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MBS Highway Daily Updates 11/28/2022

Current position: Carefully Floating

Stocks are lower and Mortgage Bonds are higher to start an action-packed week. St. Louis Fed President, James "Raging" Bullard, is speaking at 10:00 am ET. He could shake up the markets, as he did the last time, when he spoke about needing to potentially raise the Fed Funds Rate to 7%. The markets recovered following that comment, as he is typically an outlier, but be on guard for some volatility. It's also important to note that he will only be a voting member at one more meeting, December 14, and then he is not a voting member for another four years.

There was an article on Business Insider titled Buckle in for a brutal free-fall in home prices and US housing is in a massive bubble, experts say.

Let's dissect this - The article is citing 7 "housing experts" and while they are certainly names you may recognize as economists, I would not call them housing experts. Additionally, some call for a 10% decline, while others call for a 20% decline. A 20% decline would be a doomsday-like scenario, and something similar to what we saw during the housing bubble.

From the peak in home prices in 2007 to the trough in 2009, home prices declined by 20%. And while some experts are predicting a similar type of crash, the dynamics are very different.

Back in 2007, there were 4M homes for sale vs 1.22M today. And back then, builders were putting up record numbers of homes while demand was falling. Today, demand is waning, but builders learned their lesson and single-family starts are down 22%, while permits are down 21%. Additionally, in 2008, the average equity in homes was 19% vs 58% today.

As we covered last week, Case Shiller is reporting that home values nationwide have only come down 1.5% from their peak, but the data is lagging 2 months. We anticipate further softness, but nothing close to a 20% decline. And when rates come down to 5% in the first half of next year, as we project, we think that all of the buyers in hibernation due to high rates will come back and with the low supply environment, it sets up for a reacceleration in home prices.

Next Week

Tuesday: Case Shiller Home Price Index, FHFA House Price Index

Wednesday: ADP Employment Report, Pending Home Sales

Thursday: Personal Consumption Expenditures

Friday: BLS Jobs Report

We expect Thursday to be another good day for the Bond market, as we anticipate the PCE report to show lower appreciation, much like we saw in the CPI report on Nov 10. One of the main components of CPI that is lagging is Shelter, and when it catches up to what's happening in the real world, we will see even bigger declines in inflation. But in the PCE report, shelter makes up a much smaller percentage of the index. And as a result, we may see PCE come down even more than CPI.

Technical Analysis

Mortgage Bonds have back tested support at the 100.534 Fibonacci level and are moving higher. Bonds are now roughly 15bp beneath the 100 - day Moving Average, which is the next test.

The 10 - year Treasury Note Yield hit exactly our target of 3.67%, but has been unable to break beneath it thus far. Yields are taking another run at it today, and with the news, this week, maybe be able to break below it. There may be some volatility this morning after Bullard's comments, but we want to be patient, even if we see some declines in MBS Pricing, as we don't want to lock ahead of cooler inflation data and potentially weaker jobs data. Continue Carefully Floating.


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