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MBS Highway Daily Updates 02/28/2023

Current position: Carefully Floating

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Stocks and mortgage bonds are both lower to start the day, with mortgage bonds continuing to test and remain above the base of support formed in the last six trading sessions.

Case Shiller Home Price Index

The National Case-Shiller Home Price Index, which is considered the "gold standard" for appreciation, showed home prices fell 0.8% in December on a non-seasonally adjusted (raw number) basis. When factoring in the normal softness we see during this time of year and making seasonal adjustments, they were only down 0.3%. While home prices have been softening a bit, they are still up almost 6% year over year.

Looking at the 20-city index, which looks at 20 of the main metropolitan areas, the index was a bit weaker. From peak home prices in June of 2022, national home prices are down 4.4% , but after seasonal adjustments, they are down 2.7%. The 20-city index is down 6.2% and 4.7%, respectively, showing clearly that some of the areas like SF and Seattle, which saw some of the biggest gains, are giving more back now that prices are softening. It's also clear that when removing some of the bigger cities, much of the country is pretty flat. This can be seen in the FHFA numbers below.

FHFA House Price Index

The FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Different than Case Shiller, it does not include cash buyers or jumbo loans. The FHFA reported that prices were down 0.7% in December and only 0.1% after seasonal adjustments. Year over year, home prices are still up 6.6%. Since the peak, home prices, according to the FHFA, are down 2.7% in raw terms and only 1% after seasonal adjustments.

Based on this, you can extrapolate that the decline in Case Shiller is coming from higher-priced homes where there is less demand. Additionally, there are likely to be cash discounts offered, where buyers paying in cash are able to command a lower price, which is why Case Shiller is also lower.

We actually like the seasonal adjustments in these home price reports because they do a much better job of removing the strength we see every year during the busier home shopping seasons and removing some of the weakness we see in the softer months, which, when done properly, removes some of the noise and allows you to see the true trend over time. We believe the Case Shiller and FHFA seasonal adjustments are accurate, as their non-seasonally adjusted numbers and seasonally adjusted numbers match up on a year-over-year basis over time, as they should.

Apartment List Rental Report

Apartment List reported that rents rose 0.3% in February and are now only up 3% year over year, down from 3.3% in the previous report.

Bottom line: Home prices and rental prices have been significantly decelerating and have shown some outright declines. Yet the shelter component of the CPI is still accelerating, because of how they calculated the data over the last year. This will catch up, and when it does, it will be deflationary. We hope to see this start to be reflected in the March 14 inflation data.

Technical Analysis

Mortgage bonds have been trading sideways for the last six days, forming a base of support around 99.547. So long as we remain above this level, we can be patient, ahead of what we expect to be bond-friendly news on March 10 and 14. Begin the day carefully floating.


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