Morning Report: ARMs are making a comeback

Vital Statistics:

 LastChange
S&P futures3,94140.25
Oil (WTI)110.280.69
10 year government bond yield 2.83%
30 year fixed rate mortgage 5.40%

Stocks are higher this morning after the Biden Administration floated the idea of eliminating some tariffs on overseas goods. Bonds and MBS are up small.

The upcoming week will be relatively data-light, however we will get new home sales and personal incomes / outlays. The personal incomes / outlays number will be watched closely because it contains the inflation number. Markets will be watching closely to see if we are getting some relief in the month-over-month numbers. The year-over-year inflation numbers will be bad, of course but markets are looking for an indication that inflation is on the decline.

Economic growth is accelerating, according to the Chicago Fed National Activity Index. This is a meta index of 85 individual economic numbers. It indicates whether the economy is growing above or below trend. The Atlanta Fed’s GDP Now index has been moving up during May, and is looking at something like 2.3% growth in the second quarter.

The latest concern in the business press is the possibility of a recession. This is due to the fact that the Fed has often overshot to slow the economy. This was particularly true in the 1970s (a similar environment to today). St. Louis Fed President James Bullard doesn’t see a recession this year or next, unless there is a “really large shock” to the economy. “Recessions would have to come because there’s some really large shock and I can’t rule out that there would be some really big shock. Maybe there would be, but I am not seeing it near-term.” Bullard said during an exclusive interview with FOX Business’ Edward Lawrence on “Cavuto: Coast to Coast” on Friday. 

With rising interest rates, adjustable-rate mortgages aka ARMS are making a comeback. The share of ARMS came in at 10% last week, which was a tripling of the previous rate. ARMs allow borrowers to take a lower initial rate, however the rate can move upwards or downwards after a fixed period of time. Note that in the past most ARM loans had 1 year resets i.e. 5/1, 7/1 etc. Now most are based on SOFR, and they are resetting every 6 months. So you’ll hear 5/6, 7/6 etc. You can see in the chart below that ARMs are increasing but they are nowhere near where they were in the early 2000s.

5 Responses

  1. Interesting description of the current New York City rental market:

    “My colleague Bridget Read has termed tenants offering landlords more rent in the apartment bidding wars as cuck money, to capture the form of “collective debasement” that’s happening in our current rental-market craze. But most cases of cuck money are around a thousand or so more in rent at most. What we’re seeing happening here is either the pinnacle of the term or a shattering of the cuck-money ceiling altogether. Can you really be a cuck if you have $120,000 more per year to spend on rent?”

    https://www.curbed.com/2022/05/brooklyn-heights-rental-cucks.html

    https://www.curbed.com/2022/05/renters-offering-landlords-higher-rent-in-bidding-war-craze.html

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  2. First I’ve heard of these sorts of apps, but it looks like the same old financing plans just repackaged and now being marketed through TikTok.

    “Buy Now. Pay (and Pay, and Pay, and Pay) Later.
    By Scott Galloway

    The borrowing construct is introducing real risk into the system: Consumer debt jumped $52 billion in March, the largest increase on record. In California, 91 percent of consumer loans made in 2020 were BNPL loans. More than 40 percent of Gen-Z consumers will have used BNPL by the end of the year, the highest penetration of any age group. And now those debts are going bad.

    BNPL seduced a generation with a great pitch. The firms position themselves as a financially responsible alternative to credit because, per Afterpay’s former executive director, young people “don’t want to be on credit.” If the first rule of marketing is “Give people what they want,” a corollary is “Give them what they don’t want — just call it something else.” Calling debt “a better way to pay” is masterful, tapping into young people’s desire for innovation right at the point of greatest vulnerability: checkout. Merchants love BNPL because it increases basket size (by as much as three and a half times) and purchase frequency. (Maybe they learned it from my industry, higher ed, which has been selling young people on “college now, pay later” for decades.)”

    https://nymag.com/intelligencer/2022/05/buy-now-pay-later-is-coming-due-for-all-of-us.html

    “What’s the Deal With Affirm, AfterPay, Klarna, and QuadPay?
    By Hilary Reid”

    https://nymag.com/strategist/article/how-to-use-affirm-klarna-quadpay-afterpay.html

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    • Inflation is a debtor’s best friend. Euthanization of the rentier and all that.

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    • I used affirm to purchase a peloton bike.
      but it was more of an installment plan — 0%. so rather than tying up all the $, spread it out. actually just paid it off yesterday to clear it off the books.

      but i wouldnt use it if it had an interest rate

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      • Yeah, zero interest loans are they way to go when making some higher dollar purchases but I just either wouldn’t buy it or I’d buy it outright rather than pay an interest rate.

        Interestingly I tried a Peloton for a month but didn’t really enjoy it that much. It didn’t stimulate me like being outdoors does and I wish it did as exercise in the summer in Houston is tough.

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