The Fed Won’t Rescue The Housing Market | Danielle DiMartino Booth

Episode Summary

Executive Summary: Danielle DiMartino Booth argues that the U.S. is already in a recession driven by a rapid housing and auto downturn, with Fed tightening accelerating the breakage. She says credit quality is better than 2008, but frozen origination, falling collateral values, hidden losses, and weak securitization markets could still create a broader systemic stress, especially if the Fed keeps hiking into slowing real-time data.

Main Topics: Housing recession and collapsing transactions (Priority: 5/5): DiMartino Booth says housing has been in recession for most of 2022, with buyer traffic, mortgage applications, existing-home sales, and multifamily activity deteriorating sharply. She emphasizes that the downturn is deeper and faster than the last housing bust in many leading indicators. Federal Reserve tightening as a key accelerant (Priority: 5/5): She argues the Fed helped inflate the bubble via zero rates and MBS purchases, and is now deflating it by hiking aggressively. The rapid move from near zero to much higher rates is crushing affordability and freezing activity. Auto lending deterioration and rising delinquencies (Priority: 5/5): She describes a post-pandemic auto market where easy financing, FICO inflation, and used-car price reversals are causing losses, repossessions, and rising delinquencies across subprime and deep subprime borrowers. Securitization and credit-market freeze (Priority: 4/5): The discussion expands from housing and autos to ABS, CMBS, private credit, and other structured-finance markets, where rising rates and QT are making deals harder to price and refinance, exposing weak balance sheets and hidden losses. Misleading official data and recession timing (Priority: 4/5): DiMartino Booth says blue-chip data like GDP and unemployment lag the real economy, while surveys and real-time indicators point to recession. She believes the NBER could date the recession to early 2022 despite weak official recognition. Policy, politics, and the midterm stimulus hangover (Priority: 3/5): She argues fiscal support and tax refunds are still propping up consumption, but those effects are temporary and tied to politics. Once the election passes, she expects support to fade and the downturn to become more visible.

Key Arguments: Housing is already in a recession, and the speed of decline in buyer traffic and mortgage demand is worse than in 2007-2009. The Fed is not a passive observer; it helped fuel speculative excess by keeping rates at zero and buying mortgage-backed securities, then worsened the unwind by hiking quickly. Today’s mortgage market is safer than in 2008 on credit scores and equity, but that does not prevent transaction freezes, appraisal problems, and forced selling. Used-car prices and auto delinquencies show a classic bubble reversal: easy credit during the pandemic, then falling collateral values and rising defaults. Banks and lenders are delaying recognition of losses by keeping repossessed cars off auction or marking down provisions slowly. Securitization markets are weakening because QT and higher rates reduce balance-sheet capacity, making it harder to issue ABS/CMBS and refinance legacy debt. Official macro data are lagging indicators, so they can mask an ongoing recession even when real-time surveys and claims are deteriorating. Fiscal stimulus and tax refunds are cushioning consumption, especially for the lowest-income households and small businesses, but that support is temporary and politically driven. Powell may be trying to break the Fed put and restore policy discipline, but he risks creating the very systemic event he wants to avoid.

Data Points: Existing home sales decline: 8 straight monthly declines - U.S. existing home sales were falling for the eighth consecutive month, the longest such streak since 2007. Mortgage rates: Close to 7% - DiMartino Booth cited mortgage rates near 7%, the highest since 2002. Homebuilders buyer traffic index: Fell from 50 to 10 - She used this drop to illustrate the severity of the housing slowdown in the homebuilder sentiment data. Multifamily units under construction: 900,000 - She called this a 50-year high in multifamily units under construction. Multifamily sales decline: 26% year over year - Commercial/multifamily sales were described as down sharply amid a broader real-estate slump. Office sales decline: 56% - Used as a comparison point showing even worse stress in office real estate than multifamily. Investor share of housing transactions: 1/3 in 2021 - She said investors made up roughly a third of all housing transactions when rates were near zero. Used car prices: Up 20% month over month in 2021; down 10% year over year now - Illustrates the boom-bust reversal in the used-car market. Auto market size: $1.5 trillion - She noted autos are smaller than housing but still large enough to matter systemically. Consumer installment loan delinquency: Higher than car delinquencies - She said lax lending spread beyond auto loans into consumer installment lending. Distressed debt spread: About 1,000 basis points north of Treasuries - Used to describe the stress in junk credit markets. Distressed debt market size: About $260 billion - She cited this as the scale of stressed debt as of the prior week. CMBS refinancing due: $52 billion in the next 24 months - She said more than half is multifamily and has very low interest coverage. Fed tightening pace: Three times faster than since 1980 - Used to emphasize how aggressive the current hiking cycle is. M2 globally: -5% - She said global money supply growth was negative when aggregating world M2 figures. Business income tax refunds: $211 billion and counting - She cited stimulus-related refunds to businesses as a major source of ongoing support. Food assistance increase: 25% on Oct. 1, 2021; 17%-28% additional COLA on Oct. 1, 2022 - Used to explain why lower-income households still have support despite inflation. Treasury move on a heavy day: 11 basis points - She cited large daily moves as a sign of thinning Treasury market liquidity. U.S. terminal fed funds market expectation: 5% by around April 2023 - She described rising market expectations for the Fed’s peak rate. Layoffs at Facebook/Meta: 12,000 employees - Used as an example of high-income labor-market weakness that may not show immediately in unemployment data.

Pivotal Quotes: "When the dust on the construction sites settles, two words that will not be used to describe the current downturn in residential real estate are short and shallow." — Danielle DiMartino Booth: Opening claim about the severity and likely duration of the housing downturn. "The Fed is both arsonist and firefighter." — Danielle DiMartino Booth: Her framing of the Fed as having helped create the housing/credit bubble and now managing its collapse. "If he wants to have a controlled demolition ... you cannot create a systemic event that forces the Fed back into the market." — Danielle DiMartino Booth: Her warning that Powell’s aggressive hikes could backfire and trigger a larger financial crisis.

Implications: Listeners should expect further pressure in housing, autos, and credit markets as higher rates bite through a lag. Even if official recession calls lag, real activity is weakening now, and policy/political support may fade after the midterms.