What Happens When the Fed Opens? An Investor’s Eye on Inflation: The Case of the Small-Scale S&P 500
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Markets plunged on Thursday morning after red-hot inflation data raised fears on Wall Street that the Federal Reserve would continue hiking interest rates aggressively. Then, something strange happened.
The stock market staged a huge comeback. The S&P 500 was in a trading range for most of the day before ending the day up 2%.
What’s happening: The consumer price index increased 0.4% in September, double the estimate from analysts. On an annual basis, inflation was up 8.2%.
The Fed emphasized a commitment to cooling inflation to its 2% target, but pulled back its stance on additional rate increases. Fed Chair Jerome Powell said recent banking sector instability is likely to lead to tighter lending requirements, which could serve to cool inflation.
What is the cause of the sharp divergence between markets and inflation data? Investors could be betting that the stronger-than-expected inflation report means price increases are near their peak. The market is a good illustration of how investors are trying to get clues about what the Fed will do next.
Allianz: The Evolution of Household Wealth and the 2018 US Retail Retail Sales Returns After a Cosmic Crench
Household wealth is on track to reduce for the first time since the financial crisis of 2008, according to a new report.
Global assets are set to decline by more than 2% in 2022, Allianz reports. households will lose about a tenth of their wealth this year
The report paints a bleak picture. The 2008 financial crisis was marked by a relatively quick turnaround, but the current outlook shows stagnant growth in the future. Financial assets are expected to grow at an average rate of 4.6% over the next decade, compared with the last three years.
Russia’s war on Ukraine has obstructed the potential for a post-pandemic economic recovery, and increased food and energy scarcity. Inflation is rampant and central banks around the world are raising borrowing costs. It is thought that stock markets will end the year in the red in 2021 due to low interest rates and bullish stock markets.
Household debt, meanwhile, has been on the rise globally. The higher cost of living and rising interest rates can pose a risk to household balance sheets.
The takeaway: Allianz calls these changes a “tectonic shift” in global wealth that will take years to recover from. Today’s release of US retail sales for September will likely shed more light on the state of the consumer, as will earnings reports from some of the country’s largest lenders — JPMorgan
(JPM), Citigroup
(C), Wells Fargo
(WFG) and Morgan Stanley
(MS) all report this morning.
What is the Story of the Mortgage Rate and Home-Buyer Demand? The Fading Story of Two Economies in the Context of Freddie Mac Data
Freddie Mac data showed that the 30-year rate averaged 6.42% in the week ending March 23, down from 6.60% the week before. The 30-year fixed-rate was at an all time low a year ago.
Fratantoni warned that mortgage rates will see a lot of movement in the months to come, as the Fed is expected to raise interest rates this year.
Sam Khater said there was a tale of two economies in the data. Strong job and wage growth are keeping consumers balance sheets positive, while recession fears and housing affordability are driving demand down.
Today, a homeowner buying the same-priced house with an average rate of 6.92% would pay $2,059 a month in principal and interest. That’s $735 more each month.
So what’s in store for the housing market this year? Home prices rose nearly 40% from the spring of 2020 to the spring of 2022, representing roughly a decade of price gains in just a couple of years. Will what went up also come down?
The Boom and Fall of the Streaming Marketplace: Predictions for Real Estate, Mortgage Rates and Housing Demand in the First Three Years of the 2022 Mortgage Crisis
The new option will have less of what is available with the current $9.99 a month Basic plan, but it will include more commercials. Those ads will be 15 or 30 seconds in length and will play before and during TV series and movies.
Following that news, the stock tumbled, and the company lost billions in market cap. Hundreds of employees were laid off, and doubts about the platform’s future, raising questions about the viability of the entire streaming marketplace.
Third quarter earnings from Bank of America, Goldman Sachs, Johnson & Johnson, and United Airlines.
The higher cost to finance a home caused sales to drop significantly throughout 2022. More buyers have been active as rates have come down from their peak over a year ago.
There is still a lot of homes for sale that buyers are not willing to buy. Many current homeowners are hesitant to sell when they have very attractive rates under 4% and buying a new home would mean getting a much higher rate.
Wells Fargo’s economists estimate that the median price for an existing single family home to be $385,000 this year, up 7.8% from last year, but the growth will be a lot less than the 19% year-over-year increase seen in 2021.
