The End of the Stock Markets: Why Do Markets and Inflation Come Back so Strangely? An Analysis by CNN Business Before the Bell
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Markets went into a tailspin Thursday morning after red-hot inflation data raised fears that the Federal Reserve would continue raising interest rates aggressively. Then, something strange happened.
The stocks staged a huge comeback. The S&P 500 traded in a wide range for most of the day until it ended the day up 2%.
What is happening? The consumer price index, or CPI, rose 0.4% in September from the previous month, double the 0.2% estimate from analysts surveyed by Refinitiv. On an annual basis, inflation was up 8.2%.
George Ratiu, manager of economic research at Realtus.com, said that the Fed signaled to the capital markets at the same meeting that it sees its aggressive monetary tightening having an effect on inflation.
Why do the markets and inflation data divergences seem so strange? Investors could be betting that the stronger-than-expected inflation report means price increases are near their peak. The rollercoaster market illustrates how investors are desperately grasping for clues about what the Fed will do next.
What the Future holds for the American Household: Allianz Predictions for the Next Ten Years and the Long-Term Growth of Household Assets
The big picture: Household wealth is on track for its first significant reduction since the financial crisis in 2008, according to a new report by financial services company Allianz.
Global assets will decline by more than 2% in the coming years. Households will lose around a tenth of their wealth this year.
The report does not give a good picture. The 2008 financial crisis was marked by a relatively quick turnaround, but the current outlook shows stagnant growth in the future. The average growth of financial assets is expected to be around 4.6% until 2025, compared with 10.4% over the last three years.
Increased food and energy scarcity are a consequence of Russia’s war on Ukraine. Central banks around the world are raising borrowing costs because of inflation. Stock markets are likely to end the year in the red– 2021 “might have been the last year of the old ‘new normal’, with low interest rates and bullish stock markets,” wrote Allianz researchers.
Inflation outran wage growth and pandemic savings as disposable income fell from the spring of 2021. Consumers are borrowing more, while American bank accounts are still very strong. In the third quarter of 2022, credit card balances jumped 15% year over year. That’s the largest annual jump since the New York Fed began tracking the data in 2004.
According to the insurer, the changes will take years to recover from. Today’s release of retail sales for the US will likely shed light on how the consumer is faring, as will the earnings reports from some of the country’s largest banks.
Mortgage Rates in 2022 Revisited: A Tale of Two Economy, a Big Bad Brain, and a Two Economy Curve
The 30-year fixed-rate mortgage averaged 6.31% in the week ending December 15, down from 6.33% the week before, according to Freddie Mac. The 30-year fixed rate was 3% a year ago.
Mortgage rates rose throughout most of 2022, spurred by the Federal Reserve’s unprecedented campaign of harsh interest rate hikes to tame soaring inflation. Mortgage rates went down following the data that showed inflation might have finally reached its peak.
Freddie Mac’s chief economist says there is a tale of two economies in the data. Strong job and wage growth is keeping consumers’ balance sheets positive as recession fears and housing affordability are driving demand down.
Doing the math: A year ago, a buyer who put 20% down on a $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average interest rate of 3.05% had a monthly mortgage payment of $1,324, according to calculations from Freddie Mac.
According to Lazzara, mortgage financing remains a headwind for home prices if interest rates stay stable or rise, as economic weakness, such as the possibility of a recession, will also affect potential buyers. Home prices may continue to weaken, with these prospects for a challenging macroeconomic environment.
The new plan will contain much of what is currently offered with the cheapest plan, but it will include an average of four to five minutes of commercials per hour. The ads will play for 15 or 30 seconds before and after the TV series and movies.
Mortgage Market Activity Sank to a Second Low in the Last Three Years After the Stock Bought by Netflix, and Its Implications for the Mortgage and Housing Markets
Following that news, the stock tumbled, and the company lost billions in market cap. The platform laid off hundreds of employees and raised questions about how the entire streaming marketplace will function in the future.
