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As anticipated, Chairman Powell maintained a rather hawkish tone Friday afternoon, citing unexpected economic strength in the third quarter as reason to stay vigilant on inflation. “We are attentive to signs that the economy may not be cooling as expected.” Powell said. The Fed, Powell said, is “prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
JPMorgan Asset Management’s chief global strategist David Kelly said Powell wants to keep expectations open as they approach the September meeting. Kelly, however, says from his point of view the bigger risk for the Fed at this point is hiking again, as we don’t yet know the full, lagged effects of the Fed’s aggressive rate rises yet, and there is every reason to believe, Kelly argues, inflation is on its way down, citing recent global PMI numbers, new car prices falling this year, and rents stabilizing. JPMorgan expects we will be in the low 3s by the end of this year and 2% by end of next year. Kelly also said he believes it is nearly impossible to go into recession with 9.5 million job openings, a lingering effect of the pandemic that is helping to keep inflation lower.
Morgan Stanley’s Global Head of Corporate Credit Research Andrew Sheets said much the same on inflation: “Two key measures of underlying inflation, core PCE and core CPI, slowed sharply in the most recent reading.” Sheets said. He says car prices and rent—big drivers of high inflation last year—are now pointing in the opposite direction. Sheets also sights tightening bank credit and a moderation in job growth as a sign rates are restrictive enough for Morgan Stanley economists to believe the Fed is done this year.
On the bond market, Sheets also noted: “Since 1984, there have been five times where the Fed has ended interest rate hiking cycles after multiple increases. Each time the yield on the U.S. aggregate bond index peaked within a month of this last hike. In short, the Fed being done has been good for the U.S. Agg Bond Index.”
Perhaps in line, 30 year mortgage rates ticked further upward over the 7% level on tight housing supply, as Mortgage Bankers Association (MBA) data indicated mortgage application activity drifted further downward to levels not seen in nearly three decades. Lawrence Yun, chief economist at the National Association of Realtors, said the future path of rates depends on 10-year Treasury yields and on what the Fed does at its Sept. 20 meeting. “We are at this critical juncture,” Yun said. “[Mortgage rates] can either break higher, up to 8 percent, or lower, to 6.5 percent.”
Meanwhile, Auction.com reported more than nine in 10 default servicing industry leaders expect completed foreclosure auction volume to increase this year compared to 2022, with 85 percent of those surveyed expecting home prices to decline in 2023 compared to 2022.
As anticipated, Chairman Powell maintained a rather hawkish tone Friday afternoon, citing unexpected economic strength in the third quarter as reason to stay vigilant on inflation. “We are attentive to signs that the economy may not be cooling as expected.” Powell said. The Fed, Powell said, is “prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
JPMorgan Asset Management’s chief global strategist David Kelly said Powell wants to keep expectations open as they approach the September meeting. Kelly, however, says from his point of view the bigger risk for the Fed at this point is hiking again, as we don’t yet know the full, lagged effects of the Fed’s aggressive rate rises yet, and there is every reason to believe, Kelly argues, inflation is on its way down, citing recent global PMI numbers, new car prices falling this year, and rents stabilizing. JPMorgan expects we will be in the low 3s by the end of this year and 2% by end of next year. Kelly also said he believes it is nearly impossible to go into recession with 9.5 million job openings, a lingering effect of the pandemic that is helping to keep inflation lower.
Morgan Stanley’s Global Head of Corporate Credit Research Andrew Sheets said much the same on inflation: “Two key measures of underlying inflation, core PCE and core CPI, slowed sharply in the most recent reading.” Sheets said. He says car prices and rent—big drivers of high inflation last year—are now pointing in the opposite direction. Sheets also sights tightening bank credit and a moderation in job growth as a sign rates are restrictive enough for Morgan Stanley economists to believe the Fed is done this year.
On the bond market, Sheets also noted: “Since 1984, there have been five times where the Fed has ended interest rate hiking cycles after multiple increases. Each time the yield on the U.S. aggregate bond index peaked within a month of this last hike. In short, the Fed being done has been good for the U.S. Agg Bond Index.”
