Category: Insight

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The curious case of mortgage rates falling but demand not rising!

The industry is convinced that if only interest falls pent-up sidelined demand would be unleashed. But since mortgage rates started to fall in October from 8% to 6.85% today, mortgage applications have also fallen on an unadjusted basis except for one week. Today the Mortgage Bankers Association reported that the seasonally adjusted Purchase Index decreased 1% while the unadjusted Purchase Index decreased 4% compared with the previous week. Mortgage applications are 18% lower than last year and down to mid-1990 levels.

So why is demand falling when rates are falling?

• Prices are high: even if the rates have come down they aren’t low enough yet to make a dent in affordability. The largest pool of homebuyers is home sellers who sell and turn around and buy a new home. With 60% of mortgage account holders sitting on 4% of lower fixed rates, those homeowners are effectively trapped in their homes. They cannot sell and retain the same mortgage payments. Without sellers, the market will have low supply but also low demand.

• Savings: Even if rates come down homebuyers still have to come up with a downpayment and closing costs. In 2020-2021, the personal savings rate shot up to new records thanks to stimulus checks and forced savings from working from home. Today that savings rate has fallen to 2008 levels. It’s getting harder to save for that new home with inflation.

• Pulled in Demand: Contrary to the industry narrative, there was no supply issue in 2020-2021. Those were the best 2 years in total home sales since the GFC topping out at 6.1 million homes sold in 2021 (1M+ more homes sold than in any year between “08 and “19). Low rates, stimulus, forced saving, push to the suburbs and sunshine states, easy access to credit, and stock market meme stocks all helped to push demand up and unleash home sellers with large equity gains on the market. The pulled-in demand, especially in the luxury market is now dragging the market.

• Rate fallacy/Debt load: Lower interest rates are a reflection of low demand for borrowing. After years of ever-growing record borrowing, households’ appetite for debt is starting to wane. Households are now sitting on a new record of 19.7T in debt. Since 2020, households have added 3.1T in new debt. This is larger than the 2.5T household added between 2012 and 2019. Household debt has grown and now with higher rates the debt load is becoming burdensome. Debt service payments are rising as households pay college debt, credit cards, car loans, personal loans, and other debts. If it wasn’t for a large amount of refinancing of mortgages at ultra-low rates during the pandemic, US households would be drowning.

Rates are only one component.

#fed #federalreserve #rates #yields #dollar #commodities #markets #realestate #realestateadvice #realestate #realestatedata #homebuying #homeselling #homebuying #homeselling #dmvrealestate #marylandrealestate

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The markets are now believing the dot plot like it came down from the Oracle of Delphi!

What they forgot is that the Greeks also have a god named Khaos, the god of chaos. You would think after 5 years of it (2019-2023), we would have learned that volatility is the new normal. From a pandemic, to supply shortages, to a major land war in Europe, to inflation, to treasury markets stuck rolling over debt at the short end because fewer want their long-term debt.

Here we are in December, right before the holidays and Khaos has given us more gifts. Greeks bearing gifts is rarely a good sign but we opened the box and we got the Panama Canal becoming a mud puddle due to drought, flip-flop-wearing rebels taking potshots at ships in the Red Sea, Russians advancing in the snow going West, and the Middle East again embroiled in another war.

But the Bulls saw a prophecy with the clarity of Tasseomancy reading Turkish coffee cups with 2 members voting for no cuts to one voting for 6 and everyone else all over the place. So here we are with ships going around the capes like Magellan and Jacob Le Maire, the Treasury hoping the next note or bond auction works out, repo hiccups, bank losses growing, more debt coming to maturity, and households putting more on layaway all while markets hit new highs.

Somewhere above the clouds on Mount Olympus, the gods are having a good laugh watching us claiming we have seen the future from a single dot plot reading.

 

#fed #federalreserve #rates #yields #dollar #commodities #markets #homebuying #homeselling #dmvrealestate #marylandrealestate #redsea #panamacanal #middleeastconflict #dotplot

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Powell turned into Arthur Burns?

Powell turned into an Arthur Burns Pumpkin when the month struck 12!

The everything stock rally has just begun so start buying everything you won’t miss. Dollar will continue to fall, commodities will rebound, top 20% of Americans will continue spending as their portfolios balloon, the bottom will still have jobs and add credit card debt to live.