▸ Third quarter earnings from Bank of America
(BAC), Goldman Sachs
(GS), Johnson & Johnson
(JNJ), United Airlines
(UAL), American Airlines
(AAL), Tesla
(TSLA), AT&T
(T), Verizon
(VZ) and Netflix
(NFLX).
flattening of the rates in the 5.3% to 6.0% range in 2020 would give housing markets an improved foundation, while a return to the3.0% range is not anticipated in the near future.
At the same time, he said, many companies expect the economy will enter a recession as a result of the Fed’s rate hikes, even in the face of data pointing to continued resilience.
“Homebuyers are waiting for rates to decrease more significantly, and when they do, a strong job market and a large demographic tailwind of Millennial renters will provide support to the purchase market,” said Khater. “Moreover, if rates continue to decline, borrowers who purchased in the last year will have opportunities to refinance into lower rates.”
Freddie Mac’s chief economist says mortgage application activity sunk to a quarter-century low this week as high mortgage rates weaken the housing market. “While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.”
Purchase applications have plummeted to their lowest level since the beginning of the year and are 40% lower compared to last year, according to a report by the Vice President and deputy chief economist of the Mortgage Bankers Association. “Potential buyers remain quite sensitive to the current level of mortgage rates, which are more than two percentage points above last year’s levels and have significantly reduced buyers’ purchasing power.”
NAR anticipates the economy will continue to add jobs throughout this year and next, with the 30-year fixed mortgage rate steadily dropping to an average of 6.1% in 2023 and 5.4% in 2024.
House prices have been falling since the 2008 financial crisis: Evidence from the New Zealand Real Estate Institute from the 2000s to the 2021 global financial crisis
There is a principal economist at The Conference Board. The opinions expressed in this commentary are his own. CNN has more opinion.
But the housing bubble in the 2000s was underpinned by predatory lending, poor underwriting, adjustable-rate mortgages and rampant speculation. Americans were convinced that housing was a great short-term investment and that prices would only continue to rise. This famously turned out not to be the case.
New regulations were put in place after the 2008 financial crisis. Banks are better capitalized, the lending standards are tighter, and most mortgages are fixed-rate. This all buttresses the financial system from another housing downturn.
That’s good news for home buyers since it improves affordability, bringing down the cost to finance a home. It benefits sellers since the intensity of interest-rate lock-in is reduced.
Americans have more equity in their homes than they had before the last financial crisis. Indeed, loan-to-value ratios, which measure the amount of a mortgage relative to the value of a home, for US mortgages have fallen to just 42% – a 12-year low. This creates more of a “cushion” for prices to decline before home values fall below the loans that underpin them. If a home is sold at a loss, it will most likely hit homeowners before hitting the banks.
The manager of Barfoot & Thompson said that houses flew out the door. “There were chin-dropping moments when agents stand around the room and are gobsmacked at the prices being achieved,” he told CNN Business.
The time it takes to sell a property in New Zealand has increased by around 10 days on average since October 2021, according to the Real Estate Institute of New Zealand. Sales have plunged nearly 35% and median house prices are down 7.5% over the past year.
In May 2021, when sales attracted thousands of people, prices increased even further. Since then, Barfoot & Thompson’s clearance rate at auction has plummeted, according to Sykes, prolonging sales times and sending prices lower.
Since the global financial crisis, house prices have been falling across the world, and are set to go even lower, as the market is running out of steam.
Rising interest rates are driving the dramatic change. Central banks on a warpath against inflation have taken rates to levels not seen for more than a decade, with ripple effects on the cost of borrowing.
Is it a key factor in determining how low prices go? Unemployment. A sharp increase in joblessness could lead to forced sales and foreclosures, “where steep discounts are common,” according to Slater.
If the correction in prices is mild, it could have consequences because it will affect activity in other sectors of the economy.
Falling prices probably are a result of the data lags. We are in the early stages of a downturn and the only real questions are how steep and how long it will last.
In the United States, sales of existing homes were down by more than 28% year-over-year in October, the ninth consecutive monthly decline, according to the National Association of Realtors.
Sales are sliding elsewhere too, as banks take a more cautious approach to lending and aspiring homebuyers delay purchases in the face of much higher borrowing costs and a deteriorating economic outlook.
