Mortgage News>> Market Update March 2023
WHAT A MISS
December’s payroll numbers posted a gain of 260,000 new jobs, far exceeding expectations. Experts couldn’t have had a greater miss on January’s payroll numbers.
The market estimated that the payroll numbers would post an estimated 187,000 new jobs. Instead, payrolls increased in January by 517,000. That is a market miss!
“It was a phenomenal report,” said Michelle Meyer, chief U.S. economist at the Mastercard Economics Institute. “This brings into question how we’re able to see that level of job growth despite some of the other rumblings in the economy. The reality is it shows there’s still a lot of pent-up demand for workers where companies have really struggled to staff appropriately.”
The unemployment rate fell to 3.4% versus the estimate for 3.6%. That is the lowest jobless level since May 1969. The labor force participation rate edged higher to 62.4%. A broader measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons also edged higher to 6.6%.
“Today’s jobs report is almost too good to be true,” wrote Julia Pollak, chief economist at ZipRecruiter. “Like $20 bills on the sidewalk and free lunches, falling inflation paired with falling unemployment is the stuff of economics fiction.” – cnbc.com
The jobs market is way too hot. Inflation is way too hot. The Fed’s job is far from over. The market was anticipating one more rate hike in 2023. Now, with inflation showing little signs of significant slowing, the market is anticipating at least three more rate hikes in 2023.
The Fed does not anticipate shifting monetary policy from tightening to easing until well into 2024.
CONSUMER PRICE INDEX IS STILL TOO HOT
The February Consumer Price Index came in at 6.4%, again, higher than the expected 6.2%.
With higher-than-expected CPI numbers, compounded by the spike in the jobs numbers, the Fed is anticipated to continue to raise short-term rates for the foreseeable future. There was a hope that the Fed would pause, but these numbers are evidence that inflation is still a long way from being contained, and the target rate of 2.0% seems almost unobtainable.
PCE PRICE INDEX – ALSO TOO HOT
On February 24th, the Personal Consumption Expenditure price index increased 0.6%, again higher than market expectations. This is an index closely watched by the Fed as it is a measure of consumer spending habits.
“This morning’s strong inflation data continued the recent spate of market-unfriendly news. This could keep the policy rate higher for longer than the market had hoped, which in turn will likely pressure earnings,” said Matt Peron, director of research at Janus Henderson Investors. “While we do see signs that inflation will eventually moderate, higher rates for longer will take a toll.”
Consumer spending also rose more than expected as prices increased, jumping 1.8% for the month vs. the estimate for 1.4%. Adjusted for inflation, prices rose 1.1%.
Personal income adjusted for inflation increased 1.4%, higher than the 1.2% estimate. The personal saving rate also was up, rising to 4.7%.
All of the numbers suggest inflation accelerated to start the new year, putting the Fed in a position where it likely will continue to raise interest rates. The central bank has pushed benchmark rates up by 4.5 percentage points since March 2022 as inflation hit its highest level in some 41 years.
“Clearly, tighter monetary policy has yet to fully impact consumers and shows that the Fed has more work to do in slowing down aggregate demand,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed may still decide to hike by 0.25 [percentage points] at the next meeting, but this report means that the Fed will likely continue hiking into the summer. Markets will likely stay choppy during these months where higher rates have yet to materially cool consumer spending.” – cnbc.com
How do you slow inflation? Break the economy by relentless interest rate hikes. More are on the way, as the economy, including housing, is proving to be very resilient to rising rates.
CREDIT CARD DEBT AT RECORD HIGHS
Credit Card debit hits an all-time high of $930 billion. Credit card delinquencies also spike, now at 5.32%. Both debt and delinquencies are anticipated to climb as the economy slows.
MORTGAGE DEBT SPIKES IN 2022
Debt is on the rise, and mortgage debt in 2022 soared by nearly $1 trillion over 2021.
