Stocks are higher this morning as the bond vigilantes take a day off. Bonds and MBS are up.
Bonds got slammed again yesterday, with the 10 year yield pushing above 5.2%. Mortgage rates rose 11 basis points according to the Optimal Blue Mortgage Market Index. Generally speaking mortgage rates will lag the move in Treasuries, however that will become less tenable as bond market volatility increases. And yes, bond market volatility is increasing:
We are approaching the levels seen when the Iran War began. Again, this is a global phenomenon, not something that is US-centric. All of the major central banks are in tightening mode although the US has a higher inflation problem than most. But it also has higher growth. It feels like a lot of the action is oil-driven and if that is the case things will adjust. There are a lot of wells out there that were drilled when oil prices were in the 120-150 range that can be re-opened. That supply will come back on line the longer prices stay elevated. As they say in the commodities market: the cure for high prices is high prices.
That said, bond market cycles are long. The last cycle in the bond market began in the early 1980s when Paul Volcker was tightening to defeat 1970s inflation. It ended around 2021 when ultra-low interest rates began causing inflation. It feels like we are in a secular bear market in bonds that might last decades. That said even in secular bear markets, there will be opportunities.
What can borrowers / loan officers do? If you think this is temporary, then adjustable rate mortgages offer a way to lower the rate initially. I am not making investment advice, but Trump will be gone in just over two years. A new administration will almost certainly get rid of the tariffs, mend fences with our trading partners and find an off-ramp in the war with Iran. Things could look a lot different in a few years. The Fed might cause a recession, which will push rates lower. That said, the structural issues of deficit spending will not. So it isn’t a slam-dunk but it is something to consider.
New Home Sales rose 6.4% MOM to a seasonally-adjusted annual rate of 684,000 units. This is down 2.8% compared to a year ago. We have seen all of the homebuilders report a tough market out there, with resellers competing against new construction and tightening margins as builders throw in more amenities to entice buyers.
The median new home price rose 0.4% MOM and fell 5.8% YOY to $393,700. New home prices remain well below existing home prices as builders focus on smaller homes. There were 483,000 unsold units at the end of August, representing a 8.5 month supply.
This is the tough phase of the cycle for the builders. We are in late stages of a boom where the Fed is raising rates to quell inflation. Builders are early-stage cyclicals which perform best coming out of a recession. In this phase of the cycle, it is the time to make a shopping list of the defensives you want to buy when the music stops.
