Market Update December 2022

Mortgage News>> Market Update December 2022

Market Update December 2022

STRONGER THAN EXPECTED JOB GROWTH – NOT GOOD

The job report was much higher than expected, despite the Fed’s relentless pursuit to cool the economy and rein in inflation.

Nonfarm payrolls increased 263,000 for the month while the unemployment rate was 3.7%, the Labor Department reported Friday. Economists surveyed by Dow Jones had been looking for an increase of 200,000 in the payrolls number and 3.7% in the jobless rate.

The monthly gain was a slight decrease from October’s upwardly revised 284,000. A broader measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons edged lower to 6.7%.

The numbers likely will do little to slow a Fed that has been raising interest rates steadily this year to bring down inflation still running near its highest level in more than 40 years. The rate increases have brought the Fed’s benchmark overnight borrowing rate to a target range of 3.75%-4%. – cnbc.com

The job market remains far too hot. While the Fed may still ease the size of the rate hikes, anticipate another hike in short-term rates in December.

FED TALK

The Federal Reserve made its final public appearance for the year on Wednesday, and the markets were listening with much anticipation. Was the Fed going to ease monetary policy, or remain hawkish in its attack on inflation; now sitting at 7.7%. Far higher than the 2.0% target.

“Despite some promising developments, we have a long way to go in restoring price stability,” Powell said in remarks delivered at the Brookings Institution.

The chairman noted that policy moves such as interest rate increases and the reduction of the Fed’s bond holdings generally take time to make their way through the system.

“Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he added. “The time for moderating the pace of rate increases may come as soon as the December meeting.”

“Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level,” Powell said.

“It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy,” he added. “We will stay the course until the job is done.” – cnbc.com

The market took his tone as more dovish and rallied 737 points. Long-term interest rates dropped substantially. All pointing to a great end to the year, and optimism about 2023.

But did he really say anything different than what he has been saying all along? Were his comments truly more dovish? Time will tell, but with an incredibly hot job report, a 75-basis point hike in December, may not be off the table. The markets are pricing in a smaller rate hike in December, and we will know in a couple of weeks if the market is right. If short-term rates go up, but at a slower pace, long-term rates (i.e. mortgage rates) may experience a substantial pullback.

EXISTING HOME SALES CONTINUE TO DECLINE

Existing home sales drop 5.9 percent in October, a 28.4 percent year-over-year decline. – cnbc.com

Median home prices are up 6.6% year over year. Not good as this still shows high inflation with a commodity that has already been plagued with runaway inflation.

This marks the ninth straight month’s decline. Despite the decline, inventory, while rising, is still low by historic numbers. Inventory sits at 3.3 months, nearly half of what a 6-month healthy inventory level would be. To revert to a “healthy” housing market, home prices will need to pull back, and more homes will have to hit the market for sale. Black Knight reported that based on today’s interest rates, to get to a “healthy” housing market, home prices would need to fall 37%. While not likely, a 10%-20% drop is. Housing is up 40% from pre-pandemic numbers.

MORTGAGE RATES TEND LOWER

Mortgage rates are still high by last year’s standards, but after soaring to nearly 8%, mortgage rates have moved lower. Long-term 30-year fixed rates now hover in the high 6%s to low 7%s, based on several borrower variables.

Mortgage demand ticked up, but purchase applications remain down over 40% from the same time last year, and refinance applications are down a staggering 86% from the same time last year. That is an unprecedented drop in mortgage volume, which is causing deep losses for most mortgage lenders in 2023.

EMPLOYMENT COOLS

Strange times for sure when you are rooting for weak employment. Employment, like inflation, has been too hot. The Fed is not only trying to curb inflation but throwing some cold water on employment numbers. It appears that the Fed’s work is starting to have an effect.

Companies added just 127,000 positions for the month, a steep reduction from the 239,000 the firm reported for October and well below the Dow Jones estimate for 190,000. It also was the lowest total since January.

The relatively weak total comes amid Federal Reserve efforts to loosen up a jobs picture in which there are still nearly two open positions for every available worker. The central bank has raised its benchmark borrowing rate six times this year, but the unemployment rate is still 3.7%, near the lowest since 1969.

“Turning points can be hard to capture in the labor market, but our data suggest that Federal Reserve tightening is having an impact on job creation and pay gains,” said ADP’s chief economist, Nela Richardson. “In addition, companies are no longer in hyper-replacement mode. Fewer people are quitting and the post-pandemic recovery is stabilizing.” – cnbc.com

Rising interest rates should slow the economy and employment. Once both reach sustainable levels, the Fed will ease tightening, and both short-term and long-term interest rates should subside.

NEW HOME SALES TICK UP

Good news for homebuilders, but maybe not for the economy. Selling more homes is not necessarily the issue, assuming home prices go down, not up. Curbing inflation, including and maybe more importantly home values is critical for the Fed to change direction on monetary policy (i.e. lower rates).

New home sales in October jumped 7.5% over September. Good news. The median home prices also jumped to $493,000 in October from $460,600 in September. Inflation is still rearing its ugly head.

“Median prices increased even though a quarter of builders are now cutting prices. The increase in new-home prices reflects a shift in the mix of homes being sold, with fewer homes sold at lower price points, thus the median price escalated, as well as higher construction costs are being passed on to the consumer,” Kushi said. “One year ago, 18% of new-home sales were priced below $300,000. In October 2022, only 12% of new-home sales were priced below $300,000. Looking back to pre-pandemic levels in October 2019, it was 43%.”

In addition, the amount of inventory also dropped to 470,000 homes for sale or the equivalent of a supply of 8.9 months at the current sales pace, down from 9.2 months of supply in September.

Regionally, new home sales were up month over month in October in the Northeast (45.7%) and the South (16.0%), but down in the Midwest (34.2%) and the West (0.8%). Year over year, new home sales were down in three out of four regions with the Midwest recording the largest annual decline at 26.5%, and the Northeast recording an annual sum of 59.4%. – housingwire.com

U.S. NATIONAL DEBT

The U.S. now stands at $31.3 Trillion and climbing. US Federal Debt to GDP Ratio:

1960: 52.16%

1980: 34.71%

2000: 55.42%

2022: 121.51%

Source: usdebtclock.org

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