All Things in Moderation

Vital Statistics:

Stocks are higher this morning on optimism over China’s latest bout with COVID. Bonds and MBS are down.

Pending Home Sales fell 4% in November to the lowest level in 20 years. They are down a whopping 38% on a YOY basis. “Pending home sales recorded the second-lowest monthly reading in 20 years as interest rates, which climbed at one of the fastest paces on record this year, drastically cut into the number of contract signings to buy a home,” said NAR Chief Economist Lawrence Yun. “Falling home sales and construction have hurt broader economic activity.”

Note that sales tend to lag moves in the mortgage market by a couple of months, so sales today represent rates in October and November. Mortgage rates peaked in mid-November and have been falling since. The Spring Selling Season should see a pickup in sales. Geographically, the West has seen the biggest declines.

The WSJ had an interesting article about non-traded single-family REIT funds, which have outperformed their publicly traded counterparts by a lot this year. Blackstone’s BREIT fund has reported a gain of 8.5% this year, versus the bloodbath that has been the publicly-traded REIT stocks. About half of the assets in these private REITs is residential. Compare that to the stock price of Invitation Homes, a single family rental REIT, which is down 34% so far this year.

The outperformance means that a lot of the fast money in these funds want to ring the register and pull their money out. Blackstone has been forced to freeze redemptions, as has Starwood. If these funds are similar to American Homes 4 Rent or Invitation, they have heavy exposure to Southern California and Phoenix, which is where iBuyers like Zillow and Redfin have also been slammed. End-of-year redemptions could mean some forced selling for these funds, which would certainly impact property prices in these MSAs.

Transactions in general have been slowing in commercial real estate. This is usually a sign of falling prices. As interest rates increase, cap rates have to rise as well to reflect the cost of financing. I think this is most pronounced in office properties. Manhattan’s landlord – S.L. Green just cut its dividend to conserve cash.

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Stocks are flattish this morning on no real news. Bonds and MBS are down.

We should have a quiet week ahead as investors (and mortgage bankers) wrap up a year they would love to forget. We don’t have much in the way of market-moving data so any large movements in the markets should be read in the context of light holiday trading.

House prices were flat in October, according to the FHFA House Price Index. They increased 9.8% on a YOY basis. “U.S. house prices have seen two consecutive months of near-zero appreciation,” said Nataliya
Polkovnichenko, Ph.D., Supervisory Economist, in FHFA’s Division of Research and Statistics. “Higher mortgage rates continued to put downward pressure on demand, weakening house price growth. The U.S. house price index growth decelerated as it posted the first 12-month growth rate below 10 percent after 24 consecutive months of double-digit appreciation rates.” The Pacific Division had the lowest YOY home price appreciation, while New England had the highest.

The Case-Shiller Home Price Index fell 0.3% in October and was up 9.2% on a YOY basis. “October 2022 marked the fourth consecutive month of declining home prices in the U.S.,” says Craig J. Lazzara, Managing Director at S&P DJI. “For example, the National Composite Index fell -0.5% for the month, reflecting a -3.0% decline since the market peaked in June 2022. We saw comparable patterns in our 10- and 20-City Composites, both of which stand -4.6% below their June peaks after October declines of -0.7% and -0.8%, respectively. These declines, of course, came after very strong price increases in late 2021 and the first half of 2022. Despite its recent weakness, on a year-over-year basis the National Composite gained 9.2%, which is in the top quintile of historical performance levels.

Personal Incomes rose 0.4% in November, while personal consumption rose 0.1%. The Personal Consumption Expenditures Index (the Fed’s preferred measure of inflation) rose 0.1%. Excluding food and energy, it rose 0.2%. The monthly numbers are back at levels that should make the Fed happy, although the annual increases are still too high.

The drop in consumption is a worry, and I suspect the narrative is going to shift quite rapidly from fears of inflation to fears of a recession. Another signal of the change: retail. Dollar Stores are back in fashion.

New Home Sales rose 5.8% to a seasonally-adjusted annual rate of 640,000. This was down about 16% compared to a year ago. Meanwhile, Lennar is looking to sell about 5,000 homes to single-family rental funds.

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

Third quarter GDP was revised upward from 2.9% to 3.2%, according to the BEA. The revision was driven primarily by an upward adjustment to consumer spending, primarily in services. The PCE price index was revised upward by 0.1% to 4.8%. The PCE price index (ex-food and energy) was revised upward by 0.1% as well.

