Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
The thrill is gone from housing as The Fed tightens away.
Well, January’s existing home sales numbers were horrific. Down -37% year-over-year (YoY) and down -0.7% MoM.
The median price of existing home sales fell to 0.67% YoY.
I am now posting my Podcasts on Spotify.
But before I go for experimental therapy for my brain tumor, I will leave you with this diddy. Inflation expectations are on the rise, not falling like Biden and Yellen keep screaming.
US inflation is causing The Federal Reserve to raise interest rates, and mortgage applications are suffering.
Mortgage applications decreased 7.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 10, 2023.
The Refinance Index decreased 13 percent from the previous week and was 76 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 6 percent from one week earlier. The unadjusted Purchase Index decreased 5 percent compared with the previous week and was 43 percent lower than the same week one year ago.
The MBA contract rate rose 3.4% from 6.18% to 6.39% as The Fed tightens.
And if you believe the Taylor Rule (as opposed to The Fed’s current politically-based decisions), The Fed’s target rate should be 10.15% and The Fed is less than half way there at 4.75%.
The Fed is expected (by investors in Fed Funds Futures) to rise to 5.283% by the July FOMC meeting, then decline to under 5% by January ’24.
Speaking of Fed rate hikes, January’s red hot retail sales (up 3% MoM) is surely going to drive inflation UP and The Fed will keep raising rates.
Black Knight’s December Mortgage Report is out and the house price graphs show the west is a mess.
While much of the US is down from 2022 peaks in home price. but it is The West where home prices are down the most (just like 2008 where the Inland Empire of California, Phoenix and Las Vegas crashed in term of home prices).
At least Columbus Ohio is down only -2.1% from the 2022 peak. While Austin TX is down almost -10% from 2022 peak.
US inflation numbers are out tomorrow. Let’s check on home price and rent growth tomorrow. But the forecast for January inflation is a increase.
The most recent tightening by the Federal Reserve has pushed the federal funds target rate above mortgage-backed securities yields for the first time in history. Though this poses clear challenges of carry for MBS holders, selective investments in specified pool and collateralized mortgage obligations (CMOs) could provide incremental returns.
While Biden brags (redundant) about lowering inflation (that his energy policies and massive Federal spending caused), apparently he never learns. Now we learn from Mish that the Biden Administration is ready to unleash a $27 billion green slush fund on the US middle class.
Inflation started under Biden, but the massive expansion in money supply (M2) begin with Covid in 2020.
Once this latest spending splurge kicks in, we will see rising inflation again. After all, Biden and Congress have gotten the taste for massive spending bills (like vampires) and spending likely won’t slow down.
Biden’s State of the Union address saw him bragging about his record job creation (actually, it was the private sector, not Biden than created jobs) and historic unemployment rate. What Biden didn’t mention (along with not discussing the porous Mexican border with fentanyl pouring across or why he failed to shoot down a Chinese spy balloon until after it has passed over numerous military reservation) is that the unemployment rate always hit a low point just prior to a recession.
So, here we sit at 3.4% unemployment. But we also see the US Treasury yield curves (10Y-3M and 10Y-2Y) remaining deeply inverted.
The US Treasury 10-year yield is up 5.5 basis points today.
And Bankrate’s 30-year mortgage survey rate is up slightly today.
Everyone seems to have amnesia about Joe Biden’s hatred of Social Security and Medicare. He has tried to cut Social Security, Medicare and Veteran’s benefits as a US Senator. In addition, it was Biden that led the charge to TAX Social Security benefits for seniors. Now Biden has pivoted and is claiming that Republicans are the ones that want to cut Social Security. Wow. Biden simply goes where the political winds blow.
Here is where we set today. The cost of insuring for a US debt default remains elevated as the US has hit its statutory debt limit. This is happening at the effective rate of interest on US mortgage debt is rising.
Help us McCarthy! Because Biden and Schumer don’t want to cut ANY spending.
We need somebody like Mr. Garvey from Key and Peele to lead the debt ceiling debate.
But never fear! Congress LOVES to spend your money, so will eventually raise the debt ceiling.
It’s just like The Fed to ignore what is going on and do something else.
The one statement that Biden made in his State of the Union Address that was factually accurate was that inflation is coming down. Of course, he then blew it by saying he inherited inflation from Trump which was not true. Headline inflation (CPI YoY) was only 1.4% when Biden was sworn-in as President and rose to 9.1% YoY by June 2021 before finally starting to decline.
But despite the cooling of inflation (and M2 Money growth), The Fed seems hell bent on increasing their target rate, now forecast by Fed Funds Futures to peak in July 2023 at 5.123% before pivoting.
The Fed’s themesong. Drinking with my low-companions, dancing with a woman that’s not my wife, laughing at a joke I’ve heard before, welcome to a night in their life.
Starting in 2009 with the housing bubble burst and ensuing financial crisis, The Federal Reserve bought agency mortgage-backed securities (MBS) in an effort to provide stability to the then suffering housing and mortgage markets. Flash forward to today and The Federal Reserve still has $2.62 TRILLION in Agency MBS in its System Open Market holdings. And declining very slowly.
All this is happening as M2 Money growth YoY has gone negative and both mortgage rates and home price growth are slowing.
Is the US mortgage market that fragile that requires The Fed to support it?
The answer is yes if we look at the Mortgage Bankers Association weekly applications index. The Refinance Index increased 18 percent from the previous week and was 75 percent lower than the same week one year ago. The unadjusted Purchase Index increased 4 percent compared with the previous week and was 37 percent lower than the same week one year ago.
I noticed that Biden didn’t mention how mortgage purchase applications since he was installed as President have fallen -45%. Mortgage refi applications have dropped -88% since February 5, 2021.
At least the US house payment to income ratio has declined since the peak. But still higher than at the peak of the US housing bubble in 2006.
After Jerome Powell raved about the strong US labor market and oddly ignored the staggering crowding-out of US interest payments on its massive debt, the US Treasury’s 3-year debt auction was … a Hinderburg moment.
First, the high yield at today’s auction of 3-year Treasury notes was 4.073%. This occured as the allotment to brokers and dealers collapsed along with M2 Money growth YoY.
Then we have this horrible chart of the 3Y auction stop through, crashing into uncharted waters. A stop-through indicates when the highest yield the Treasury sold in the auction is below the highest yield expected when the auction began – the “when issued” level.
Here is the rest of the auction story.
The Federal Reserve is doing Archie Bell and The Drells “Do The Tighten Up!”
Over the fourth quarter, significant net shares of banks reported having tightened standards on C&I loans to firms of all sizes.
Banks also reported having tightened all queried terms on C&I loans to firms of all sizes.
Actually, banks are tightening standards across the various credit boxes.
And as banks tighten up their credit box, we are seeing the median age of US homebuyers rising from 31 to 47 years.
As banks tighten, we are seeing a slow down in the growth rate for C&I lending and 1-4 unit mortgage lending.
This is reminding me of Germany where you save for your entire life to buy a home.
Somehow, I don’t think Biden will mention any of this is his State of the Union address tonight.
Confounded Interest - Anthony B. Sanders 
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