A weekend topic starting with Mortgage News Daily. “So why did rates spike on Friday? This is actually a bit of a trick question. Rates have been rising in general since late 2020. The current rate spike really began last week. The first 4 days of the week were mostly a lull in the bigger picture. They had a chance to be the start of a bigger reversal, but ultimately revealed themselves to be a breath-catching exercise before more pain. In other words, it was a trap–at least for anyone hoping that rates would do something better than catch their breath.”
“The response is varied among mortgage lenders in terms of scope and timing, but on average, 30yr fixed rates are nearly 3/8ths of a point higher in the first 2 weeks of 2022. Even the notoriously stale but widely-cited Freddie Mac weekly rate survey mostly caught up to reality with their biggest jump since the start of the pandemic.”
The Associated Press. “With inflation surging, unemployment falling and wages rising, some economists are warning that the Federal Reserve may have waited too long to reverse its ultra-low-rate policies. With the number of unemployed dwindling, businesses have been forced to raise hourly pay to keep and attract workers. In the final three months of 2021, wages jumped at a 6.2% annual rate. And for workers in restaurants, hotels and casinos, pay soared 14.1% in December compared with a year ago.”
“‘Normally, the Fed would have raised rates long before,’ said Tim Duy, chief U.S. economist at SGH Macro Advisors. ‘The fact that we’ve barely started suggests the Fed has misjudged how quickly the economy was going to come back online.’”
From Yahoo Finance. “Jamie Dimon sees more rate hikes than we think for the U.S. economy this year. The JPMorgan chief executive officer predicted on Friday that rising inflation could prompt the Federal Reserve to raise short-term borrowing costs as many as six or seven times, doubling down on his earlier bet that the currently-anticipated three to four increases are likely a low estimate of what investors can expect.”
“‘My view is, there’s a pretty good chance there will be more than four — there could be six or seven,’ Dimon said during a post-earnings conference call. ‘This whole notion that it’s somehow going to be sweet and gentle and no one is ever going to be surprised I think is a mistake, but that does not mean we won’t have growth.’”
From Market Watch. “Many on Wall Street now expect short-term rates, potentially, to increase four times this year from the current 0% to 0.25% range. Longer-term rates, however, likely will hinge on how aggressively the central bank shrinks its mortgage bond holdings, said Scott Buchta, head of fixed-income strategy at Brean Capital, particularly as the Fed works to get annual inflation closer to its 2% target from 7% as of December.”
“‘I don’t think they want to shock markets,’ he said, noting that home price appreciation historically has run about 2% to 3% above inflation, or roughly 5% growth yearly. ‘20% is not sustainable.’”
“That said, every 100 basis-point increase in the 30-year mortgage rate translates to about a 13% decline in purchasing power for a homeowner relying on financing, according to Buchta’s estimates.”
From Bloomberg. “As a child in the 1940s, Dan Fuss watched helplessly as the price of his favorite ice cream doubled in just one day. Later, he was vindicated as a bond market ‘vigilante,’ when he and others exhorted U.S. administrations to curtail fiscal deficits and wrest control of the inflationary breakout of the 1980s. But all that experience doesn’t make the biggest bout of consumer price growth in nearly four decades much easier for the 88-year old vice chairman of Loomis Sayles — and the generation of pensioners whose investments he helps oversee.”
“Boomers and the like may have the most to lose from price pressures and rising rates that are punishing bonds, which account for 45% of assets held by pension funds and insurers in the world’s biggest markets, according to JPMorgan Chase & Co. Pensions oversee $30 trillion overall in the U.S., Britain, Europe and Japan, the data shows.”
“These funds have boosted their bond allocations from 35% two decades ago as easy-money policies encourage governments and companies to borrow at rock-bottom rates. ‘People most affected by inflation are those on fixed incomes, especially if their income is not indexed to inflation. Most retirees are in that category,’ Fuss said in an interview. ‘Their income will not catch up with rising prices.’”
“A preference for fixed income puts the older generation in an uncomfortable position with the Treasury index in line for a second year of losses — an event last witnessed in 1974 — as the Federal Reserve pares pandemic stimulus. Already, U.S. government bonds have lost 1.5% in less than two weeks of trading.”
From CNN Business. “‘There’s always the risk of a policy error. The Fed is carrying a monetary policy nuclear football with them, so there is a potential for a mistake,’ said Kristina Hooper, Invesco’s chief global market strategist.”