The Atlanta Fed’s GDP Now model sees 2.7% GDP growth in Q4.

The index of leading economic indicators declined sharply in November, according to the Conference Board. “The US LEI fell sharply in November, continuing the slide it’s been on for most of 2022 after peaking in February,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “Only stock prices contributed positively to the US LEI in November. Labor market, manufacturing, and housing indicators all weakened—reflecting serious headwinds to economic growth. Interest rate spread and manufacturing new orders components were essentially unchanged in November, confirming a lack of economic growth momentum in the near term. Despite the current resilience of the labor market—as revealed by the US CEI in November—and consumer confidence improving in December, the US LEI suggests the Federal Reserve’s monetary tightening cycle is curtailing aspects of economic activity, especially housing. As a result, we project a US recession is likely to start around the beginning of 2023 and last through mid-year.”

Purchase application payments (a proxy for mortgage affordability) fell slightly in November as mortgage rates fell. The national median mortgage payment fell from $2,012 to $1,977. The MBA attributed this to a slowing in home price appreciation and a 26 basis point decrease in the mortgage rate.

It is important to understand that affordability is more than just the mortgage payment – it is also a function of incomes. Since incomes are rising at the fastest rate in decades that helps blunt the impact of rising payments. Last October / November almost certainly will be the peak of unaffordability as rates continue to fall and home price appreciation slows. As Keynes discussed about “sticky wages” they generally won’t fall, so higher incomes are baked into the cake already. Falling rates and prices will square the circle.

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

Mortgage applications rose 0.9% as purchases rose 0.1% and refis rose 6%. “The Federal Reserve raised its short-term rate target last week, but longer-term rates, including mortgage rates, declined for the week, with the 30-year conforming rate reaching 6.34 percent – its lowest level since September,” said Mike Fratantoni, MBA SVP and Chief Economist. “Refinance application volume increased slightly in response but was still about 85 percent below year-ago levels. This is a particularly slow time of year for homebuying, so it is not surprising that purchase applications did not move much in response to lower mortgage rates.”

Consumer confidence improved in November, according to the Conference Board. “Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. This shift in consumers’ preference from big-ticket items to services will continue in 2023, as will headwinds from inflation and interest rate hikes.”

Existing home sales fell 7.1% in November, according to the National Association of Realtors. “In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the COVID-19 economic lockdowns in 2020,” said NAR Chief Economist Lawrence Yun. “The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows.”

The median home price rose 3.5% on a YOY basis, which is more evidence that home price appreciation is slowing. Affordability has been a big issue, as the first time homebuyer accounted for 28% of sales, which is just above the series low of 26%. Historically, the first time homebuyer has been around 40%.

Yesterday’s bond market sell-off had some people asking about how Japan’s change in policy could cause such a seismic change in US rates. First of all, in the grand scheme of things, yesterday was really just noise. The moves in Japan will have little bearing on US rates longer-term. The move in Japan also caused yields to jump higher in Europe, with the German Bund and UK Gilt yields rising by 15 bps or so.

Sovereign debt markets tend to correlate. This makes sense since global economies are dependent on the health of each other. That said, the Japanese government bond market is different in that the Bank of Japan has a yield cap, which means the Bank of Japan (BOJ) won’t let the Japanese Government Bond (JGB) fall far enough to cause the yield to rise above the cap. It is the way the BOJ decided to conduct QE. This is different than the Fed and ECB’s version of QE, where they bought bonds to push down rates but didn’t draw any bright lines.

I suspect that Japanese bond fund managers (who invest all across the spectrum of sovereign yields) re-weighted their bond portfolios to increase exposure to Japan and sold off Treasuries, Gilts, and Bunds to raise the capital. And I suspect this adjustment will probably wrap up by the end of the year.

United Wholesale CEO Mat Ishbia is purchasing the Phoenix Suns. It would be wild to see a championship between the Cavaliers (which Dan Gilbert of Rocket owns) and the Suns.

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Stocks are lower this morning after the Bank of Japan unexpectedly increased rates. Bonds and MBS are down.

The Bank of Japan announced it will allow its 10 year bond yield to rise up to 0.50%. This was a surprise announcement, and we are seeing reverberations throughout global sovereign debt markets. Most benchmark yields are up about 10 basis points this morning, and the US 10 year is up to 3.68%. While this is a surprise, I think the global narrative is moving from global inflation to a global recession, which will push rates lower next year.

