November Market Update
INDUSTRY INSIDERS - RECESSION IS REAL
Economists are not the only ones warning of the possibility of a looming recession. The Chief Economist, Mike Frantantoni, of the Mortgage Bankers Association believes we will see a recession on or before Q2 of next year.
“We could absolutely get a recession in the first half of next year is what makes sense for when it would happen,” Frantantoni stated at a recent conference.
“Interest rates will, on average, remain lower for longer given the somewhat cloudy economic outlook. These lower rates will, in turn, support both purchase and refinance origination volume in 2020,” Fratantoni said. “Lower-than-expected mortgage rates gave the refinance market a significant boost this year, resulting in it being the strongest year of volume since 2016. Given the capacity constraints in the industry, some of this refinance activity will spill into the first half of next year.”
A mild recession could simply reset the economy and pull back housing to more affordable levels. A slowing economy should also drive long term rates lower, further improving home affordability and fueling a refinance boom, which is already underway. If unemployment numbers spike upward, a recession would be nearly unavoidable and could lead to a surge in credit defaults, in all categories. Mortgage defaults are currently extremely low, but the economy has been strong for a decade, and credit has not been tested for some time.
Find out if you are eligible for refinance your mortgage to lower your payment here.
TRUMP STRONG-ARMS FED, AGAIN
President Donald Trump tweeted at 10:20 a.m. on Thursday (10/24): “The Federal Reserve is derelict in its duties if it doesn’t lower the Rate and even, ideally, stimulate. Take a look around the World at our competitors. Germany and others are actually GETTING PAID to borrow money.” – housingwire.com
Trump has been an outspoken critic of the Federal Reserve, going as far as demeaning board members, calling them in tweets “boneheads” and “clueless,” in an attempt to sway monetary policy. The market had been anticipating that the Fed will cut the Fed Funds rate another 25 basis points at their next meeting, but Trump is calling for a rate of 0; which means a 200-basis point cut.
On October 30th, the Fed did cut short term rates by another 25 basis points; far less than what the President has been demanding.
“After cuts at the last three meetings, we feel that policy is well-position to support the outlook that I described,” he said. “We’re going to be watching all factors and if developments emerge that cause a material reassessment with that outlook, we would respond accordingly, but that’s what it would take: a material reassessment of our outlook.” - Fed Chairman Jerome Powell
Cutting rates too fast could create a financial disaster if the country enters a much-anticipated recession, and the Fed is out of options for a fiscal stimulus. Trump’s aggressive approach to slashing rates to zero is to prevent an economic slowdown ahead of the election, as a recession could spell doom for him on the re-election.
The last President to try to press the Fed for political gain was Richard Nixon.
BREAKING POINT FOR STUDENT DEBT
Student debt is now at a suffocating all-time high, as it hits $1.5 trillion.
“$1.5 trillion is enough to buy every single home on the market in the U.S. twice.” – housingwire.com
“Student debt has ballooned to an all-time high as the price of education continues to outpace wage growth, and this is holding back many potential buyers from being able to purchase a home,” realtor.com Senior Economist George Ratiu said. “Student debt is already impacting borrowers’ ability to buy a home and education debt is expected to hamper consumers’ financial decisions for many years down the road.”
Student debt is now outpacing wage growth 4 to 1. Many students are digging holes they may never get out of, slowing their purchasing power.
“The important implication of rising debt is that young generations are delaying major life decisions,” Ratiu said. “On the real estate front, the affordability crisis in major cities is driving young families to more affordable midwestern and southern markets, where savings for a down payment stretch much further and can turn owning a home from a future dream into today’s reality.”
Today student debt, consumer debt, and mortgage debt sit at all-time historic highs. The U.S. appears to be at the end of a ten-year economic growth cycle. What happens to all that debt in a recession, that appears to be imminent?
HOUSING MARKET SCREAMS RECESSION
Employment has been exceptionally strong, but wages are not keeping pace with the cost of housing. Year over year income showed a 1.3% increase in wages, where housing posted a 4.7% gain. – National Association of Realtors This gap is long past unsustainable.
