Stocks are higher as we await the Fed decision. Bonds and MBS are flat.
The FOMC decision is due at 2:00 pm today. The most likely outcome is that they make no move on rates. The thing to look for will be their body language on future cuts. If the statement (or Jerome Powell) says something like “if progress on inflation continues the way we expect future cuts may be warranted.” will be a good sign. If they imply that they are pausing for an indefinite time, then that would be a bad sign. Look for language like “policy is still modestly restrictive” as a clue for where they think policy is. There has been indications they think r-star (the neutral rate of interest) is higher than they previously thought.
Home prices rose 1.4% YOY in November, according to the Case-Shiller Home Price Index. On a month-over-month basis, prices fell 0.1%. The hip-to-be-square trade continues, with MSAs like Chicago, New York and Cleveland leading the pack. On the other side of the coin, Florida continues to struggle, with home prices in Tampa down 3.9%. Phoenix, Dallas and Miami also saw YOY declines.
“High mortgage rates continue to cast a long shadow over housing,” Godec concluded. “Thirty-year loan rates hovered in the mid-6% range during November, weighing on affordability even as they eased slightly from recent peaks. This elevated financing cost continues to cap home price growth. Inflation has erased most nominal gains, leaving home values essentially flat in real terms.”
Given that inflation is still running around 3% or so, we are seeing real (inflation-adjusted) declines in home prices. As long as wage inflation continues and home price appreciation flattens we should see a continued, gradual improvement in home affordability. If we want durable improvements in affordability, this is the least painful way to do it. Sugar-high steps like QE won’t do the job, and price controls will only make it worse.
Consumer confidence tumbled in January, according to the Conference Board. The index fell by almost 10 points as current conditions and future expectations deteriorated. Perceptions of the labor market continued to deteriorate, which the Fed noticed in its “low hiring / low firing” characterization. There is a noted political bifurcation with Republicans holding much more optimistic views on the economy than Democrats and Independents. Demographically, Gen X and Boomers are the most depressed.
“Confidence collapsed in January, as consumer concerns about both the present situation and expectations for the future deepened,” said Dana M Peterson, Chief Economist, The Conference Board. “All five components of the Index deteriorated, driving the overall Index to its lowest level since May 2014 (82.2)—surpassing its COVID-19 pandemic depths.”
Part of the decline could be due to the drip-drip announcements of job cuts. Yesterday, UPS announced 30k job cuts. Today Amazon announced 16k. Consumers also indicated they are less likely to spend going forward.
Overall this number is hard to reconcile with the Atlanta Fed’s GDP Now model which forecasts a whopping 5.4% GDP growth in Q4.
Granted, the trade balance is adding a lot to GDP, and some items parts matter more than other when it comes to perceptions of the overall economy. If GDP is rising because imports are decreasing, people probably won’t feel it much. You could say the same with government spending – if government spending is rising because healthcare spending is rising, people won’t get a warm fuzzy feeling about the economy either, even though the GDP numbers look good on paper.
The Fed will be wrestling with these considerations as they make their decision on rate cuts.
Mortgage applications fell 8.5% last week as purchases fell 4% and refis fell 16%. Apps are still up in the high teens compared to a year ago. “Mortgage rates increased for the first time in a month, and as expected, refinance applications fell by 16%. The 30-year fixed rate was the highest in three weeks at 6.24%,” said MBA’s Joel Kan, Vice President and Deputy Chief Economist. “FHA refinance activity bucked the overall trend and increased, as FHA rates remained almost 20 basis points lower than conforming rates. With rates holding in the 6%range, the refinance market is likely to remain sensitive to week-to-week rate movements.”
FHA refinances make me thing we are seeing borrowers with high levels of credit card debt doing debt-consolidation refis into FHA loans. This is an overall sign of stress in consumers, which does create opportunities for loan officers to offer a solution.
