All Things in Moderation

Vital Statistics:

Stocks are flat this morning as retailer earnings come in. Bonds and MBS are up.

Industrial production fell 0.6% in October, according to the Federal Reserve. Manufacturing production fell 0.7%. Capacity Utilization fell to 78.9% which is well below its long-term average. This confirms the readings we have been getting out of the ISM surveys – manufacturing is struggling. Separately, the employment market seems to be weakening as initial jobless claims rose to 231k last week.

Hot on the heels of cautious guidance out of Home Depot and Target, Wal Mart sounds the alarm on consumer spending. The CFO said in an interview on CNBC that Wal Mart has been “leaning heavily into promotions,” which should be taken to mean “cutting prices to move the merchandise.” “Our events have been strong,” he said. We’ve been pleased with those. Halloween was good overall. But in the in the last couple of weeks of October, there were certainly some trends in the business that made us pause and kind of rethink the health of the consumer.” Comp sales were strong at 4.9%, but if the consumer is struggling you should expect to see better results out of the discounters and the dollar stores.

There is lots of talk about a soft landing (Google it), and certainly most everyone will prefer that to a hard landing. That said, it is usually a negative sign.

Now lets look at how much the Fed Funds rate increased before these mentions: 1995: 345 basis points, 2000:285 basis points, 2006: 440 basis points, 2018: 243 basis points, 2023: 525 basis points. I know a soft landing is the base case for the government and the big investment banks, but it feels like drawing into an inside straight right now.

What does that mean for rates? They should be going down, but the US has a lot of debt maturing over the next year that needs to be rolled over. And China isn’t buying:

The third quarter was tough for independent mortgage banks according to research from the MBA. Independent mortgage banks lost an average of $1,015 per loan, an increase from the $534 loss in the second quarter. “Net production income has been in the red for six consecutive quarters. MBA forecasts lower industry volume over the next two quarters compared to last quarter, which means a turnaround is unlikely until the second quarter of 2024. One silver lining is that mortgage servicing continues to be a bright spot for many companies. Combining both the production and servicing business lines, roughly half of mortgage companies stayed profitable in the third quarter of 2023. Were it not for mortgage servicing, only about one in three companies would have been profitable.”

Homebuilder sentiment fell in November as rising interest rates dampened affordability.

“The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out of the market,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “Moreover, higher short-term interest rates have increased the cost of financing for home builders and land developers, adding another headwind for housing supply in a market low on resale inventory. While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building, thereby allowing more attainable housing supply to the market.”

“While builder sentiment was down again in November, recent macroeconomic data point to improving conditions for home construction in the coming months,” said NAHB Chief Economist Robert Dietz. “In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%. Given the lack of existing home inventory, somewhat lower mortgage rates will price-in housing demand and likely set the stage for improved builder views of market conditions in December.”

Mortgage credit availability improved in October, according to the MBA. “Mortgage credit availability rose in October, but the growth was driven by increased activity in the jumbo market. The jumbo index increased by 2.7 percent to the highest level in 14 months – its third straight monthly increase. However, despite the uptick in credit availability recently, we are still close to the lowest levels since 2013. Loan offerings remain narrower as lenders have reduced capacity to cope with the lower origination volumes,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Some lenders responded to the challenging rate environment and offered more ARM products, as mortgage rates increased by over 40 basis points on average in October, reaching almost 8 percent in the second half of the month.”

Filed under: Economy | 10 Comments »

Vital Statistics:

Stocks are higher after a weaker-than-expected CPI print. Bonds and MBS are up big.

Inflation was flat month-over-month in October, according to the Bureau of Labor Statistics. The number was driven by an increase in shelter, which was offset by a decline in gasoline. On a year-over-year basis inflation rose 3.2%.

If you strip out food and energy, inflation rose 0.2% month-over-month and 4% year-over-year. Both the headline and the core inflation rates came in below expectations, which drove a big decrease in the 10 year yield, taking it down to the lowest level since late September.

