Heading into the fourth quarter and the end of a wild election, we thought that it would be a good time to look into the real estate market and have some fun with graphs. Here we go:
On November 7th, the Federal Reserve announced a 25bps rate cut. This pushed the overnight Fed Funds rate to 4.58%. Odds for a rate cut in December have moved to 50% and predictions are now at 2.5 total cuts between now and the end of next year and 3 cuts by March 2026. For whatever those predictions are worth.
Regardless, there are signs that the economy is slowing. Payroll numbers are going down and the LEI is drastically heading down.
Rate changes have had an impact on mortgage rates. Right after the election on November 6th, the average 30-year rate got up to 7.13%. Since that time, it has slowly come down and as of November 25th is back to 6.93%.
Historically, the average 30-year mortgage over the past 50-years was 7.74%
The good news today is that the average existing homeowner is in pretty good shape. Delinquencies are at near record low levels with the trend actually continuing to move down despite other types of borrowing seeing an increase in delinquencies.
The major advantage of being an existing homeowner is the "lock in" effect of that mortgage where the average rate for an existing borrower is just under 4%; a near 3% spread versus new issue mortgage rates.
That distribution of rates is pretty interesting and the loans are not that seasoned as it was only a few years ago where borrowers could access loans in the low 3s.
This has been good in general as the number of underwater mortgages has come down significantly.
As a result, household equity has risen starkly. Now, a lot of this equity is paper money but it is still an extremely significant amount of wealth creation and asset accumulation.
But what has been pretty interesting throughout these past years is that higher prices for homes has not really become the "cure" for high prices. In fact, home prices continue to go up. Mainly, this is because inventory has remained about the lowest on record. While builders have been active in new home construction, the real supply comes from liquidity in the existing home markets, which we just have not seen because of the lock-in effect mentioned previously.
Housing needs liquidity and volume to bring prices down and we are not seeing much by way of that existing inventory.
What this means to us as investors and folks who are thinking about real assets and real estates is what gives first? Will rates come down first? Prices? The economy? Even though we are forecasting rate cuts in the future, that might not lead to a decrease in mortgage rates.
This is good for mortgage servicers with rates at this level but times remain tough for mortgage originators. We do not foresee this changing in the short-term. However, with how tight spreads are, we are starting to see a lot of interest and demand for MBS and RMBS securities in the market. Agency mortgage spreads are about as wide as we have seen in quite a few years.
Corporate spreads are at cyclical tights and do not have a government guarantee as agency mortgages do. This is a pretty good time to look at sector spreads as you seek risk/return balance and as a result of those rate cuts and their impact on yields in other areas of the market.
Lots of excitement sure to come over the holidays and especially into the new year!
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