Weekend Talking Points…What is the Market Doing?
Real Estate News In Brief
The collapse of two banks, a pseudo-bailout, and contagion fears at home and abroad might finally encourage the Fed to slow rate hikes down (or even pause!). We also got much “cooler” readings for February retail sales and wholesale price growth. In response, avg. 30-yr mortgage rates dropped nearly half a percent to 6.55%.
Signs of Cooling?
In February, the US economy created 311,000 jobs. That was higher than expectations, but a lot lower than the (statistically flattered) ~500,000 jobs added in January. Average weekly earnings were a tiny bit lower MoM, which means the YoY increase is now just 4.0%. [BLS]
The headline CPI (Consumer Price Index) for February increased 0.4% MoM, which meant that annual inflation dropped from 6.4% to 6.0%. The “Core” CPI (excluding volatile food & energy prices) dropped from an annual rate of 5.6% to 5.5%. Higher shelter costs drove most of the increase. [BLS]
The PPI (Producer Price Index = wholesale prices) for February FELL 0.1% MoM (a 0.3% increase was expected!) and is now up just 4.6% YoY — the smallest increase in two years. [BLS]
Retail sales dropped 0.4% MoM in February, after an unusually large +3.2% MoM increase in January. But we’re still big spenders: Feb 2023 retail sales of $698 billion was 32% higher than it was in Feb 2020 (just pre-COVID). [Census Bureau]
Improving Sentiment, Despite Higher Rates
MBS Highway’s March 2023 Housing Survey showed resilient levels of buying activity and an improved pricing environment — despite the +100 bps increase in average 30-year mortgage rates during February 2023. Nearly one-third of respondents indicated that homes were now ‘selling quickly with multiple offers’. That same figure was just 4% in January 2023!
Also shrugging off higher rates, the National Association of Homebuilders’ confidence index rose for a 3rd-straight month to 44 in March (>50 = expansion), as the pace of new home sales and prospective buyer traffic picked up. [NAHB]
Consistent with builders being ‘almost bullish’, February housing permits (+14% MoM to 1.5 million annualized pace), housing starts (+10% MoM to 1.45 million annualized) and housing completions (+12% to 1.56 million annualized) all continued to bounce after a rough 2022. [Census Bureau]
A Silver Lining?
Signature Bank failed: unsustainable growth, enabling regulations, corporate greed, lack of risk controls etc. But one of the most important things to understand is that it’s harder for banks (all banks) to make money and retain deposits in an inverted yield curve environment.
The silicon silver lining to all this is that the bankruptcies and (don’t call it a) bailout have made it crystal clear to the Fed how badly some banks are struggling with inverted yield curves and the cash flow / valuation reckoning happening in the tech sector. And SVB wasn’t some tiny bank, either. You might not have heard of it before last week, but it had over $200 billion in assets at the end of 2022 — making it the 16th-largest bank in the US.
Does it make depositors and investors more concerned about the banking sector in general? Absolutely. The Fed’s pseudo-bailout of SVB (and Switzerland’s of Credit Suisse) were necessary moves to prevent banking sector contagion (Silicona virus?) or worse.
Are banks going to pull their heads back into the safety of their shells? Yup. That’s both defensive AND deflationary.
Should it make the Fed think twice about continuing to hike rates? Hope so. Worrying about inflation when banks are going bust is focusing on the past when they need to be in the present or even (gasp!) looking forward.
A Short History of Recent Rate Moves
But before we do that, here are some things to remember:
Inflation — Bond investors hate inflation because it erodes the value of their future, fixed payments. When inflation rises (or even if inflation expectations rise), bond prices fall. And when bond prices fall, the yields on those bonds (and mortgage rates) go up.
Recession — If the US goes into a recession, the Fed would certainly stop raising rates and might start cutting them. That’s why bad economic news (weaker jobs data etc.), is generally good for bond prices (which move higher) and mortgage rates (which move lower). But if the economy seems to be staying hot or speeding up, the bond market worries about higher inflation and more rate hikes ahead.
(A) DOUBLING FROM DOWN LOW
30-Yr Rates: 3.20% → 7.37% (+417 bps)
When: Dec 1, 2021 — Oct 20, 2022
Why: Responding to fast-rising inflation that was clearly not ‘transitory’, the Fed embarked on an unprecedented pace of tightening, raising the Federal Funds rate by 450 bps (so far). Mortgage rates more than doubled in less than a year.
(B) INFLATION PEAKS AND EASES…
30-Yr Rates: 7.37% → 5.99% (-138 bps)
When: Oct 20, 2022 — Feb 2, 2023
Why: Headline CPI peaked in June 2022 at +9.1% and has declined (growth has gotten smaller) every month since then. But it was in mid-November 2022 that the bond market hit an inflection point, reacting to a big drop in October CPI (from +8.2% → +7.7%). If inflation continued to ease like that, we could expect slower Fed hikes (and perhaps even a rate cut?) over the remainder of 2023. Rates dropped nearly 140 bps over the next 3 months and briefly dropped below 6%.
(C) …BUT ECONOMY STAYS “HOT” AND FED HAWKISH
30-Yr Rates: 5.99% → 7.10% (+111 bps)
When: Feb 2, 2023 — Mar 2, 2023
Why: Was slowing inflation just a head fake? Beginning with a wild (highly suspect) jobs report for January (+500,000 jobs!), a series of “hot” data releases (January retail sales +3.2% MoM, January CPI accelerating to +0.5% MoM etc.) gave the Fed more ammo to keep talking tough. Rates rebounded more than 100 bps in a month.
(D) SVB SHOCK + ECONOMY “COOLING”
Rates: 7.10% → 6.55% (-55 bps)
When: Mar 2, 2023 — March 16, 2023
Why: Two banks collapsing, and contagion narrowly averted (by the Fed itself) might finally encourage Powell & friends to slow things down. Nobody expects a +50 bps hike next week anymore, and a ‘pause’ (no hike at all) is at least a possibility. Then a so-so CPI (still high but not alarming) was followed by lower than expected PPI and retail sales figures.
Mortgage Market
Most of this issue of Talking Points has been focused on the banks and mortgage rates, so we’ll keep this brief. The next FOMC (Fed) meeting will be held next week, on March 21–22. The Fed will probably raise rates another +25 bps, but the tone of Fed commentary could be (should be!) a bit more dovish considering the events of the past week.
The Big Take Away
Since 1941, national home prices have risen in 73 of the years, fallen in 7 of the years, and been flat once. Would you bet against a fighter with that kind of record? Owning a home is the undisputed champion of long-term wealth creation.
