Morning Report: House prices rose 19% YOY in Q1

Vital Statistics:

 LastChange
S&P futures4,143-10.25
Oil (WTI)119.233.94
10 year government bond yield 2.83%
30 year fixed rate mortgage 5.27%

Stocks are lower this morning as oil continues to climb. Bonds and MBS are down.

The upcoming week is packed with data, with the jobs report on Friday, ISM numbers and productivity. The jobs report will be the most impactful on the markets, however the consensus is that the Fed will hike by 50 basis points at the June meeting and another 50 at the July meeting.

House prices rose 18.7% YOY in the first quarter, according to the FHFA House Price Index. “High appreciation rates continued across housing markets during the first quarter of 2022,” said William Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “Strong demand coupled with tight supply have kept prices climbing.  Through the end of March, higher mortgage rates have not yet translated into slower ​​price gains, but new home sales have dropped during the last few months, with a significant falloff in April.”

The fastest growing states were Florida (up 30%), Arizona (up 28%), Utah (up 27%), Tennessee (up 26%) and Idaho (up 26%). The slowest MSA was Washington DC (up 7%). You can see the rapid rise in home prices in the chart below which looks at Q1 appreciation since 2011 when home prices bottomed after the bubble.

Though there is disagreement amongst economists whether money printing causes asset inflation, the above chart certainly correlates with the increase in the money supply.

Mortgage backed securities have been unpopular this year ahead of the Fed’s plan to increase rates and sell some of its portfolio. The additional yield required by MBS investors has risen to 1.2% compared to 0.70% at the beginning of the year. Annaly Capital, a major mortgage REIT has raised capital to start increasing its portfolio of mortgage backed securities. The mREIT stocks have been sold off hard over the past year, but the feared dividend cuts have not materialized. Annaly currently yields over 13%, and AGNC Investment yields 12%

The increase in MBS spreads has also been driven by extreme volatility in the bond market. Since borrowers have the option to prepay the mortgage early, MBS investors are “short” that option. This means that as volatility increases, the value of that option increases, which increases the difference between the yield on Treasuries and mortgage backed securities. The TBA market is trading at extremely wide bid-ask spreads which demonstrates some of the fear in the market.

Bond market volatility seems to be calming down, which will naturally pull MBS yields closer to Treasury yields. In addition, we are seeing relative value investors like the mortgage REITs begin to put in a floor on MBS. If Treasuries stabilize, I would expect to see mortgage rates work lower. We might have already seen the highs of the year in mortgage rates.

Sun Belt cities are the fastest-growing, with 1/3 of them in Arizona. Florida is also seeing a big increase. Where are they coming from? The biggest cities in the US – New York City (which lost 305k people in 2021), Los Angeles, Chicago, San Francisco. 8 of the 10 largest cities in the US lost population in 2021.

Author: Brent Nyitray

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

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