Morning Report: Existing Home Sales fall

Posted on August 22, 2023 by Brent Nyitray

Vital Statistics:

Stocks are higher this morning as the rise in the 10 year yield pauses. Bonds and MBS are flat.

Bond yields are at the highest levels since November 2007. Investors are nervous ahead of Jerome Powell’s speech in Jackson Hole this Friday. The fear is that the neutral interest rate – called r* – might need to be higher than it was pre-pandemic. In other words, we have had a seismic shift in interest rate levels, and the era of ZIRP (from 2008 to 2022) is over.

From BMO strategists: “What started as a simple supply concession for a slightly larger-than-anticipated August refunding auction series has snowballed” into traders revisiting the most important pillars supporting the lower-rate thesis — one of which was that the neutral policy rate wouldn’t be “sustainably higher in the post-pandemic world.” As the thinking goes now, the Fed’s policy rate target might need to be higher than where it was prior to 2020 even if inflation returns to 2%, policy makers could be forced to delay their first rate cut, or possibly both. The most current guess as to where r-star lies is 0.5% — after subtracting 2% inflation from the Fed’s long-run estimate of where interest rates will eventually settle, which was 2.5% as of June.”

S&P has downgraded 5 regional banks on the “higher for longer” outlook on rates and commercial real estate concerns. The companies affected were Keycorp, Comerica, Valley, Associated Banc, and UMB. “Amid higher for longer interest rates, we expect further asset quality deterioration,” it warned. “Banks with material exposures to commercial real estate, especially in office loans, could see some of the greatest strains on asset quality.”

Existing Home Sales fell 2.2% in July to a seasonally-adjusted annual rate of 4.07 million. This is down 16.6% compared to a year ago. “Two factors are driving current sales activity – inventory availability and mortgage rates,” said NAR Chief Economist Lawrence Yun. “Unfortunately, both have been unfavorable to buyers.”

The median home price rose 1.6% to $406,700. Inventory was down 14.6% YOY to 1.11 million units. The first-time homebuyer accounted for 30% of sales, up from 27%.

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