MBS Weekly Market Commentary Week Ending 1/6/23

Back to Business in 2023

While it’s back to business as usual, it was a fairly quiet week as we settled into the new year. Fast inflation and high interest rates dominated the narrative and upended markets across the world in 2022. When the dust settled, 10-year Treasuries were 200+ BPS higher than the start of the year, the yield curve inverted in a bearish fashion (faster and farther than ever), and mortgage spreads were pushed from stubbornly rich to suddenly cheap. The result was an entire trade-able universe moving out of the money, originations grinding to a halt, and duration becoming a function of illiquid trade flows. U.S. mortgage applications at the end of 2022 dropped to the lowest level since 1996 amid seasonal headwinds and high financing costs.

Overall agency mortgage bond gross issuance for 2022 came in at $1.7 trillion, far above the $1.3 trillion annual average seen during the 2000 through 2019 period, but far below the $3.3 trillion average seen in 2020 and 2021. The MBA’s forecast for 2023 expects originations to fall to $1.9 trillion and the first quarter is projected to be the roughest quarter, with total originations expected to fall to $345 billion. Originations are expected to increase throughout the year, and similarities have been drawn with 2018 in terms of origination volume and margins. Mortgage rates are expected to fall throughout 2023, with the 30-year mortgage rate falling to 5.2% by the end of the year.

Housing and Labor Markets

Housing has traditionally led the economy out of a recession, and we have seen housing starts reach something like 2 million annual units in early stage recoveries. Housing starts are expected to remain depressed, around a 1.5 million annual rate in 2023. The pre-bubble historical average since the late 1950s has been 1.4 million housing starts annually, but the U.S. population is now much larger than it was seven decades ago. The National Association of Realtors estimates a 5 million to 6 million unit deficit in needed housing, so the demand is there. Simply put, homebuilding can’t stay depressed forever, though you don’t build what people can’t afford to buy. Home price appreciation is predicted to slow and eventually turn negative by the end of 2023, although that means annualized single-digit appreciation rather than a crash. Finally, existing home sales are expected to remain low, but improve throughout the year.

The bond markets drive interest rates, and much of the current sentiment in the bond markets is being dictated by the strong domestic labor market, which gives the Fed fuel to further tighten policy. Earlier this week, the ADP figure came in at 235k versus the expected 150k and we also had lower initial jobless claims. Today, payrolls beat estimates, coming in at 223k versus 203k expectations and unemployment declined to 3.5%. The market was almost hoping for a weak report that would have triggered a rally in stocks and bonds as it would have increased the chances that the Fed will pivot from a tight monetary policy to a neutral one.

There are three basic inputs to current inflation: supply chain issues (stemming from the pandemic, though they are largely fixed), housing (expected to fade by the summer), and services ex-housing (read: service sector wage growth).

There are three basic inputs to current inflation: supply chain issues (stemming from the pandemic, though they are largely fixed), housing (expected to fade by the summer), and services ex-housing (read: service sector wage growth). Services excluding housing are the focus of the Fed as the central bank is trying to avoid a wage-price spiral, last seen in the 1970s. A big component of this will be productivity growth, which has been muted. As long as wage growth remains high, the Fed will keep tightening. Fed Chair Powell has insisted that the job openings and quits rate should decrease and wage growth should slow to help bring down prices.

 

Hawkish FOMC Minutes and Best Business Practices

FOMC minutes released earlier this week indicated that Fed officials are expecting rates to remain elevated in 2023. Though the inflation data for October and November showed welcome reductions in the monthly pace of price increases, consistent with easing supply bottlenecks, the FOMC stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path. The current restrictive policy approach appears to be best until the FOMC is satisfied with easing inflationary pressures. The FOMC also noted that the Fed Funds futures were at odds with the FOMC, and that no members thought it would make sense for the Fed to start easing in 2023. My two cents is that it’s hard to see the FOMC opening up the sluice gates again anytime soon.

