By Alex Kimani of OilPrice.com

The European Union on Friday once again failed to reach an agreement on a price cap for Russian oil, with the bloc’s eastern-most members including Poland, Estonia, Latvia, and Lithuania objecting that the proposed $60-$70 per barrel for Russian crude is too generous and well above the rates Russia currently sells crude.  

European Commission Vice President Valdis Dombrovskis has acknowledged as much, saying, “If you put the price cap too high, it doesn’t really bite. Oil is the biggest source of revenue for the Russian budget, so it’s very important to get this right so it really has an impact on Russia’s ability to finance this war,” he told Bloomberg TV.

Well, they are right: offering $70 per barrel for Russian Urals is incredibly generous, considering that Bloomberg has just reported that China and India are currently getting them for half that price. 

According to Bloomberg’s oil strategist Julian Lee, Russia’s flagship Urals crude oil traded at a massive discount of $33.28, or about 40% to the international Brent crude oil, at the end of last week. In contrast, a year ago, Urals traded at a much smaller discount of $2.85 to Brent. Urals is the main blend exported by Russia. The result: Moscow is beginning to feel the heat of its war in Ukraine, and could be losing ~$4 billion a month in energy revenues as per Bloomberg’s calculations.

Washington is not losing sleep over it. “If Russian oil is going to be selling at bargain prices and we’re happy to have India get that bargain or Africa or China. It’s fine,” US Treasury Secretary Janet Yellen previously told Reuters.

Shipping nations like Greece are in favor of a higher price cap that will help keep trade flowing. However, the situation could get even murkier for Russia with EU sanctions on Russian oil set to kick in on December 5, with disruptions to the market expected if a price cap is not in place. Meanwhile, Russia is reportedly drafting a presidential decree that would ban its companies and any traders from selling it to anyone that participates in a price cap.

Surging Imports From Russia

Previously, India was never a big buyer of Russian crude despite having to import 80% of its needs. In a typical year, India imports just 2-5% of its crude from Russia, roughly the same proportion as the United States did before it announced a 100% ban on Russian energy commodities. Indeed, India imported only 12 million barrels of Russian crude in 2021, with the majority of its oil sourced from Iraq, Saudi Arabia, the United Arab Emirates, and Nigeria.

But back in May, reports emerged of a “significant uptick” in Russian oil deliveries bound for India.

According to a Bloomberg report, India spent a good $5.1 billion on Russian oil, gas, and coal in the first three months after the invasion, more than five times the value of a year ago. However, China remains the biggest buyer of Russian energy commodities, spending $18.9 billion in the three months to the end of May, almost double the amount a year earlier.

And, it’s all about the money.

According to the International Energy Agency (IEA), Urals crude has been offered at record discounts since the war began. In the early months after the war began, Ellen Wald, president of Transversal Consulting, told CNBC that a couple of commodity trading firms – such as Glencore and Vitol – were offering discounts of $30 and $25 per barrel, respectively, for the Urals blend. 

The experts say simple economics is the biggest reason why White House pressure to curb purchases of crude oil from Russia have fallen on deaf ears in Delhi.

“Today, the Government of India’s motivations are economic, not political. India will always look for a deal in their oil import strategy. It’s hard not to take a 20% discount on crude when you import 80-85% of your oil, particularly on the heels of the pandemic and global growth slowdown,” Samir N. Kapadia, head of trade at government relations consulting firm Vogel Group, told CNBC via email.

Still, it will not be lost on many readers that India has maintained a cozy relationship with Russia over the years, with Russia supplying the Asian nation with as much as 60% of its military and defense-related equipment. Russia has also been a key ally on crucial issues such as India’s dispute with China and Pakistan surrounding the territory of Kashmir.

But hey, India and China are not the only ones to blame here. Reports have emerged that whereas supplies of Russian pipeline gas – the bulk of Europe’s gas imports before the Ukraine war – are currently down to a trickle, Europe has been hungrily scooping up Russian LNG.

Europe has been working hard to wean itself off Russian energy commodities ever since the latter invaded Ukraine. The European Union has banned Russian coal and plans to block most Russian oil imports by the end of 2022 in a bid to deprive Moscow of an important source of revenue to wage its war in Ukraine.

