US mortgage applications just hit the lowest levels in 22 years, January 2000 as The Federal Reserve continues monetary tightening to combat Bidenflation.
Mortgage applications decreased 1.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 19, 2022. The Refinance Index decreased 3 percent from the previous week and was 83 percent lower than the same week one year ago.The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 21 percent lower than the same week one year ago.
MBA mortgage applications just declined to their lowest level in 22 years (January 2000) as The Fed has begun raising rates to fight inflation caused by 1) excessive monetary stimulus since late 2008, 2) Biden’s green energy policies driving up transportation costs, 3) distortionary Federal spending (e.g., Covid relief, infrastructure bills and now green energy/IRS spending by Biden/Pelosi/Schumer).
Here is the data summary for the latest MBA applications report.
Fed Chair Jerome Powell shrinking The Fed’s balance sheet.
The National Association of Realtors’ Homebuyer Affordability Index for fixed-rate mortgages is now at the lowest reading since 2006 and the peak of the 2005-2007 housing bubble that burst catastrophically.
The reason? The Federal Reserve, in their attempt to put out the inflation fire (caused by 1) excessive monetary stimulus since late 2008, 2) rampant Federal spending and 3) Biden’s green energy policies, driving up prices.
If we compare mortgage rates with the US Treasury 10Y-2Y yield curve, you can see that the yield curve remains inverted (historically a bad sign). This may signal an eventual loosening of monetary policy by March 2023.
Dear Mr. Fantasy, play us a tune, something to make us all happy (like hitting 2% inflation WITHOUT crashing the economy). Do anything take us out of this gloom (caused by The Fed, Biden’s energy policies and Federal spending). Sing a song, play guitar, Make it snappy. Or in the case of housing, make it crappy.
(Bloomberg) — Federal Reserve Bank of Richmond President Thomas Barkin said the central bank was resolved to curb red-hot inflation, even if that meant risking a US economic recession.
“We’re committed to returning inflation to our 2% target and we’ll do what it takes to get there,” Barkin said Friday during an event in Ocean City, Maryland. He said that this could be achieved without a “tremendous decline in activity” but acknowledged that there were risks.
“There’s a path to getting inflation under control but a recession could happen in the process,” he said.
The US central bank hiked interest rates by 75 basis points in July for the second straight month as policy makers tackle inflation that’s running near 40-year highs. Fed officials speaking in recent days have said more rate increases are needed, but they are still deciding how big to move at their next policy meeting.
St. Louis Fed President James Bullard, one of the most hawkish policy makers, on Thursday urged another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone.
Well, The Fed (aka, Der Kommissars) let the monetary stimulus blow out of control since 2000.
With the 2001 recession, The Fed crashed the target rate (white line) causing home price growth (blue line) to soar. Then The Fed decided that the economy was overheated and cranked up their target rate. This sudden rise in The Fed’s target rate helped to slow/crash housing prices. Resulting in … a frantic decrease in the target rate (late 2007- late 2008) and the adoption of asset purchases of Treasury Notes/Bonds and Agency Mortgage-backed Securities in late 2008.
The Bernanke/Yellen “loose as a goose” policies from late 2008 to Feb 2018 created a total mess. Bernanke/Yellen raised the target rate only one before Trump was elected President, and 8 times AFTER Trump was elected. And Yellen’s Fed began to let the balance sheet shrink a bit before Covid struck in early 2020. And with Covid came another massive expansion of The Fed’s Balance Sheet WHICH HAS NOT YET BEEN WITHDRAWN (despite Fed talking heads saying it would be reduced).
Here we sit with The Fed NOW trying to extinguish inflation (yellow line) by raising their target rate (white line) but NOT shrinking the balance sheet (orange line).
Wonder why this is a horrible homeless problem in the US, particularly in California? While Stanford University has an excellent study of the causes of California’s homeless problem, there is another cause of homelessness … The Federal Reserve’s insane monetary policies since late 2008. The Case-Shiller National Home Price Index is 65% higher in May than during the calamitous home price bubble of 2005-2007, helping to exacerbate the homeless problem.
One of the many problems created by the reckless Bernanke/Yellen/Powell monetary policies is the M2 Money Velocity is near an all-time low making a return to “easy money policies” far more difficult.
I won’t post any photos of the homeless encampments in Los Angeles since it is very sad. But here is a photo of the Dunder-Mifflin paper company “office” on Saticoy Street. The point is that thanks to The Federal Reserve’s loose monetary policies, housing is unaffordable for millions of households forcing many to live on the streets.
Figure 2: Median Rent for a Two-Bedroom Apartment, California, 2022
And a point of trivia. The Office’s Charles Miner (played by the GREAT Idris Elba) was allegedly hired from Saticoy Steel. The Dunder-Mifflin paper company site was on Saticoy Street in sunny LA, not Scranton PA.
Good luck to The Federal Reserve in combating inflation without causing a recession.
The 2020 Covid outbreak led to a massive (and generally awful) reaction. There were economic shutdowns that caused extensive damage (particularly to small firms), but it was the massive overreaction by The Federal government in terms of Covid relief and The Federal Reserve’s expansion of the money supply that caused considerable damage.
One truly horrific chart is that of M1 Money and M1 Money Velocity (M1/GDP). M1 Money surged with Covid driving M1 Money Velocity down to levels never seem before.
The broader measure of money, M2, isn’t as dramatic, but we also see that M2 Money VELOCITY has plunged to levels never seen before.
What does low money velocity indicate? Simply put, The Fed is printing trillions of dollars, but GDP isn’t moving much. But that won’t stop Congress from spending (and using The Fed to buy its debt).
So, here we sit. This morning, the US Treasury yield curve (10Y-2Y) remains inverted. This AM, the curve inverted another -.591 basis points to -42.725, a sign of impending recession.