Not sure how that’s going to help bring inflation down to 2% while the government net issuance cranks up next year above 8% and we have an election year trying to buy votes for one side or another and mostly for campaign donations. The can has been kicked. Record debt will become even greater record debt from households to corporate to government.

The stage has been set for more folly and greater tears down the road. A Shakespearian tragicomedy of greed and power.

“All gold and silver rather turn to dirt!
As ’tis no better reckon’d, but of those
Who worship dirty gods.”
Cymbeline

#fed #federalreserve #rates #yields #dollar #commodities #markets #homebuying #homeselling #dmvrealestate #marylandrealestate

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Retail data is coming in for Black Friday and it’s looking good and that is bad!

Online Black Friday sales are up 7.5% versus last year, Mastercard SpendingPlus reports a 2.5% increase, and malls are full (my anecdotal observation the last 2 days). This is great for the soft landing story but bad if you expect rates to decrease.

I went to stores and watched videos of other shoppers seeing that Black Friday deals are not Black Friday deals. Retailers are not discounting much if at all. How come?

To understand this we have to go back to the pandemic. Economics is not about taking snapshots and interpreting the data but looking at actions and reactions, and reactions of reactions.

During the pandemic, we had two driving forces. The first was supply disruptions due to government actions that shut down factories, created shipping backlogs, and saw inventory levels tumble. The second was artificial demand in the form of stimulus and cheap money. Prices went up because there was not enough supply and too much demand.

Retailers’ reaction was to overorder as supply chains were disrupted and goods took longer to arrive and demand was strong. Goods inflation rose dramatically through 2021.

By 2022, the supply issues were resolved and retailers found themselves with ballooned inventory levels. The reaction was to discount. The result was goods deflation and demand waning as it was pulled in and then shifted to services. But after 3 years people started to come back to goods as they returned to their normal lives. That 3-year old TV broke, family are coming for Thanksgiving etc.

A year later, retailers’ counter-reaction was to cut orders and run off their inventory. ISM data fell, inventory draws worked their way through and retailers went back to pre-pandemic JIT (Just in time).

Retailers are no longer sitting on large inventory levels and therefore no longer have to discount heavily or even at all. Goods deflation is now over and that means the Fed inflation war just got harder.

Actions create effects that lead to a reaction that creates a new effect that leads to a new reaction that creates another effect and reaction and so on. 3 years later, the pandemic is still affecting us through secondary and tertiary effects and reactions.

As shelter inflation is still rising at 6.7% and services less energy at 5.5% now we have to deal with goods deflation ending. We can’t pin all our hopes on energy, used cars, and medical services costs. The first is highly volatile, the second a small component and the third is going the opposite direction than historically

Markets might interpret this as a soft landing revelation. It is not. It is part of a cycle of inflation until debt that has a maturity debt starts knocking on the door and starts asking for its money back.

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The real estate industry has lost touch. (Part 2)

After the recent lost case for collusion, I don’t see the industry understanding the writing on the wall, and is doubling down.

More agents and brokers are fear-mongering about buyers not getting represented because they can’t afford them. Yes, they can’t afford the current commission rates but that doesn’t mean they can’t afford something reasonable. Also, it is not like they were looking out for their interests or the interests of sellers as obvious from the lawsuits and recent verdict.

The industry is more worried about their revenues and profits versus ethics, good practices, and the public. The reason why they lost touch is because they forgot what this industry is about. They forgot who we are supposed to be which is agents.

Our job is not to sell or complete a transaction even though nearly every agent and broker I have ever talked to has said the job is to facilitate the transaction and get the sale done. This explains their preoccupation with commissions as it is tied to a sale.

Agency creates a legally binding relationship between the agent and their client. Because of agency, real estate agents are to act in their client’s best interest and owe an ethical and fiduciary responsibility to the client and not to the transaction. Only then can an agent be able to advise a client of what is in their best interest which can be or not to start or complete a transaction.

But if one is told the opposite and is paid only if a transaction is complete then one is not an agent but a salesperson. The salesperson has no fiduciary interest or responsibility to the client only that the sale is made to get paid.

MLS should not have commissions visible and bonuses for agents should not be allowed to influence behavior. Only the best interests of the client matter and that is what an agent is truly paid for. He/She is paid for obedience, loyalty, disclosure, confidentiality, accounting, and reasonable care, not the sale.


#marylandrealestate #nar #realestateindustry #homebuying #homesales #dmvrealestate #dcrealestate

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The real estate industry has lost touch (Part 1)

After the recent lost case for collusion, I don’t see the industry taking seriously what is happening.

