The housing market data has been somewhat disappointing this year, and the most recent reports did little to reverse the trend. In July, both new and existing home sales decreased a little from June. For existing home sales, which make up roughly 90% of the market, this was the fifth straight month of declines, and they were lower than a year ago. The inventory of existing homes available for sale fell slightly from June to a 4.3-month supply. A 6-month supply is considered a healthy balance between buyers and sellers. Sales of new homes fell to the lowest level since October 2017. A number of factors have contributed to the loss of upward momentum in home sales this year. One big reason is a lack of inventory in many regions, especially for lower priced homes. Single-family home construction is essentially flat from a year ago, and it is not meeting the demand at the lower end of the market. Builders say that rising land, material, and labor costs are obstacles to a faster pace of construction and make adding entry-level homes less desirable due to lower profit margins. For decades, single-family housing starts averaged about 1.1 million per year. Following [...]
During the quantitative easing years of 2008 through 2014, the Fed acquired trillions of dollars of Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities (Agency MBS) and U.S. Treasuries. Its balance sheet grew from under $1 trillion to over $4 trillion. The Fed stopped adding to its holdings a few years ago, but has maintained a policy to reinvest principle payments received, thus maintaining a steady level of investments. At times over the last few years when refinance activity was high and the Fed was reinvesting the principle payments it received, the Fed was the buyer of the vast majority of all newly issued Agency MBS. Even recently, the Fed has been the buyer of approximately 25% of newly issued Agency MBS. The demand from the Fed for Agency MBS has had a positive effect on mortgage rates. For the past few months, Fed speakers have been saying that the time to begin “normalizing their holdings was near. But few details were provided. The minutes of the Fed’s May 3nd meeting, released on May 24th, provided some details about their plan. Although many details remain unknown. The plan calls for the Fed to tell investors the maximum amount it [...]
In a speech this afternoon, Fed Chair Yellen surprised investors with a potential new twist on U.S. monetary policy. Yellen put forth the possibility that a “high-pressure economy may be the best approach to repair the damage done during the financial crisis. This would involve waiting longer in the business cycle than in the past to raise the federal funds rate. She acknowledged that this approach would run the risk of inflation rising above their 2% target level. Some of the hoped for goals of this twist for longer loose monetary policy would be to encourage business investment and to increase the number of workers who return to the labor force. The possibility of Fed policy which tolerates higher inflation caused long-term bond yields, including MBS, to rise.
Comments from an unnamed official at the European Central Bank (ECB) caused global bond yields to rise today, including U.S. MBS. The official said that a “consensus was being formed to gradually taper the ECB’s bond buying program when they decide that it’s time to conclude it. The plan would be similar to what the U.S. Fed did to end its bond buying program. The ECB’s program is currently set to expire in March 2017. At the last meeting in September, some investors were disappointed that the ECB did not announce an extension to the program. According to the ECB, the decision about when to end the program will depend on the performance of the economy. The next ECB meeting will take place on October 20. The added demand for bonds from central banks around the world has helped push down yields. Today’s comments caused investors to reduce their expectations for additional stimulus from the ECB, which was negative for both stocks and bonds. Wednesday October 5, 2016