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MBS Highway - Daily Updates 10/19/2022

Current position: Carefully Floating


Stocks and Bonds are both lower to start the day, but they are well off their worst levels. While it's tough to see another day where Mortgage Bonds are lower and the 10 - year is setting a new local high at 4.12%, there is light on the horizon. As we have discussed many times, we believe towards the end of the year and into next year, inflation will begin to abate... And mortgage rates will follow.


One of the smartest minds in the world, Lacy Hunt, spoke with Barry yesterday and agrees with us - He believes that the money supply, beginning in March, will fall to a more neutral level that removes all of the excesses that were created over the past two years... if the Fed continues its path of tightening. He thinks that long yields will drop next year, which means the 10 - year Treasury and mortgage rates.


Minneapolis Fed President, Neel Kashkari, said yesterday that the Fed may need to take the Fed Funds rate above 4.75%. If they hike 75bp at the November 2 meeting as well as the December 14 meeting, the Fed Funds Rate will be at 4.75%.


The NAHB Housing Market Index, which measures builder confidence, dropped significantly from 46 in September to 38 in October, the lowest since April 2020. This was 5 points below expectations and is now well below the 50 market, which is the neutral level - Anything above 50 signals expansion and below signals contractions. Looking at the internals - The Present situation dropped 9 points to under 50 at 45, while the Future outlook component was down by 11 points to 35. Buyer Traffic is now down to just 25 from 31 last month.

The NAHB said that higher rates have weakened demand, as we all know. But they also added that this will be the first year since 2011 that we will see a decline in single-family starts... meaning new construction on the single-family front.



Housing Starts in September were down 8% to a 1.439M unit annualized pace. Starts are down almost 8% year over year. Single-family starts, which are most important, were down 5% last month at an 892k unit pace. They are now down 19% year over year. So, while interest rates are higher, and demand is lower, supply should remain tight as NAHB mentioned.

Housing Permits, which is the future supply, were up 1.4% last month at a 1.564M unit pace but are still down 3% year over year. Single-family was down 3% last month to 872k units and down 17% year over year.


Completions were up 6% last month at a 1.427M unit annualized pace. With household formations trending between 1.6M to 1.7M annualized, there is still not enough supply to meet the households being formed.



It appears that builders have learned their lesson from 2006/2007 when there was not enough demand and they kept buildings homes like crazy. They are clearly building less, and while the lack of new supply is not a good thing for the number of transactions if you couple that with the fact that many existing homeowners are staying put with a 3% mortgage, it should provide some support for home values. Things will be volatile, and there will likely be vacillations in months to come.


When rates come down and affordability comes back, it sets the stage for prices to reaccelerate. And as we mentioned, we believe inflation and rates will start to come down, and Lacy Hunt echoes those beliefs. But Lenders do as well, which is why it is so hard to get a zero-point loan. The bottom line, there is a great opportunity to purchase a home today, as you can negotiate more, and the future outlook looks promising. Using a 2-1 buydown where available can be a great strategy to help buyers deal with higher rates – We just released a new social studio script on this topic.


Maybe Zillow is seeing some of these dynamics - They released their Home Price Index for September, showing that home values have increased 14.9% year over year. They believe that homes will appreciate 2% in the year going forward, which is still meaningful for wealth creation. They also reported that homes were only on the market for 16 days, matching the last Existing Home Sales report, and showing that if priced correctly, homes are still moving very fast.


The MBA released their Mortgage Application data last week and overall demand is at a 25 - year low. Purchases fell 4% last week and are down 38% year over year. Interest rates moved higher from 6.81% to 6.94%, which is the highest rate in 20 years. Rates are now roughly 3.75% higher than this time last year. Refinances decreased by 7% and are down 86% year over year. ARMs made up 13% of transactions. With the move higher in interest rates this week, they are likely a little over 7%.


Later this afternoon at 1:00 pm ET there will be a 20 - year Bond Auction, which can impact the market, depending on the level of demand from investors.


Mortgage Bonds broke beneath support at 98.266 earlier today, but are now just above it. If Bonds can remain above this level, there is room to move higher, but if they break beneath it, the next support level is 130bp lower. The 10 - year is trading at 4.07%, which is lower than the new local high it set earlier at 4.12%. Yields are now back under the 4.075% ceiling, with room to improve. But if this level is broken to the upside, yields get back into price discovery mode and have room to move higher. After locking yesterday, and with Bonds improving from earlier levels, we can begin the day Carefully Floating.

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