“New listings were at the lowest level in the last six years in January as sellers stayed on the sidelines, waiting to see buyers return, before placing their homes for sale,” said Jones. During the first month of this year, the year-over-year declines in both existing and new home sales slowed, and buyer sentiment improved slightly.
Mortgage rates in 25 major cities around the world tracked by UBS have almost doubled on average since last year, making house purchases much less affordable.
“A skilled service sector worker can afford roughly one-third less housing space than before the pandemic,” according to the UBS Global Real Estate Bubble Index.
In Britain, more than 4 million first-timers have been granted a mortgage in the last few years. Tom Bill said that many people do not understand what it is like when their outgoings spike.
With a larger share of variable ratemortgages in countries like Sweden and Australia, the shock will be immediate and could increase the risk of forced sales that drive prices down faster.
The average maturity of a large proportion of fixed-rate mortgage in New Zealand and the United Kingdom is very short.
The global financial crisis isn’t immune to a global housing bubble: Oxford Economics estimates the growth of global employment, employment, and mortgage rates
“This means that there will be more debt subject to higher rates over the next year or so, than might first appear to be the case,” stated the report issued last month.
“History shows that if labor markets can remain strong, then the chances of a more benign correction are higher,” according to Innes McFee, chief global economist at Oxford Economics.
Employment levels in many advanced economies have recovered from the start of the pandemic. There are early indications that labor markets are cooling due to the weak economy.
The number of hours worked in the third quarter was 1.5% below pre-pandemic levels and resulted in a deficit of 40 million full time jobs according to estimates by the International Labour Organization.
The outlook for global labour markets has worsened in recent months and on the current trends job vacancies will decline and global employment growth will degrade in the final quarter of 2022, said the ILO in an October report.
The market watchers don’t expect another housing market crash. Banks and households are in better financial shape, and housing supply in some countries remains tight.
In a worst-case scenario — one in which house prices fall more sharply than anticipated and price declines are met with a slump in residential investment and tighter lending by banks — Oxford Economics forecasts that world GDP will expand by just 0.3% in 2023, rather than the 1.5% it currently expects.
The Chinese housing market is not immune from the global financial crisis. The Chinese housing sector is contributing to the slump due to the impact on world output of a global housing downturn, rather than offsetting it.
Inflation and Mortgage Rates: Predictions from the Census Bureau, Mortgage Bankers’ Association, and Lennar, a Leading Mortgage Builder
The Bureau of Labor Statistics’ closely watched index showed inflation cooled considerably in November, and was at its lowest level in nearly a year.
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. Only borrowers who put 20% down are included in the survey.
While the Fed does not set the interest rates borrowers pay on mortgages directly, its actions influence them. Mortgage rates can be tracked by the yield on 10-year US Treasury bonds. The 30-year fixed-rate mortgage usually goes up when the rate goes up. When the Treasury rate goes down, so do mortgage rates.
“Depending on the extent of the impact of a tighter banking sector, Powell expressed a ‘wait-and-see’ approach to further contractionary policy,” Jones said. “However, the federal funds rate is expected to remain elevated through the end of the year, meaning that a higher interest rate environment is here to stay for the time being, including for home loans.”
Inflation is still quite high, but it is slowing and analysts think there will be a slower economy over the next few quarters which will bring down inflation. This is positive news for mortgage borrowers, who can expect to see rates fall through this year, according to Fratantoni.
“With more homes available for sale, and more of them sporting price cuts, some buyers are running the math and finding that the slide in rates is offering better options within their budgets,” said Ratiu.
Mortgage applications rose last week as buyers took advantage of a few weeks of slightly lower rates, according to the Mortgage Bankers Association.
The vice president and deputy chief economist at the Mortgage Bankers Association said that purchase activity that was put on hold last year due to the quick runup in rates is coming back as rates ease and housing demand remains strong.
A lot of housing data is being worked on. The Census Bureau will release housing starts and building permits for November, followed by the release of new home sales for the same month. The data on mortgage rates and applications will be released on Thursday, as well as the November Existing Home Sales numbers from the National Association of Realtors on Wednesday.
