Morning Report: Inflation at 48 year highs

Vital Statistics:

S&P futures4,2035.2
Oil (WTI)124.765.59
10 year government bond yield 1.86%
30 year fixed rate mortgage 4.10%

Stocks are higher this morning after yesterday’s bloodbath. Bond and MBS are down.

Bonds are subject to a push-pull situation, where investors on one hand are buying in the flight-to-safety trade, while others are selling because of inflation.

Home prices rose 19.1% YOY in January, according to CoreLogic. Home price appreciation is expected to slow to 3.8% this year, as a result of rising rates. Given the supply chain shortages and rising input costs, new homes are taking longer to build, which does little to mitigate the massive supply / demand imbalance. Inventory is at a generational low.

Nearly 6,000 homes have sold at prices $100,000 over asking price this year. January was a highly competitive month, where 70% of home sales had bidding wars.

“The housing market was in a frenzy in the beginning of 2022, with buyers competing for a limited supply of homes and sellers reaping the rewards of bid-up prices,” said Redfin Deputy Chief Economist Taylor Marr. “Buyers are likely to face strong competition at least through the next few months as demand is buoyed by the temporary drop in mortgage rates fueled by the Russian invasion of Ukraine. But bidding wars may ease a bit by summer as more new listings come on the market and mortgage rates resume their rise.  Homes are still likely to sell above list price, but the premiums will probably be lower.”

Tappable equity in US homes hit a 16 year high, according to Black Knight Financial Services. Home prices have been on a tear, and borrowers have been using cash-outs to refinance credit card debt and other liabilities. Last year, approximately $1.2 trillion of loans were cash-out refinances. About $275 billion in home equity was extracted in 2021, and that should continue.

Does this massive amount of equity extraction set us up for another 2006 debacle? Probably not. Post-cash out LTVs are about 10 points lower than they were in the bad old days.

Plus, real estate bubbles don’t come around that often. Prior to 2006 the previous bubble was during the 1920s. Bubbles are largely psychological phenomenons which require buy-in from everyone involved: lenders, buyers, regulators, etc. The memories of 2006 are too fresh for that to re-occur and the market fundamentals of supply and demand are not in place.

Small business optimism fell again in January, according to the NFIB. Price-raising activity is back to levels not seen since the early days of the Reagan Administration. This is the second month where small business optimism fell below the half-century average. A net 45% of small businesses reported raising compensation, which was a touch below December’s record 48%.

Note that price controls, a vestige of central planning and occasionally used in the US are making a comeback. This has always been a disastrous policy, since price controls create shortages and create black markets. The Biden Administration is already jawboning energy companies about price gouging, and as prices continue to rise, expect to see more of this.


Author: Brent Nyitray

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

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