Friday Market Update: June 24th 2022 with BRIAN MANNING

Happy Friday! Brian Manning here with your weekly update. Let’s get right to it. Monday this week everything was closed for a holiday. I actually hope you had a wonderful holiday weekend.

Tuesday this week, we’ve got existing home sales. Existing homes sales for closings in the month of May and on a month-over-month basis, it was down 3.4%. We expected to see this. This is not shocking.

We also got some feedback from CoreLogic. So, CoreLogic has a rent index. And on a year-over-year basis, the blended rent index is up 14%. So… what that means is it’s looking at rents for new leases and how much they’re increasing if you’re going to go find a new lease and then it looks at rents for lease renewals and how much you’re paying for your lease renewal. When you blend those two together, it’s up to 14%. So, certainly, good cause for first time home buyers that historically make up about 30% of the housing market. As you’re seeing rents go up. And your cost increase in there is definitely a cause for looking at the benefits of purchasing a home.

Wednesday this week and every Wednesday we get feedback from the MBA. That’s the Mortgage Bankers Association. They give us information on purchase applications. So, this is new people applying for a mortgage and that was up 8%. So really good to see just continued strength in people applying for a mortgage to purchase a new home. Thursday this week for the first time, we had Jerome Powell talking about a recession. And for the first time, he said the recession is likely. You know, they don’t have a lot of credibility. If you look at what they said last year, they kept saying that oh, inflation is transitory, inflation is transitory, it’s not a problem. Now here they are hiking rates and now for the first time, you have Jerome Powell saying the recession is likely. We’ve been talking about this for a long time. If you watch any of these videos, you’ll see we’ve been talking about this since last year. So… not surprised to hear that.

As shocking as it sounds, we’re going to look at some charts here in a minute that recessions are historically always good for mortgage interest rates in the housing market, which is very shocking, I know, but we’re going to look at that in a minute. Also, speaking of the Federal Reserve and Fed rate hikes, just from talking to a lot of our clients, there’s a lot of concerns right now about Fed rate hikes going forward. We’re going to look at some charts there. And there is just a misnomer. A lot of people think, you know, the Federal Reserve hiked rates the other day by 75 basis points or three quarters of a percent, the mortgage rate shot up by three quarters of a percent as well. And that is not the case. What the Federal Reserve is trying to do is combat inflation. And the way that they combat inflation is by raising the Fed funds rate.

So, when the borrowing costs and this is for short-term lending, so when borrowing costs for short-term lending increase, it makes us as consumers think about spending money, and potentially, we won’t go out and spend as much money. So, this impacts car loans, RV loans, boat loans, credit cards, home equity lines of credit, everything that’s considered short-term. It does not impact directly mortgage rates. When the Federal Reserve hike rate 75%, it does not mean that mortgage rates went up. Actually, it was quite opposite. So, the Feds doing this to combat inflation. Inflation is the enemy of mortgage interest rates. So, as the Federal Reserve is raising rates and they’re more successful eventually in combating inflation, you’re going to see mortgage rates come down.

Again, we’ll look at a chart for that in a minute because I know it’s counterintuitive, but I promise you that’s how it works. Today, we got new home sales. New home sales looks at signed contracts for the month of May. This was up 10.7%, a really strong report. There was also a revision to the prior month in April when they added in an additional 38,000 units. I have no idea how they misplaced 38,000 units in the month of April, but they did. And when you look at new home sales for the month of April and May, now we’re up 18%. So, new home sales is very strong right now.

So, let’s look at some charts here. Bear with me for one moment, please. And I just want to run through a couple of items here with you real quick. I’m not sure if that worked correctly. Hold on one second. Screen share. I swear I’ve done this before.

Okay, so this is a chart I want to show you, which is Fed rate hikes leading to recession. So, it goes all the way back to 1955. Every single time in history you look at the Federal Reserve hiking rates, it always pushes us into recession. Federal rate hikes, recession. Fed hikes rates, recession. These dark lines that go up and down are recessions. Going into the 70s, the Federal Reserve hikes rates. We go into recession. 75, 80, 82, 90s 2000, we saw the same thing, Fed rate hike here. And then we had Fed rate hikes again going in 2010. We had a little bit of a recession here in 2019 that was started, and then Covid changed all that. So, continuously, we’re seeing Fed rate hikes always leading into recession back from the 50s.

Then if you look at mortgage rates during a recession, you go back to 72, every time you go into a recession, and again, the dark vertical lines of recession, mortgage rates always drop, right? In 1980, mortgage rates went from 16% to 11.75%. Can you imagine that? People are crazy right now about 6% interest rates or 5%. Rates went from 16 to 11.75%. Then we had another recession in 82 and rates went from 18% to13%. 91, 11% to 8.75. 2002, this is Alan Greenspan time, 7.375 to 6.75. 2008, 6% to 4.875. 2019. So, again and again and again, Every time we go into recession, it’s always friendly for interest rates.

So… looking at the US economy right now, anticipating we’re going to see a recession here in the beginning of Q1 2023, that’s favorable for mortgage rates. Also, housing always stays strong through recession. So, this goes looking at recessions back to the 60s, and this is the Case Shiller index which looks at housing appreciation. So… every time we go into recession, 70s, prices did well, 74, 75, they did well. Ended in 80s, home prices went up. Into the 90s, they went up. Beginning of 2000, they went up. Yes, this is a blip right here. Totally different situation. This was back in 2007, 2008, when you can have a 580 credit score, not have a job, no income, and still get 100% financing on a million dollar home.

So, not shocked that that had a slight housing collapse attached to it. And then going in right now, we’re pushed into recession. In 19, we saw home prices go up. So, housing always remains strong through a recession as well. So, I would say you just gotta be careful of what you watch in the media. If you watched the media for the month of April on new home sales, they would tell you the housing is collapsing. And then here we are in the month of May, you have housing up 18% for new home sales when you look at April and May. So, you got to pay attention to the data. Unfortunately, right now the media is just doom and gloom and it’s pretty pessimistic. But when you look at the factual data, it’s all pretty good right now.

I’m around all weekend. If you have any questions, let me know. If you want to go through our strategic buyer consultation, give me a call, call me on my cell phone, text me. I’d love to help you in any way I can. Happy Friday.