Morning Report: FOMC week

Vital Statistics:

 LastChange
S&P futures3937-1.4
Oil (WTI)64.88-0.76
10 year government bond yield 1.62%
30 year fixed rate mortgage 3.27%

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

The big event this week will be the FOMC meeting on Tuesday and Wednesday. While no one expects to see any change in policy, a lot of attention will be drawn to the dot plot and whether we see an increase in the number of members seeing rate increases in 2023. We will also get a fresh set of economic forecasts, and economists are taking up their numbers for this year. While I won’t be surprised to see the Fed take up GDP estimates, I am more interested to see whether they take up inflation estimates.

Jerome Powell will hold another press conference, and I am curious as to whether he will discuss the effect that the supplemental liquidity ratio is having on longer-term rates, or whether the business press asks about it.

Tappable equity, or the amount of home equity that could be converted into a cash-out refinance, reached a record of $7.3 trillion at the end of 2020. This works out to be about $158,000 per homeowner. “This past year has been one of significant home price growth, to say the least,” Walden said. “But it has also occurred in a market in which the word ‘unprecedented’ has likely been used more over that same period than perhaps ever in history. Nevertheless, that growth has brought the levels of equity available to American homeowners with mortgages to…well, unprecedented levels.”

This stat is important, because it illustrates how cash-out refinances, particularly debt consolidation refis, will increase in importance as rates rise. Even if the new rate is more or less the same, if the borrower can repay credit card debt that costs in the teens with a 30 year fixed rate mortgage at 3.5%, it still makes sense to do. Don’t forget that 30 year to 15 year refis will also be popular with rates down here. There will still be plenty of business to be done.

Given the supply / demand imbalance for available homes, expect to see home prices continue to rise. I do wonder however if the new Fannie restrictions on investment and second homes affects pricing in certain areas.

Higher input prices will be driving up the price of new homes. Lumber prices are trading around $1,000, and skilled labor wages are on the rise as well. This will affect affordability issues.

Author: Brent Nyitray

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

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