This print, along with the weaker-than-expected jobs report shows that the Fed’s tightening policies are having the desired effect. With UBS introducing a call for 275 basis points in easing next year, the discussion over Fed policy is now starting to consider the possibility that the Fed has over-shot. Given that 525 basis points in rate hikes over 18 months is one of the most aggressive tightening cycles on record, it does need to be part of the conversation.

The Fed Funds futures have taken any further rate hikes off the table. They are forecasting no change at the December and June meetings, and a 28% chance of a cut at the March meeting.

Small Business Optimism declined in October, according to the NFIB. Business is seeing weakened demand, with a net negative 17% of business owner reporting lower sales over the past 3 months. This is down dramatically from September and is the lowest reading since July 2020. Despite the drop in demand, inflation remains the single biggest concern, with a net 30% of small businesses raising prices.

In the commentary, the NFIB discusses how we could have such low sentiment when GDP grew at 4.9% in the third quarter. The first explanation is that the growth rate will be revised downward. That is a possibility. However if you look at the components of GDP growth a lot came from inventory build. Inventory buildup is generally what causes recessions in the first place, as companies cut production in order to move the merchandise which triggers layoffs. Given the data about sales and inventory build the fourth quarter is looking to be weak.

The economy has also been supported by government spending, which is often called “junk GDP” since it is largely artificial and doesn’t represent real, sustainable demand.

Filed under: Economy | 18 Comments »

Vital Statistics:

Stocks are lower this morning after Moody’s downgraded the US outlook from stable to negative after the market closed on Friday. Bonds and MBS are down small.

Moody’s downgraded their outlook for the US on Friday from “stable” to “negative,” citing the mounting debt and the rising cost of servicing that debt. “In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues,” the agency said. “Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability.”

The US will have to pass another stopgap measure once we hit the debt ceiling later this week. Given that bond prices are roughly where they were prior to the announcement, the markets appear to be taking this in stride.

The week ahead will have the Consumer Price Index on Tuesday, along with retail sales and housing starts. We will also get a lot of Fed-speak.

UBS is out with a call saying the Fed will cut the Fed Funds rate by 275 basis points next year. Morgan Stanley sees the first rate cut in June, while Goldman sees Q4.

Mortgage delinquencies increased in the third quarter, according to the MBA. “The national mortgage delinquency rate increased in the third quarter from the record survey low reached in the second quarter of this year, with an uptick in delinquencies across all loan types – conventional, FHA, and VA,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “The increase was driven entirely by a rise in earliest-stage delinquencies – those 30-days and 60-days past due. Later-stage delinquencies – those 90 days or more past due – declined to the lowest level since the first quarter of 2020. The decline in later-stage delinquencies, along with a foreclosure starts rate of 0.14 percent – which is well below the historical quarterly average of 0.40 percent – suggest that distressed homeowners may be utilizing available loss mitigation options that prevent a foreclosure start. Additionally, accumulated home equity may also be enabling some homeowners to sell their homes well before foreclosure becomes a possibility.”

The problems in commercial real estate are coming to a head as the problems in office expand to retail and multi-family. I discussed the state of play in my latest Substack post – please check it out and consider subscribing.

The Wall Street Journal had a story this morning (paywall) about the problems in mezzanine debt, which is like a second mortgage for commercial real estate properties. Foreclosures hit a record this year in the mezzanine space, which is often a canary in the coal mine. It looks like a lot of the creditors are not banks, but hedge funds and asset managers. But with asset prices in free fall, the banks will start to feel the heat.

The problems in commercial real estate might be one reason why the Fed will need to ease sooner rather than later.

Filed under: Economy | 11 Comments »

Vital Statistics:

Stocks are higher despite some hawkish comments out of Jerome Powell yesterday. Bonds and MBS are up.