Still, there are some promising signs that the worst could soon be over. Shares of Lennar
(LEN), one of the largest homebuilders in the US, rallied after reporting earnings last week. The company was able to top forecasts and has higher than expected guidance for the number of homes it expects to deliver next year.
Lennar investors “may be looking ahead to 2023, perhaps crossing the valley from recession to potential recovery,” according to CFRA Research analyst Kenneth Leon.
The recent slide in prices is important for the investment firm that buys single-family homes to rent out.
Ratiu said that investors assumed the economy would fall into a recession due to the higher borrowing costs, which would make it harder for consumers to continue spending on credit. Even as Americans shifted their focus to services due to the strong job market, they still maintained a steady consumption pace.
Some people are saying that the good news is that most existing homeowners will still be paying their mortgage on time even though housing sales may remain weak.
That is a stark contrast from 2008, when many people with poor credit histories were unable to afford their mortgage payments.
What Will General Mills (GIS) Tell Us About the Next Five Years? A Brief Review of Key Issues for Stock Markets and Homebuying
There are no companies reporting their latest earnings this week. But the few that are could give more clues about the financial health of consumers and the state of corporate spending.
Cereal giant General Mills
(GIS) will release earnings on Tuesday. Analysts are expecting a slight increase in both sales and profit. Consumers are growing increasingly wary of inflation, but they still eat their Wheaties. Shares of General Mills
(GIS) have soared nearly 30% this year.
Sneaker king and component of the DOW, Nike, used car store CarMax, and memory chip maker, Micron, are among companies that analysts don’t think will do as well in the future.
In their earnings reports, companies will be paying close attention to what they say regarding their outlook for the coming year. Analysts expect earnings growth to be 5.3% for the next five years. If companies start cutting their forecasts due to worries about the broader economy, that could be too optimistic.
A recession is a very high possibility, according to Vincent Reinhart, chief economist and macro strategist of Dreyfus & Mellon. There will be a knock-on effect for corporate earnings. Weak earnings and higher rates suggest that there will be further pain for stocks.
US housing starts and building permits, China’s loan prime rate, and the Bank of Japan’s interest rate decision are all on Tuesday.
Throughout 2022, the Federal Reserve hiked its benchmark interest rate at a record pace to slow the economy and fight high inflation. Housing took the brunt of the impact, as the most interest rate-sensitive sector of the economy. The Fed’s actions had the intended effect, though, with housing affordability deteriorating and demand dwindling, which led to declining sales and slower annual price growth.
The National Association of Realtors projects prices will go up less than 1%, reaching a median price of $385,800 by the end of 2023. But NAR warned that even this small shift masks a lot of regional variability.
He said that locked-in homeowners who have been holding their mortgage rates low for a couple of years would be able to find more inventory.
The Real Estate Market in the Light of November 2008, and a Mirror Image of 2023 for Buyers in Seattle, San Francisco, and Seattle
In November, prices in San Francisco had fallen on a year-over-year basis and the city’s decline worsened in December, with prices down 4.2% year-over-year. In addition, prices in Seattle were also down from last year.
“Markets like Manchester, New Hampshire; Columbus, Ohio; Fort Wayne, Indiana; Hartford, Connecticut; Lancaster, Pennsylvania; or Topeka, Kansas are still seeing homes change hands as buyers from more expensive locations are lured by solid local economies and median prices, which in some cases are still below $300,000,” Ratiu said.
The median monthly mortgage payment fell for six weeks in a row starting in November, dropping from $2,012 in October to $1,977.
As the Fed slows the pace of rate hikes in response to slowing inflation, the 30-year fixed mortgage rate will likely go down to 5.7% by the end of the year.
In 2023, we may see a mirror image of 2022 — a somewhat trying first half that gives way to a surprisingly strong back half of the year for buyers, said Leonard Steinberg, corporate broker at Compass in New York.
It isn’t enough for the would-be buyers that stepped back from the market inlate 2022 to stay away forever because of the competing demands from first-time buyers.
Chronic under-building of new homes is also likely to remain a challenge across all market segments as builders grapple with the challenge of balancing a short-term decline in demand with the long-term need for more new housing, he added.