Yes, we are living through Jay Powell’s famous chili episode where money velocity is near historic lows and we have an inverted yield curve.
BTW, congratulations to Will Zalatoris (aka, Happy Gilmore’s caddy) for his first PGA Tour victory at the FedEx St. Jude Championship!
Agency mortgage-backed securities (MBS) prices started to degrade as The Federal Reserve started to try to combat inflation caused by Biden’s energy policies and rampant Federal spending. That is, under June when the implied Fed O/N rate (red line) cooled and the 30-year mortgage rate (blue line) has come down a little.
In terms of duration risk, the FNCL 3% MBS duration has risen with anticipated Fed tightening.
So, further Fed tightening will result in greater MBS losses AND rising duration risk.
The 10Y-2Y yield curve hit the worst inversion since 2000 as the curve slope hit -47.7 basis points, inverting another -2.267 basis points today.
Yes, the 10Y-2Y Treasury yield curve is SCREAMING RECESSION.
(Bloomberg) – Prashant Gopal – The supply of homes for sale across the US grew at a record rate last month, another sign that higher mortgage costs are cooling down the housing market.
The number of active listings nationwide jumped 31% from a year earlier, a record-high increase for a third straight month, according to a report Tuesday by Realtor.com.
And according to Redfin, stale inventory is accelerating.
The US housing market is simply unaffordable for millions of Americans. To illustrate the problem, here is a chart of the Case-Shiller National home price index less CPI YoY graphed against Average Hourly Wages less CPI YoY.
The gap between the REAL national home price index YoY and REAL US average hourly earnings YoY is near the largest since 1988. Inflation is making matters far worse since REAL average hourly earnings growth continues to decline.
The only thing positive to say is that REAL home price growth YoY is lower now than at the peak of the 2005 home price bubble that burst catastrophically.
Another “positive” is that the REAL 30-year mortgage rate has fallen to -3.23%. At the peak of the house price bubble in June 2005, the REAL 30-year mortgage rate was +2.58%. THAT is one big difference between the pre-2008 recession and today’s impending recession.
Here is your weekend update on Treasury and Mortgage markets.
The current US Treasury 10Y-2Y yield curve just slipped further into reversion at -40.299 basis points, screaming impending recession. Oddly, The Federal Reserve has been leaving its balance sheet of Agency Mortgage-backed Securities (MBS) in tact (green line).
On the mortgage front, Bankrate’s 30-year mortgage rate index rose to 5.60% while the affordability-friendly 5/1 Adjustable Rate Mortgage (ARM) rate rose to 4.21%.
Currently, a 5/1 ARM borrower can save 139 basis points over the traditional 30-year mortgage rate.
Today’s jobs report was … strange. While the US economy added more jobs than expected, we also saw labor force participation contract and real wage growth decline again.
The reaction in the bond market? US Treasury 10-year yields exploded by +14 basis points. As I used to tell my fixed-income students, any basis point jump or decline of 10 basis points or more is a BIG DEAL.
The implied target rate for The Fed (based on Fed Funds Futures) is now lower for the Jan 1, 2024 FOMC meeting (3.025%) than it is for the Sept 21, 2022 FOMC meeting (3.034%).
Mortgage rates? They will go up as The Fed removes its Brawndo, the economy mutilator.
The US economy may need to undergo a deeper and longer recession than investors currently anticipate before inflation can be brought under control, according to Zoltan Pozsar of Credit Suisse Group AG.
Markets expect the surge in consumer prices will soon peak and central banks will become less hawkish, but there’s a high risk that global cost pressures will remain elevated, Pozsar, global head of short-term interest-rate strategy at Credit Suisse in New York, wrote in a client note.
The world is being wracked by an economic war that’s undermining the deflationary relationships that have prevailed in recent decades where Russia and China supplied cheap goods and services to more developed nations such as the US and those in Europe, he said.
“War is inflationary,” Pozsar wrote. “Think of the economic war as a fight between the consumer-driven West, where the level of demand has been maximized, and the production-driven East, where the level of supply has been maximized to serve the needs of the West.” That pattern held “until East-West relations soured, and supply snapped back,” he said.
The result is that inflation is now a structural problem, rather than a cyclical one. Supply disruptions have arisen from the changes in Russia and China, along with tighter labor markets due to immigration restrictions and a reduction in mobility caused by the coronavirus pandemic, Pozsar said.
There’s now a risk the Federal Reserve under Chair Jerome Powell has to raise interest rates to 5% or 6% and keep them there to create a substantial and sustained reduction of aggregate demand to match the tighter supply profile, he said.
‘More Misguided’
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Pozsar’s warning that inflation will stay elevated puts him at odds with the Treasury market, which rallied last month as investors switched their focus to recession risks from inflation concern. While an economic slowdown typically weighs on consumer prices, the latest annual US inflation reading of 9.1% for June remains far above the Fed’s 2% goal, although the price surge is forecast to slow for the first time in three months to 8.8% in July according to a Bloomberg poll of economists.
The bond market is more misguided now than at any other time this year as traders wager the US central bank will start cutting rates in early 2023, Bloomberg Economics’ chief US economist Anna Wong and her colleagues said this week. Money markets are wagering on almost one percentage point of hikes by year-end followed by a quarter-point cut by June.
“Interest rates may be kept high for a while to ensure that rate cuts won’t cause an economic rebound (an ‘L’ and not a ‘V’), which might trigger a renewed bout of inflation,” Pozsar wrote in his note. “The risks are such that Powell will try his very best to curb inflation, even at the cost of a ‘depression’ and not getting reappointed.”
Speaking of “recession,” the US Treasury 10Y-2Y yield curve has inverted even further to -31.69 BPS.
Confounded Interest - Anthony B. Sanders 
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