Tucker claims that the cooling off will be more regional, unlike the run-up in prices that caused home values to surge. The drops will be more profound in places where there were bigger gains during the Pandemic, for example Austin, Phoenix and Boise, he said.
Forecasters, again, predict a wide range of where rates will go in 2023. The 30-year fixed rate loan will be between 5.8% and 6.1% this year, ending the year between 5.5% and 6:09, according to a projection by Zillow.
For the Fed to reach its desired target of 2% inflation, jobs will have to take a hit, with unemployment rising to about 4.6% this year, according to the central bank’s projections released in December. The central bank will probably impose painful rate hikes until we get there.
Kan said first-time homebuyers will account for a large portion of housing demand over the next few years. Fewer starter homes are available due to homeowners staying put and unwilling to give up their ultra low mortgage rates. Housing supply is likely to remain constrained due to low inventory of homes for sale and slow new construction activity.
“Mortgage application activity sunk to a quarter-century low this week as high mortgage rates continue to weaken the housing market,” said Sam Khater, Freddie Mac’s chief economist. Mortgage market activity has been cut in half over the last year, and should lead to a reduction in mortgage rates in the coming years.
“Purchase applications dropped to their lowest level since the beginning of this year and were more than 40% lower than a year ago,” said Joel Kan, MBA’s vice president and deputy chief economist. “Potential buyers remain quite sensitive to the current level of mortgage rates, which are more than two percentage points above last year’s levels and have significantly reduced buyers’ purchasing power.”
As the economy continues to add jobs, the 30-year mortgage rate is expected to fall to an average of 6.1% in 2023 and 5.2% in 2024 according to the NAR.
Inflation After the Great Financial Crisis: What Have Banks Done About the Real Estate Industry? Comments on Erik Lundh’s Analysis
Editor’s Note: Erik Lundh is a principal economist at The Conference Board. His own opinions are expressed in this commentary. Read more opinion at CNN.
Builders overbuild in the early 2000s due to years of rampant demand, flooding the country with a home surplus. It took a long time for demand to work through the large amount of housing stock that had been amassed. Chronic underbuilding resulted from this, causing the homebuilding industry to be crushed.
Additionally, in the years that followed the 2008 financial crisis, new regulations were introduced. Banks are now required to be better capitalized; lending standards are much more rigorous, leading to higher-quality loans; most mortgages are fixed-rate; and financial derivatives, such as asset-backed securities, are better regulated. This all buttresses the financial system from another housing downturn.
George Ratiu ofRealEstate.com said that as inflation pressures have lessened, mortgage originators have followed suit.
Additionally, Americans have more equity in their homes than they did leading up to the last financial crisis. The loan-to-value ratio, which takes into account the amount of a mortgage relative to the value of a home, has plummeted to a 12-year low. This creates more of a “cushion” for prices to decline before home values fall below the loans that underpin them. Home sales at a loss will likely hit homeowners first, before it hits the banks.
The Consumer Price Index and Mortgage Rates: The Effects of Inflation and Treasury Yields on Mortgage Application Activity in the U.S.
The Bureau of Labor Statistics, which tracks inflation, says that the Consumer Price Index was at its lowest level in nearly a year in November.
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers that put down less money upfront will pay more than the average rate.
The Fed doesn’t set the interest rates that borrowers pay on their loans directly, but the actions it takes influence them. Mortgage rates tend to move on the 10-year US Treasury bonds, which can be linked to a variety of factors. When the Treasury yields go up, so do mortgage rates.
Fed Chair Jerome Powell mentioned in his remarks that with prices still rising at a high rate, more rate increases are needed and the central bank remains committed to rate hikes until the pace of inflation notches a noticeable slowdown, Ratiu said.
Ratiu said that the continued cooling in inflation measures should help ease the upward pressure on mortgage rates.
“The sellers aren’t putting their houses on the market and the buyers that are out there, certainly the power of their dollar has changed with rising interest rates, so there is a little bit of a standoff,” says Susan Horowitz, a New Jersey-based real estate agent.
“Mortgage applications increased for the third consecutive week, despite the ongoing volatility in the financial markets and the broader economy,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association.
According to the vice President and deputy chief economist of the Mortgage Bankers Association, purchase activity that was put on hold last year due to the quick runup in rates is now coming back as rates ease and housing demand remains strong.
The data from January showed a growing number of homes for sale, as well as properties that lingered longer on the market, as well as prices that were down from their peak.
