Housing

Some incomplete comments on the current US economic environment

Some incomplete comments on the current US economic environment

This is going to be a quick hit post to get some thoughts down on paper because a few threads are coalescing for me that I want to give some coherence to. The essence of the threads revolves around the tension at the Fed between normalizing policy and the ability of the economy to withstand it. My view has been upbeat about the US economy – and that’s been without a trace of recession worry for the last several months. But there are some negative factors coming together that give me pause. And it begins with housing.

Jumbos still cheaper than conforming mortgages

Jumbos still cheaper than conforming mortgages

For years mortgage rates on “jumbo” loans have been higher than for traditional (conforming) mortgages. Since jumbo loans were larger than the upper limit permitted to be packaged and sold to Fannie and Freddie, banks would typically charge a premium for “illiquidity” on these products. But starting last year conforming mortgages became more expensive for borrowers than jumbo loans.

Developed economy house price-to-rent ratios from Canada to Japan

Developed economy house price-to-rent ratios from Canada to Japan

Drawing on research by the IMF’s Hites Ahir and Prakash Loungani, the chart compares the house-price-to-rent ratio compared with the historical average. This is a standard measure of valuation. Clearly by such a metric, the recovery in the housing market has been uneven. Canada has the dubious honor of having the most over-valued houses, or where it makes the most sense to rent. The current ratio is about 85% above the average.