It's Fed Meeting Day, Here Is Why You Should Care. Also, Tides Are Changing In The Real Estate Market --- Sellers Put On Notice| 12.14.22
"Only when the tide goes out do you discover who's been swimming naked." - Warren Buffett
What You Need To Know Today:
• The Federal Reserve will wrap up its meeting today around 2:00 PM CT and is expected to slow the pace of its interest rate hikes, moving the benchmark (Federal Funds Rate) to a range of 4.25%-4.5%. Right now, the market still projects a hike of 50bps (0.50%). It is also anticipated that the Fed will highlight the need for further rate hikes in order to prevent continued inflation. Many economists expect that the Fed’s stance following the November meeting, indicating rate hikes until a terminal Federal Fund Rate of 5% is reached, will remain. That said, some Fed members have called for a range between 5%-7%. This is concerning to some market participants because they fear the Fed doing “too much” and slowing down the economy more than is necessary to reach the target inflation rate via a “soft landing.” Honestly, after the much lower-than-expected CPI reading yesterday their fears have gained some legitimate footing… Finally, the Fed is expected to address the future of its balance sheet, with a decision on how to wind down the assets expected in the coming months. Remember, this balance sheet is loaded with bonds that were purchased during the COVID-19 pandemic in order to support, or “prop up” the market — this must be unwound.
TL;DR — A 50bps Federal Funds Rate hike is expected today. The market also expects the Fed to provide clarity as to what its terminal rate goal is as well as a plan for winding down balance sheet assets.
• The Bureau of Labor Statistics (“BLS”) published updated month-over-month import prices this morning, which measure the change in the price of imported goods and services purchased domestically. This data serves as another important gauge of inflation — specifically for businesses and consumers who rely heavily on imported goods and services. According to the BLS, U.S. import prices decreased by (-0.6%) in November down from the (-0.4%) drop in October.1 This is a steeper decline than the pre-report market forecast of (-0.5%) and serves as another indication that inflation might be “curbing” faster than we think.
TL;DR — U.S. import prices decreased by (-0.6%) in Nov — More evidence that inflation is slowing more rapidly than the market expected.
• Mortgage loan application volume saw a move upward ahead of today’s Fed meeting. According to the Mortgage Bankers Association (MBA), applications for mortgage financing increased by 3.2% on a seasonally adjusted basis last week (ending 12/9).2 Further, increases were seen for both purchase and refinance applications. On the Refinancing side, and according to the Refinance Index, applications were up 3% week-over-week — but remain at a level that is 85% lower than the same week in 2021. That said, of the total share of applications, refinances made up 29.4% which was an increase of nearly 1% from the previous week. Lastly, the seasonally adjusted Purchase Index increased 4% from last week showing increased transaction activity but is still 38% lower than the same week last year.
TL;DR — Applications for mortgage financing saw an uptick last week (ahead of CPI & the Fed meeting this week).
Chart Of The Day:3
Despite a slight dip in inventory last week, we have already hit multiple home “inventory milestones” this year including:
The seasonal “bottom” (Occurred on 3.4.22)
Inventory “up” year-over-year from 2021 (Occurred on 5.20.22)
Inventory “up” relative to 2020 (Occurred on 10.7.22)
A milestone we are still waiting on:
Inventory above 2019 “Pre-COVID-19 Pandemic” levels (Currently 34.1% below)
As inventories continue to recover, negotiating leverage will shift in favor of buyers. This will be even more significant once we see meaningful declines in interest rates. The days of 10+ competing offers on day 1 and sellers expecting a sales price significantly above the listing price (with limited to no contingencies including inspection) are coming to an end. Buyers & buyer’s agents rejoice!
U.S. Inventory of Available Homes For Sale:4
TL;DR — Home inventories are recovering and the tides are beginning to turn in favor of home buyers.
Twitter Exchange Of The Day:5
Source: U.S. Bureau of Labor Statistics: U.S. Import and Export Price Indexes Summary.
Source: Mortgage Bankers Association (MBA): Weekly Applications Survey.
Source: Calculated Risk Finance & Economics: “Housing December 12th Weekly Update: Inventory Decreased 2.5% Week-over-week”
Source: Altos Research.
Source: Twitter — @Jimcramer