All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,159	-16.75
Oil (WTI)	77.08	0.66
10 year government bond yield		3.65%
30 year fixed rate mortgage		6.26%

Stocks are lower as investors continue to digest Jerome Powell’s comments yesterday. Hawks and doves both found something to seize upon. Bonds and MBS are up small.

We have 5 Fed speakers today, with Neel Kashkari (heavy hawk) speaking at 12:30.

Jerome Powell spoke yesterday, calling the US labor market “extraordinarily strong.” He did acknowledge that the disinflationary process has begun and we have seen progress on goods, however services remain high. It will take “not just this year but next year to get down to 2%,” the central bank’s inflation target, Powell said. And rates will have to remain at a restrictive level “for a period of time” before that happens, he noted. There has been an expectation that [inflation] will go away quickly and painlessly; I don’t think it’s guaranteed that’s the base case,” Powell said. “It will take some time.”

Jerome Powell talked with David Rubenstein and discussed the Fed’s plans to reduce the size of its balance sheet. Powell characterized it as passive reduction, which means it will let its portfolio mature and run off but not actively sell its holdings. While the Fed said it could consider sales of mortgage backed securities, it isn’t something that is being actively considered.

The Fed purchased its portfolio of mortgage backed securities when rates were extremely low, and liquidity is fickle in the MBS market. Unless a coupon is being actively originated, it won’t trade with any meaningful liquidity. The 3.5% coupons the Fed owns are trading well below par and the Fed would struggle to actually sell any of its holdings.

Mortgage applications rose 7.4% last week as purchases rose 4% and refis rose 18%. “Applications rose last week as the 30-year fixed mortgage rate inched lower to 6.18 percent, its fifth consecutive weekly decline. The 30-year fixed rate is almost a percentage point below its recent high of 7.16 percent in October 2022,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Both purchase and refinance applications increased last week and have shown gains in three of the past four weeks because of lower rates. Overall applications remained 58 percent lower than a year ago and rates are still significantly higher, however, this week’s results are a step in the right direction. Purchase activity that was put on hold last year due to the quick runup in rates is gradually coming back as rates ease and housing demand remains strong, driven by supportive demographics and the ongoing strength in the job market.”

Added Kan, “The average loan size on a purchase application increased to $428,500 – the largest average since May 2022. This increase is a sign that the recent upward trend in purchase activity remains skewed toward larger loan sizes and less first-time homebuyer activity, as entry level housing remains undersupplied, and buyers struggle with affordability in many markets.”

I talked about yield curve inversions and what they mean in a recent Substack article.

Home prices fell 0.4% MOM and rose 6.9% YOY according to the CoreLogic Home Price Index. CoreLogic sees prices falling another 0.2% in January and rising 3% in 2023.

“The continued slowing of home prices at the end of 2022 reflects weaker housing market demand, primarily caused by higher mortgage rates and a more pessimistic economic outlook in general. But while prices continued to fall from November, the rate of decline was lower than that seen in the summer and still adds up to only a 3% cumulative drop in prices since last spring’s peak.

Some exurban regions that became increasingly popular during the COVID-19 pandemic saw prices jump and affordability erode at the time, but these areas are now seeing major corrections. And while price deceleration will likely persist into the spring of 2023, when the market will probably see some year-over-year declines, the recent decrease in mortgage rates has stimulated buyer demand and could result in a more optimistic homebuying season than many expected.”

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