From Newswire. “Foreign interest in supporting US public debt has fallen off a cliff, it’s basically net zero, so now it is up to the banks, the Fed, and consumers, through their 401K retirement plans, to purchase the regular offerings of US government bonds – which the federal government relies on to finance its deficits. What I’ve tried to prove in this article is the growing disinterest of foreign investors in buying US Treasury debt; with US banks, the Fed and consumers left holding the bag for the federal government’s continued issuance of debt.”
The Globe and Mail. “Real estate investor buying has spread to the smaller cities during the pandemic, with purchases increasing in relatively cheaper housing markets such as Halifax and Ottawa, according to new research from the Bank of Canada. ‘The increased presence of investors in the housing market has contributed to strong demand and may reflect a belief that house prices will continue to rise in value,’ said the research paper, authored by Mikael Khan and Yang Xu.”
“The Bank of Canada report found that investors accounted for the highest share of highly indebted borrowers: 44 per cent of investors had a loan-to-income ratio greater than 450 per cent, meaning they were shouldering loans 4.5 times greater than their annual income. For first-time home buyers and repeat buyers, the share of highly indebted borrowers was each 24 per cent. ‘Investors that are highly indebted could face difficulty servicing their debt following a loss of income (either employment or rental) or an increase in interest rates,’ the paper said.”
The Daily Mail. “Rich Dad Poor Dad author Robert Kiyosaki is expecting Australian house prices to crash after rising by the third-fastest pace in history – because of speculation. House and unit prices in 2021 surged by 22.1 per cent in 2021, CoreLogic data showed. In records going back to 1880, that was the third-fastest in Australian economic history.”
“‘It’s good for a while. You guys can keep flipping houses, all this stuff, but I’m doing my best to warn you that something might happen,’ he told Daily Mail Australia from Phoenix in Arizona. ‘You can’t just keep printing money. What worked up to 2022 may not work after 2022.’”
“‘You guys are a bunch of punters, you gamble a lot,’ Mr Kiyosaki said. ‘I watched your properties go up and up and up and up and I got out of there. There are too many Aussies and people all over the world, they’re flipping houses. I’ve got to be ten times more cautious now because we have never been here, none of us have ever been here. None of us alive have ever been here.’”
From Newshub New Zealand. “It’s thought that ‘realistic pricing’ will prevail in 2022 as house value growth is expected to slow into the single-digits after a monster couple of years. ‘At this point in time, despite these increases, interest rates are still considered low by historic standards and this has most likely prevented the market being absolutely stuck in the mud,’ says QV Operations Manager Paul McCorry. ‘But any more increases could start to make both banks and their borrowers feel pretty nervous. More rigorous lending criteria that came into effect in December will also have banks really scrutinising every application.’”
“There’s also been a flood of new listings on the market, McCorry says, as people look to put their home up for sale when there is good weather. This means buyers will have a greater choice. ‘They won’t attend every open home and you won’t get as many multi-offer situations. The chatter about properties being handed in at auction is real, as is property sitting on the market beyond the initial tender period – often re-listed with an asking price. Managing vendor expectations coming out of 2021 and into 2022 will be a very advantageous skill set for an agent.’”
From Bloomberg. “China’s indebted real estate developers are getting desperate. Following the epic defaults of China Evergrande Group and Kaisa Group Holdings Ltd, the nation’s two largest high-yield dollar bond issuers, investor sentiment is understandably fragile. Developers, straining to repay debt, are pulling all stops to get loan extensions. Navigating the treacherous market can test even the cleverest financiers.”
“The latest uproar is over Guangzhou R&F Properties Co, which had a US$725 million (RM3.02 billion) dollar bond due. Ten days before Christmas, the developer asked for a six-month extension. To appeal to bondholders, it claimed to have put aside about US$300 million cash to retire some of the outstanding principal. Almost all investors agreed to the deal; over two-thirds were even willing to take a 17% haircut to get their cashback. After the investor vote, Guangzhou R&F changed course. It turns out the actual amount available is now ‘materially less’ than the US$300 million, with the repurchase amounting to only about US$116 million.”
“About US$609 million, or more than 80% of the original amount, is now due in July. Some of its investors must feel pretty stupid right now. While Guangzhou R&F gained six months of breathing room, it could turn out to be a very short-sighted move. The clever ones might be victims of their own cleverness, the Chinese like to say.”