“The first rule of Fight Club is: You do not talk about Fight Club.”
— Tyler Durden
Dallas-Fort Worth area home sales approached a new record in July, and Denton County home sales reached a new high on the back of plunging mortgage interest rates. The sharp year-over-year drop in rates has produced a nice stick save for a stagnating (or should I say stagflating) housing market. Denton County and the city of Denton saw double-digit sales increases during the month. The average price of a Denton County home eclipsed $370,000 in July.
Denton County and Denton were standout performers for the month, besting the 6% sales gain for the greater DFW area. Pending home sales were positive as well, although not as strong as actual home closings. For the last several months the new home market has been driving sales higher as the primary beneficiary of lower rates. July was no different. The existing home market, which happens to be the bulk of sales, is still grappling with a supply and demand mismatch. Market bifurcation is still a prevailing theme.
Housing market bifurcation has been a nagging problem in this latest economic cycle, a direct result of the Federal Reserve’s top-down monetary stimulus. During the last 10 years the Fed poured trillions of dollars into the economy to reflate asset prices, and a great deal of that liquidity went into the real estate sector. This a big reason for why we have so few affordable homes, and why many millennials are now priced out of the market as home price inflation has greatly exceeded wage growth.
Real estate agents generally don’t talk about this market dynamic. The Texas A&M Real Estate Center, funded by real estate licensing dues and renewals, spends a great deal of time writing and researching the intricacies of the Texas economy and housing market fundamentals, yet they miraculously leave the Federal Reserve out of the conversation in their research. According to TREC’s 2018 annual report, Texas real estate professionals paid over $6 million to fund the center and its tainted research — research that dares not mention the Fed’s entanglement with the Texas housing market.
To their credit, the staff at the A&M Real Estate Center does some valuable work, including the compilation of housing market data for a number of the Texas metro real estate markets. The center has a rich history, but in recent years the Real Estate Center at A&M has often looked like an extension of the Federal Reserve research, which offers copious amounts of data with little insight. I have an idea about why this is the case.
If you scroll down to Page 27 of the Real Estate Center’s history, you will find a note about the “new era of REC-FED cooperation,” which began back in 2012 with the arrival of one Dr. Luis Torres. It makes sense that following the Great Recession, the Fed was looking to use its army of economists to preach the gospel of trickle-down monetary prosperity. The Federal Reserve needed cover for their massive quantitative easing experiment, and what better way to spread the news than to have economists cutting their teeth at the Federal Reserve and then branching out into other firms and agencies to spread the message of economic growth.
While Dallas-area home prices are about as unaffordable as they have ever been, you would think the Real Estate Center staff would be discussing the fact that Federal Reserve policy is directly responsible for the inflation of Texas home prices. It’s surprising you never hear the Ph.D. economists at A&M’s center mention how the Fed blew a new bubble in Dallas-area home prices with trillions of dollars in new liquidity injected into the markets. You never see charts in Real Estate Center research pieces showing how the Fed’s liquidity dump lit the fire for the Dallas-Fort Worth economic boom following the Great Recession. I have these charts plastered across my website, because they are an integral part of the discussion if you want to truly understand what’s going on with the Texas housing market.
If you read the A&M Real Estate Center’s research pieces and publications, the Texas real estate boom is all about fundamentals like a strong employment sector and a growing economy. To be sure, these things have contributed to the longest economic expansion in recent memory. They were also facilitated by massive stimulus from the Federal Reserve bank. If you doubt that is the case, just take a look at how the housing market rolled over in late 2018 as interest rates approached a mere five percent.
The recent stick save for the housing market is the result of a complete capitulation by the Federal Reserve, after they spent the last 10 years goosing asset markets to new highs. The Fed’s liquidity is agnostic, and you can be sure plenty of it made its way into the Texas real estate market. But here’s the problem. The Fed is already cutting rates again with the federal funds rate at roughly half of where we started the last recession.
The Fed has precious little ammo to waste to prevent another meltdown. The president is screaming for lower rates, and the bond market is signaling more rate cuts are coming regardless of what Federal Open Market Committee officials may want. As I noted in my latest housing market report, the reasons are fairly obvious. Without super cheap credit, the endless growth narrative falls apart rather quickly. The same holds true for the housing market. The last quarter of 2018 was a wake-up call for anyone paying attention.
The economists at the A&M Real Estate Center may not want to talk about the Federal Reserve’s involvement in the Texas housing market, but that doesn’t mean you have to be caught off-guard by the lack of disclosure. The Texas housing market has been detached from traditional long-term fundamentals for years due to the Federal Reserve’s interventions. Fed policy is directly responsible for many of the distortions we are experiencing, and the general unaffordability of homes in many Texas markets.
If the Ph.D. economists at the Texas A&M Real Estate Center don’t want to acknowledge this, they don’t deserve to be funded with real estate agents’ dues. Texas real estate professionals should not have to pay money to be misinformed. Texans deserve honest research that includes a discussion of Fed policy as it manifests in the housing market.
The Fed’s army of economists have a history of really bad forecasting and myopic thinking. In the Federal Reserve’s distorted view, Main Street America has the same access to super cheap capital as GE or Goldman Sachs. This is of course lunacy, but it’s how the Fed operates. The Fed’s flawed economic models and assumptions are not just bad; they are dangerous. If you need an example, here’s Exhibit A:
“We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” — Ben Bernanke, former chairman of the Federal Reserve, May 2007