There are signs that the worst could soon be over. One of the biggest homebuilders in the US, Lennar, was up after reporting earnings last week. Revenue topped forecasts and the company’s guidance for the number of homes it expected to deliver next year was a little higher than analysts’ estimates as well.
CFRA Research analyst Kenneth Leon states that investors may be looking ahead to the future, perhaps crossing the valley from recession to recovery.
According to data from Amherst Group, an investment firm that buys single-family homes to rent out, it’s important to put the recent slide in prices in context.
It’s also worth noting that the job market is still strong and wages are growing. What’s more, many consumers still have decent levels of excess savings thanks to pandemic era government stimulus.
Many point out that the good news is that most existing homeowners still pay their mortgage on time, even though housing sales may remain weak because of high home prices and elevated mortgage rates.
Again, that’s a stark contrast from 2008 when many people with subprime loans or borrowers with poor credit histories were unable to keep up with their mortgage payments.
The economy isn’t being brought down by housing. The housing market has been affected. But mortgage delinquencies are still low,” said Gene Goldman, chief investment officer at Cetera Investment Management.
There are not many companies that are reporting their earnings this week. But the few that are could give more clues about the financial health of consumers and the state of corporate spending.
General Mills will release its earnings on Tuesday. There is a slight increase in both sales and profit. Consumers may be growing increasingly wary about inflation and the broader economy, but they’re still eating their Wheaties. Shares of General Mills
(GIS) have soared nearly 30% this year.
Analysts aren’t optimistic about theoutlook for sneaker king Nike, used car retailer CarMax and memory chip maker Micron, whose chips are used in devices ranging from cell phones to cars.
According to data from FactSet, fourth-quarter earnings for S&P 500 companies are expected to decline 2.8% from a year ago. Analysts have been busy cutting their forecasts too. John Butters, senior earnings analyst at FactSet, noted in a report that fourth-quarter profits were expected to rise 3.7% as recently as September 30.
“Odds of a recession are pretty high,” said Vincent Reinhart, chief economist and macro strategist at Dreyfus & Mellon. It will have an effect on corporate earnings. Higher rates and weaker earnings suggest more pain for stocks.”
Tuesday: US housing starts and building permits; China sets loan prime rate; Bank of Japan interest rate decision; earnings from General Mills, Nike, FedEx
(FDX) and Blackberry
(BB)
An open house in Los Alamos, Calif., sold for $1.8 million dollars, sold in the first three years of home resale
“We wanted to start having kids because we were in a good position financially in our lives, so we decided that we would settle down and give our kids up,” says Paul, 34.
“We lowered our expectations, and went looking for bigger houses and more expensive locations, because we realized that the high mortgage rates were forcing us out again,” says Paul, who realized that his family was pricing them out again.
There were two dozen other offers, all of which would be $100,000 over the asking price. It was gone before we could even look at it, no matter how long we were waiting for an open house.
While sales were down by 24.1% from last year, activity appears to be bottoming out in the first quarter of this year, before any improvements can be made.
Home prices have remained mostly high despite the slump in sales activity because inventory has remained low. The unsold homes inventory fell in November for the fourth month in a row.
At an open house for a charming starter home in Hollywood one recent weekend, agent Elijah Shin didn’t see many people swing through like he did a year ago.
The Real Estate Market in New York City Returned after a Super-Pendered 2021: Insights from the CoreLogic Case-Shiller US National Home Price Index
In the year 2021, New York City bounced back from the worst of the PAIN and the purchase of apartments in Manhattan took off. But it nosedived at the end of 2022, with the market returning to its pre-pandemic trajectory as sales dropped and prices slipped. The only outlier is that inventory is still slow to materialize.
US home prices fell for the fifth month in a row in November as rising mortgage rates kept prospective buyers out of the housing market, according to the latest S&P Core Logic Case-Shiller US National Home Price Index.
The largest share of condos sold were one-bedrooms with a median price of $1,140,000. A two-bedroom condo sold for $2,150,000. A one-bedroom co-ops were sold for $710,000 and a two-bedroom for $1,325,000.
As a result, there were 6,523 listings in Manhattan at the end of the fourth quarter. That’s 5% higher than the fourth quarter of 2021, but 15.7% less than the third quarter of 2022.
The market metrics of prices, sales, and inventory are going up at a modest pace from their pre-pandemic levels.
The would-be buyers that stepped back from the market in late 2022 can’t and won’t stay away forever, given the competing demands from first- time buyers looking to get into the market and retirees looking to move or downsize.
