Mortgage Market Update - 08/26/23
Happy Friday, hope this finds everyone smiling and possibly enjoying one of the many National Days that passed this week; National Eat A Peach Day, National Take Your Cat to the Vet Day, National Be An Angel Day, National Pecan Torte Day… Who makes these days anyways?? Nerdy number people like myself prefer quantitative celebrations – like this week’s Jackson Hole Symposium.? It would take too long to explain why the hype behind this event is very real, but if you’d like quick rundown you can find it here: https://www.kansascityfed.org/research/jackson-hole-economic-symposium/.
Also quick this week will be my breakdown on the markets… It’s truly as easy as A + B = C:
A)???? During COVID-19, to stimulate the economy, the United States printed more money than ever before.? This is showcased via the spike on the M2 report below, and this massive influx of cash caused a massive spike in inflation.? It also created historically low mortgage rates that brought buyers into the housing market at a pace never before seen.? These buyers quickly exposed what those in the housing industry have known since the housing crash of 2008-2010: We’re massively short housing inventory.? But that part of the story is for another day.? Part A of this A + B = C equation is that a surplus of fiat currency was printed during COVID-19.
B)??? Coming out of COVID-19 all that access fiat currency hit the streets; people were spending money left and right.? It’s truly been astonishing to watch… During COVID-19 we had the largest savings balances, on average, that we’d ever had before as a nation, and now we have the highest credit card debt balances, as a nation, ever on record (see below chart). ?To curb this spending, and the abundance of funds floating around, and fight rapid inflation, the Federal Reserve spiked their Federal Funds Rate at a historic pace – 0.00 to 5.00% in less than 12 months (see below chart).? But the genie is out of the bottle, the milk has been spilled, and the train has left the station… the US economy won’t be stopped. ?We’ll use the housing market to put things in context.? Mortgage rates have more than doubled in the last twelve months, but home prices continue to appreciate.? Summed up by Fannie Mae’s Chief Economist, Will Doerner, "House prices continued to rise in May, but at a slower pace. Since peaking in February, price appreciation has moderated slightly. Price growth continues to remain above historical levels, supported by the low inventory of properties for sale."? Full article here, https://money.usnews.com/loans/mortgages/articles/mortgage-market-news-july-28-2022. Part B of this A + B = C equation, in the face of the most aggressive rate hike in history, prices of tangible items continue to rise and people continue to spend money.
C)???? As the saying goes, if it’s not broken then don’t fix it.? But it is broken and what’s been attempted to fix it isn’t working.? So what comes next… More rate hikes.? Until the economy comes crashing down – although the narrative will be a soft landing, or that a crash can be avoided, and a recession won’t happen, etc. – rate hikes and elevated borrowing costs will be the play run by the Federal Reserve.? This was all but guaranteed in Jerome Powell’s address to the nation midway through this year’s Jackson Hole Symposium (which took place yesterday).? Take your pick of media outlets:
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-??????? https://www.reuters.com/markets/us/highlights-fed-chair-powells-jackson-hole-speech-2023-08-25/
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A = The money printed during COVID-19 was historic and lead to raging inflation
B = The Federal Reserve’s response has been to raise their Federal Funds Rate at a historic pace… It hasn’t yet solved the problem.
?C = The only tool the Federal Reserve has to solve the problem is to continue leaving rates elevated and/or continue raising rates for the foreseeable future. Until the economy breaks, rates aren't coming down.
If you’d like a better understanding of how this effects the housing market directly just let me know.? I mentioned above the housing inventory shortage being for another day, and that day can be whenever you’d like to talk about it.? All I have on the books next week is National Hero’s Day and National Bowtie Day.