What Happened in Financial Markets after the First Three Months of Inflation and Mortgage Rate Adjustment? The Case of S&P 500
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There was concern that the Federal Reserve would hike interest rates even more aggressively when the data was red-hot. Then, something strange happened.
Stocks staged a massive comeback. The S&P 500 traded in a wide range for most of the day and ended the day up 2%.
The consumer price index increased 0.4% from the previous month, double the estimate from analysts. On an annual basis, inflation was up 8.2%.
Tucker said that inflation expectations play into mortgage rates. The Fed wants to see inflation come down first before raising rates. Growing consensus is to expect another step down in the pace of tightening.”
So what explains the sharp divergence between markets and seemingly terrible inflation data? The higher-than- expected inflation report could cause investors to bet that the price increases are near their peak. The market shows how desperate investors are for a clue about the Fed’s next move.
Allianz: The Big Picture of the Rise and Fall of the Household Wealth Regime: Freddie Mac’s Chief Economist Sam Khater
The big picture: Household wealth is on track for its first significant reduction since the financial crisis in 2008, according to a new report by financial services company Allianz.
Global assets are set to decline by more than 2% in 2022, Allianz reports. That means households, on average, will lose about a tenth of their wealth this year.
The report paints a poor picture. The financial crisis was relatively quick, but the outlook for the future shows stagnant growth. The average growth of financial assets is expected to be around 4.6% until 2025, compared with 10.4% over 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. Stock markets are likely to end the year in the red– 2021 “might have been the last year of the old ‘new normal’, with low interest rates and bullish stock markets,” wrote Allianz researchers.
Household debt, meanwhile, has been on the rise globally. The higher cost of living could 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.
The upward shift has been swift: Just a year ago, the 30-year fixed rate stood at 3.05%. The Federal Reserve pushed ahead with its unprecedented campaign of hiking interest rates to tame soaring inflation and mortgage rates more than doubled in the past year.
“Mortgage rates continued their downward trajectory this week, as softer inflation data and a modest shift in the Federal Reserve’s monetary policy reverberated through the economy,” said Sam Khater, Freddie Mac’s chief economist.
Sam Khater, Freddie Mac’s chief economist, says there is a tale of two economies in the data. “Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously.”
The End of Streaming? What will it take to get rid of a tetrad? A report from the Wall Street Journal
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. It costs $735 more each month.
“Next year will be particularly challenging for the US and global economies,” said Mike Fratantoni, chief economist and senior vice president for research and industry technology. “The sharp increase in interest rates this year – a consequence of the Federal Reserve’s efforts to slow inflation, will lead to an equally sharp slowdown in the economy, matching the downturn that is happening right now in the housing market.”
The new option will not include the same amount of commercials as the current one, but it will feature a lot of the stuff available in the Basic plan. The ads will be about 15 or 30 seconds in length and played 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 ran rampant about the platform’s future, raising questions about the viability of the entire streaming marketplace.
The following companies had third quarter results: Bank of America (BAC), Goldman Brothers (GS), Johnson & Johnson (JNJ), United Airlines (UAL), and American Airlines (AAL), to name a few.
The Rise and Fall of Mortgage Market Activity: Implications for the Real Estate Market and Mortgage Rates in the 2020-2023 Fed-Matchup
At the time of that housing crash, there was a four times higher inventory of homes for sale. Competition for homes has increased because of the lower inventory. And that is keeping prices relatively strong.
Black Knight says that buying a home is less affordable today than it has been in the past due to soaring mortgage rates, elevated home prices and stagnant wages.
The median price of a home will go up to $388,500 by the end of 2023 according to the National Association of Realtors. NAR warned that even this small shift hides a lot of regional variability.
Home prices are still up 40% from their pre-pandemic levels. So even a further drop of about 15% would merely bring them to mid-2021 levels. This is not like the mid-2000s real estate bubble bursting.
According to an updated forecast, mortgage rates are expected to retreat in 2023 after doubling this year.
The US is likely to enter into a recession in the first part of next year because of tighter financial conditions, less business investment and slower growth globally according to economists at the Management and Budget Association. That will, in turn, push the unemployment rate up from its current 3.5% to 5.5% by the end of next year, according to the forecast.