Perhaps in line, 30 year mortgage rates ticked further upward over the 7% level on tight housing supply, as Mortgage Bankers Association (MBA) data indicated mortgage application activity drifted further downward to levels not seen in nearly three decades. Lawrence Yun, chief economist at the National Association of Realtors, said the future path of rates depends on 10-year Treasury yields and on what the Fed does at its Sept. 20 meeting. “We are at this critical juncture,” Yun said. “[Mortgage rates] can either break higher, up to 8 percent, or lower, to 6.5 percent.”
Meanwhile, Auction.com reported more than nine in 10 default servicing industry leaders expect completed foreclosure auction volume to increase this year compared to 2022, with 85 percent of those surveyed expecting home prices to decline in 2023 compared to 2022.
Fed Chairman Jay Powell is on the Hill delivering the Fed’s semiannual report on monetary policy to the Senate and House. He told the House Committee the Fed is likely to raise interest rates in the coming months but at a slower pace than they have moved over the past year, weighing the risk that the combination of their 10 consecutive rate hikes and recent banking stress is more than enough to slow the economy to tame inflation (perhaps causing an deeper economic downturn than expected) against the risk that the combination of economic strength of the first two quarters and inflation staying elevated may require additional tightening. Powell pushed back on the notion that last week’s pause was indeed a pause, signaling the Fed will not hesitate to take future action on inflation.
In the absence of recent negative headlines around regional bank stress in the US, Morgan Stanley said they believe there is complacency setting in while “key data points on bank balance sheets show that things have worsened on the margin since March.” We’ve been watching this relative to its potential impact on the commercial real estate loan refinances expected in the next 12-18 months.
Green Street said commercial deals are down a “stunning” 70% year over year.” With the U.S. vacancy average at 18 percent for office properties verses 3.8 percent for industrial properties, and given a lower per-square-foot cost relative to conversion to residential brokerage firm, a Newmark report find conversions from office to industrial are on the rise. Although delinquency rates for office properties are low, with office vacancy rates on the rise, the Financial Stability Oversight Council (FSOC) said Friday that they are stepping up scrutiny of how exposed banks are to commercial real estate.
Meanwhile, a slight decline in 30-year fixed rates over the past few weeks was met with a Mortgage Bankers Association (MBA) report that purchase applications increased “driven by a 2 percent gain in conventional purchase applications and a 3 percent increase in FHA purchase activity,” according to Joel Kan, MBA vice president and deputy chief economist. (The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.73 percent from 6.77 percent, MBA said)
The American Bankers Association’s Economic Advisory Committee said they expect credit conditions to tighten the rest of the year and loan losses to rise. Still, given the low inventory, the Census Bureau and HUD jointly reported this week that privately owned housing starts in May hit a seasonally adjusted annual rate of 1,631,000, 21.7% above the revised April estimate of 1,340,000 and up 5.7% year-over-year. The May rate for units in buildings with five units or more hit 624,000. Single-family housing starts were just shy of 1 million at 997,000, or 18.5% above the revised April figure — the largest single-month jump since June 2020 which occurred as the market rebounded from the initial shock of the COVID pandemic.
In a recent piece published by DS News, Gate House Digital CEO/President Dain Ehring discusses the role of Artificail Intelligence (AI) in mortgage lending decisions.
Amidst significant momentum for the technology, Dain shares his insights on its increased usage within the mortgage market and opines that the “genie is out of the bottle.” Rather than looking backward, he argues it is time to push forward, albeit deliberately, in the name of expanding credit to qualified unbanked applicants, fair lending, and common sense.
While acknowledging a need for sound guardrails, Ehring strikes a cautious note against government’s preference for ambiguity in the guidance, a trend that stifles innovation and product development in the private sector, and often leads to capitulation to the legal risks of their ingenuity, and ultimately, producing “increased fees, fewer services, and diminished access to affordable credit for aspiring homeowners.”
“Without a thorough and prudent understanding of their appropriate role for the agencies, they could produce harmful unintended consequences,” Dain writes. “…Washington, D.C., must be careful not to wield a rusty axe, when a surgeon’s knife is more warranted.”
Dain warns that our oversight agencies need “not become a drag on the very thing most of our policymakers and government leaders want: mortgage financing available to families in need of affordable, quality housing, thereby creating more equitable homeownership.”
In a note of optimism for AI’s future in mortgage lending, Dain explains that “artificial neural networks” are helping to overcome the objections of its skeptics and critics. Can AI be “be free of bias” as the top regulator suggests, Dain asks: “Compared to what?”
