300,
But many people do not think tech stocks are expensive now due to the correction in contrary to what Bloomberg says; many pundits are advising to buy the dip, such as stocks like NVDA and MSFT.
You seem to be saying that everybody knows this that is that tech stocks are still expensive, but they don’t.
But I am thinking out loud and if people’s 401k go down, that could affect real estate. There’s just a lot of headwinds.

I will leave the stock market expertise and opinions to people like Nada.

I am not surprised that rate increases are not on buyers’ minds.

I am not surprised that rate increases are not on buyers’ minds. I imagine these effects work slowly. The buyers were considering buying (say) 6 months ago under rate considerations present then. They had their discussions, etc. then and decided that it made sense for them to buy something this year once (say) their bonuses came in. So they have kinda committed to buying already. They probably won’t be deterred by a 0.3% increase in jumbos, don’t know about the 0.6% increase in conforming or what it could mean for jumbos, and have little anticipation of the rate increases are coming, or that the Fed has been subsidizing mortgage rates via direct buying all this time.

>> I'm seeing a higher level of interest in purchasing real estate than in January, but so far the comments all seem to be "well my rent's being going up and I got a bonus."

I’ve noticed an uptick over the past week in broker+visitors at our gym/pool. I asked a lifeguard who sits there all day, and he said there had indeed been a noticeable uptick. So as a civilian, I am seeing what the brokers here are seeing too.

I think this impetus of “rents been going up and I’m flush with cash” is going to add more fuel to the inflation fire. This seems like precisely the sort of issue economists are talking about with the positive-feedback loop once inflation gets going.

Is the Fed going to be able to get ahead of this with 3 rate increases in 2022 and letting the <1-year bonds roll off? That sure seems to be the prevailing view now. Then again, the prevailing view ~5 months ago when I started the other thread was that there’d be no rate increases and bond-buying would continue at a healthy clip.

Maybe 3 (or 4) rate increases is all it’s going to take to end the inflation. I dunno, but I’m not holding my breath on it. Personally, I have been positioning myself to be in a good place even if it rates go up a few percent. I.e., my assets / investments make sense even without the easy money and ongoing speculative headwinds. It seems increasingly clear that the punch bowl is going away, but people are still partying on like it’s 1999.

It promises to be interesting times ahead…

Err, “speculative headwinds” => “speculative back winds”.

Nada, What is your estimated range of YE22 10Y rate?

Squinting briefly, I think Mr. Market has the forward rate somewhere in the neighborhood of 2.0 % +/- 0.6% or so?

Ha. I try to get a forecast out of you and all I get is forward rate plus std dev despite you high inflation and hawkish fed view above!!

I don’t care enough to form an opinion: I just don’t have that much exposure to it. Even if I did have a view, I’m not so stupid/arrogant as to make it that strong relative to the market. I could think real hard and conclude (say) 1.8% +/- 0.6% or 2.2% +/- 0.6%, but I don’t have enough impetus to expend the effort.

More interesting to me has been that the market had been putting forward 10-yr rates at 1.5% +/- 0.5% or so, but many people effectively levered themselves on it it while effectively thinking it’d be 1.0% +/- 0.1% or whatever.

OK 300, I’ll update my forecast to 2.1% +/- 0.6% just for you…

Ha..

Guessing Fed feels good that 10y is getting closer to 2%. All their talk has been effective.

My friend was just quoted sub 2.85% for a 30y from City for a $4mm++ mortgage. I do not think they will offer that to most people.

So everyone shitting bricks after Powell conference and the 10y back to 1.8 which is roughly pre-fed announcement and we saw that level last year as well. And it seems that the purchase boom in NYC will continue for now.

To me, most interesting thing over the past month is that the consensus view of the number of rate increases in 2022 has shifted from 3 to 5.

I agree the purchase boom will continue for now, but with these increases and the Fed exiting bond-buying, I think we will soon be at 4% fixed-rate mortgage. And ARMs resetting from 2.x% to 4.x% over the upcoming couple of years.

Barclays looks for 3 rate hikes
Morgan Stanley looks for 4 rate hikes
Goldman looks for 5 rate hikes
Bank America looks for 7 rate hikes

The winner of the rate hike guess game will land you on overnight money.

Market has already priced in 4 hikes

I think these market players are forgetting the maturing treasury roll-off speed and which maturities get rolled off which will have at least at big of an impact as rate rises.