Social media, statements, and emails I have seen from the industry are in defensive mode. There is all-out campaign to pump up the industry. A campaign to tell the industry’s story and convince the public that they are wrong and simply don’t understand.

This won’t help or change the fact that the public has lost trust in the industry. Blaming them for it, talking down to them, and pumping ourselves up and refusing to change isn’t going to help to regain it.

We have to listen to the public, understand their concerns, empathize, and find new ways to address their concerns and needs.

Just saying you know how things are done, and know better isn’t going to help in the conversation when one is telling you they don’t like how things are done and want change.

This is the opportunity to reflect, discuss, and work with the public to implement change that they obviously want. You don’t win arguments calling the other side wrong about how they feel, call them clueless, use fear, and say trust us.

You win the argument by listening, understanding the other side, addressing their concerns, innovating, and changing.

I am here to say I am listening. Tell me what you think, what you don’t like or like, what you want, how to do better for you, and how to make home selling and buying easier, better, and cheaper.

#marylandrealestate #nar #realestateindustry #homebuying #homesales #dmvrealestate #dcrealestate

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Ask not what you will do for your realtor but what your realtor will do for you!

They are there to help, advise, render services, and protect your interests. The real estate industry has lost touch. We are not in the business of selling homes or commissions but in the business of advising clients and offering services that have value. This industry now cares more about their commissions and high prices versus clients.

You the clients and future clients, don’t have to accept it. You don’t have to accept the commission they are offering or the level of services they barely talk about. You have the right to negotiate with real estate agents and their brokers the level of compensation and services as a seller and as a buyer. You deserve more it’s your money, your home, you have the power. You don’t have to:

– Pay broker fees!
– Pay administrative or hidden fees!
– Pay what they say is the commission rate as a seller and a buyer and can negotiate!
– Accept long commitments and have the right to say how and when you can terminate the contract!
– Accept little services and customer service.
– Take on all expenses.
– Accept a few pictures, post them on the MLS, and do an open house and have someone else than them doing it!

You don’t have to accept any of it!

You are the client, you own the home or have the purchasing power, not realtors. You own the power, the asset, the purse, and the process not realtors. You decide not us. You always had the right to set the terms and not set terms set on you. You always had the right to negotiate not be bound by industry standards or policies.

NAR, real estate commissions, and large brokerage house have lost their case in court and have been found to be colluding. Jurors have found that they colluded and awarded 1.78B in damages. We have known this for a long time in the industry and have been saying it. The system was built not as a service-based industry that prides itself on representing the interests of clients but on a middle-man pyramid scheme industry where the few that are on top collect splits, commissions, and fees.

It is time to take back the industry and bring back the clients and the public back into focus, ethics, services, and value. The time is now.

Like JFK said, “I would rather be accused of breaking precedence than breaking my promises.”

My oath is to my clients, their interests, and their success not that of NAR, real estate commissions, large brokerage houses, and developers. My promises are for the first not the latter.



#silversrpingmd #homebuying #homebuyingtips #realestate #dmvrealestate #dmvrealtor #dmvevents #washingtondc #rockvillemd #washingtondc #marylandrealestate #firsttimebuyer #firsttimehomeowner #buyingahome #realestatedata #realestatetips #realestateadvice
 
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Treasury Auctions aren’t as pretty as they used to be!

As the Treasury pushes more and more debt and more and more debt at the longer end things aren’t as business as usual. October issuances have had dealers required to absorb more of the total sales higher than the usual share of around 10 to 12%, as an increasing number of potential buyers hesitated to participate. This development in auctions is happening in the 20Y, 10Y, and 3Y bonds and notes.

In a note released on Thursday, strategists from TD Securities raised a pressing question, pondering whether this might be a “canary in the coal mine.” since “While purchases by end-users during auctions have remained robust in recent years, the recent decline in end-user demand is causing concern, particularly given the limited balance sheet capacity of dealers to support these auctions,” they noted.

Treasury issuances, Fed’s QT, and Japanese/Chinese absence have pushed the selloff in long-dated Treasurys and bear steepening. Things are not great but not in disaster mode in the Treasury auctions. Yields are rising across the board. The yield curve is flattening but flattening without the short end falling with the 10Y hitting briefly 4.996%, the 20Y hitting 5.33%, the 30Y hitting 5.1%, and the 2Y hitting 5.25%.

