Friday Wrap: Analysis of News and Events for the Week

Interest Rates Tick Back Up as Fed Prepares for Third Cut

The Federal Reserve is expected to cut rates for the third time this year at the Federal Open Market Committee meeting next week. It’s also expected that this will be the final rate cut by the Fed in 2019.

The uncertainty of the trade war with China, along with data showing mixed growth reports, continue to be mitigating factors for the Fed. Last month we saw the major manufacturing indexes decline, whereas this month we are seeing the Richmond Fed manufacturing index rebounding significantly with all three major components rising. Shipment, new orders and employment went up by 18, 21 and 10 points respectively with expected new orders and expected shipments also rebounding. 

As of Friday morning, the 10-year Treasury yield was trading at 1.75%. The market has settled into a relatively benign range trading in the 1.70s the last few weeks after falling to the low 1.50s early this month.

Global Political Uncertainty

The International Monetary Fund is predicting that economic growth in Asia is especially vulnerable at this time with the trade war between the United States and China, continued unrest in Hong Kong as well as other geopolitical concerns in the region. Right now, it’s predicted that Hong Kong’s economy could grow by just 0.3% this year and 1.5% in 2020 with similar, low projections for South Korea. 

Hong Kong, which is under the government of China, has slipped into a technical recession according to the city’s chief executive, Carrie Lam. Just this week, Hong Kong finally withdrew the extradition bill that sparked all the ongoing protests. The protests were seen as one of the main economic risks for the region. The IMF also flagged what’s happening in the United Kingdom as part of the external risks. 

The mess that is Brexit somehow got even messier this week as Prime Minister Boris Johnson was forced to ask for yet another extension from the European Union to allow more time to cut a deal for Brexit. Last Saturday’s vote on a deal turned into a vote to postpone the vote which in turn forced Johnson’s hand on asking for an extension which the EU does not have to grant. It has been nearly three and a half years since the initial Brexit referendum. 

There are still a lot of possible outcomes for what could happen with Brexit including the potential for another nationwide vote to confirm the sentiment to withdraw from the EU. The most recent move is Boris Johnson saying he will give lawmakers time to go over his Brexit deal but only if they allow for a general election on Dec. 12. 

Canada has also seen a governmental shakeup as Prime Minister Justin Trudeau won reelection but without a majority vote. The Canadian dollar was generally unchanged after the election, but if there is not a sustainable solution for the minority government, Canada’s economy might see some changes as well.

Oil Prices not Going Anywhere

Slowing global economic growth along with tension in the Middle East have taken their toll on the oil industry as Goldman Sachs analysts predict Brent crude oil to continue to trade around $60 per barrel into next year. Earlier this year, the Organization of Petroleum Exporting Countries, or OPEC, decided to cut production by 1.2 million barrels per day. Then, when government data out this week showed a run on U.S. crude oil, oil prices went up. 

Goldman Sachs sent out communication noting, “With the headwinds of strong U.S. producer hedging and high freight rates fading, we expect stronger Brent timespreads and higher prices in coming weeks, with upside risk to our year-end $62 per barrel forecast.”

Interest Rates Climb Back Up, Inventory Shortage Plaguing Housing

The latest move higher in interest rates has started to hit the housing market as mortgage applications took a dive week-over-week, to the tune of 11.9% according to the Mortgage Bankers Association. However, when you look at it year-over-year, volume of applications was still 54% higher than this time in 2018. Refinances even saw a bit of a slowdown because of the slight uptick in rates. This week the Freddie Mac survey showed another rise with average rates now sitting at 3.75% for a 30-year fixed-rate mortgage. The survey cited, you guessed it, the trade war with China as one of the main factors causing uncertainty and volatility in the markets. 

Overall, rates are still significantly lower than a year ago but the persistent problem of a housing shortage continues to plague new home sales. The National Association of Realtors’ data shows that existing home sales were abysmal in September, dropping by 2.2%. Analysts were expecting a drop in sales, but only by 0.7%. That’s the first drop in new home sales in two months. 

With inventory so low, down 2.7% from a year ago, that’s allowed home prices to rise at a faster pace and out-price many first-time homebuyers trying to get into the market. According to Reuters, the median home price has increased 5.9% year-over-year in September, putting the price around $272,100. The Federal Housing Finance Authority’s August numbers, released this week, show a slowing appreciation rate of just 4.6% year-over-year. 

Part of the reason for the lack of inventory was the housing crisis itself. When homes went into foreclosure, many were purchased by investment firms and rental companies. According to a study published in the National Bureau of Economic Research, there are more than 12 million single-family homes being rented in the United States, making up 35% of the housing market and adding up to $2.3 trillion in assets. 

One report in 2018 showed that just a handful of companies owned about 200,000 single-family rental homes. And according to the study from NBER, a lot of these homes have been put together as capital in the form of single-family rental bonds. This article from CityLab notes that “three Real Estate Investment Trusts (REITs) backed by single-family rental assets have had IPOs with a market capitalization of more than $18 billion.”

The way that the investors make money on these homes is both by collecting rent and appreciating value of the homes themselves. 

The article goes on to note that “The NBER study estimates that the 4 percent decline in America’s homeownership rate, from 67 percent before the crash in 2007 to 63 percent in 2014, means that roughly 1.5 million American households have shifted from owners to renters.”

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized contract.