Fed's Powell statements last week were that the Fed would allow runoff to start in fall of 2022, so that extra rate pressure will be later than the rate hikes which will most probably start in March.

Fed Funds futures are pricing in first rate hike in March , a second one by April , third by August and fourth by October

I do not think the timing is decided: "Fed would allow runoff to start in fall of 2022"

30yr conforming mortgages have hit 3.9%, even as the Fed continues its buying at $45B a month:

https://fred.stlouisfed.org/series/WSHOMCB

Does anyone have a sense of why the data doesn’t seem to show any tapering yet?

Nada, The portfolio is so big that it is hard to see reduction in purchases. However, if you look at successive peaks in the last few months, monthly increase is smaller but unclear if market movements can cause that due to increasing rates in the last few months.

I was looking trough-to-trough, which was $45B last month. Even peak-to-peak was $37B. I doubt they are showing it at market values, optics wouldn’t be great. If PIMCO or Vanguard agency MBS funds are any guide, there was a 1.6% / $45B loss over the past month.

Reading through above forecasts. Fed dot plot forecasts 7 in 2022. Plus a few more in 2023 taking the short end to 2.75%. I am not sure Fed will be able to or can take it that high and invert the yield curve when they can exercise fair bit of control of the long-end by selling Fed's bond holdings. 10y at 2.20%. It seems like real estate buyers can absorb the impact so far as rents keep going up.

They haven't even first stopped qe yet, they are still buying. Then rates up, then selloff balance sheet if shit doesn't hit the fan by that time.

Fed is trapped in a tough spot

Market has it at 8 hikes by year-end. Why won’t the Fed be able to take it that high?

>> It seems like real estate buyers can absorb the impact so far as rents keep going up.
As long as rents keep going up, they will keep raising rates.

There is a bit of a buying frenzy right now, especially for top tier homes. I thought it was bonus money juicing the market. However for the first time I'm hearing many buyers talk about their concerns regarding higher rates. Seller's seem to have the same concerns....

7 offers this week, all went to highest and best. 'Won' two. Two of our listings found buyers. In two cases we were 10% over asking all cash, and we were in the middle of the pack when the dust cleared. On two of the properties there were 10, 12 bids.

We're swamped. Haven't had a chance to look over at urbandigs, what are you seeing and hearing Noah?

Keith Burkhardt
TBG

Actually we did have one deal that did not go to highest and best. New development west side.

"Market has it at 8 hikes by year-end. Why won’t the Fed be able to take it that high?"

In my opinion, which was clearly wrong earlier on in the thread with only 4 rate hikes in 2022, economy will not be able to take 7-8 in 2022 and supply chain situation will improve. The Fed also has balance sheet unwind to do which will help inflation objective.

Hey Keith! Market is still quite strong, deal vol still strong, inventory tight but rising, prices rising bouyed by luxury that will fade next few months.

Too early to tell if current macro is having effect yet

Hey Keith! Market is still quite strong, deal vol still strong, inventory tight but rising, prices rising bouyed by luxury that will fade next few months.

Too early to tell if current macro is having effect yet

Agreed with 300 re FFR, I doubt fed hikes that much, markets will do some for then

Kind of interesting dynamic, seems some sellers are anxious to get to market fearing rising rates along with all the other volatility out there. But if they've got the right home, they're getting met with buyers foaming at the mouth.

The bidding on some homes, especially brownstones in Brownstone Brooklyn, can really get out of hand. There are just some buyers who want to win at any cost. We just bid on a home in Fort Greene, it was nice, we bid 260k over the ask, non-contingent on 40% financing. I was told we weren't even close....

Wow

Wow

Current buyers seem pot-committed w.r.t. making a purchase. Mortgage rates are already ~50% higher than mid-2021 when they started contemplating it, and now they are scrambling. Should be interesting to see it play out into next year.

On inflation and rates, people have shown consistent complacency here over the past year. Because of the experience of the last decade, people take it as an article of faith that in steady-state we will forevermore have 0% interest rates and sub-2% inflation. Even in the face of:

- 8% inflation
- Market expectations of 2% FFR this year, more next
- Market expectations of 5% inflation over the next year even with FFR going to 2%
- Fed expectations of the same on both
- “buyers foaming at the mouth”, etc.

