Stocks are higher this morning on no real news. Bonds and MBS are up.
Housing starts rose 1.9% MOM to a seasonally adjusted annual rate of 1.37 million. This was still down 4.2% on a YOY basis. Building Permits rose 1.1% MOM to 1.49 million. The mix of housing starts continues to shift from multi-family to single family. There is a glut of apartments under construction and multifamily commercial real estate is becoming an issue.
The National Association of Realtors reports that listings are increasing as mortgage rates fall. The rate “lock-in” effect, which basically says that people are unwilling to move when that means trading a 3.5% mortgage for a 8% mortgage, appears to be easing. Median listing prices are holding up, although it sounds like some of the Western markets which rocketed during the pandemic are seeing a lot of price cuts without homes moving.
NAR Chief Economist Lawrence Yun forecasts that existing home sales will rise 15% in 2024 as mortgage rates fall into the 6% – 7% range by the Spring Selling Season. Based on normal MBS spreads, a 4.4% 10-year should translate into a 6.4% mortgage rate. “The 10-year Treasury yield is at 4.4%, which historically means mortgage rates could be at 6.4%, but they are much higher,” said Yun. “The bond market is forcing the Fed to pivot.”
Ultimately the rate lock-in effect will dissipate as real life intrudes. “Pent-up sellers cannot wait any longer. People will begin to say, ‘life goes on,’” said Yun. “Listings will steadily show up, and new home sales will continue to do well. Existing home sales will rise by 15% next year.”
The Wall Street Journal has a piece this morning on how foreign demand for Treasuries has dissipated. Much of it has to do with foreigners selling Treasuries in order to prop up their own currencies (China in particular). However, there was an interesting note in the piece: China is swapping out its Treasuries for MBS.
“At the same time, China has diversified reserves away from Treasurys and has been investing in bonds backed by U.S. government agencies such as Freddie Mac that offer higher yields than Treasurys. China has bought a net $32 billion of those in the year through August, according to data from the Council on Foreign Relations. “
If this catches on, increased appetite for agency debt, along with a decline in bond market volatility could be the catalyst for decreasing MBS spreads, at long last.
Personal interest payments continue to rise. Hard to see how consumer spending can be sustained in the context of this, especially as the COVID payment suspensions go away.
Interestingly WalMart’s CEO warned of deflation on the earnings conference call yesterday. Haven’t heard that word bandied about in a while – deflation is generally a credit event, not a monetary one – but if retailers are cutting prices to move excess inventory that should be a good sign for inflation.
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