Your hedging model probably dictates what percentage of your pipeline to hedge based on your pull-through at five or six stages of loan manufacturing. Test pull-through at least quarterly and monitor it closely when there’s a lot of volatility. Adding things like new products or branches can change your pull-through numbers. We are not out of the woods yet, and you should be prepared for any further downturn with a written plan that has specific actions to be taken at set milestones for volume declines. Making decisions in the heat of the moment is not as efficient as having a plan that’s thought out well in advance and can be referenced more dispassionately as each milestone is reached.

10-Year Treasury Yield Curve

Compare this chart with the mortgage rates chart to see how the 10-year treasury and mortgage rates are correlated. Read more below to learn how mortgage rates are tied to the 10 year treasury yield. View raw data on U.S. Department of the Treasury website.

 

Mortgage Rates Today

The current MBS daily rates are shown below in this chart for 5/1 Yr ARM, Jumbo 30 Yr, FHA 30 Yr, 15 Yr Fixed, 30 Yr Fixed. Sign up for our MBS Market Commentary to receive daily mortgage news in your inbox.

About the Author

Robbie Chrisman, Head of Content, MCT

Robbie started his mortgage industry career with internships during high school and college at Peoples National Bank in Colorado, and RPM & Bay Equity in the San Francisco Bay Area. After graduating from The University of Texas at Austin with a degree in Finance in 2014, he went to work at SoFi, where he rose to Director, Capital Markets assisting in the creation of SoFi’s residential mortgage division before leaving to work for TMS in Austin, Texas. From there, he went to work for FinTech startup Riivos in San Francisco and now is the Head of Content at Mortgage Capital Trading (MCT) in San Diego.

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Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

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MBS Weekly Market Commentary Week Ending 2/3/23

As strong as economists may have thought the job market was, it’s even stronger. In addition to headline non-farm payrolls in January (517,000) beating estimates by around 300,000, employment numbers were revised higher for the past two months. Yes, a tight labor market is anathema to any sort of quick stop to the Federal Reserve’s rate hiking cycle, but the growth rate in average hourly earnings is declining, which will be welcome news to Fed Chair Powell and his colleagues. There exists a raging debate among economists over whether we’ll need a sharp rise in unemployment to keep inflation low.

MBS Weekly Market Commentary Week Ending 1/27/23

Even with the most aggressive pace of rate hikes in over a generation during the past year, recent data suggests that there’s still a path to a “soft landing” for the Federal Reserve. The U.S. economy posted the kind of mild slowdown in the last quarter of 2022 that the Fed wants to see as it attempts to tame inflation without choking off growth. Gross domestic product beat expectations to rise at a 2.9% annualized pace, down from 3.2% in the third quarter and a long way from a recession.

MBS Weekly Market Commentary Week Ending 1/20/23

Have you heard? Inflation was so 2022. All jokes aside, after we learned last week that U.S. inflation cooled for the sixth consecutive month (the consumer price index dropped 0.1% in December compared to the month prior), expectations are now that the Federal Reserve is likely to downshift rate hikes to 25 BPS going forward, beginning at next month’s FOMC meeting.

MBS Weekly Market Commentary Week Ending 1/13/23

Pay attention to the bond market rather than the Fed. That’s what I’m hearing as we learned this week that inflation continued to ease in December, though much focus was also on Wells’ exit from the correspondent space and its ramifications. The headline CPI (-0.1% month-over-month, +6.5% year-over-year) posted the slowest inflation rate in more than a year and core inflation (+5.7% year-over-year), which excludes food and energy, also posted the smallest advance in a year.

MBS Weekly Market Commentary Week Ending 12/23/22

MCT would like to wish everyone a Merry Christmas and Happy Holidays. Talk to close the year has been dominated by the Federal Reserve’s most aggressive policy tightening in four decades and its impact on the economy, and for us the residential housing market.