Bonds got hit yesterday on a lousy 30-year auction and hawkish comments out of Jerome Powell. At an IMF conference, Powell said:

“The Federal Open Market Committee (FOMC) is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance. We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so. We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening. We are making decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks, determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time. We will keep at it until the job is done.”

The 30 year auction at a -5.3 basis point tail, the highest on record. Primary dealers bought nearly a quarter of the issue (double normal) as foreign demand evaporated.

Consumer sentiment fell for the fourth straight month, according to the University of Michigan Consumer Sentiment Survey. We saw a divergence in sentiment amongst income groups, with higher income groups improving based on asset prices, while lower income groups are getting hit by inflation.

Importantly, the year-ahead inflationary expectations ticked up from 4.2% to 4.4%, indicating that the big jump in October (from 3.2% to 4.2%) was not just an outlier. Long-run expectations increased as well to the highest since 2011. Blame high gasoline prices on the increase.

On this Veteran’s Day, I want to share a sea story.

I was on the USS Gridley (CG-21) in the Persian Gulf at the end of Desert Storm (early 92). The combat part was over, but we still kept a Tomahawk shooter in the Northern Persian Gulf. The job of the USS Gridley was to defend the Tomahawk shooter (typically a Spruance class destroyer) from air attack.

Anyway, defending a Spruance destroyer is a pretty boring job. We were assigned a 8 nautical mile box and would lazily steam back and forth in it, all while dodging fishing boats, oil rigs, and tankers. One morning, the Middle East commander ordered us to investigate a distress signal in the Arabian Sea. We left the Northern Persian Gulf and headed through the Straits of Hormuz.

We eventually found the ship that made the call. It was a Somali cargo ship with a ton of people on it. We couldn’t communicate with the ship, so we sent a couple of engineers in a small boat to take a look at it and see if they could fix it. The seas were really rough, and doing loops around the ship while we waited for the verdict from the engineers was a pain. The engineers reported back that the diesel engine had somehow lost its oil and it was ruined, like cylinder-lining-in-the-sump. Unfixable. We reported back to the ME Commander who ordered us to tow the thing back to Somalia.

To pass a rope between ships, you fire a shot line (basically an orange bobbin with strong thread) from a rifle, then attach a 1 inch rope to that (called the messenger line) and then attach the towline (which is 5 inches in diameter and heavy as hell). The towline does the work. We pass by the ship, and our guy on deck pulls out the rifle and shoots the line over. Everyone on the deck of the Somali ship watches the orange bobbin fly over their heads. Then they look back at us with a “What the hell are you weird Americans doing?” look on their faces. We yell back “PULL! PULL!” They don’t speak English and they don’t get that they are supposed to pull on the orange line. By this time, the orange line has slipped off the Somali ship and we had to make another pass. Remember, these are ships, not Ferraris and getting close for a loop around in rough seas takes a while.

So this time, we pass by slowly, shoot the line over, and pantomime pulling. Luckily the light bulb goes off on the other ship and they start pulling on the shot line. They pull the shot line up, grab the 1 inch messenger line and tie it to the bow and signal they are ready to go. They don’t realize there is another rope tied to the 1 inch rope. Towing a 8,000 ton ship with a 1 inch line is like towing a car with twine. We pantomime pulling again. They don’t get it. We finally get them on the radio. We pass the word on the ship for anyone with foreign language skills to report to the bridge. That covered Spanish and Tagalog. No dice. We call up the intel weenies. Get an Arabic speaker, but the Somalis don’t understand.

We finally gave up and towed the ship with the messenger line. We go slowly (like 1.5 knots) and take them back to Mogadishu. It took us forever to get back. When we finally got them to port, we asked the Port Manager where he wanted these guys. He didn’t want them and told us to take the ship somewhere else. We didn’t want a diplomatic incident, so we called up the Commander of the Middle East and told him the story. We were told to just leave them anyway. We told Mogadishu ”the Adele II is your headache now.” The Adele II dropped anchor, and we headed back to the Persian Gulf.