But ditching Russian gas is proving to be more onerous than Europe would have hoped for. Whereas supplies of Russian pipeline gas – the bulk of Europe’s gas imports before the Ukraine war – are down to a trickle, Europe has been hungrily scooping up Russian LNG. The Wall Street Journal has reported that the bloc’s imports of Russian liquefied natural gas jumped by 41% Y/Y in the year through August.

“Russian LNG has been the dark horse of the sanctions regime,” Maria Shagina, a research fellow at the London-based International Institute for Strategic Studies, has told WSJ. Importers of Russian LNG to Europe have argued that the shipments are not covered by current EU sanctions and that buying LNG from Russia and other suppliers has helped keep European energy prices in check.

Only very recently Ukrainian government officials were blasting and taking jabs at Elon Musk, but now Ukrainian President Volodymyr Zelensky has “invited” the billionaire SpaceX (and more recently) Twitter CEO to Ukraine. 

Or rather, it’s looking like this “invitation” is itself another sarcastic jab in response to Musk’s unwavering position that compromise or negotiated settlement must be reached with Russia, in order to avoid unpredictable escalation which could spiral into WWIII. Any talk of battlefield or territorial compromise has ‘outraged’ Kiev.

Zelensky in a Wednesday appearance at The New York Time’s DealBook Summit – an event which funny enough (or sadly) also included a live interview with disgraced FTX founder Sam Bankman-Fried, urged Musk to come and see Ukraine “with your own eyes” in order to understand Russia’s actions there.

“If you want to understand what Russia has done here, come to Ukraine and you will see this with your own eyes without any extra words,” Zelensky said during the discussion. “And after that, you will tell us how to end this war, who started it and when we can end it.”

Zelensky also joined other Ukrainian officials in suggesting that Musk has been “influence” by the Kremlin, a baseless charge that was floated by some Western pundits after Musk in early October held a “Russia-Ukraine Peace” Twitter poll. 

According to more from The New York Times: 

During the interview with Andrew Ross Sorkin of The Times, the video link cut out, and when it resumed, Mr. Sorkin joked that Mr. Musk might have somehow cut the connection.

“I hear you,” Mr. Zelensky said. “Most important is that Mr. Musk will hear us.”

Mr. Zelensky said the risk that Mr. Putin would use nuclear weapons was not his biggest fear, and that it shouldn’t be the biggest fear of the West.

“I don’t think he will use nuclear weapons,” Mr. Zelensky said. “This is my opinion.”

As for Musk’s offending original sin, he had encouraged his over 100 million Twitter followers to vote on whether they think negotiated settlement to the war is a good idea or not, proposing a “redo” of referendums for the four annexed regions of eastern Ukraine which Vladimir Putin declared part of the Russian Federation last week. It would also be conditioned on Ukraine remaining neutral vis-a-vis future NATO membership. 

This is highly likely to be the outcome in the end – just a question of how many die before then

— Elon Musk (@elonmusk) October 3, 2022

Of course, talk of territorial concessions outraged Ukraine officials and their supporters in the West, with an avalanche of blue check mainstream media pundits pouncing amid cries of Musk supposedly being ‘pro-Kremlin’. Soon after, Musk questioned whether SpaceX will continue providing Starlink for free to Ukrainian forces, unleashing more controversy. 

Stocks are soaring because once again CNBC’s in-house clown Jim Cramer was dead wrong when he predicted that Powell has “every reason to be hawkish” after today’s stronger than expected Q3 GDP – because apparently the Fed looks at 6 month old lagging indicators when making policy…

… and instead the opposite happened – as usual – with Powell signaling that the Fed would slow the pace of interest-rate increases, starting as soon as at its Dec. 13-14 meeting (read: 75bps hike are dead). While Powell did have his hawkish moments, like when he repeated that it’s likely that interest rates will need to go “somewhat higher” than what policymakers had forecast in September, he was more dovish than hawkish and omitted language from Nov 2 when he said that “we have a ways to go with interest rates before we get to the level that is sufficiently restrictive.”

