By: Jeff Anderson
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.456%|
Source: Wall St. Journal
It was a rough week for investors, as the major indices gave back all their gains from the prior week. Why? Traders (not investors) front ran this week’s inflation data, hoping for a much softer number that would take the Fed’s foot off the rate hike pedal. The August inflation print came in around 8.3%, all but ensuring that the Fed would raise rates by another 75 basis points next week. What’s interesting is that more than one Fed official had commented that they would need to see more than a month or two of declining inflation before considering changing course. The inflation number wasn’t a surprise really. We are, however, getting more comfortable with the fact that inflation has likely peaked, but the path back to the Fed’s 2% target will likely take longer. If/when the Fed raises next week, the Fed Funds rate with be 2.75% to 3% and likely on a path to 4% next year. Traders had priced in moderate rate hikes after this coming September meeting and even factored in a cut in rates by mid-2023. So, as we sit here today, we know rates are not coming down anytime soon. We know the economy is slowing. We know the Fed is hell-bent on bringing down inflation, and we know that it doesn’t feel good. However, it is far better that the economy feels the pain now vs letting inflation get away from us and repeating the late ‘70s and early ‘80s. It is the medicine we don’t want to take but know we need it.
Mortgage Rates Surpass 6% – Stocks and Bonds are on Sale but Homes are not:
Not since 2008 have homebuyers faced 6% mortgage rates. Heck, we were sitting below 3% last year. The move up in rates has been sudden and dramatic. Yet, keeping things in perspective, 6% is a far cry from the 18% rates homeowners had to pay in the 1980’s. Regardless, such a dramatic increase has all but stunted the housing market. Sales are way down. Prices (yet) are not. Mortgage originations this year are expected to be half of what they were last year. We are in this phase of adjustment where sellers are clinging to last year’s home values and not being realistic about the current environment. They are emotionally anchored to a value that is not grounded in reality. Buyers, on the other hand, are very timid. Those that are looking are hoping for a “deal.” The spread between the two is large. As we discussed during our recent podcast, one of three things needs to happen. One, we need a 40% pay raise to justify these prices. Two; mortgage rates need to go back to 3% or three; home prices need to decline 30%. I wouldn’t bet on the first one. And, frankly, I wouldn’t put much stock in the second option either. At least for now.
When inflation gets under control, rates will come back down, but that may be months from now. Fortunately, most potential sellers are sitting on a lot of equity and carrying a mortgage rate well below the current 6%. So, for those that were considering trading down (or up), they can sit tight. Those that must move may have a tough time wrapping their head around the new environment. Something must give.
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