All Things in Moderation

Vital Statistics:

Stocks are higher after the NASDAQ officially hit a bear market. Bonds and MBS are down small.

Inflation at the wholesale level rose 0.4% MOM and 8.5% YOY, according to the Producer Price Index. Ex-food and energy, the index rose 0.3% MOM and 7.2% YOY. The headline number was a touch above expectations, although tomorrow’s Consumer Price Index report will be the main focus.

Mortgage applications hit a 25-year low last week, falling 2% as rates hit their highest mark since 2006. Purchases and refinances fell by the same amount. “Mortgage rates moved higher once again during the first week of the fourth quarter of 2022, with the 30-year conforming rate reaching 6.81 percent, the highest level since 2006,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Mortgage rates increased across all product types in MBA’s survey, with the largest, a 20-basis-point increase, for 5-year ARM loans. The ARM share of applications remained quite high at 11.7 percent – just below last week’s level. Application volumes for both refinancing and home purchases declined and continue to fall further behind last year’s record levels.”

The pain in the real estate sector isn’t only limited to mortgage bankers. Realtors, brokers, and appraisers are adjusting to the new glacial pace of home sales. “There’s going to be a major shakeout,” said Ken Johnson, a real estate economist at Florida Atlantic University who is also a former broker. “There are roughly 1.5mn realtors, but that number will be down 20 per cent within 24 months. And those aren’t the only members of the real estate industry that are very dependent on the volume of transactions. There are these tertiary jobs like the appraisers, the mortgage lenders, all the way down to termite inspectors.”

Much of this overcapacity came as a result of the hiring spree in response to the COVID pandemic. Home sales rose as people fled the cities, and mortgage bankers feasted on easy refinance opportunities. “That growth was much stronger than the home sales opportunities that were available,” said Lawrence Yun, the chief economist for the National Association of Realtors. “The reality is that not everyone’s going to survive.”

Homebuilder sentiment is approaching all-time lows, according to Fannie Mae’s Housing Sentiment Index. For the first time since the beginning of the pandemic, most respondents expect home prices to decline going forward.

“The HPSI declined this month to its lowest level since October 2011,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “Consumers’ expectation that home prices will decrease matched a survey high, with a higher percentage of consumers believing home prices will decrease rather than increase over the next year – a shift in survey sentiment that had previously only happened in 2011 and at the start of the pandemic in 2020. Moreover, 75% of consumers still think it’s a bad time to buy a home, with most citing high home prices and unfavorable economic and mortgage rate conditions as primary reasons. As long as supply is limited and affordability pressures continue to constrain potential homebuyers via elevated home prices and mortgage rates, we expect home sales will remain sluggish.”

The hits keep coming. Angel Oak is laying off 15% of staff. “Angel Oak Home Loans, a full-service, retail residential mortgage lender, reduced its headcount by 57 employees or 15% of its workforce to better position itself as it manages through the headwinds currently facing the mortgage industry,” the spokesperson said. “Angel Oak Home Loans continues to serve home buyers across the country and maintains staffing levels to meet the changing dynamics of the residential mortgage market.”

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