Across the Pacific, things aren’t better with the Japanese 10Y hitting .85% not since in a decade. The risk of Japan abandoning YCC, selling off Treasuries, intervening in the yen, and blowing up the yen carry trade is growing.

With all this going on and Powell saying again inflation is too high and GDP growth too strong, the stock market has barely moved. The amount of this time is different sentiment is astonishing. My favorite phrase from Powell today was “We’re very far from the effective lower bound, and the economy is handling it just fine,”. This epitomizes the late-stage return to normal.

We know the economy is not going to keel over this year. It might not even keel over the first half of next year but it will sooner or later with rates going even higher for even longer. That has been the historical behavior of the economy without exception and has been with much less debt, much less government spending, less or as much geopolitical and structural issues, and much lower P/E and equity valuations.

 

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How long before Japanese bonds blow up like US treasuries?

How long before Japanese bonds blow up like US treasuries?

Not sure how the BoJ and MoF can hold back the tsunami. US 10y is going over 5% soon and will weaken the yen past the 150 magic wall. Not like their inflation is getting better (flat around 3.2% for months).

A few months ago I said to watch out if we blow past 1% for the JP10Y and YCC goes out the window. This would be the biggest shift in monetary policy. Should this happen, it could have significant implications for financial markets. This could halt the depreciation of the yen and blow up the yen carry trade that many in the US were using to buy US assets, blow up short positions against the yen, and suck liquidity from fixed-income markets in other countries. Also, this could impact US treasuries big time if they sell US treasuries. Late last year when they sold Treasuries, TIPS and 10Y yields were pushed higher and along with a more hawkish Fed tone, we also saw equities fall. Yes, Japan can influence US stocks and bonds.

Japan is not just another country. It is a major financial player and was with China, the ones that bailed us out in 2008. This is the scary part. Congress is not going to stop spending we know that. Without Japan and China playing ball and releasing some of the pressure on the US, I cannot see how we can have lower rates.

A global hard landing is becoming the base case scenario and probably the preferred scenario.

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RE industry: “We don’t have the same issues as before GFC because of higher standards and credit scores!”

Me the last 3 years: “You sure about that?”

I said several times that the stimulus and forbearance programs were acting as temporary financial safety nets and worse a trampoline for people to borrow more money than they could just like the pre-GFC.

Thanks to Uncle Sam, credit scores shot up like a SpaceX rocket in 2020 and 2021. But, alas, just when you thought the party would never end, the music stopped, and credit card delinquencies decided to crash the party at the end of 2021 and through 2023.

More and more research is coming out looking at the impact of gov intervention on credit scores during the pandemic. When I was saying rising scores with 8 million homeowners in forbearance, millions not paying rent or college debt, and no one getting reported would lead to artificially opening credit and making underwriting mistakes no one listened.

Now we are starting to see that the ones that got the biggest boosts in credit score (deep and subprime) are the ones getting more and more behind in payments. Surprise!

Like Cinderella’s carriage turning back into a pumpkin, their scores are returning to pre-COVID levels. But wait. They got to borrow like a princess to buy the glass slippers from Amazon, the carriage at 120% LTV, and a castle 50k over asking. The banks swore to us they were not lending to subprime like pre-GFC. Yes technically, because much of subprime was magically turned into near and prime with a twist of the wand from the fairy grand federal government mother and got an allowance to build their savings now pretty much gone.

The truth is the banks didn’t care as they had bloated deposits, investors, and the Fed eating up any asset they would through their way. All one had to do was make a loan and securitize it and it would be bought at a premium as soon as it was originated. Sound familiar?

It’s the same story every time. If there is a buck to be made someone will look over details and close their eyes. No one stopped for a second and asked if credit scores, credit history, DTI, savings, and service payments as a percentage of disposable were affected by external forces and no longer were accurate, if long-term/temporary effects, or if standards adjusted to reflect the changes. Nope, let’s lend and lend a low rates and hand out even bigger loans.

They said this time is different. Yes, this time the pig had lipstick on it.

Some of the recent data coming out:

https://research.stlouisfed.org/publications/economic-synopses/2023/09/18/the-role-of-credit-scores-in-the-recent-rise-in-credit-card-delinquency

https://www.consumerfinance.gov/about-us/blog/office-of-research-blog-credit-score-transitions-during-the-covid-19-pandemic/