Kan said a large part of housing demand will be made up of first-time buyers. Since more homeowners are staying put, it means fewer starter homes are available. A combination of low inventory of homes for sale and slower new construction activity means that housing supply is likely to remain constrained.
Freddie Mac’s chief economist said that mortgage application activity sank this week to a quarter century low as high mortgage rates continue to weaken the housing market. “While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.”
Revenues have dropped and expenses have gone up according to Walsh. Reducing staffing levels, leaving less profitable channels or even exiting the business entirely are some of the ways in which bankers have begun to shrink excess capacity.
The decrease in production volume from record levels in 2020 and 2021 will cause a 25% to 30% decrease in mortgage industry employment from peak to trough.
The Real Estate Market in the Presence of a Great Recession: An Economic Perspective from the 2006-2008 Real Estate Crises and the New Regulations
Editor’s Note: Erik Lundh is a principal economist at The Conference Board. His own opinions are in this commentary. CNN has more opinion.
As interest rates rose leading into 2006, prices finally began to slide later that year, and homeowners started defaulting on their mortgage payments. homeowners rushed to dump their properties, creating a feedback loop which cascaded throughout the entire real estate market. The subsequent financial crisis was triggered by mass defaults in low-quality mortgages that had been wrapped up in mortgage-backed securities. These assets suddenly became near-worthless, which threw the financial system into crisis.
Additionally, in the years that followed the 2008 financial crisis, new regulations were introduced. Banks are required to be better capitalised, lending standards are more stringent, and most mortgage are fixed-rate. The financial system is in a strong position from another housing downturn.
There has been a spike in refinancing activity in the last few years due to ultra-low interest rates. This pushed down monthly payments for many homeowners, making servicing their mortgages easier.
Americans have more equity with their homes than they did before the last financial crisis. Indeed, loan-to-value ratios, which measure the amount of a mortgage relative to the value of a home, for US mortgages have fallen to just 42% – a 12-year low. This creates a cushion so prices can decline before home values go into freefall. Home sales that result in a loss will likely hit homeowners first.
The Freddie Mac Mortgage Rate Index: Implications for Real Estate Markets and Wall Street Walls after the Decline in Inflation
Inflation, as measured by the Consumer Price Index, cooled considerably in November and was at its lowest level in nearly a year, according to the Bureau of Labor Statistics’ closely watched index, released on Tuesday.
Freddie Mac gets mortgage applications from thousands of banks and credit unions across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less-than-perfect credit will pay more than the average rate.
Mortgage rates affect the yield on 10-year US Treasury bonds. When that rate goes up, the 30-year fixed-rate mortgage typically goes up, too. Mortgage rates go down when the Treasury rate goes down.
The central bank remains committed to rate hikes until the pace of inflation slows, after which more increases are needed, according to Fed Chair Powell.
What this means for real estate markets is that the continued cooling in inflation measures should ease the upward pressure on mortgage rates, said Ratiu.
He said that should mortgage rates go down a bit, there will be more movement in the housing market because of the tight inventory picture.
After a month of declines, mortgage applications rose last week as buyers looked to take advantage of slightly lower rates.
The increase in purchase and refinance activity drove the increase in applications, according to theMBA’s vice president and deputy chief economist. Purchase and refinance applications are behind last year’s pace with rates more than three points higher than a year ago.
A long list of housing data is on tap. On Tuesday the US Census Bureau will report housing starts and building permits figures, followed by Friday’s release of new home sales data. On Wednesday, existing home sales numbers will be released by the National Association of Realtors, as well as weekly data for mortgage rates and applications that same day.
There are some hopeful signs that the worst may soon be over. After reporting their earnings last week, the shares of Lennar surged. 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.
Lennar investors “may be looking ahead to 2023, perhaps crossing the valley from recession to potential recovery,” according to CFRA Research analyst Kenneth Leon.
According to data from Amherst Group, the recent slide in prices is not a cause for alarm.
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.
Others point out that even though housing sales may remain weak due to high home prices and still elevated mortgage rates, the good news is that most existing homeowners are still paying their monthly mortgage on time.
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.
“Housing is not bringing down the economy. The housing market has been affected. While mortgage delinquencies are still low, Gene Goldman is an investment officer at Cetera Investment Management.
There isn’t a lot of companies reporting their latest earnings this week. But the few that are could give more clues about the financial health of consumers and the state of corporate spending.