The Federal Reserve raised its benchmark interest rate to slow the economy and fight inflation. Housing took the brunt of the impact, as the most interest rate-sensitive sector of the economy. The Fed’s actions had the intended effect, though, with housing affordability deteriorating and demand dwindling, which led to declining sales and slower annual price growth.
There is likely to be a return to the traditional seasonality of the real estate market, in which inventory tends to rise in February and carry through the summer. Meanwhile, prices often peak in May or June and prices and sales tend to slowly decline until the end of the year.
He said more inventory would then become available from the locked-in homeowners clinging to their ultra-low mortgage rates from the past couple of years.
A Wonderful Surprise for the Real Estate Markets: The November November Decline in Seattle and New York City, as Mortgage Rates Decline and Construction Construction Continues Down
In November, prices in San Francisco had fallen on a year-over-year basis and the city’s decline worsened in December, with prices down 4.2% year-over-year. In addition, prices in Seattle were also down from last year.
The markets of Manchester, New Hampshire, Columbus, Ohio, Fort Wayne, Indiana, Hartford, Connecticut, Lancaster, Pennsylvania, or Topeka, Kansas all still are seeing homes change hands because buyers from more expensive locations are lured by solid local economies and median prices.
In November, as mortgage rates started a six-week tumble, the median monthly mortgage payment fell by 1.8% to $1,977 from $2,012 in October, according to the Mortgage Bankers Association.
After the 30-year fixed mortgage rate hit 7 percent in the final quarter of 2022 and then continued to go up, he expects that to come down to 5.7% as the Fed slows their rate hikes.
In the year 2023, we might see a mirror image of the year 2022, when the first half gives way to a strong second half for buyers.
Builders face the challenge of balancing a decline in demand with the need for more housing as chronic under-building of new homes is likely to remain a challenge across all market segments.
Buyers are likely to pay more during the spring selling season, when homes tend to sell for a seasonal premium because that’s when most buyers are trying to get it done.
“The big surprise for a lot of people might be that the market has a really boring year,” said Tucker. It would be a huge change of pace. A boring, uninteresting year in the housing markets would be a wonderful surprise.
Ratiu said that with the Federal Reserve committed to bringing inflation down, investors expect business investments and consumer spending to pull back. The drop in spending has yet to happen despite the fact that most Americans are still employed and have modest pay gains.
He said that with more than 10 million jobs open, there wouldn’t be enough applicants to fill it and the labor market would have to suffer a sharp drop in spending. “This scenario is more likely if corporate executives overreact to the recession chatter and preemptively cut payrolls, which would create a self-fulfilling downward spiral.”
Does the Labor Market Resiliently Cool the Year? The Case for Rate Increases in the U.S. Economy during the New Year
But traditional seasonal norms are expected to kick in come March as more inventory becomes available and more buyers starting to look at what’s available — as long as buyers can stomach the current rates and sellers are willing to give up the ultra-low rates they enjoyed in the past couple years.
“We may have to wait until the start of the spring shopping season for more clarity on the direction of housing markets this year, especially as both buyers and sellers are pulling back from the marketplace,” he said.
In the salad days of New Year, people feel refreshed and motivated as they look toward the year ahead. There’s a certain clarity that comes during this time in January.
The Bureau of Labor Statistics said last week that the US economy added over 507,000 jobs in January, showing that the labor market is still strong. Analysts were expecting 185,000 jobs to be created. The surprising number makes the Fed’s historic and aggressive efforts to cool the labor market and bring inflation down through rate hikes all the more complicated.
Kan said that data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as anticipated, which is putting upward pressure on rates.
In an interview with the Financial Times this week, Gita Gopinath, second in command at the International Monetary Fund, urged the Fed to continue with rate increases this year, citing the labor market’s resilience.
So will wages moderate this year? Analysts at Goldman Sachs predict that they will. They believe that unemployment will grow and wage growth will slow from above 5% in 2022 to about 4% by the end of this year.
“This would still be a bit too hot, but any sizeable drop would provide Fed officials with a proof of concept for the idea that gradual labor market rebalancing can dampen wage and eventually price pressures without a recession,” they write.
How Do US Consumers Can Stabilize Away from the Inflationary Cycle? A Rejoinder to Bank of America Chairman Brian Moynihan
Bank of America CEO Brian Moynihan told CNN around the holidays that the continued strength of the US consumer is nearly single-handedly staving off recession.