The mood in the market is a lot more optimistic than it was a month ago, and agents and brokers are expecting a robust spring housing market.
The beginning of the year tends to be among the quietest times in the seasonal real estate market, but this year is even moreso given that higher rates and still-elevated prices are creating a barrier for many buyers.
“With a Federal Reserve committed to bringing inflation down, investors expect business investments and consumer spending to pull back,” said Ratiu. “However, with most Americans still employed and seeing modest pay gains, the pullback in spending has yet to meaningfully materialize.”
“With more than 10 million open jobs and still not enough applicants to fill them, the labor market would have to experience a sharp and significant drop to move the needle on spending,” he said. If corporate executives overreact to the recession chatter and then cut payrolls, it will create a spiral of decline.
New Year in the Salad Days of the New Year: Implications for the Fed, the Labor Market, and Wage and Housing Markets
And even as prices dropped 10% from the summer peak nationally, home values were still up by double digits from last year in 79 out of the top 150 largest metropolitan areas during November, according to Realtor.com.
But traditional seasonal norms are expected to kick in come March as more inventory becomes available and more buyers starting to look at what’s available — as long as buyers can stomach the current rates and sellers are willing to give up the ultra-low rates they enjoyed in the past couple years.
Home buyers are pulling back because of higher mortgage rates even as the spring home buying season should be heating up.
We’re in the salad days of the New Year — that period where many feel refreshed and motivated and perhaps even optimistic about the year to come. There’s a certain clarity that comes during this time in January.
The Bureau of Labor Statistics said last week that the US economy added 517,000 jobs in January. Analysts were expecting something closer to 185,000 jobs. The surprising number makes the Fed’s historic and aggressive efforts to cool the labor market and bring inflation down through rate hikes all the more complicated.
“Data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as anticipated, which continues to put upward pressure on rates,” said Kan.
The second highest ranking official at the International Monetary Fund urged the Federal Reserve to keep up the rate increases this year due to the labor market’s resilience.
Will wages moderate this year? Analysts think that they will. They think that unemployment will rise from 5% to 4% by the end of the year, and that wage growth will slow from above 5% to 4%.
They say that a big drop would give the Fed a proof of concept for gradual labor market rebalancing, which could eventually lower wage and price pressures.
Fed Chairman Brian Moynihan: Why the US Economy is Staggered by a Low Interest Rate? CNN’s December Report on the Fed Meeting
Bank of America CEO Brian Moynihan told CNN around the holidays that the continued strength of the US consumer is nearly single-handedly staving off recession.
The Fed’s interest rate hikes last month raised the odds that the economy would go into a recession, as weak retail sales in November eroded market sentiment.
This is the main question on every investor’s mind — and the answer will not only help determine what happens to markets this year, but also whether the economy will fall into recession.
The minutes from the December Fed meeting said no policy makers anticipated that the rate would be cut in just a few years. The minutes warned that “an unwarranted easing in financial conditions … would complicate the Committee’s effort to restore price stability.”
They stressed that more evidence of progress was needed, and said that inflation was still unacceptable.
There is “substantial doubt about the company’s ability to continue” because of its worsening financial situation, the home goods chain said in a regulatory filing.
According to sources, Bed Bath & Beyond is preparing to file for bankruptcy within the next few weeks. Bed Bath & Beyond did not immediately respond to a request for comment from CNN.
Last July marked the first month-over-month decrease for the national index since February 2012 and that continued through November, with seasonally adjusted prices falling 0.3% month over month.
The cities in the 20-city index reported declines before seasonal adjustments. After seasonal adjustments, 19 cities still reported declines, with only Detroit increasing 0.1%.
The U.S. National Home Price Index (NHI) released Tuesday reveals a slowdown in the home price market but it may not be the worst yet
Home prices rose 7.7% in November from the year before, a smaller jump than the 9.2% growth seen in October, according to the latest S&P CoreLogic Case-Shiller US National Home Price Index, released Tuesday.
The cities with the strongest price appreciation were all in the Southeast, with Miami, up 15.9% from last year, seeing the strongest prices for the fifth-straight month. It was followed by Tampa, Florida, up 13.9%; Atlanta, up 10.4%, and Charlotte, North Carolina, up 9.9%. The South and Southeast were the strongest parts of the country.