And while we’ll get an update to those forecasts at the December meeting, which will likely show an uptick in that terminal rate projection, it will be below 5%, as Powell’s comments clearly hammered the terminal rate back under 5%.

Powell also said Fed officials will be looking for “significant positive” real rates across the yield curve, among other asset classes, to assess how restrictive monetary policy is.

While the Fed chair discussed monetary policy, he talked extensively about the labor market, saying there are some early signs of a slowdown and that a “softish” landing is still possible. He said officials are concerned that workers may soon start demanding higher wages, which could have a more troubling impact on inflation.

And despite Powell’s saying that history has taught him “loosening policy prematurely would be a mistake” and that the Fed is going to stay the course until its job is done, stocks exploded when he echoed Brainard saying that “If you are waiting for inflation to go down, it’s very difficult not to overtighten.”

In response to Powell’s dovishness, the S&P 500 soared more than 2.1% as of 3:00 p.m. in New York, while the Dow Industrial Average added 1.3%; Tech stocks were the standout, with the Nasdaq 100 surging more than 3%. The VIX index of volatility was set to drop below 20.

Below is a snapshot of several Wall Street reactions to Powell’s comments.

Neil Dutta of Renaissance Macro Research:

“Powell is giving the Fed an off-ramp to 75 basis point moves, but I don’t think you can rule out anything else. There is a reasonably strong chance the Fed extends 50 basis point hikes or 25 basis point hikes.”

Bloomberg Chief US Economist Anna Wong:

“Powell said the labor shortfall — which he estimates at 3.5 million — mostly reflects early retirement, and there’s few signs these workers will return. He’s implying the unemployment rate will likely have to rise to cool wage growth, since an increase in labor supply is not forthcoming.”

“Powell has sounded more hawkish than the typical FOMC participant. Notably, he appears less confident than some in the November FOMC minutes that wage growth has cooled. He hinted labor supply is unlikely grow anytime soon, and the Fed will have to bring down demand or raise the unemployment rate to slow wage growth. This speech confirms our view that Powell is on the hawkish end of the FOMC spectrum — possibly more hawkish than the median participant.”

Bloomberg rates strategist Ira Jersey

Jersey notes that Powell discussed when to stop the balance sheet runoff, and mentioned that at some point they will stop shrinking the balance sheet while allowing reserves to fall as other liabilities naturally climb adding:“The thing that eventually will need to happen is organic balance sheet growth. Everyone has seemed to forget the Fed used to purchase modest amounts of Treasuries every month — but these weren’t ‘large security asset purchases,’ they were just normal. Communicating this shift may be confusing to some market participants when the time comes. The Fed may need to consider starting to communicate this once they’re done hiking.”

Developing

Via Greg Hunter’s USAWatchdog.com,

Renowned geopolitical and financial cycle expert Charles Nenner said, back in September, the markets would sink and then go back up.  Both calls happened right on time.  What does Nenner see now? 

Nenner says, “Two days ago, we started to take profits again.  So, we are not that bullish…”

“The public we have now do not understand bear markets… They don’t understand that we can have rallies of 15% to 20%, and then it can go down again…

So, we took profit and we are mostly in cash again.  We are long in the bond market for a change because it looks like inflation is going to moderate for a little bit. 

We are waiting for the gold cycles to bottom, and we are getting very close, but the bull market in gold will come, but it’s still going to take a few more weeks.”

So, are interest rates on the way down?  Nenner says, “Yes, but for very short term…”

”  You might remember our interest rate cycles bottomed, and the cycle is up for the next 30 years.  I expect interest rates to go back to where they were in the early 1980’s…

Longer term interest rates are going much higher.  Right now, we have a bounce because commodities are weaker, and I think they will be weak until around February.  This is probably why the Fed is not going to talk as aggressive as they were talking.  This is still temporary and interest rates are still going to go much higher in the future.”

Nenner also says, “Mortgage interest rates will go to the 8% to 9% range in 2023. . . .and the stock market will go down by about 50%.”

Nenner says look for inflation to moderate for the next few months but look out in 2023.  Nenner predicts,

“Beware because once inflation raises its head, it is very difficult to get it back into the box.  We could go down to 6% or 6.5% inflation, but also the inflation cycle just started, and we are going to see much higher inflation.”