Housing starts in November fell to a seasonally-adjusted annual rate of 1.427 million units. This is flat with October and down 16.4% compared to a year ago. Building Permits fell 11% MOM and 22% YOY to a seasonally-adjusted annual rate of 1.342 million. Rising rates and higher construction costs have caused the builders to hold off until things normalize. I do wonder on the last part if work from home will cause a change in mindset for builders. It would seem that exurbs will become more popular again as a way for builders to avoid the zoning and land availability headaches of building close to urban areas.

The MBA put out its forecast for 2023. Total originations are expected to fall to $1.9 trillion. The first quarter of 2023 is projected to be the nadir for this cycle, with total originations expected to fall to $345 billion before increasing to $510 billion in Q2, where it will begin to increase throughout the year. To put 2023 into perspective: it will be similar to 2018, and much better than 2014.

Mortgage rates are expected to fall throughout 2023, with the 30 year mortgage rate falling to 5.2% by the end of the year. Housing starts are expected to remain depressed around 1.4-1.5 million per year. Existing home sales are expected to remain on the low side, however they will improve throughout the year. Finally, home price appreciation should plateau and turn negative at the end of 2023, although we aren’t talking a crash, just low single digit decreases.

Historically, housing has led the economy out of a recession, and we have historically seen housing starts reach something like 2 billion in early stage recoveries. This was the missing piece of the puzzle in the post-2008 recovery, and it seems that forecasters don’t expect it to ever return. Housing starts of 1.4 million units are the pre-bubble historical average since the late 1950s. Given that the US population has been growing since then there are more heads that need beds. The National Association of Realtors sees a 5 – 6 million unit deficit in needed housing, so the demand is there. I suspect the surprise of 2023 will be a rebound in homebuilding. It can’t stay depressed forever.

New home applications rose 1% in November, according to the MBA. “New home purchase applications recovered slightly in November, as mortgage rates retreated from their October highs and brought some prospective buyers back into a market that still faces affordability challenges,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “Similarly, estimated new home sales for November saw an annual pace of 660,000 units – a 10 percent increase from October. While mortgage rates remain high compared to the past few years, the 30-year fixed rate was 6.49 percent at the end of November after reaching 7.16 percent in mid-October, providing a slight boost in purchasing power for buyers. However, both applications and sales remained over 20 percent below last year’s pace.”

Like everything else, we are back at 2018 levels.

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Stocks are flattish as we head into a week of light trading. Bonds and MBS are down.

The week should be quiet ahead of the holidays, however we will get a lot of housing data with existing home sales, housing starts, and new home sales. We will also get the third revision to last quarter’s GDP and personal incomes / spending.

Speaking of GDP, this is interesting. The Philadelphia Fed took a look at the jobs created in the second quarter of 2022. According to government estimates, the economy added over a million jobs in the April, May and June of this year. Using more comprehensive data, the Philly Fed found that job growth was barely positive – only about 10,000 jobs were added.

This highlights how difficult the Fed’s job is. While the inflation numbers are the motivating factor for Fed policy, the strength of the labor market has been the justification for its hyper-aggressive policy of sequential 75 basis point increases. If the labor market isn’t as tight as the Fed thinks, then it has probably overshot at this point.

That said, when you look at the preponderance of the labor data out there, this Philly estimate looks like the outlier. The labor market is indeed tight when you look at job openings, the unemployment rate and wage increases.

The Freddie Mac Multifamily Apartment Investment Market Index declined 5.4% in the third quarter. “Rising mortgage rates continue to fuel a decline in the Apartment Investment Market Index,” said Steve Guggenmos, vice president of Research & Modeling at Freddie Mac Multifamily. “Property prices and net operating incomes, although positive, are now decelerating, further fueling the decline. Multifamily fundamentals remain consistent and strong, but there’s no question that higher rates are having an effect.”

Homebuilder confidence fell ever single month in 2022, according to the NAHB / Wells Fargo Housing Market Index. In December, the index fell 2 points to 31, which is the lowest since 2012 if you exclude the pandemic-related decline in mid-2020.

“In this high inflation, high mortgage rate environment, builders are struggling to keep housing affordable for home buyers,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “Our latest survey shows 62% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions. But with construction costs up more than 30% since inflation began to take off at the beginning of the year, there is little room for builders to cut prices. Only 35% of builders reduced homes prices in December, edging down from 36% in November. The average price reduction was 8%, up from 5% or 6% earlier in the year.”