The report provides evidence of a slower housing market but it may not be the worst yet, according to Bright MLS chief economist Lisa Sturtevant.
“This one percentage point reduction in rates can allow as many as three million more mortgage-ready consumers to qualify and afford a $400,000 loan, which is the median home price,” said Sam Khater, Freddie Mac’s chief economist.
On Wednesday, the Federal Reserve raised the federal funds rate by a quarter point, the smallest hike since March. The central bank is seeing a marked improvement in the battle against inflation, as demonstrated by the decision to slow the pace of increases.
The effect of the Fed’s actions are keeping a floor under mortgage rates for the short term, he said, adding that he expects rates to stay around 6% for the next few weeks.
The next report on inflation is set to be released in February and will be used by economists to see if prices continue to increase.
Homebuyer affordability declined in February, according to MBA, with the national median monthly payment for those applying to purchase a home rising nearly 5% to $2,061 from $1,964 in January.
The North and South of the Fed: Predictions for the Next Four Months Mortgage Rate Rise and Fall, and Implications for Mortgage Rates
Speaking at the Economic Club of Washington on Tuesday, Federal Reserve Chairman Jerome Powell said the resilient economy means the central bank “may have do more and raise rates more than is priced in.”
George Ratiu, manager of economic research at Realtor.com, said that there would continue to be tension between expectations and economic data for several more months.
Freddie Mac estimated that mortgage rates continued to slide as financial market concerns came to the forefront.
“Affordability — especially at the lower end of the market — continues to be a challenge, but MBA expects purchase demand to continue to recover heading into the spring,” said Bob Broeksmit, MBA president and CEO.
In January, home sales were much higher than expected and buyers took advantage of the lower mortgage rates.
While home sales were down by 24.1% from the still-hot market of a year ago, activity appears to be bottoming out in the first quarter of this year, before incremental improvements will occur, Yun said.
The Northeast, Midwest, South, and West all had a month-to-month increase in pending home sales.
Lower home prices lead to an extra boost in the West region, while gains in the South are due to stronger job growth in that region.
“The cooling in home prices that began in June 2022 continued through year end, as December marked the sixth consecutive month of declines for our National Composite Index,” says Craig J. Lazzara, Managing Director at S&P DJI.
“But as rates are right back up in February, it’s likely that any momentum in this market will be short lived and affordability challenges will remain key to the direction and speed the market moves in the coming months,” she said.
There has been a flurry of strong economic data over the last few weeks which suggests the Fed is not done raising its benchmark lending rate.
He said that if mortgage rates continued to slide, look for a continued rebound during the first weeks of the spring homebuying season.
Hannah Jones, economist at realtor.com said that the yields on 10-year US Treasury bonds climbed on Tuesday as investors prepared for the impact of the committee’s revised rate projections. But rates fell on Wednesday on news from the Fed that its series of aggressive rate hikes could be coming to an end.
The 30-year fixed rate will fall to around 5.3% by the end of the year, he said, but it’s still much higher than a year ago.
The Fed’s Meltdown, Mortgage Rates, and the Mortgage Market: What Have We Learned About Their First Three-Year Mortgage Rate Cycles?
While the bank failures made the Fed’s work more complicated, analysts have said that, if contained, the banking meltdown may have actually done some work for the Fed, by bringing down prices without raising interest rates. To that point, the Fed suggested on Wednesday that it may be at the end of its rate hike cycle.
It’s possible that the secondary mortgage market will react to the speculation that more financial entities will need to sell their long-term investments.
“This could restrict mortgage lenders’ access to funding sources, resulting in higher rates than Treasuries would otherwise indicate,” Divounguy said. “For borrowers, lending standards were already quite strict, and tighter conditions may make it more difficult for some home shoppers to secure funding. In turn, for home sellers, the time it takes to sell could increase as buyers hesitate.”
In his remarks on Wednesday, Fed Chair Jerome Powell said estimates of how much the recent banking developments could slow the economy amounted to “guesswork, almost, at this point.”