Uneventful Monday Fits Fed Week Narrative

After last week’s economic data ebbed and bonds sold-off with Europe on Friday, we knew we’d likely be waiting until Wednesday’s Fed events for the next significant bond market input.  That leaves the path of least resistance as a generally sideways range just under the long-term high yields.  AM trading was weak enough to approach those highs without breaking them (the actual 10yr high today is 4.358, not the 4.415 seen in many charts due to reasons discussed in this morning’s commentary).  The rest of the day was spent rallying calmly back into the range but not forcefully enough to be interesting.

Econ Data / Events

NAHB Builder Confidence

45 vs 50 f’cast, 50 prev

Market Movement Recap

10:31 AM Slightly weaker overnight, sideways and choppy in a narrow range so far this AM.  10yr unchanged at 4.337.  MBS down 1 tick (0.03).

12:24 PM Into positive territory now.  MBS up 1 tick and 10yr down 1.1bps at 4.325.

03:31 PM Near the best levels. MBS up 3 ticks (.09) and 10yr down 2bps at 4.317.

The National Association of Home Builders (NAHB) said on Monday that its index that measures home builder confidence in the new home market has fallen below the halfway mark for the first time since April.  The NAHB/Wells Fargo Housing Market Index declined 5 points in December. Coupled with its 6-point drop in August, the index has erased five months of gains. NAHB chief economist Robert Dietz said, “The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7 percent and significantly eroded buyer purchasing power. And on the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots and distribution transformers , which is further adding to housing affordability woes. Insurance cost and availability is also a growing concern for the housing sector.” Derived from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor. All three major HMI indices posted declines in September and two of the three are now below the break-even point. The HMI indices gauging current sales conditions and those over the next six months each fell 6 points to 51 and 49 respectively. The component measuring traffic prospective buyer traffic was down 5 points to 30.

If you want something sobering, almost mesmerizing, here’s a short drone video of the flood damage in Libya (at the 15 second mark you can see how it tore through the city). Fortunately not so sobering are some stats out of the United States. The U.S. homeownership rate in 2022 was even higher than before the COVID-19 pandemic at 65.8 percent compared to 64.6 percent in 2019. That rebound was driven largely by those aged 44 and younger. And who says Millennials aren’t buying homes? Homeownership continued to climb from the foreclosure crisis (2004) and Great Recession (2008), when rates dipped as low as 63.4 percent in 2016. Homeownership rates recovered approximately half of the 5.6 percent decrease from 2004 to 2016. In Hawai’i the homeownership rate is 59 percent, I bring up the Aloha State because American Savings Bank, First Hawaiian Bank, and Central Pacific Bank joined Hawaiʻi Community Lending, a Hawaiʻi-based nonprofit community development financial institution, in pledging to provide mortgage forbearances to Maui families impacted by the recent wildfires. (Today’s podcast can be found here and this week’s is sponsored by the Trade-In Mortgage powered by Calque. Homeowners can buy before they sell, make non-contingent offers, and tap their home equity to fund the down payment on their next home. Lenders can help their clients negotiate a lower purchase price, reduce their interest payments, and eliminate PMI. Today’s podcast features Greg Korn and Ben Petit in an interview from the New England Mortgage Bankers Conference.)

But that share is trending downward. In the fourth quarter, nearly nine out of 10 metro areas had home prices that were considered to be above sustainable levels.

Nearly 60,000 deals to purchase homes fell through in August, according to a report released Friday by Redfin Corp.

Commercial real estate loans are a growing area of concern for banks. But OceanFirst says its exposure to a troubled shared credit tied to a Manhattan office building isn’t a sign of broader problems in its portfolio.

The loan origination system steps out from the shadow of former parent company Black Knight’s mortgage servicing technology platform.

Production costs, which typically run higher for such loans, can actually fall during a purchase market, a white paper published by the MBA found.

Ceiling Defense!

There are two ways to look at today’s weakness in the bond market. On one hand, yields did a great job of holding underneath the 4.34% technical ceiling in 10yr yields despite multiple bounces.  On the other hand, 10yr yields moved quickly up to the 4.34% ceiling and attacked it multiple times.  The first scenario is an optimistic defense.  The second scenario could be viewed as “staging” for a breakout.  Traders likely haven’t determined which scenario they’ll support and are instead waiting to see the lay of the land after next week’s Fed events. 

Econ Data / Events

Import Prices

0.5 vs 0.3 f’cast, 0.1 prev

NY Fed Manufacturing

1.9 vs -10 f’cast, -19 prev

Industrial Production

0.4 vs 0.1 f’cast, 0.7 prev

Consumer Sentiment

67.7 vs 69.1 f’cast
1yr inflation expectations down 0.4
5yr inflation expectations down 0.3

Market Movement Recap

09:14 AM Weaker overnight with Europe, but traders “buying the dip” in bond prices now.  10yr up 2.2bps at 4.308.  MBS down roughly an eighth.

12:00 PM Slightly weaker into the PM hours.  MBS down about a quarter point.  10yr up 4.4bps at 4.33%

04:24 PM 10yr up 4.2bps at 4.328.  MBS down .25 to .375.  

In and of itself, today wasn’t too bad for mortgage rates. Things got a bit worse, but the change from yesterday was average or slightly lower.   There’s even still a little bit of a cushion between current levels and the long-term highs seen in late August. Mortgage rates are often compared to 10yr Treasury yields because the two tend to move in very similar fashion.  The assessment of the 10yr is a bit less optimistic.  Yields ended the day at their 2nd highest closing level since 2007 and repeatedly pushed up against the 4.34% level during the day.  4.34% is the first highest closing level since 2007.  It happened a few weeks ago and it serves as something the market refers to as a “technical level” (other names include: key level, pivot point, inflection point, or simply “ceiling”). A technical level can be a ceiling if it acts like a ceiling, but it can be an inflection point if it is subsequently broken.  We may find out exactly what sort of technical level 4.34% will prove to be next week after the Fed announcement.  10yr Treasury yields do not directly dictate mortgage rates, but if 10s are breaking quickly higher from the 4.34% ceiling, it could create upward momentum for all related rates, with mortgages being one of the most related.  That’s the fearful scenario.  If 4.34% is reinforced as a ceiling and yields shoot lower, mortgage rates would likely be doing the same. Despite the volatility surrounding next week, the Fed can only tell the market how it will react to certain developments in the economy.  It is the ongoing revelation of those developments themselves that will ultimately determine the long-term rate trend.