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Stocks are lower as they continue their post-Fed sell-off. Bonds and MBS are down.



Retail sales fell 0.6% in November, which was lower than expectations. On a year-over-year basis they rose 6.5%. These numbers are not adjusted for inflation, so if you take into account the 7.1% CPI print from Tuesday, retail sales are more or less down on a year-over-year basis in real terms. Ex-vehicles and gasoline they fell 0.2%. Note October’s numbers were revised downward. This doesn’t bode well for this year’s holiday shopping season.



Industrial Production fell 0.2% in November, according to the Federal Reserve. Manufacturing output fell 0.6% and is up 1.2% compared to a year ago. Capacity Utilization ticked down 0.1% to 79.7%.



These two reports show the economy slowing. The Atlanta Fed’s GDP Now estimate now sees 2.8% growth in the fourth quarter, but that seems high given the other data out there.



A lot of attention has been placed on the issue of home affordability and how it is impacting potential buyers. This is a fair point, but affordability is also an issue for sellers too, and this helps explain the dearth of home sales. According to one study, many people who would like to move consider themselves stuck.

High home prices are one issue – the home seller would presumably be looking in the same picked-over market that everyone else is in for a new home. Second higher mortgage rates are a problem. So many homeowners who would like to move will probably hunker down with their 3.5% mortgage and wait it out while homebuilding squares the circle.

I imagine this problem is most acute for downsizers – people who’s kids are grown and no longer need a 3,000 square foot house. The other side of the trade – the move up homebuyer – isn’t really there. The move-up homebuyer is a smaller group (less people are having families) and affordability constraints have been a double-whammy.

That said, I think the respondents are too pessimistic, at least on rates. When the study was conducted, the mortgage rate was between 7% and 7.5%. Over 2/3 of respondents though rates would be higher in 12 months. Since then, we have seen mortgage rates fall about a percentage point. As MBS spreads revert to the mean and the Fed wraps up its tightening cycle rates should stay the same or move lower.



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Stocks are lower this morning after the Fed poured cold water on a dovish shift in policy. Bonds and MBS are up.

The Fed raised interest rates 50 basis points as expected, however it increased its forecast for the Fed Funds rate in 2023 by 50 basis points. So instead of the markets seeing another 25 basis points of tightening in 2023, it looks like we will get another 75. The dot plot comparison is below:

The Fed revised downward their estimate for 2023 GDP from 1.2% to 0.5%, and increased its unemployment projection from 4.4% to 4.6%. The core PCE inflation forecast was increased as well, from 3.1% to 3.5%. The bottom line is that in spite of a couple good prints on the consumer price index the Fed became more hawkish, not less.

The press conference was basically non-eventful with Powell going back to his 3 components of inflation explanation: goods, housing and services wages. The goods issue was a function of supply chain bottlenecks from the pandemic, and this appears to be more or less over. The housing issue (which is really rental inflation) will probably begin to fade as we head into mid-2023. The wages part is the driver for the Fed’s decision-making.

The Fed is looking at a historically tight labor market, and is trying to avoid the 1970s wage-price spiral. FWIW, I personally don’t think that is as applicable today, mainly because we don’t have as many workers covered under collective bargaining agreements, which is where those wage increases got cemented in the past. Regardless, this is the driver of the Fed’s thinking.

The reaction in the markets was muted. Stocks sold off, while bonds tried to sell off and failed. The yield curve continues to invert, and is now fully negative across the board with the overnight rate at 3.81% and the 30 year rate at 3.49%. This is even more interesting in the context of quantitative tightening. Lower long term rates made sense when the Fed was building its balance sheet, but it is odd when you consider they are letting it run off. The inversion of the yield curve is back towards where it was in the early 1980s during the deep and painful recessions of 1980-1982.

Now check this out: It is still early, but look at the December 2023 Fed Funds futures implied probabilities: They aren’t buying the Fed’s narrative.

The futures may in fact adjust over the coming days, but at least as of this morning, they see the Fed funds rate at 4.25% – 4.5%, exactly where it is today. Really strange.

