All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,058	6.75
Oil (WTI)	79.98	-0.40
10 year government bond yield		3.94%
30 year fixed rate mortgage		6.73%

Stocks are marginally higher as we await Jerome Powell’s Humphrey-Hawkins testimony. Bonds and MBS are down.

Jerome Powell heads to the Hill this morning at 10:00 am. I don’t see the prepared remarks on the Fed’s website quite yet, so we don’t have a preview. The market’s focus will be on whether Powell still sees the “disinflationary process” continuing in the face of strong inflation numbers in January.

It will be interesting to see how much push-back Powell gets from Congress over rising rates. Republicans will probably beat him up for missing the turn in inflation while Democrats will hammer him for wanting a weaker labor market.

The Federal Trade Commission is set to sue to block the merger between Black Knight and Intercontinental Exchange. The two companies would need to divest either Encompass or Empower to get past the regulators. The problem is that the regulators probably won’t accept a spin-out into a separate company. They will have to find a strong buyer who will be able to compete with the newly merged company, and there probably aren’t many players in the industry who would be able to make it work. The merger spread is ginormous right now, so the market thinks this deal is deader than Elvis.

For-sale inventory declined in January, according to the Black Knight Mortgage Monitor. The company reported that home prices fell 0.13% MOM on a seasonally-adjusted basis, which is the smallest decline since it started about 7 months ago. Half of all mortgages are at rates of 3.5% or lower, while 2/3 are below 4%. We have a long way to go in rates before refinance activity returns, although cash-out refinances will come into play if rates fall further.

“The interplay between inventory, home prices and interest rates has been the defining characteristic of the housing market for the last two years, and this continues to be the case,” said Walden. “Today, we see buyer demand dampened under pressure from rising rates and their impact on affordability, with purchase rate-lock volumes cooling in late February. However, when rates ticked down closer to 6% early in the month, we saw a rebound of buyside demand. On the other side of the equation, we’ve seen a consistent theme of potential sellers – many with first-lien rates a full 3 percentage points below today’s offerings – pulling back from putting their homes on the market. In fact, January marked the fourth consecutive monthly decline in overall for-sale inventory according to our Collateral Analytics data, with the primary driver being a 25-month stretch of new listing volumes running below pre-pandemic averages. While demand remains weak, faltering supply has resulted in months of available inventory stagnating near 3.1 in recent months.

“Sharply rising 30-year rates in February have weakened home affordability, with nearly all major U.S. markets remaining unaffordable as compared to their own long-run averages. With 30-year rates at 6.5% in late February, it took 33.2% of the median household income to make the monthly principal and interest payments on the average home purchase. That’s up from January’s 32.4% and significantly above the 30-year average of ~24%, but still 3.5 percentage points below the 37% level reached in October 2022 when affordability hit a more than 35-year low. Between escalating inventory challenges and worsening affordability, we’re seeing some volatility in the market – just not in the form of widespread, steep price corrections.”

Congress is looking at a tax credit to incentivize builders to renovate homes in blighted areas. In many areas, the cost to renovate is more than the price the property could fetch on the market, so nothing happens. “We must continue to make it more attractive to invest in the communities that need it most,” Mr. Cardin said in a written statement. Mr. Young said the bill would help restore communities by directing private capital to low-income neighborhoods,” bridging the gap between the cost of renovation and neighborhood property values.” The bill hopes to see 500,000 new homes added to inventory.

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