On the war cycle, Nenner has been predicting this “war cycle will really heat up in 2023.”  He’s convinced all the signs say he’s going to be right.  Nenner says,

“I don’t think the inflation has anything to do with the war in Ukraine, but I think in the middle of next year, we have war cycles bottoming.  I think we are in for a really big mess because it doesn’t seem like anybody is ruling any country anymore, even China.  This may be the reason why gold and silver are going to take off.  If there are shortages, then the inflation will go through the roof.”

There is much more in the 36 min. interview.

Join Greg Hunter of USAWatchdog.com as he goes One-on-One with renowned cycle analyst and financial expert Charles Nenner. (11.29.22)

*  *  *

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An unusual incident occurred Wednesday over regional waters at a moment tensions across the Korean peninsula remain high. A group of Chinese and Russian fighter jets abruptly breached South Korea’s Air Defense Identification Zone (ADIZ), causing the South Korean military to scramble jets to warn the foreign fighters off. 

Seoul described that six Russian and two Chinese warplanes had approached without notice, with the south’s Joint Chiefs of Staff describing “the Chinese H-6 bombers repeatedly entered and exited the Korea Air Defense Identification Zone (KADIZ) near South Korea’s southern and northeastern coasts early Wednesday.”

Additionally, Russian and Chinese bombers were monitored flying over regional waters nearby, but not in breach of the South Korean air defense zone. 

The South Korean military statement of the events, which spanned hours, was published in AFP as follows:

“Our military deployed air force fighter jets even before Chinese and Russian aircraft entered the KADIZ to take tactical measures in case of contingency,” the JCS said in a statement.

Beijing and Moscow appeared to have “engaged in a combined air exercise”, Seoul’s Yonhap news agency reported, citing unnamed “observers”.

Japan’s Joint Staff said two Chinese H-6 bombers “entered the Sea of Japan and then flew north” on Wednesday morning.

“Around the same time, what appears to be two Russian aircraft flew south over the Sea of Japan and then turned around,” it said, adding that it had scrambled jets in response.

At one point the group included four Russian TU-95 bombers, which indeed suggests that this was a planned significant joint aerial exercise. 

The flights triggered at alert among Japan’s defense force as well, with Japanese fighter jets also having been dispatched over the Sea of Japan.

While such Chinese-Russian cooperation in bomber patrol flights is less common, the past year has seen stepped up naval patrols among the two countries, coming at a time Washington has put pressure on both related to the war in Ukraine.

Authored by ‘NAMCIOS’ via BitcoinMagazine.com,

Brazilian lawmakers have approved a complete regulatory framework for the trading and use of cryptocurrencies in the country…

Voted on Tuesday evening in Brasilia, the country’s capital, the new rules recognize bitcoin as a digital representation of value that can be used as a means of payment and as an investment asset in the South American nation.

The bill applies broadly to a sector which it calls “virtual assets,” and now only needs the President’s signature before it becomes law. It does not make bitcoin or any cryptocurrency a legal tender in the country.

The bill tasks the executive branch with selecting government bodies to oversee the market. The expectation is that the Central Bank of Brazil (BCB) will be in charge when bitcoin is used as payment, while the country’s securities and exchange commission (CVM) will be the watchdog when it is used as an investment asset. Both the BCB and the CVM, along with the federal tax authority (RFB), helped lawmakers craft the overhaul legislation.

Home to a vibrant cryptocurrency economy, Brazil has at times seen more citizens trade coins such as bitcoin than invest in the stock market. Now, the country seeks to set the stage for that to translate into more day-to-day usage in financial transactions.

But not all in the text is positive for the development of the market in the country. A big miss from Tuesday’s vote was the rejection of a clause that sought to cut some state and federal taxes on purchases of bitcoin mining machines. While the text was quite restrictive –– the benefit would only apply to operations using renewable energy sources –– it was apparently not enough to be approved.

Other provisions include the regulation of service providers such as exchanges, who will need to abide by specific rules to operate in Brazil. The bill seeks to regulate the establishment and operation of Bitcoin service providers in Brazil, defining such entities as those who provide cryptocurrency trading, transfer, custody, administration, or sale on behalf of a third party. Cryptocurrency service providers will only be able to operate in the country after explicit authorization by the federal government.

