It's 2006 again, or maybe 1999

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Corporate profits are trending down.  The yield curve is flattening.  And, it's just a matter of time before the Fed raises rates again.  This is an unusual recovery because interest rates never recovered and firms and households never re-leveraged.  That probably makes it more like the 1990s.

In the early 1990s, there was a deep and persistent housing correction and a persistent stagnation in mortgage credit.  Then, there was a long and steady recovery.  The housing collapse in 2007 was deeper, with some complications, but I think we will see a long term recovery again.  As in the 2001 recession, housing will probably hiccup slightly and then continue to recover.  There really isn't much of a source for contraction in housing, as credit deprived as the market has been.

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Credit has actually been growing in mortgages - finally.  The weekly figures on closed end real estate loans have been inching up on a 10% annualized growth rate.  When we contract, this might flatten for a little while.  Then it will continue to accelerate.  There is so much pent up demand that growth will eventually have to explode.

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I think we are getting to a point where the lowest priced homes are finally regaining enough equity for the market to be liquid again, in spite of mortgage markets that have been fettered.  As this process continues to unfold, there will be a positive feedback effect as growing equity begets liquidity, begets sales, begets rising prices, etc.  At the bottom end of the market, there is probably a 30% gain to be had.  If you have the disposition for low priced real estate ownership, this is probably a good time to get in.  (Disclaimer: Don't take advice from cocker spaniels with blogger accounts.)  There may be a lull in the market as the Fed creates a brief, unnecessary contraction.  But, this is probably among the best sub-asset class to be in - direct ownership of low priced residential single family homes.  (Remember: Disclaimer.)

Outside the Closed Access cities, there was never much difference in home price trends among the quintiles of zip codes, by price....until after the bust when the federal government enforced Draconian and wrong-headed barriers to mortgage credit through bank regulation and control of the GSEs.  The lowest quintiles fell by, typically, about 30% more than the top quintiles, and never recovered.  Working class savings went down a black hole.  But, finally, it looks like the low priced zip codes might be recovering.  With hope, this will come with recovering homeownership and the demand that would come along with that, growing construction employment, and a boost to incomes.

On the downside, it looks like top quintile homes are decelerating.  This looks like 2006.  The Fed is squeezing the money supply again.  This is the same dynamic that there was in 2006, except in 2006, we were starting from a much higher level with more credit available.  Now, it's just the first few green shoots of credit in the low priced markets that are finally creating much awaited recovery, and the less credit constrained zip codes are moderating because nominal economic activity, in general, is moderating.

I think this will look more like 2001 than 2007 because housing market prices don't reflect a healthy credit market now, anyway.  So, prices at the low end may hang on and continue to rise, unless regulators clamp down on new mortgage activity.

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I suspect that the target rate is already above the natural interest rate, so that the natural interest rate isn't going to rise, and may fall.  That is why the yield curve has flattened, NGDP growth is weak, and high end home prices are levelling off.  It doesn't matter too much.  I expect it is a matter of time until the Fed raises rates again - maybe December.  The error will eventually become clear at that rise or the next one, and some sort of QE program or something will be initiated again.  I suppose there is the danger that the inflation-phobes convince the Fed not to do what's necessary to reverse contraction.  And, if the anti-debt crusaders clamp down on credit markets, too, the combination of those pressures could be disastrous.  But, lacking that, I think the natural growth in mortgage credit, which should have some momentum, will help to keep positive pressure on currency growth and economic growth in general.  We can hope.

Given distortions of the zero lower bound, we may be close to what would be an inverted yield curve in a normal environment.  Another hike would seem likely to do it.  Two hikes seem nearly certain.  Seems like we're amid an example of IMH.  I'm looking for defensive or counter-cyclical positions.  I hope for the country's sake this is 1995 and not 1999 or 2006, but I don't see any indication that the doves can hold on indefinitely.