Morning Report: Yellen: full employment next year

Vital Statistics:

 LastChange
S&P futures389716.3
Oil (WTI)57.430.54
10 year government bond yield 1.18%
30 year fixed rate mortgage 2.85%

Stocks are higher this morning on no real news. Bonds and MBS are down.

The upcoming week is relatively data-light, with inflation data as the only potential market-moving numbers.

Janet Yellen said that if Congress passes the stimulus bill, the economy will return to full employment by 2022. “There’s absolutely no reason why we should suffer through a long slow recovery,” Yellen said during an interview on CNN’s “State of the Union.” “I would expect that if this package is passed that we would get back to full employment next year.” These comments have bond yields rising. The Fed’s December projection has unemployment falling to 4.2%, so I guess you could call that full employment.

FWIW, I guess this is conceivable, but something like one third of small businesses have failed during this pandemic. I don’t know that we have seen anything like that since the Great Depression, and I suspect it will take longer than a year or two to repair that damage. Most of these small business failures were retail, bars and restaurants. Their failures are then transmitted upwards to their commercial real estate landlords. But, remember Yellen is no longer a civilian, she is part of the Biden Administration, so she is talking her political book. It is part of the job description, and you should take her pronouncements with a grain of salt.

The pandemic has hit the hotel sector hard, so hard that many buildings can be bought at deep discounts and then re-purposed into affordable housing. “Apartments around here, you might pay $120,000 a door, and we can purchase these hotels probably $30,000 to $40,000 a door, and maybe put $10,000 a door into the renovations.”

Democrats are mulling a $15,000 tax credit for first time homebuyers in an attempt to mitigate the affordability crisis caused by soaring home values. The fly in the ointment is the left wants to raise the tax rate on long-term capital gains. Since Democrats are going to use the reconciliation process to push through the stimulus bill (thus passing it without Republican votes) it might not matter, but it also does not allow for any D defections.

Ultimately the issue in the housing market is one of supply, not demand. Adding a tax credit will probably just push prices higher. More homebuilding is the need, not housing subsidies. But that is a harder issue since zoning is a local issue, and there are major internecine wars there with the Democrats. Building in the suburbs will be easier, but single family builders are still struggling with high input prices (lumber especially) and a shortage of skilled construction labor.

Merger mania in the mortgage space. Guaranteed Rate just bought Owning Corp, a direct-to-consumer lender in California. Note that Guaranteed Rate just bought Stearns lending as well, so the big players are bulking up for what might be the mother of all price wars down the line.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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