MBS Highway Daily Updates 02/21/2023
Current position: Carefully Floating
Stocks and Mortgage Bonds are both sharply in the red to start the week. Pressuring Bonds is a better than expected Purchasers Manufacturing Index report, which, after being in contraction for 6 months, finally got back above 50 and into expansionary territory, albeit barely.
There were also better-than-expected reports abroad, which pressured foreign 10-year yields higher and also drove our yields to the upside.
Existing Home Sales
Existing Home Sales, which measures closings on existing homes, showed that sales were down 0.7% in January at a 4M unit annualized pace, which was a little worse than expectations looking for a 2% gain. On a year-over-year basis, sales are down 37%.
Inventory levels increased slightly from 970,000 to 980,000, but remain very tight. Inventory is now down 15.3% from last year.
There is a 2.9-month supply of homes, which is tight because 4.6 months is considered normal. But if you look at active listings, there are only 626,000, which means that 29% of the "inventory" in the Existing Home Sales report is under contract and not truly available. This speaks to demand, as a normal market has 25% of inventory under contract. When looking at the month's supply of available homes for sale, it's really 1.9 months.
The median sales price of $359,000 is down 2% on the month but up 1.3% year over year.
Homes remained on the market on average for 33 days, up from 26 days, but they are still moving fast. 54% of homes were on the market for less than 30 days.
First-time home buyers accounted for 31% of sales, which was unchanged from the previous report but up from 27% at this time last year. Cash buyers accounted for 29% of sales, which was up from 28%. Investors made up 16%, or one out of every six transactions.
Leading Economic Indicators
The Conference Board's index of leading economic indicators came out for January and fell 0.3%, which was the tenth month of decline in a row. When looking at the six-month growth rate on an annualized basis, the LEI is -7.4%. When this number breaks beneath 0%, it's a warning signal, and when it breaks beneath -4%, it's a recession signal that has been extremely accurate historically. The Conference Board stated that they believe the US will enter a recession in 2023.
Only six times in the past have we seen anything like this, and each time the economy slipped into an official recession (1970, 1973–75, 1980–82, 1990, 2001, and 2007). Historically, a recession begins on average 13 months after LEI peaks. And being that it peaked in December 2021, the recession should be upon us or starting soon, based on the average.
If we do indeed see recession-like conditions, we will see economic activity slow and interest rates move lower.
News This Week
Wednesday: Mortgage Apps , Fed Minutes
Thursday: Q1 GDP, Initial Jobless Claims
Friday: Personal Consumption Expenditures (PCE), New Home Sales
Mortgage bonds are testing a very important floor of support at 99.711. The 10-year is also testing an important level at 3.90%. If this level does not hold, the next stop is 4%. Begin the day carefully floating.