The housing market is signaling there will be an economic recession by the 2020 election, according to Benn Steil, director of international economics at the Council on Foreign Relations.
“Looking back at the years preceding the 2008 financial crisis, a critical warning sign was the surging gap between the growth in home prices and household income,” Steil wrote in a blog post with former CFR analyst Benjamin Della Rocca on the think tank’s website. “Today, a parallel dynamic is playing out.”
“The trend-line in existing-home sales growth has also been down since 2015, tipping into negative territory at the start of last year,” the post said. “Similar drops have preceded nearly every recession since 1970,” it said.
“When income fails to keep pace with home prices, the latter must fall back,” the post said. “Falling home prices, in turn, drive down household spending by way of the so-called wealth effect – that is, consumers cut spending when their assets fall in value.”
“If these trends continue, we should expect broad falls in home prices beginning by mid-2020, which will, in turn, drag down household spending against a darkening economic backdrop,” the post said. “Growth has been slowing, with Trump’s tariff war hitting exports. Manufacturing is contracting. Retail sales, excluding autos, have stalled. Consumer confidence is falling.” – housingwire.com
MANHATTAN – CANARY IN THE COAL MINE
In the last 12 months, home prices in Manhattan have tanked 17%. The average home price now just shy of $1MM for the first time since 2015.
“Market prices have gone from what was once described as the kindest, gentlest correction to a near free-fall,” said Garrett Derderian, CORE’s managing director of market analysis. “The last time conditions were described in such a way was in the height of the recession.” – housingwire.com
QE OVER – NOT SO FAST
The Federal Reserve aggressively started buying short term Treasury debt in 2008 in an aggressive attempt to ease the recession and prevent an economic depression. This policy was coined QE, or quantitative easing. This policy was to come to an end this year with the economic recovery at a ten-year high. – Wall Street Journal
In October, it appears that the Fed has started that easing once again, with the purchase of $60 billion a month. The Fed is denying that QE has begun again. Keep in mind that the Fed does not have a history of telling full truths, as not to cause panic in the financial markets.
Time will tell if the $60 billion per month gets expanded, and QE gains steam; a clear move to stall an economic slide.
CONSTITUTIONALITY OF THE CFPB TO BE HEARD BY THE SUPREME COURT
The Consumer Financial Protection Bureau (CFPB), the agency created to protect consumer interest and prevent another financial crisis that led to the Great Recession, is under attack again. When the CFPB was created, it was created with protections from the President of the United States. In 2017, this protection was challenged in a case between PHH, a mortgage company, and the CFPB. PHH lost that fight.
Since the PHH case, the makeup of the Supreme Court now looks very different from the appointment of two new, conservative, Supreme Court justices. This new Court is now set to take on the constitutionality of the agency created to protect consumers. The not so partisan Court is believed by industry leaders to likely vote against the CFPB, ruling that the agency is in fact unconstitutional. Such a vote would allow the President to fire, at will, the Director of the CFPB.
Today, even the current Director of the CFPB, Kathy Kraninger, is supportive of a ruling making her own agency unconstitutional. The future of consumer protection looks to be coming to an end.
WARNING TO AGENCY SHAREHOLDERS
“If the circumstances present themselves where we have to wipe out the shareholders, we will.” - Mark Calabria, director of the Federal Housing Finance Agency (FHFA)
In 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the U.S. government. The government received senior preferred stock making up 80% of the total Agency's stock. The stock, which was traded at $60 a share, plummeted to a value just north of zero. Stockholders got hammered, and hedge funds jumped in to purchase stock at a deep discount.
Now as Fannie and Freddie are destined to come out of conservatorship, the fate of current shareholders seems to be dire. The current Director of FHFA, the agency with direct oversight of Fannie and Freddie, has been crystal clear on his intentions to end the conservatorship, even if terminal for shareholders.
RATE WATCH – FLAT (treading lower)
I am licensed in these states: Alabama, Arkansas, Arizona, California, Colorado, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Minnesota, Montana, Nebraska, New Hampshire, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, Washington