In our wrap-up report to the Commander Middle East, we included a “lesson learned” – translate “Heave Around” in every known language.

Filed under: Economy | 38 Comments »

Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are up.

Neel Kashkari isn’t convinced rate hikes are over. “Undertightening will not get us back to 2% in a reasonable time,” Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said in an interview with The Wall Street Journal on Monday. He is awaiting further data. “I am not ready to say we are in a good place.” Note that Kashkari has generally favored more aggressive responses to the economy, pushing for lower rates during the ZIRP period and higher rates now.

Chicago Fed President Austan Goolsbee thinks we could be on a “golden path” of lowering inflation without causing a recession. “Because of some of the strangeness of this moment, there is the possibility of the golden path … that we got inflation down without a recession,” Goolsbee said on CNBC’s “Squawk Box.” “If that happened … it would just be a continuation of what we’ve already seen this year, which is unemployment up very modestly, while inflation has come down a lot. … That’s our goal.”

The “strangeness of the moment” is the residual effects of a firehose of fiscal stimulus in 2020-2022. The Fed has never been able to hike rates like this without causing a recession in the past. It is a “this time is different.” take.

Credit standards continue to tighten, according to the Fed’s Senior Loan Officer Survey. “For loans to households, banks reported that lending standards tightened across all categories of residential real estate (RRE) loans other than government residential mortgages, for which standards remained basically unchanged. Meanwhile, demand weakened for all RRE loan categories. In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Moreover, for credit card, auto, and other consumer loans, standards reportedly tightened, and demand weakened on balance.”

The survey mentioned commercial real estate as a continued pain point.

Mortgage delinquencies picked up in September, according to the Black Knight Mortgage Monitor. The DQ rate increased to 3.29% which was up 12 basis points from August and 13 basis points from a year ago. This was the largest increase in the past 2.5 years. 30 day DQs rose by 5.1% making it the fourth consecutive monthly rise, while 60 day DQs have risen for 6 months in a row. Note DQs are still below pre-pandemic levels, but it looks like rising rates and a weakening labor market are starting to have an effect.

Rocket reported third quarter numbers that beat expectations. Closed loan volume fell 13% YOY to $22.2 billion. Gain on sale margins increased by 10 basis points to 2.79%. Rocket is guiding for a seasonal slowdown in the fourth quarter which is to be expected.

It looks like the Fixed Income Clearing Corporation is greasing the skids to up margin requirements for MBS. The volatility in the bond market is causing them to increase their risk assessments.

Filed under: Economy | 57 Comments »

Vital Statistics:

Stocks are higher after the Fed paused at the November meeting. Bonds and MBS are up big. Sovereign yields are down across the board, with big declines in Gilts after the Bank of England maintained rates at current levels. We also are seeing a double-digit drop in Bund yields.

As expected, the Fed maintained the Fed Funds rate at current levels. The statement itself was virtually identical to the September statement. The markets seem to be seizing on this statement from Powell that the Fed is done: “The question we’re asking is: Should we hike more?” Powell told reporters yesterday after the Fed held off on raising interest rates for a second consecutive policy meeting. “Slowing down is giving us, I think, a better sense of how much more we need to do, if we need to do more.”

The December Fed Funds futures now predict only a 15% chance of another 25 basis point hike, a sizeable difference from a month ago, when it was closer to 40%.

Great interview with Chris Whalen on why the Fed has to stop and the problems in the commercial real estate market. His point is that valuations in the commercial real estate market are falling and that is a big problem in a rising interest rate environment.

Productivity rose 4.7% in Q3, which is good news for the Fed as it allows output to increase without pushing up inflation. Unit labor costs fell 0.8%. Manufacturing productivity fell, while services productivity increased by a lot.