One rule sought to demand that such companies explicitly separate their patrimony from capital owned by customers –– for example, bitcoin the firm custodies for users. The clause sought to prevent events such as the recently seen with FTX, where user funds were commingled with the company’s funds, and help the recovery of user assets in the event of bankruptcy. It was rejected on Tuesday’s vote.

Russia has rejected White House accusations that Moscow is to blame for the collapse of the planned resumption of New Strategic Arms Reduction Treaty (New Start) negotiations, which were supposed to kick off this week and run into the next.

On Monday the United States said that Russia had “unilaterally postponed” the important nuclear arms control talks without explanation. But in a fresh statement the Kremlin said the American side is to blame for “lack of desire” to take seriously Russian priorities. 

“We have encountered a situation where our American colleagues not only demonstrated a lack of desire to take note of our signals, acknowledge our priorities, but also acted in the opposite way,” Russian Deputy Foreign Minister Sergei Ryabkov told a press briefing. 

Ryabkov’s comments did suggest it was the Russian side that canceled, and further admitted that the Ukraine war makes the nuclear talks more difficult to resume, citing Washington’s immense weapons and foreign aid support to Kiev: 

“Naturally, the events unfolding inside and around Ukraine in this case impact that,” he said.

A potential date for New START dialogue resumption remains uncertain. Ryabkov Russia will eventually propose new dates, but only when “the time is right.”

“The situation was developing in the way that left us no choice. The decision was made on the political level,” the Kremlin official explained further.

It was a mere weeks ago that the two sides finally agreed to restart the talks for the first time since Russia’s Ukraine invasion, given the growing international alarm over the increasing prospect of nuclear confrontation and accompanying rhetoric. 

New START remains the last significant end of Cold War era agreement on nuclear arms control between Washington and Moscow. It is also one of the last hoped-for points of positive communications between the two sides, given spiraling relations over the Ukraine war.

The commission has not met in more than a year, in October 2021, with central aspects of the treaty since stalled due to attempts of the US to resume nuclear arsenal inspections on Russian soil, which Moscow rebuffed.

by Elwin de Groot, Head of Macro Strategy at Rabobank

French president Macron and his wife have arrived in Washington for a two-day state visit to the White House. After a joint press conference with President Biden, dinner will be served on Thursday. We may not be in for the same intense moments that Macron had in his encounters with Biden’s predecessor. Take that famous handshake moment with Trump in May 2017, just after Macron’s election, with which Macron intended to show that he was not somebody to mess with. But the to-and-fros were mutual and over time the relationship between the two remained volatile. During Macron’s state visit in 2018, Trump said: “We have a very special relationship, in fact I’ll get that little piece of dandruff off,” Trump said. “We have to make him perfect — he is perfect.” In reality, they already were miles apart. At a G7 meeting in June 2018, Macron threatened to exclude Trump from participating in a joint declaration with other leaders. The tariff wars, including steel and aluminium tariffs on Europe were also a drag on the relationship. In December 2019, Trump called Macron “very, very nasty” after the French leader criticized the US for withdrawing troops from Syria.

This week’s state visit is seen as a possibility to reset those relations and “orient squarely towards the future”, as White House spokesman John Kirby put it on Monday. Yet, from a geo-political (or should we say, geo-powerful) perspective, the French president is starting from an underdog position. Aside from the painful decision by Australia in September 2021 to engage in a trilateral security pact with the UK and US for the Indo-Pacific region that would help Australia to acquire nuclear-powered submarines from the US rather than French diesel-propelled subs as per the original plan, the biggest sting at the moment is the Inflation Reduction Act (IRA) that was signed into law by President Biden on August 16 and aims to address climate change. France and many of its European partners, however, argue that parts of that Act violate WTO rules. In particular subsidies for electric vehicle purchases are seen as unfair competition as they discriminate against foreign (car) producers. Under the IRA, electric car buyers are eligible for a tax credit of up to $7,500 as long as the vehicle has a battery that is built in North America, with minerals mined or recycled on the continent.

