Vital Statistics:
| Last | Change | |
| S&P futures | 3,828 | 14.00 |
| Oil (WTI) | 91.62 | 0.12 |
| 10 year government bond yield | 4.19% | |
| 30 year fixed rate mortgage | 7.15% |
Stocks are higher this morning on no real news. Bonds and MBS are flat.
Small Business Optimism declined again, according to the NFIB Small Business Optimism Index. Inflation and a tight labor market remain the biggest issues. The number of businesses reporting inflation is back to levels last seen in the late 1970s. Labor shortages are particularly acute in transportation, construction and manufacturing.
A net 50% of companies reported raising prices. Retailers and wholesalers most widely reported raising prices. “The frequency of reported price increases was highest in the retail trades, 69%, followed by 64% in wholesale, and 61% in construction. The other industry groups averaged about 50% raising prices, with the exception of professional services at 20%. Clearly, consumers are being confronted with inflation in every aspect of their lives. So far, inflation has been resistant to the impact of higher interest rates. If the Fed were a “fiscal” arm of government, it could just raise taxes on everyone for a short period of time to slow spending. But it can’t and must rely on the tenuous link between interest rates and spending. Major expenditures by consumers can be impacted (cars, houses, boats, etc.), a slow, erratic process. Firms are more directly impacted as the cost of loans (capital) rises, making more and more investment outlays unprofitable and thus impacting employment and income in affected sectors.”
The part about the cost of capital is important, because in a labor-constrained environment, investing in productivity-enhancing technology could help alleviate this issue. Productivity has been lousy, and low productivity has always been a driver of inflation. As borrowing costs rise, the rate of return on these investments has to rise as well, or else it isn’t worth doing.
Fannie Mae reported third quarter earnings this morning. Acquisition volume was down 32% to $117.7 billion. Purchase volume fell 17% while refi volume declined 58%. On the purchase side, about 45% were first time homebuyers. Delinquencies fell again to 0.69% as more borrowers exited forbearance.
Fannie Mae’s Home Purchase Sentiment Index hit an all-time low in October. The index only goes back to 2011, so it doesn’t capture the depths of the Great Recession. “The HPSI reached an all-time survey low this month, in line with expectations that the housing market will continue to cool in the months ahead,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “Consumers are increasingly pessimistic about both homebuying and home-selling conditions. Amid persistently high home prices and unfavorable mortgage rates, the ‘bad time to buy’ component increased to a new survey high this month, while the ‘good time to sell’ component continued its downward trend. Consumers also remain concerned about the movement of home prices – expectations that prices will decrease reached a new survey high, particularly among homeowners – offering further support to our forecast of home price declines in 2023. As continued affordability constraints reduce homebuyer demand, and homeowners become reluctant to sell at potentially reduced prices, we expect home sales to slow even further in the coming months, consistent with our forecast.”
Fannie Mae sees future declines in home prices and sales in the coming months. With refinances out of the picture, seasonality is going to have a bigger impact on origination volumes. We have a few months to go until the Spring Selling Season kicks off, which is usually around the time of the Super Bowl.
The Daily Tearsheet 