Companies announced 36,836 job cuts in October, a 22% decrease from February and a 9% increase from last year. Technology continues to be the leading sector, with financial in the #2 slot. AI is a driver of a lot of these changes. Hiring plans are down 46%. Seasonal hiring plans are the lowest in 10 years.

Filed under: Economy | 47 Comments »

Vital Statistics:

Stocks are higher this morning as we begin the Fed meeting. Bonds and MBS are up small.

Consumer confidence fell in October, according to the Conference Board. “Consumer confidence fell again in October 2023, marking three consecutive months of decline,” said Dana Peterson, Chief Economist at The Conference Board. “October’s retreat reflected pullbacks in both the Present Situation and Expectations Index. Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular. Consumers also expressed concerns about the political situation and higher interest rates. Worries around war/conflicts also rose, amid the recent turmoil in the Middle East. The decline in consumer confidence was evident across householders aged 35 and up, and not limited to any one income group.”

I did a deeper dive into this phenomenon in my latest Substack article. Check it out and please consider subscribing.

Home prices rose 0.4% month-over-month and 2.6% year-over-year according to the Case-Shiller Home Price Index. We are definitely seeing a reversal of fortunes regionally, with the strongest areas of 2020-2022 (Phoenix, Las Vegas) underperforming, while the weakest areas since the Great Recession (New York, Chicago, Detroit) now outperforming.

The FHFA House Price Index increased 0.6% MOM and 5.6% YOY. “U.S. and regional house price gains remained strong over the last 12 months.” said Dr. Nataliya Polkovnichenko, Supervisory Economist in FHFA’s Division of Research and Statistics. “The South Atlantic division showed moderate weakness in August, while the remaining census divisions posted positive price appreciation from the previous month.”

Redwood Trust reported third quarter earnings yesterday. Book value fell by 5.3% as MBS spreads widened. The company purchased $800 million of jumbo loans, a big jump from Q2 and a year ago. Redwood has been increasing its counterparty exposure, focusing primarily on depository institutions. Business purpose originations of $411 million was marginally higher than Q2 and down 28% compared to a year ago.

Mortgage REIT AGNC Investment reported earnings per share that beat the street, although the company pre-announced lousy earnings a while ago. Book value per share fell 14% compared to the second quarter. “A complex set of domestic and global factors, including heightened geopolitical risks, Treasury supply concerns, and an approaching inflection point in the Federal Reserve’s monetary policy, drove the significant volatility and underperformance in the Treasury and other fixed income markets,” said Peter Federico, the Company’s President and Chief Executive Officer. “In environments in which Treasury securities experience considerable price instability and the market struggles to find a new equilibrium, Agency MBS typically underperform, which was indeed the case in the third quarter. As challenging as this period has been for all bond market participants, the current opportunity for both levered and unlevered investments in Agency MBS remains historically attractive on both an absolute and relative basis. Once the uncertainties associated with the current market environment subside, we believe that a durable and attractive investment environment will emerge.”

MCM announced its new Artificial Intelligence Fallout Analytics Service: “CloseLytics Pro” MCM’s founder states: “The guessing game of what’s my mortgage pipeline exposure is over….” MCM’s AI based neural network software system “CloseLytics Pro” utilizes the latest data science techniques and AI to accurately predict which loans will close with or without renegotiations in all market conditions. The system is designed to be self-correcting with automatic back testing and reporting. MCM has over 29 years of experience with managing mortgage pipeline risk using state of the art OAS technology and proven statistically based fallout analytics and has been developing and using AI tools for over 10 years. CloseLytics Pro can be integrated with any Pipeline Risk Management System or hedge advisory service. The system not only can provide singular closing rate predictions on an individual loan basis it also provides forecasts by loan for any range of market movement. For more information , contact Dean Brown @ 858 483 4404 x101

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Filed under: Economy | 13 Comments »

Vital Statistics:

Stocks are higher this morning after good numbers from Amazon. Bonds and MBS are down small.

