Morning Report: Housing affordability declines

Vital Statistics:

S&P futures4,357-2.8
Oil (WTI)73.76-0.85
10 year government bond yield 1.34%
30 year fixed rate mortgage 3.09%

Stocks are flattish this morning as investors fret about global growth. Bonds and MBS are down small.

Earnings season kicks off this week with many of the big banks reporting. The first report will be JP Morgan on Tuesday, followed by Wells and Citi on Wednesday. Last year, the big banks were taking huge COVID-19 and CECL provisions for loan losses, so year-over-year comparisons will be quite strong.

In terms of economic data, we will get the consumer price index and the producer price index and quite a bit of Fed-speak.

The Atlanta Fed’s GDPNow model is predicting 7.9% growth for the second quarter. You can see the estimates from this model have been falling rapidly, especially compared to the Blue Chip Consensus which is based on Wall Street research. The Blue Chip consensus is perhaps a good indication of what has been driving the stock market higher, while the GDPNow forecast is pushing bond yields lower.

Janet Yellen is agitating for a global tax system to prevent corporations from playing low tax jurisdictions against each other. “We need sustainable sources of revenue that do not rely on further taxing workers’ wages and exacerbating the economic disparities that we are all committed to reducing,” Yellen said in remarks prepared for delivery to Eurogroup finance ministers. EU countries like Ireland which attract capital due to lower taxes are lukewarm about the proposed system, which presumably would require legislation in the US and possibly elsewhere.

Housing affordability is falling as real estate prices rise. The NAR Housing Affordability Index has fallen from 180 last year to 151.7 now. This is a function of a 1.2% increase in income versus a 20% increase in mortgage payments. FWIW, I would take this index with a grain of salt given that YOY comparisons are being heavily distorted by the lockdowns of a year ago. That said, rates and home prices have risen while incomes have been relatively stagnant.

The West is by far the least affordable, while the Midwest is the most affordable. I wonder if the South is going to become less affordable than the Northeast at some point, as housing prices are soaring in places like Austin and Nashville.

I would add that housing bubble questions are back in the press along with Google searches. We do not have a housing bubble. Bubbles are extremely rare events and the memories of 2008 are simply too fresh that we won’t see another. We have a supply / demand imbalance which was exacerbated by COVID-19 shortages. While we could see home prices level out, the chance of a 2006 – 2008 wholesale decline in real estate prices isn’t in the cards. The cure for the market will be more homebuilding and it will take years just to get to a balanced market, let alone an oversupplied one.


Author: Brent Nyitray

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

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