One option for Europe is to engage in a ‘tit-for-tat’ strategy, by launching similar subsidies and regulations for European manufacturers. In a recent interview with French daily Les Echos, Macron said: “I strongly defend a European preference in this area and strong support for the automotive industry. We must stand by this and it must happen as soon as possible […] We must wake up, neither the Americans nor the Chinese will give us such gifts! Europe must prepare a strong response and move very quickly. […] I have been pushing for more European sovereignty for five years. The software of many Europeans is changing,”

Some commentators suggest that by asking President Biden for ‘permission’ to engage in a similar type of subsidies scheme, Europe could re-invigorate its goals of achieving  form of ‘(open) strategic autonomy’. Yet, the fact that Macron’s meeting with Biden is being perceived by some as asking for permission, that very much underscores Europe’s current lack of strategic autonomy and the power to pursue it on its own.

Moreover, there are numerous risks attached to such a tit-for-tat strategy. By openly going against WTO rules themselves, the EU would undermine the “open” part of its strategic autonomy strategy. As recently as February 2019 it signed a significant Economic Partnership Agreement with Japan, on which the EU themselves note that it “removes tariffs and other trade barriers and creates a platform to cooperate in order to prevent obstacles to trade; and helps us shape global trade rules in line with our high standards and shared values, and; sends a powerful signal that two of the world’s biggest economies reject protectionism.” Clearly, agreeing with the US to erect trade barriers goes against the grain of such views.

Another question is whether the US would play ball. In fact, why would they? As Europe is puffing under the weight of potential energy shortages and high energy costs, its (energy-intensive) industry already has a significant competitive disadvantage vis-à-vis US producers. Plus, Europe will need significant additional US LNG supplies in the coming years. The US has also provided the majority of military equipment and funding for the Ukraine to fend of Russia; the EU has been playing second fiddle. Even though Biden may not be as inclined as Trump to make French toast of Macron if he doesn’t like his proposals, he does not have many reasons to agree to them

Ukrainian diplomats around the world are on high alert after a small bomb went off at Ukraine’s embassy in Madrid on Wednesday, injuring a diplomatic staff member. 

The embassy had received an envelope that exploded when it was either moved or opened, and the package was addressed to Ambassador Serhii Pohoreltsev, a statement released by the Spanish government confirmed. 

Ukrainian Foreign Minister Dmytro Kuleba soon after the mail bomb attack which appeared to target the country’s ambassador to Spain said he has “issued an urgent instruction to step up security at all Ukrainian embassies abroad.”

A foreign ministry statement additionally said: “Whoever is behind this explosion they will not succeed in intimidating Ukrainian diplomats or stopping their daily work to strengthen Ukraine and to counter Russian aggression.”

It’s unclear whether Ambassador Serhii Pohoreltsev was at the embassy at the time, or how close in proximity he was to the explosion. Spain’s Foreign Affairs Minister Jose Manuel Albares held a phone call with Amb. Pohoreltsev wherein the latter confirmed the injured person was a Ukrainian worker. 

Spanish FM Albares is currently in Romania, where he’s visiting Spanish troops there on a NATO mission. Spain is among Western European countries which have from the beginning been sending consistent defense and foreign aid to Kiev.

Spain: Security tightened outside the Ukrainian Embassy in Madrid after a letter bomb injured a staff.#UkraineEmbassy #Ukraine pic.twitter.com/JLfLNpzODm

— Annu Kaushik (@AnnuKaushik253) November 30, 2022

The mail bombing is under investigation, and at this point there have been no statements to suggest the police or Spanish government have any leads at this time. 

Within hours after the incident, Spanish police have established a stronger security perimeter with vehicles completely surrounding the embassy location in the Hortaleza district of northeastern Madrid.

Submitted by QTR’s Fringe Finance

Since Fringe Finance has started, I’ve scoured the Earth far and wide to try and bring a perspective on real estate to the blog that is going to be both no bullshit and an unfiltered on-the-ground opinion that I know and trust (and could add value to my readers).