The press conference was pretty much uneventful, though you are seeing a narrative being formed politically: “The Fed wants you out of work.” Of course that is a simplistic and unfair framing (most narratives are) but watch this germ begin to manifest itself more clearly in the coming weeks. I wouldn’t be surprised to see more and more pointed rhetoric out of Washington over monetary policy as politicians hammer on the idea that workers, who’s wages have not kept up with inflation for decades are finally getting a raise and the Fed is looking to sacrifice them at the altar of 2% inflation. Incidentally one reported asked if the Fed might reconsider its 2% target and Powell basically said it wouldn’t. Personally, I don’t see the magic in 2%, but it they do.

So, bottom line, people who were hoping for the all-clear signal didn’t get it. That said, with MBS spreads still wide and the 10 year kind of solidly stuck where it is, we should see mortgage rates work lower despite all of this.

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Stocks are flat as we await the Fed decision at 2:00 PM. Bonds and MBS are flat.

Today’s Fed decision is one of the biggest ones in the past few years. The inflation numbers are falling, and the yield curve is inverted. The actual decision (50 basis points versus 75) is really not going to be the important part. The dot plot will be the focus, as the Fed Funds are predicting a more dovish path than the Fed was forecasting at the September meeting. Below is the September dot plot, and I put some lines next to the year-end 2023 forecast to give you what the Fed funds futures are currently predicting. The wider the line, the higher the probability, if that makes sense.

IMO, if the Fed’s dot plot confirms the Fed Funds futures, then it will be a signal to the markets that the Fed is more or less done with this tightening cycle (the steepest since the early 80s), and that will be a weight off the shoulders of the stock market and the bond market.

The economic projections will matter less, although the forecast for inflation will carry some weight. We are seeing increased financial stress in the markets, so at some point that will begin to drive the Fed’s thinking, especially if inflation continues to moderate. If the financial stress begins to accelerate, the Fed will probably cut rates since illiquidity is a front-burner issue.

Mortgage applications rose 3.2% last week as purchases increased 4% and refis increased 3%. “Mortgage rates increased slightly after a month of declines, as financial markets reacted to mixed signals regarding inflation and the Federal Reserve’s next policy moves,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “The 30-year fixed rate inched to 6.42 percent, which is still close to the lowest rate in a month. Overall applications increased, driven by increases in purchase and refinance activity. However, with rates more than three percentage points higher than a year ago, both purchase and refinance applications are still well behind last year’s pace.”

Wells Fargo investment raised its weighting on PennyMac to overweight based on falling rates. “We are not expecting a return to the 2020/2021 boom period, but we believe the worst is behind the industry,” he said. “The risk is that we are early and that the interest rate drop reverses or remains stubbornly high.”

Chase has apparently raised its net worth requirement for correspondents from $2.5 million to $10 million.

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Stocks are rocketing after the consumer price index came in below expectations. Bonds and MBS are up.

Consumer prices rose 0.1% MOM in November, according to the BLS. The Street was looking for a 0.3% increase, so this is very good news. On a YOY basis, prices are up 7.1%. The core rate (which excludes food and energy) rose 0.2% MOM and 6.0% YOY.

Shelter was the big contributor to inflation, while energy was a drag. Here is a chart of the MOM changes for the past year. It definitely looks like inflation is beginning to return to normalcy on a MOM basis

The December Fed meeting begins today, and I have to imagine this will weigh heavily in the discussion. The December 2022 Fed Funds futures reaction so far is somewhat muted with the probability of a 50 basis point hike rising to 79% from 75%.

The December 2023 Fed Funds futures now look like this:

According to this, the most likely scenario is that the Fed raises rates 50 basis points in December and is then done. The next most likely scenario is another 50 tomorrow and another 25 sometime next year and then it is done. We are seeing some handicapping of a rate cut next year.

This may be too optimistic, but what this graph is telling us is that as of tomorrow, the fed is out of the way. Which should be good news for housing and the mortgage market in general.

Don’t take this as a sure thing. The next shoe to drop is the dot plot which will be released tomorrow. If the Fed still sees 5% in the fed funds rate next year, this rally will probably unwind.

Small business optimism improved in November, but remains below its 48 year average. “Going into the holiday season, small business owners are seeing a slight ease in inflation pressures, but prices remain high,” said NFIB Chief Economist Bill Dunkelberg. “The small business economy is recovering as owners manage an ongoing labor shortage, supply chain disruptions, and historic inflation.”

Future business expectations remain recessionary, although they are improving. Sales are down, and price increases are abating. Supply chain issues seem to be improving as well.

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