In November, US retail sales were the lowest in more than a year. Weak sales are likely to continue, say analysts, and if they do, retailers’ earnings will suffer.
The answer to this is crucial to determining what will happen to the markets this year, but also to determining whether the economy will fall into recession.
So while rate cuts may be off the table this year, the Fed could opt for more modest increases, or even none at all as the year progresses. It would be great for investors to have some relief after four hikes last year.
And while officials welcomed softer inflation reports in recent months, they stressed that “substantially more evidence of progress” was required and said that inflation was still “unacceptably high.”
The home goods chain stated in a regulatory filing that there is doubt about the company’s ability to continue.
“Bed Bath & Beyond is too far gone to be saved in its present form,” Neil Saunders, an analyst at GlobalData Retail, said in a note to clients Thursday. “All of this points to bankruptcy as being the most likely outcome.”
The November Real House Price Rises After Seasonal Adjustments and the Central Bank of New York Lifted $sim$1.4 TeV
In July of last year, the national index saw its first month-over-month decrease since February of 2012 and that continued through November, when adjusted prices were down for the third consecutive month.
The declines before the seasonal adjustments were reported in the 20-city index. After seasonal adjustments, 19 cities still reported declines, with only Detroit increasing 0.1%.
Home prices rose 7.7% in November from the year before, a smaller jump than the 9.2% growth seen in October, according to the latest S&P CoreLogic Case-Shiller US National Home Price Index, released Tuesday.
The cities with the strongest price appreciation were all in the Southeast, with Miami, up 15.9% from last year, seeing the strongest prices for the fifth-straight month. It was followed by Tampa, Florida, up 13.9%; Atlanta, up 10.4%, and Charlotte, North Carolina, up 9.9%. The Southeast and South were the strongest regions, and the West continued as the weakest.
The November report provides evidence of a slowing housing market but it may not be the worst yet, said Lisa Sturtevant, Bright MLS chief economist.
“This one percentage point reduction in rates can allow as many as three million more mortgage-ready consumers to qualify and afford a $400,000 loan, which is the median home price,” said Sam Khater, Freddie Mac’s chief economist.
On Wednesday, it did so. The Fed raised the rates to fight inflation while taking into account recent risks to financial stability.
Mortgage rates are being kept under a floor for the short term by the actions of the Fed, he said.
Housing economists and those in the mortgage market are looking to the next report on inflation, set to be released February 14, to see if the pace of price hikes continues to slow.
Powell spoke at the Economic Club of Washington on Tuesday and said that the central bank may have done more and raised rates more than they should have.
According to George Ratiu, the uncertainty between expectations and economic data will continue into the next few months.
BobBroeksmit said thatAffordability at the lower end of the market is a challenge but that he believes purchase demand will recover heading into the spring.
The Mortgage Rate Rises in the Midwest, Midwestern, and South, and Implications for the Future of the Mortgage Rate Curvature Puzzle in the US
The pending sales index, based on signed contracts to buy a home rather than the final sales that are accounted for in existing home sales, rose by 8.1% from December to January, beating economists’ predictions for a rise of 1%. January saw a 1.9% rise, which was downwardly revised in December.
All regions saw a month-to-month increase in pending home sales, with the Northeast up 6%, the Midwest up 7.9%, the South up 8.3% and the West up 10.1%.
Lower home prices in the West region resulted in an extra boost to the region, while gains in the South were a result of stronger job growth.
“But as rates are right back up in February, it’s likely that any momentum in this market will be short lived and affordability challenges will remain key to the direction and speed the market moves in the coming months,” she said.
A flurry of recent data indicates the Federal Reserve will likely hike its benchmark lending rate again, as it fights to control the US economy.
Freddie Mac’s chief economist said mortgage rates continued to slide down as financial market concerns came to the fore over the last two weeks.
He said to expect a rebound in mortgage rates during the first weeks of the spring homebuying season.
Hannah Jones, an economic data analyst at REALTY.com, said the yield on 10-year US Treasury bonds rose on Tuesday as investors prepare for the impact of the revised rate projections. But rates fell on Wednesday on news from the Fed that its series of aggressive rate hikes could be coming to an end.
While rates remain much higher than a year ago, he said MBA is forecasting a gradual decline, with the 30-year fixed rate falling to around 5.3% by the end of the year.