And to be honest, I didn’t have to scour much, as a good friend of mine is a brilliant up and comer in the world of real estate in Philadelphia. I’ve worked with her several times and have known her for years – she’s insightful, pragmatic, conscientious and has a serious pulse on the industry. I know for a fact that she eats, sleeps and breathes the industry.

As such, my kind friend, award-winning realtor Kira Mason, has agreed to drop in once in a while to offer up her take on the pulse of the industry for benefit of my readers. Kira runs the Substack Gritty City Real Estate, which you can read & follow free here and she is @kmasonrealtor on Twitter.

Post-Holiday Inventory Increase Fixed to Add Insult to Injury for the Housing Market

I’m beginning to think that the timing of the interest rate hike this fall has prevented us from experiencing the full effects of deteriorating buyer demand.

Every year, housing inventory gears down for real estate’s dormant period through the holiday season. After the new year begins, inventory then begins its slow hike towards peak in the spring and summer. It was approaching the time when inventory typically begins its final annual descent that rates hit 7% and demand vaporized.

With low inventory the belt keeping the emaciated real estate market’s pants up, I’m nervous about what could happen once more homes hit the market in Q1 and Q2 of 2023.

The inventory decline this year came in two distinct phases. Between January and July, mortgage interest rates rose from 3.11% to 5.81%: a 270 basis point increase representing a roughly 32% increase in one’s monthly mortgage payment.

Market behavior started shifting significantly once rates passed 5.5% in June. By July, inventory began its seasonal downturn…four months early. When rates finally reached and surpassed 7% in October (by which time monthly payments were up a nauseating 47%), inventory began to decline more steeply. Though steeper, inventory declined at more more moderate pace than it usually does at this time of year. This was an effect of reduced demand; despite fewer new listings being added to the market, the dearth of sales caused a relative buildup of older listings.

The perennial reason for the seasonal decline is that few people are interested in house hunting, going through stressful real estate transactions, and moving during the holiday season.

Sellers know that this will affect demand, not to mention the fact that they’ll face the same inconveniences on the buy side, so most choose to hold off on listing their homes until after New Year’s Eve. This holiday season, we can add an additional “inconvenience” to the list: mortgage interest rates at their highest level in 20 years, and affordability at an all time low. With 92% of homeowners enjoying mortgage interest rates under 5%, and 62% with rates under 3.75%, nobody is putting their home on the market unless they absolutely must.

While resale inventory isn’t likely to fully rebound until rates and prices both come down and affordability improves, we will still be seeing inventory start climbing up again in the new year. There’s also a pipeline of specs under construction that, when combined with built-to-order homes, is close to the record highs recorded in 2006. When these hit the market and are combined with whatever little burst of resale listings our homeowners can muster up, we will be experiencing the effects of today’s interest rates in a rising inventory environment for the first time.

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The fact that the market has shifted so dramatically, even in a declining inventory environment, is testament to the 180-degree turn that buyers have taken at the tail end of this year.

And no wonder: with overvalued real estate and record high interest rates, housing affordability is at an all time low. As a result, transaction volume in Philadelphia plummeted 40% from June to October of this year. One might try to attribute this to normal seasonality, but the same period in 2021 saw only a 27% drop.

Just this past summer, buyers were catering to the whims of sellers with waived inspections, above-asking offers, and all the housing boom tricks you’re probably well acquainted with at this point. Bidding wars were still an expected and despised part of the home buying process.

By October, buyer activity had dried up, and sellers were placing reverse offers.

These days, one can hardly show a home to their buyer client without fielding a series of calls from the listing agent offering escalating concessions in a desperate attempt to bring in an offer. The change has been stark and sudden, with housing market analyst Ivy Zelman declaring that the rate of change is “faster than she’s ever seen”.

It’s important to note that not only did 7% rates hit when inventory was on its way down- peak inventory in 2022, which was reached in June, was the lowest annual peak since 2018, with only 8,582 listings. So when inventory fell this year, it was falling from already depressed levels.

If this is the way the market behaves when already low inventory goes into hibernation mode for the holiday season, how will it behave during the uptick we traditionally see after the new year? Even if we don’t get the panic selling that some are anticipating, our normal seasonal inventory increase, paired with new construction entering the market, could be enough to exert additional downwards pressure on prices that are already falling.