Morning Report: Tappable equity hits a record

Vital Statistics:

 LastChange
S&P futures4,078-41.25
Oil (WTI)117.95-0.64
10 year government bond yield 3.00%
30 year fixed rate mortgage 5.50%

Stocks are lower this morning after another profit warning from bellwether retailer Target. Bonds and MBS are down.

Target made a profit warning this morning saying that it will need to discount some inventory in order to move it.

“We’ve had some additional time after earnings to really evaluate the overall operating environment,” said Target Chief Executive Brian Cornell in an interview. That includes watching consumer behavior as they face high rates of inflation, he said, and seeing many other retailers talk about high inventory levels during their earnings presentations. “We have to be decisive and get out in front of this to make sure this doesn’t linger through the back half of the year,” he said.

Consumption is 70% of the economy, so warnings from retailers are a red flag. The Atlanta Fed’s GDP Now model has Q2 GDP coming in at 1.3%, which is pretty lousy given that GDP contracted in the first quarter.

That said, we are starting to see some moderation in inflationary indicators. Shipping rates are down 33% from their peaks in fall of 2021. Fertilizer prices are beginning to drop as well.

Tappable equity (in other words, home equity above 20%) rose $1.2 trillion in the first quarter of 2022 as home price appreciation accelerated. This is a record gain. Total tappable equity sits at $11 trillion, or about $207,000 per mortgaged property. This is more than 2x the amount of tappable equity at the peak of the US residential real estate bubble of the mid ’00s.

This increase in tappable equity creates opportunities for cash-out refinances. That said, the vast majority of this equity is held by high-credit borrowers with very low rates. They don’t have much high-rate credit card debt to refinance and would probably prefer to take out a HELOC if they want to take out any equity.

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