Personal Incomes rose 0.3% in September, while spending rose 0.7%. The PCE Price Index rose 0.4% MOM which was 0.1% above expectations. On an annual basis, the PCE Price Index rose 3.4%, which was in line with expectations. If you strip out food and energy, the PCE Price Index rose 0.3% month-over-month and 3.7% year-over-year. The savings rate declined again.

Consumer sentiment fell in October, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment confirmed its early-month reading, falling back about 6% this October following two consecutive months of very little change. This decline was driven in large part by higher-income consumers and those with sizable stock holdings, consistent with recent weakness in equity markets. Across all consumers, one-year expected business conditions plunged 16% and expectations over consumers’ own personal finances in the year ahead fell 8%, reflecting ongoing concerns about inflation and, to a lesser degree, uncertainty over the implications of negative news both domestically and abroad.” Inflationary expectations increased substantially, rising from 3.2% in September to 4.2% in October.

So consumption is strong, but the consumer is depressed. What is going on? Yesterday’s GDP report provides a bit of a clue. Much of the increase in consumption was accounted for by housing, insurance, and health care. These are necessities, not discretionary goods, and no one gets a dopamine hit from writing a bigger check to the landlord or flood insurance company.

After the data this week the Fed Funds futures are predicting the Fed does nothing at its meeting next week, and is handicapping a 16% chance of a hike in December.

The number of seriously delinquent mortgages dropped to an all-time low in August, according to CoreLogic. “U.S. mortgage performance remained strong in August, supported by a robust job market and a healthy economy,” said Molly Boesel, principal economist at CoreLogic. “However, this thriving job market comes at a time when interest rates are quickly rising, which is keeping many potential homebuyers from being able to secure a mortgage.”

This partially explains why servicing valuations remain so high. Prepayment assumptions assume that people will only pay off their mortgage if they move or die, delinquencies are low, and short term rates are high enough that you can earn interest on escrow. PennyMac Mortgage Trust said in its earnings release that it is valuing its MSR portfolio at 6.3x.

Filed under: Economy | 25 Comments »

Vital Statistics:

Stocks are lower this morning after some disappointing earnings last night. Bonds and MBS are down.

New Home sales rose 12% MOM and 34% YOY to a seasonally adjusted annual rate of 759,000. The median sales price fell 12% YOY to $418,800, while the average sales price fell 5% to $503,900.

Mortgage applications fell 1% last week as purchases fell 2% and refis rose 2%. “Ten-year Treasury yields climbed higher last week, as global investors remained concerned about the prospect for higher-for-longer rates and burgeoning fiscal deficits. Mortgage rates followed Treasuries higher, with the 30-year fixed mortgage rate jumping 20 basis points to 7.9 percent – the highest since 2000. Rates have now risen seven consecutive weeks at a cumulative amount of 69 basis points,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Mortgage activity continued to stall, with applications dipping to the slowest weekly pace since 1995. These higher mortgage rates are keeping prospective homebuyers out of the market and continue to suppress refinance activity. The ARM share of applications inched up to 9.5 percent, its highest since November 2022.”

Homebuilder Pulte Homes reported third quarter earnings. Earnings per share rose 7.8% while revenues rose 3%. Gross margins came in at 29.5%. Despite rising rates, new orders rose 43%. On the subject of mortgages and incentives, Pulte CEO Ryan Marshall said:

We continue to use the permanent 30-year buy-down as probably our most powerful incentive. Right now, we’ve got national incentives that offer 5.75% on a 30-year fixed, so I think given rates today on the open market would be over 8%, to be able to get a new home in a great location of the quality and design features that we have at 5.75%, I think is pretty powerful.

I’ll remind everybody, what we’ve done is we’ve simply redistributed incentives that we’ve historically offered toward cabinets and countertops and things of that nature, we’ve redirected those to interest rate incentives, and I think that’s the–you know, that’s been the most powerful thing for that buyer group.