I’m hearing “1% will do the trick”. Long-term rates have already baked in the above schedule of FFR increases, resulting expected inflation, etc. If the Fed stops at 1%, mortgage rates will drop from what they are now. Somehow I don’t think that’s gonna do the trick w.r.t. putting the inflation genie back in the bottle.

If anything, people (Fed, market, peanut gallery on SE) have been consistently behind the curve w.r.t. rates increasing. It’s interesting to se me that continue.

Looks like you have a 10y forecast in mind Nada.

https://www.wsj.com/articles/the-end-of-zero-prepare-for-a-world-with-higher-rates-11647595822

Warren Buffett has compared interest rates to gravity. That is an especially useful way to think about them right now.

For the last two decades the developed world went from living on Mars, with barely a third of Earth’s pull, to the Moon more recently with even less. Now we might finally return to what used to be normal. For consumers, businesses and even governments, the transition will feel alien. Many will find it crushing at first, while others will be reinvigorated by a world where money costs something. Some that grew up on those extraterrestrial colonies simply won’t survive the transition.

On Wednesday, Federal Reserve policy makers didn’t just lift their range on overnight rates above near zero for the first time in two years but promised to keep on doing it through this year and next. The European Central Bank surprised markets earlier this month by setting the stage for rate increases later this year. The Bank of England started raising last year.

I remember when my parents were shopping for a house, think it was the late seventies or very early 80s? Mortgage Rates were about 17%. I believe my money market account at Citibank was paying 12%?

Keith
TBG

The difference being, nada, that during everyone's time on the moon, some people built fortunes and used them to run up the marginal prices of goods that *I* want. If they would just take those fortunes and run up the prices of fancy Swiss chonometers and NFTs, that would be fine, but unfortunately they have taken their anti-gravity boots and stomped over near me!

I have a variable-rate mortgage (two actually, because I have one on the investment place) and for a dozen years that's been an amazing play. Now, I'm okay with the rates going up; I'm just sad to live in a neighborhood where "B" building two-bedroom/two baths cost one point five million dollars.

(Don't even get me started on college)

>> I believe my money market account at Citibank was paying 12%?

Wait a sec, you had a bank account back then? I thought you were the starving musician.

I have a new in-law of an in-law who is a mortgage broker. I spoke to him last month, and he was feeling relieved that his business has finally started slowing down (exhaustion). He said most of his business was I/O ARMs, because that’s what would get people qualified for the most house, with down payments from parents. Even then, most were losing out to a higher bidder.

I’m not so sure your B-building $1.5M 2BR is really going to the machers who built fortunes. The way this broker tells it, it’s going to some working stiff who got a few hundred thousand from mom & dad and a job that can service $2500 a month in interest on a $1M+ loan. For now, anyways.

Market expectations are now at (the equivalent of) 9 raised by year end, 2.25%.

@nada I still needed a bank account! My $500 dollar balance was earning bank!

May have been Chemical bank?

Nada, I get that, but the whole reason it costs $1.5 mm in the first place is that the machers who built fortunes soaked up all the "good " inventory, and this is the rats fighting over the scraps...

And there are too many rats, and not enough scraps (which IMHO is the result of tax policy rewarding developers instead of development). The particular unit I have in my mind had six bidders, which means... five losers.

Keith, I think I was earning a mere 7% in my first savings account (an S & L, of course). And I was pissed when it dropped to 6% the subsequent year!

FP, when did this all occur? As far as I can tell, and SE’s price index of same home resales in Manhattan backs this up, sales prices are flat since 2008. Up 3.5% to be precise. Inflation is up 34%.

I swear I've heard a couple of regulars here criticize the rewards developers get, which has created overdevelopment.... It's only overdevelopment when people aren't buying.

Anyway, there are plenty of scraps, just not in prime neighborhoods. And I also think it has less to do with the mechanics of development, more with a very favorable economic climate. If you want to slow down buying, tax the hell out of it... or better yet tax the hell out of 'high earners'.

I just wrote the biggest check of my life to Uncle Sam. Personally I think it's a bit crazy what we pay in taxes, and we don't even get health care. And this coming from a guy that as a teenager identified as an anarchist, now I think I'm more of an anarcho capitalist ; )

At the time I didn't fully understand or appreciate what earning 12% on fully guaranteed money men! But I was very annoyed when my Marcus account went from about 2% down to less than 1% not too long ago!

