Connect with us


The housing market correction takes an unexpected turn



The housing market correction takes an unexpected turn

The Federal Reserve has a simple inflation fighting playbook. It goes like this: Keep applying upward pressure on interest rates until business and consumer spending across the economy weakens and inflation recedes.

Historically speaking, the Fed’s inflation fighting playbook always delivers a particularly hard hit to the U.S. housing market. When it comes to housing transactions, monthly payments are everything. And when mortgage rates spike—which happens as soon as the Fed goes after inflation—those payments spike for new borrowers. That explains why as soon as mortgage rates rose this spring, the housing market slipped into a steep housing correction.

But that housing correction could soon lose some steam.

Over the past week, mortgage rates have declined fast. As of Tuesday, the average 30-year fixed mortgage rate sits at 5.05%, down from June, when mortgage rates peaked at 6.28%. Those falling mortgage rates give sidelined homebuyers immediate relief. If a borrower in June took out a $500,000 mortgage at a 6.28% rate, they’d pay $3,088 monthly in principal and interest. At a 5.05% rate, that payment would be just $2,699. Over the course of the 30-year loan that’s a savings of $140,000.

What’s going on? As weakening economic data rolls in, financial markets are pricing in a 2023 recession. That’s putting downward pressure on mortgage rates.

“The bond market is pricing in a high probability of a recession next year, and that the downturn will prompt the Fed to reverse course and cut [Federal Funds] rates,” Mark Zandi, chief economist at Moody’s Analytics, tells Fortune.

While the Fed doesn’t directly set mortgage rates, its policies do impact how financial markets price both the 10-year Treasury yield and mortgage rates. In expectation of a rising Federal Funds rate and monetary tightening, financial markets increase both the 10-year Treasury yield and mortgage rates. In expectation of a reduced Federal Funds rate and monetary easing, financial markets price down both the 10-year Treasury yield and mortgage rates. The latter is what we’re seeing now in financial markets.

As mortgage rates spiked earlier this year, tens of millions of Americans lost their mortgage eligibility. However, as mortgage rates begin to slide, millions of Americans are regaining access to mortgages. That’s why so many real estate professionals are cheering on lower mortgage rates: It should help to increase home buying activity.

While lower mortgage rates will undoubtedly prompt more sideline buyers return to open houses, don’t pencil in the end of the housing correction just yet.

“The bottom-line is the recent decline in mortgage rates will help at the margin, but the housing market will remain under pressure with mortgage rates at 5% (fewer sales, slowing house price growth),” wrote Bill McBride, author of the economics blog Calculated Risk, in his Tuesday newsletter. The reason? Even with the 1 percentage point drop in mortgage rates, housing affordability remains historically low.

“If we include the increase in house prices, payments are up more than 50% year-over-year on the same home,” writes McBride.

There’s another reason housing bulls shouldn’t get too overconfident: If recession fears—which are helping to drive mortgage rates lower—are correct, it would cause some additional weakening in the sector. If someone is afraid of losing their job, they’re not going to jump into the housing market.

“While lower rates by themselves are a positive for housing, that isn’t the case when accompanied by a recession and quickly rising unemployment,” Zandi tells Fortune.

Where will mortgage rates head from here?

Researchers at Bank of America believe there’s a chance that the 10-year Treasury yield could slip from 2.7 to 2.0% over the coming 12 months. That could make mortgage rates fall to between 4% and 4.5%. (The trajectory of mortgage rates correlates closely with the trajectory of the 10-year Treasury yield).

But there’s a big wild card: The Federal Reserve.

The Fed clearly wants to slow the housing market. The pandemic housing boom—during which home prices soared 42% and homebuilding hit a 16-year high—has been among the drivers of sky-high inflation. Reduced home sales and a decline in homebuilding should provide relief for the overstressed U.S. supply of housing. We’re already seeing it: Plummeting housing starts is translating into reduced demand for everything from framing lumber to cabinets to windows.

But if mortgage rates fall too quickly, a rebounding housing market could mess up the Fed’s inflation fight. If that happens, the Fed has more than enough monetary “fire power” to once again put upward pressure on mortgage rates.

“Whether we are technically in a recession or not doesn’t change my analysis. I’m focused on the inflation data…And so far, inflation continues to surprise us to the upside,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CBS on Sunday. “We are committed to bringing inflation down and we’re going to do what we need to do.”

Want to stay updated on the housing recession? Follow me on Twitter at @NewsLambert.

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.


Coinbase’s near-term outlook is ‘still grim’, JPMorgan says, while BofA is more positive about firm’s ability to face crypto winter



Coinbase's near-term outlook is 'still grim', JPMorgan says, while BofA is more positive about firm's ability to face crypto winter

Coinbase is well positioned to successfully navigate this crypto winter and take market share, Bank of America said in a research report Tuesday. It maintained its buy recommendation following the exchange’s second-quarter results.

The results warrant “a muted stock reaction,” the report said. Net revenue of $803 million was below the bank’s and consensus estimates, while its adjusted $151 million loss before interest, tax, depreciation and amortization was better than the street expected. Importantly, the company remains “cautiously optimistic” it can reach its goal of no more than $500 million of adjusted EBITDA loss for the full year, the report added.

Coinbase shares fell almost 8% in premarket trading to $80.74.

Bank of America notes that Coinbase had no counterparty exposure to the crypto insolvencies witnessed in the second quarter. The company also has a “history of no credit losses from financing activities, holds customer assets 1:1, and any lending activity of customer crypto is at the discretion of the customer, with 100%+ collateral required.” These rigorous risk-management practices will be a “positive long-term differentiator” for the stock, the bank said.

JPMorgan said Coinbase had endured another challenging quarter, while noting some positives.

