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MBS Highway Daily Updates 05/18/2023

Current position: Carefully Floating

Stocks are higher and mortgage bonds are lower once again, being pressured by debt ceiling fears. There has been some recent progress, which points to a potential deal being made over the next week, but there is a lot of uncertainty. As we covered in a previous update, there is a supply issue that is causing bonds to move lower and yields to move higher. Besides banks that are being forced to sell their bond holdings to come up with deposits for their customers, if the debt ceiling is raised, the Treasury will have to issue bonds to come up with the money. This would create additional supply that has to be absorbed by the market.

The latest from the Fed: Lori Logan, Dallas Fed President, says the current data doesn't justify a pause. She is in the camp of another rate hike. How disconnected can she be? We will hear from Fed Chair Jerome Powell tomorrow, ahead of the Fed Minutes next week.

Existing Home Sales

Existing Home Sales, which measures closings on existing homes, showed that sales were down 3.4% in April at a 4.28 million unit annualized pace, in line with estimates. On a year-over-year basis, sales are down 23%. The slower pace of sales is all due to inventory, which remains extremely low.

Inventory levels increased slightly to 1.04 million but still remain very low. 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 563,000, as many of the homes counted in the existing inventory are under contract.

The median sales price of $388,800 is up 3.5% from the previous month but is down 1.7% on a year-over-year basis.

Remember, the median home price is not appreciation but rather the middle-priced home. That means that if more lower priced homes are sold, this number will fall. You could have all home prices increase but the median price fall if a higher concentration of sales were on the lower end. Actual appreciation numbers are higher, not lower, on a year-over-year basis and are showing acceleration.

Homes remained on the market on average for 22 days, down sharply from 29 days, showing you that the lack of sales is due to inventory, not demand. 73% of homes sold in less than 30 days, up from 65%. If the home is priced correctly, it's selling fast.

First-time home buyers accounted for 29% of sales, which was up from 28% in the previous report. Cash buyers accounted for 28% of sales, which was up from 27%. That means that roughly 40% of homes with a mortgage are owned by first-time home buyers. Investors made up 17% of transactions, which was unchanged. They made up roughly one out of every six transactions. Clearly, investors are seeing the opportunity in housing right now.

Initial Jobless Claims

Initial Jobless Claims, which measure individuals filing for unemployment benefits for the first time, fell by 22,000 to 242,000. Don't take this as a drop in week-to-week unemployment; rather, there was fraud in Massachusetts last week that spiked the numbers. Averaging out the last four weeks, this figure stands at 245,000.

Continuing claims, or those that continue to receive benefits after their initial claim, decreased by 8,000 to 1.8 million.This metric remains at some of the highest levels we have seen in a long time and shows pretty clearly that hiring has slowed as people continue to receive benefits and not find a new job.

Technical Analysis

Mortgage bonds have broken beneath support at 100.281, which will now act as a ceiling of resistance. The next floor is at 99.845. We have to watch the 10-year closely, as it is above its 200-day moving average but now at a critical level. Yields are testing the 3.644 Fibonacci ceiling, which has held yields from moving higher many times since March. If this level is broken, there are not a lot of barriers, and we could see a big spike in yields. Begin the day carefully floating.


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