*meant

I think what Ali is really alluding to is there is no low-end new development in $ terms. Main reason for that is heavy regulation (DOB approval time, time taken to get new utility connections, Condo offering plan approval process etc), which don’t impact construction quality but increases carrying cost for the developer, and labor costs.

Yes exactly 300, and yes Keith, let's tax high earners more (my parents, who were both public servants, probably paid a higher tax rate back in the day than anyone on this board does now) and nada...three weeks ago, maybe? Though who knows with people feeling weird about the Ukraine whether the winning bidder will perform...

FYI: I was being cheeky with the tax high earners even more. Sorry, not sorry ; )

FYI: I was being cheeky with the tax high earners even more. Sorry, not sorry ; )

It's not like we've never taxed high earners, but we've certainly lost the will to do it. Here's some data on tax rates from an article I was reading earlier today:

Marginal tax rates by president (since WWII) for the top income brackets:

FDR: 81 - 94%
Truman: 82 - 94%
Eisenhower: 91 - 92%
Kennedy: 91%
Johnson: 70 - 91%
Nixon: 70 - 77%
Ford: 70%
Carter: 61.93 - 70%
Reagan: 28 - 69.13%
HW Bush 28 - 39.6%
Clinton: 39.1 - 39.6%
W Bush: 35 - 39.1%
Obama: 35 - 39.6%
Trump: 37 - 39.6%

Why not go back a bit further in history?
https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates

Do you really think that paying almost 40% of your income in federal taxes is not a lot???

And what about all the other taxes you pay every day?

I am sitting here waiting for the financial gravity to kick in. I sold my queens 2 BR apartment in 2020, closing in 2021. Now I have two kids in a rental that it looks like we will renew for another year. Best thing I did was put my savings in XLE which has been performing nicely (didn't know I was betting on a war at the time).

Now I have just about a million savings to try to buy a 3 BR apartment or a townhouse for my kids to grow up in. But with this kind of money, I don't want to throw it away competing against 3% IO mortgage borrowers with a downpayment from Mom and Dad.

The way I figure it is that one of two things must happen:
1. The fed hikes 6-7 time this year and everything is OK. In this scenario, I think that the yield curve doesn't invert and the 10-year government bond goes to ~4%+. If this is the case, mortgage rates go to 5-6%. I think that housing cools in this scenario because the change in monthly mortgage payments between a 2.75% mortgage and a 5%+ is just too significant.
2. The yield curve inverts and mortgages stay around 4%. In this scenario I think that we get a recession and housing and inflation cool substantially.

I think that both 1 & 2 could occur - higher rates and a recession - and that would also be good for my 2023 housing purchase opportunity. I am betting that the fed won't let inflation continue while maintaining low low rates (and the market seems to finally agree with this).

First off, 40% is a marginal rate, not the rate on all income, and yes, I think it's "not a lot." I know taxes are a pain point when one has to pay them -- and being freelancers we pay them four times a year -- but fire, police, teachers, support for the mentally ill and priced-out-of-housing in our society are all good things for the community, and they're not free.

Back in the day, when we had higher marginal tax rates, we had better government services too.

I don’t think you can read anything from those top marginal tax rates. Effective tax rates for the top 1% have not changed much over the year, just the degree to which one could avoid them (used to be easy, nowadays not so much).

https://taxfoundation.org/taxes-on-the-rich-1950s-not-high/

The fact that people quote them without knowing that / providing the context is interesting.

Thank you Nada. Any generalization of taxes and govt spending is too hard. Net of taxes paid and transfer payments received analysis is too complex. Will appreciate if you ever come across any historical data on that.

Now that Fed seems to have included "Income Inequality and Equitable" growth in their goals if not not in the main mandate, it will be very tricky to raise rates as the people will complain about the affordability of housing.

I'm not sure what you mean by 'back in the day' from porch. however, I can attest to the fact that government services were not better in the seventies. Js.

I think my biggest problem with government is the inefficiency in which they spend money and administer programs. New York City was a mess in the '70s, though very entertaining.

1970 child poverty rate (percentage of all people under 18 in poverty): 15.1
2020 child poverty rate: 16.1

1970 U.S. Prison population: 197,245
2020 U.S. Prison population: 1,215,800