Real estate in Europe is falling. Sweden is one of the hardest hit along with Greece, Spain, Italy, Portugal, and Poland. Many of these are facing the problem of using variable rates as rates continue to go up and households get their purchasing power eroded by inflation.
The US is not immune. ARM use has popped up in 2022. Yes, they are less popular than in pre-GFC. In mid-2022, according to the Mortgage Bankers Association, 10.8% of all purchase mortgage originations were ARMs in May 2022. We have been doing a 6% to 10% share nearly every month as higher rates and affordability issues continue. To this, we add 1.5% to 2% of loans doing 3/2/1 or 2/1 buydowns. It’s a far cry from the height of 35% in 2005. But back then rates were lower (under 6%), the median home price was between 191k to 209k, and inflation was 3.39%. In some ways, 2005 was a bargain versus today and some still think it’s a bargain today.
Between inflated prices, high inflation, and bank issues with the resulting tightening, the continued downtrend in housing prices is all gravity now. An actual shock (SVB was a pre-shock) in the banking or financial sector and we could accelerate the speed of the fall. The Fed is still a few months away from pausing and has 0 and repeat 0 plans on cutting rates so far in 2023.
A small to moderate rate cut could also not significantly influence the markets and banks. The banks can’t get out of the triple trap of holding long-ended bonds, falling deposits, and holding bad debts CMBS and Corporate debt with a couple of small rate hikes. A little cut won’t change the equation from being negative and the Fed can’t do QE with high inflation remaining or without fiscal spending. The banks need 0 or nothing and the Fed can’t give them that unless we have a true hard landing at the minimum but then what?
If the banks get their 0 FFR and low yields what are they most likely to do? Exit their bond positions. CMBS and junk corporate bondholders can get out. Few get to refinance but overall not much lending or liquidity. Someone else holds the bag (the Fed most likely) and that could be it.
It might not be another 2008 to 2012 or 2020-2021, where the banks jump in and speculate on bonds again. They might close out their positions and then call it a day. No lending, no liquidity injected in the markets. What’s the point? They won’t need the reserves as deposits fall and they won’t be so eager to make the same mistake twice.
If that happens then that could be the worse thing ever. Imagine having a debt party and no one shows up!