Americans’ debt balances continued to compound in 2022 as inflation put pressure on budgets and the cost of borrowing increased. Aggregate household debt, which includes all outstanding credit market debt held by consumers, increased by $394 billion in the fourth quarter of 2022 alone, according to the Federal Reserve Bank of New York‘s Q4 Household Debt and Credit report — and mortgage balances were no small part of the equation.
Per the report, mortgage balances drove the uptick in household debt during the fourth quarter, with an increase of $254 billion compared to Q3. This was due, at least in part, to higher mortgage rates resulting in higher monthly home loan payments. Mortgage balances were also up year over year, totaling $11.92 trillion by the end of December.
In addition, the number of homeowners who are seriously delinquent on their mortgage payments also increased quarter over quarter. Per the report, mortgage loans considered in “serious delinquency,” meaning the loans are late by 90 days or more, increased to a rate of 0.57%.
But while seriously delinquent mortgages have increased, foreclosures have stayed low. The foreclosure moratoria has been lifted nationwide, but only about 34,000 homeowners had new foreclosure notations on their credit reports in Q4. Still, that rate is a slight uptick from Q3, when about 28,500 homeowners had new foreclosure notations on their credit reports.
The median credit score of borrowers with newly originated mortgages also declined in Q4, per the report. During the fourth quarter, the median credit score of borrowers with newly originated mortgages was 766, down about 22 points from the high of 788 in the first quarter of 2021. – housingwire.com
SELLERS PAY CLOSING COSTS
The raging hot housing market has turned cold. The pendulum has swung, and we are now in a buyer’s market. With interest rates tripling since their 2021 lows, homes now sit on the market as buyers look for buying opportunities.
One such opportunity is having the seller pay most, if not all the buyer’s closing costs. This includes lender fees, title fees, and interest rate buy-downs.
According to a report from Redfin, 41.9% of purchases in the fourth quarter of 2022 included seller-paid closing costs as sellers look to incentivize buyers. The mortgage industry is hopeful that the dramatic rise in seller-paid costing costs will stimulate purchase activity. Mortgage purchase applications are up just over 1% to the start of the new year but are down 44% from a year ago. – housingwire.com
MORTGAGE VOLUME PLUMMETS IN 2022
Mortgage volume in 2022 plummeted 49%, to $2.2 trillion. To put things into proper perspective, the mortgage industry produced record volumes in 2020 and 2021.
Mortgage volume is expected to fall another 10%-15% in 2023, with rising rates, and falling home values. The industry is still staffed for approximately $3 trillion, so more layoffs are anticipated.
Relief for the industry would come from a mild recession. A recession would likely cause the Fed to reverse from fiscal tightening to loosening. Long-term rates generally fall in a distressed economy, creating some potential for debt refinance, and for those still employed, rate motivation to purchase real estate.
A QUICK MESSAGE
As mortgage rates and short-term credit rates raise, the consumer gets squeezed. The cost of revolving debt rises, and refinance options to lower rates are non-existent. This is compounded by falling home values and a looming recession. No, this is not a repeat of 2008, but the potential for a credit crisis is growing.
A mild recession may lead to a nominal uptick in credit and mortgage defaults. A more severe recession, or a recession that takes an extended period to exit, could lead to a problematic debt problem. The mortgage industry welcomes a mild recession. A recession is where the economy slows, long-term rates fall, and employment stays stable. Again, a recession is a healthy reset of the economic cycle. There is a consensus that the Fed will likely send the economy into at least a mild recession by year’s end. Housing is longing for interest rate relief, and a mild recession will bring just that. You see, not all recessions are bad.
The economy is on the verge of a correction. How severe of a correction is heavily debated, but still unknown. The market expectations have been proven wrong, repeatedly. Regardless of when, or the severity of the correction, the signs are there for a pending credit event is evident. It is time for everyone to be rational, and not be led by blind optimism. The Fed is making decisions based on math and data. Maybe time for the consumer to do the same. – Aaron VanTrojen (CEO / Geneva Financial, LLC)
U.S. NATIONAL DEBT
The U.S. now stands at $31.58 Trillion and climbing. US Federal Debt to GDP Ratio: 133.96%.
Source: usdebtclock.org
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