All Things in Moderation

Markets are down on no real news. Bonds and MBS are up.

Home Prices increased .1% on a seasonally adjusted basis in July, according to the FHFA. On a year-over-year basis, prices are up 4.4% and the index is 6.4% below its April 2007 peak.

I wanted to mention something from yesterday’s existing home sales report. All cash sales have dropped to 23% of all purchases, down from nearly 29% a month ago. It seems like professional investors are not chasing properties at these levels, which is opening the door for more traditional homebuyers. In terms of how this affects mortgage bankers, consider this – as cash percentages drop, that means the number of sales with a mortgage is increasing. So even though existing home sales fell from 5.14 million to 5.05 million from July to August, the number of homes with a mortgage (in other words, gettable business) actually increased about 6.5%.

The White House has taken action on corporate inversions, not by banning them, but by trying to make them less financially attractive. The rules are not finalized, so it is too early to say whether the Administration’s plans are even legal. Corporate tax reform is needed, and the left will have to trade lower rates for closing loopholes. This is an attempt to steal a freebie. Also, the administration is hoping that by bringing that point up, Republicans can be branded as “pro-corporate deserters.” Corporate Inversion arb spreads are wider this morning.

Goldman is calling for a 4% 10 year bond yield within the next year as QE ends and the Fed starts hiking rates. Lately, the correlation between Treasuries and mortgages has broken down, so it is unclear how much mortgage rates will rise as a result.

Citi is out with a note discussing what happens to corporate bond yields when rates start increasing. Historically, rate increases have been a benign event, however we are in uncharted waters here, and Citi is advising caution.

Note that the Fed is about to get significantly more dovish as two hawks – Philly Fed President Charles Plosser and Richard Fisher, Dallas Fed President retire. They weren’t going to be voting members next year at any rate, however the Fed is losing some important hawkish voices. The Fed could now be running the risk of groupthink.