Trading volume and revenue were down materially. Subscription revenue was also lower, but would have been much worse were it not for higher interest rates, it said in a research report Wednesday.

The company is taking steps on expense management, and in addition to the June headcount reductions, is scaling back marketing and pausing some product investments, the note said.

The bank says the company’s near-term outlook is “still grim,” noting that the exchange expects a continued decline in 3Q 2022 monthly transacting users (MTUs) and trading volumes, but says Coinbase could take more “cost actions” if crypto prices fall further.

JPMorgan is less optimistic than Bank of America about the company in the near term, saying pressure on revenue from falling crypto markets will have a negative impact on the stock price. Still, it sees positives including higher interest rates, from which the firm will generate revenue. It also sees opportunities for the exchange to grow its user base, leveraging almost $6 billion of cash. The surge in crypto prices in July, and the forthcoming Ethereum Merge are also seen as positive catalysts, it added.

The bank maintained its neutral rating on the stock and raised its price target to $64 from $61.

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.

Continue Reading


Elon Musk sold $6.9B in Tesla stock in case he’s forced to buy Twitter



Elon Musk sold $6.9B in Tesla stock in case he's forced to buy Twitter

Elon Musk sold $6.9 billion of his shares in Tesla Inc., the billionaire’s biggest sale on record, saying he needed cash in case he is forced to go ahead with his aborted deal to buy Twitter Inc.

“In the (hopefully unlikely) event that Twitter forces this deal to close *and* some equity partners don’t come through, it is important to avoid an emergency sale of Tesla stock,” Musk tweeted late Tuesday after the sales were disclosed in a series of regulatory filings. 

Asked by followers if he was done selling and would buy Tesla stock again if the $44 billion deal doesn’t close, Musk responded: “Yes.”

Tesla’s chief executive officer offloaded about 7.92 million shares on Aug. 5, according to the new filings. The sale comes just four months after the world’s richest person said he had no further plans to sell Tesla shares after disposing of $8.5 billion of stock in the wake of his initial offer to buy Twitter.  

Musk last month said he was terminating the agreement to buy the social network where he has more than 102 million followers and take it private, claiming the company has made “misleading representations” over the number of spam bots on the service. Twitter has since sued to force Musk to consummate the deal, and a trial in the Delaware Chancery Court has been set for October. 

In May, Musk dropped plans to partially fund the purchase with a margin loan tied to his Tesla stake and increased the size of the equity component of the deal to $33.5 billion. He had previously announced that he secured $7.1 billion of equity commitments from investors including billionaire Larry Ellison, Sequoia Capital, and Binance. 

“I’ll put the odds at 75% that he’s buying Twitter. I’m shocked,” said Gene Munster, a former technology analyst who’s now a managing partner at venture-capital firm Loup Ventures. “This is going to be a headwind for Tesla in the near term. In the long term, all that matters is deliveries and gross margin.”

At the weekend, Musk tweeted that if Twitter provided its method of sampling accounts to determine the number of bots and how they are confirmed to be real, “the deal should proceed on original terms.” 

Musk, 51, has now sold around $32 billion worth of stock in Tesla over the past 10 months. The disposals started in November after Musk, a prolific Twitter user, polled users of the platform on whether he should trim his stake. The purpose of the latest sales wasn’t immediately clear.  

Tesla shares have risen about 35% from recent lows reached in May, though are still down about 20% this year. 

With a $250.2 billion fortune, Musk is the world’s richest person, according to the Bloomberg Billionaires Index, but his wealth has fallen around $20 billion this year as Tesla shares declined.    

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.

Continue Reading


The rent is too d*mn high for Gen Z: Younger generations are ‘squeezed the most’ by higher rents, BofA says



The rent is too d*mn high for Gen Z: Younger generations are 'squeezed the most' by higher rents, BofA says

Most of Gen Z is too young to remember the 2010 New York gubernatorial candidate Jimmy McMillan.

But over a decade later, they would probably agree with his signature issue (and catchphrase): the rent is too damn high.

This July, median rent payments were 7.4% higher than during the same period last year, according to a Bank of America report released Tuesday. 

The national median price for a one-bedroom apartment has been hitting new highs nearly every month this summer. It was $1,450 for July, according to rental platform Zumper. In the country’s largest city, New York, average rent exceeded a shocking $5,000 a month for the first time ever in June. 

But inflation in the rental market hasn’t hit each generation equally, and no one is getting squeezed harder by the higher monthly payments as Gen Z. Those born after 1996 have seen their median rent payment go up 16% since last July, compared to just a 3% increase for Baby Boomers, BofA internal data shows. 
“Younger consumers are getting squeezed the most by higher rent inflation,” BofA wrote.

The great rent comeback

Early in the pandemic, landlords slashed rents and gave significant COVID discounts to entice tenants to stay instead of leaving urban areas. Once those deals started expiring in 2021, many landlords suddenly raised payments once again, sometimes asking for over double their pandemic value. 

Young people across the board have been hit hard, and rent burdens compared to age can be seen even within a single generation. Younger millennials had their median rent payment grow 11% from last year, while the median payment for older millennials rose 7%. Gen X experienced a 5% median rent increase, according to BofA. 

It’s not a surprise, then, that Gen Z feels so strapped for cash. The majority of young people, 61%, said they want to receive their wages daily instead of twice a week, a practice typically reserved for workers living paycheck to paycheck, according to a report from the Center for Generational Kinetics, which specializes in research across the generations. Rising rent inflation has even priced nearly a third of Gen Zers out of the apartment search altogether. Around 29% of them have resorted to living at home as a “long-term housing solution,” according to a June survey from personal finance company Credit Karma.

It’s no wonder—the rent really is too high.

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.

Continue Reading

Copyright © 2021 Seminole Press.