Pulte says that they have about $35,000 in incentives baked into the price, so if they are losing 5-6 points on the mortgage, that is well within the $35,000 limit.

MCM announced its new Artificial Intelligence Fallout Analytics Service: “CloseLytics Pro” MCM’s founder states: “The guessing game of what’s my mortgage pipeline exposure is over….” MCM’s AI based neural network software system “CloseLytics Pro” utilizes the latest data science techniques and AI to accurately predict which loans will close with or without renegotiations in all market conditions. The system is designed to be self-correcting with automatic back testing and reporting. MCM has over 29 years of experience with managing mortgage pipeline risk using state of the art OAS technology and proven statistically based fallout analytics and has been developing and using AI tools for over 10 years. CloseLytics Pro can be integrated with any Pipeline Risk Management System or hedge advisory service. The system not only can provide singular closing rate predictions on an individual loan basis it also provides forecasts by loan for any range of market movement. For more information , contact Dean Brown @ 858 483 4404 x101

Goldman released its 2024 housing outlook yesterday, which says that 2024 will look a lot like 2023, with mortgage rates stuck between 7% and 8%. They see home price appreciation more or less stagnating – rising only 1.3% for the year. They see housing starts falling next year, weighed down by a huge backlog of multi-family properties under construction with poor absorption rates. “While the sharpest declines in housing activity and prices are now long behind us, the recent jump in mortgage rates and the prospect that they are likely to remain elevated for the foreseeable future present headwinds to the economy’s most interest rate sensitive sector.” Existing home sales are expected to fall to the lowest level since the early 90s, at 3.8 million units.

Filed under: Economy | 8 Comments »

Vital Statistics:

Stocks are lower this morning after the 10 year bond yield broke through 5% overnight. Bonds and MBS are down.

The week ahead will have new home sales, Q3 GDP and personal incomes / outlays which contain the PCE inflation index. We don’t have any Fed-speak as we are in the quiet period ahead of next week’s FOMC meeting.

The US government ended the fiscal year with a deficit of $1.7 trillion. That isn’t helping sentiment in the bond market, as rising rates increase the amount of debt the US must sell in order to cover interest payments. This is part of the reason why bonds can’t get out of their own way.

Part of the issue is the “this time is different” mentality in the markets – that the Fed can execute the most dramatic rate hiking cycle in history without triggering a recession.

I suspect we will find that the rules haven’t changed, and we will hit a recession which will be the final nail in this bout of inflation’s coffin.

The relative value of renting versus buying a house has never been more skewed in the favor of renting. The relationship has eclipsed the levels we saw during the residential real estate bubble. The average mortgage payment is 52% higher than the average rent payment.

Going forward, what will bring the relationship back into balance? Falling rates will have to do the job given the scarcity of existing homes for sale. The supply and demand dynamics don’t seem to be there for a bear market in single family homes.

There is a glut of apartment construction however, and many of those projects might have made sense when interest rates were way lower, but won’t now. Apartment cap rates are generally in the mid single-digits and with rates where they are, it will be tough to cover the mortgage along with taxes and maintenance. So I expect to see further pressure on rental rates.

The National Multifamily Housing Council said the apartment market was loose in October. “A combination of rising interest rates and tightening lending standards has caused a decrease in the availability of debt financing for the ninth consecutive quarter,” noted NMHC’s Vice President of Research, Caitlin Sugrue Walter. “Buyers and sellers of apartments, meanwhile, remain unable to agree to terms on pricing, resulting in the sixth consecutive quarter of declining sales volume…Yet, continued softness in the apartment market means that we should expect the shelter component of inflation to come down eventually as well, which could help overall inflation to cool to the Fed’s 2% target and allow the Federal Reserve to start easing policy. Over the longer term, demand for multifamily housing remains strong based on demographic trends and market fundamentals.”

Filed under: Economy | 10 Comments »