Cereal giant General Mills
(GIS) will release earnings on Tuesday. Analysts predict a slight increase in 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.
Sneaker king Nike, used car retailer CarMax and memory chip maker Micron are three companies that analysts do not think will do well in the near term.
Investors are also going to be paying very close attention to what companies say in their earnings reports about their outlooks for 2023. Analysts currently are anticipating earnings growth of 5.3% for 2023. That could be too optimistic… especially if companies start cutting their own forecasts due to worries about the broader economy.
“Odds of a recession are pretty high,” said Vincent Reinhart, chief economist and macro strategist at Dreyfus & Mellon. “That will have a knock-on effect for corporate earnings. Higher rates and weaker earnings suggest more pain for stocks.”
The Bank of Japan is expected to decide on interest rates Tuesday, as well as the US housing starts and building permits.
The Long-Sleep of Growth in the Real Estate Market: A Closer Look at the Paul’s Anisotropic Exit
Paul says, “We just kind of got to that place in our lives where we were financially stable, we wanted to start having children and we wanted to just sort of settle down.”
Then came the Fed’s rate hikes. The Pauls were unable to afford the homes they were looking at after a few months of rising mortgage rates.
“There’d be, you know, two dozen other offers and they’d all be $100,000 over asking,” says Paul. “Any any time we tried to wait until the weekend for an open house, it was gone before we could even look at it.”
Yun and others describe the market as frozen, one in which home sales activity has declined for 10 months straight, according to NAR. It’s the longest streak of declines since the group started tracking sales in the late 1990s.
Home prices have remained mostly high despite the slump in sales activity because inventory has remained low. The inventory of unsold homes went down for a fourth consecutive month in November.
In a year’s time, many people visited an open house for a starter home in Hollywood, but agent Elijah Shin didn’t see as many of them this time.
Real Estate Properties in the State of the 21st Century: Expected Prices, Demand, and the First-time Buyers Exposure in the Real Estate Market
Throughout 2022, the Federal Reserve hiked its benchmark interest rate at a record pace to slow the economy and fight high inflation. Housing was 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.
Economists’ predictions range from prices rising by around 5% this year, according to Realtor.com, to as much as a 22% decline from the peak in 2022 to the trough, according to John Burns Real Estate Consulting.
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.
“Half of the country may experience small price gains, while the other half may see slight price declines,” said Lawrence Yun, NAR chief economist. “However, markets in California may be the exception, with San Francisco, for example, likely to register price drops of 10%-15%.”
“Markets like Manchester, New Hampshire; Columbus, Ohio; Fort Wayne, Indiana; Hartford, Connecticut; Lancaster, Pennsylvania; or Topeka, Kansas are still seeing homes change hands as buyers from more expensive locations are lured by solid local economies and median prices, which in some cases are still below $300,000,” Ratiu said.
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 went from 7% to 5.8% in late 2022, it’s expected to go back up again as the Fed slows the pace of rate hikes.
In 2023, we may see a mirror image of 2022 — a somewhat trying first half that gives way to a surprisingly strong back half of the year for buyers, said Leonard Steinberg, corporate broker at Compass in New York.
“The would-be buyers that stepped back from the market in late 2022 can’t and won’t stay away forever, especially given the competing demands from first-time buyers looking to get into the market and retirees looking to move or downsize,” Steinberg said.
He mentioned that the chronically under-building of new homes is a challenge across all market segments as builders wrestle with balancing a short-term decline in demand with long-term need for more new housing.
Source: https://www.cnn.com/2023/01/05/homes/what-to-expect-in-the-housing-market-in-2023/index.html
What can we learn from a boring year in the housing market if we get rid of corporate executives, or sellers are willing to give up?
“The spring market will be busier and more competitive, for buyers, while the next two months will be the calm before a more hectic time,” said Tucker.
The market has a really boring year and it might be surprising for a lot of people. “It would be a great change of pace. A plain, boring, vanilla year in the housing market would be a wonderful surprise.”
Ratiu said that investors expect business investments and consumer spending to pull back because the Federal Reserve wants to bring inflation down. Even though most Americans are still employed and having modest pay gains, the downsizing of spending has yet to really happen.
He said that with more than 10 million open jobs and not enough applicants to fill them, the labor market would have to experience 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.”
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.