Morning Report: Credit is becoming harder to get for real estate

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are up small.

The upcoming week will contain housing data, with the FHFA House Price Data, Case-Shiller, the third revision of first quarter GDP and Personal Incomes / Outlays which will contain the PCE inflation number. Jerome Powell will also speak on Wednesday.

The regional bank crisis has had some effects on the homebuilding sector, according to research from the NAHB. Loans for land acquisition / development and spec single family construction have become more scarce. In multi-family the effect is even more pronounced. Multi-family construction has been hitting on all cylinders and the number of buildings with 5 or more units is at a record.

The regional bank contagion may be a factor in this, however I suspect declining real estate prices are the bigger component. Commercial real estate is particularly problematic, and this is probably the driver.

Jerome Powell’s comments last week pretty much stuck the fork in bets for rate cuts this year. While the comments didn’t impact the July futures all that much, the December futures now predict that the Fed Funds rate at the end of the year will be 25 basis points higher than it is now. Interestingly, they are not predicting the two hikes that the dot plot predicted.

It wasn’t that long ago, that the futures were handicapping a Fed Funds rate around 4.5%. The Fed has instituted a drastic tightening policy, the likes of which we haven’t seen in 40 years. Historically tacking on 500 basis points of tightening would cause a recession, and we simply haven’t seen one yet.

Why haven’t we seen a recession yet? The biggest reason is the labor market, which has remained remarkably resilient. Companies had a difficult time finding workers during the COVID-19 pandemic and are probably reluctant to let them go. Second, companies took advantage of low rates to refinance their existing debt, and now they are paying rates that are pretty much close to the inflation rate. This is the equivalent of free money. And don’t forget the government has been handing out money like candy since COVID began and that spigot will eventually get turned off one way or another.