Market Update as of March 26, 2019

FHA Slams The Door – Good!
Credit cycles matter. Where are we in this credit cycle? Pretty close to the end. Let’s check the landscape, we have stocks trading at super high multiples, employment nearly full, pockets of rapid inflation and consumers stretched on car loans and credit card debt. Oh, also Europe (of course) and China are facing real recessions. The economy in the US is fantastic, but clearly maxing out, this will not last. Does this sound like a good time to expand credit to super low FICOs and high DTIs? No. No it doesn’t. It’s bad for borrowers and bad for banks to have borrowers spending over half their pretax income on a mortgage. There’s real risk in this market, for what feels like the first time in a long time. The bond market agrees, corporate credit spreads are widening and the yield curving is flat and inverting (see below). Shows over, recession time. Run the cycle back. It is not a coincidence that the Unicorn cohort of companies are racing to IPO. Many of them are money losing, Lyft, Pinterest and Slack. They aren't IPO-ing for growth capital, they’re doing it because the PE shops and VCs that hold most of their shares decided now is the time to cash out and take risk off. It’s not a secret, PE partners have been talking about less deals and higher prices for 2 years now. It’s not the end of the world, but it’s not the time to have your chin sticking out. It’s good to see the FHA acknowledge the risk and pump brakes.

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Is A Recession Glooming?
One of the most reliable recession indicators in the market got triggered on Friday and investors across the globe are starting to worry if this could mean the U.S. economy is slowing down. Last week, the yield on the U.S. 10-year Treasury note dipped below the yield on the three- month paper. The yield curve — which plots bond yields from shortest maturity to highest and is considered a barometer of economic sentiment — inverted for the first time since mid-2007 on Friday. That part of the curve inverted again on Monday. A yield curve is a graph that depicts yields on all of the U.S. Treasury bills ranging from short-term debt such as one-month to longer-term debt, such as 30-years. A normal yield curve is when shorter dated yields are lesser than longer-dated yields. The curve, in a normal market environment, is upward sloping as bond investors are likely to get higher rates in a longer term market environment as opposed to short-term. That’s because the perceived risk in a longer-term environment is higher.

Existing Home Sales Surge, High End Dead?
Sales of previously owned homes rose strongly in February, a sign that demand for housing picked up as mortgage rates eased last month. Sales rose 11.8% in February from the prior month to a seasonally adjusted annual rate of 5.51 million, the National Association of Realtors said Friday. Economists surveyed by The Wall Street Journal had expected sales would rise 3.2% to a rate of 5.1 million in February. Compared with a year earlier, sales in February were down 1.8%. Existing-home sales were revised slightly lower for January, to an annual rate of 4.93 million after also declining in December and November. The National Association of Realtors said there were 1.63 million existing homes available for sale at the end of February, up 3.2% from a year earlier and representing a 3.5-month supply at the current sales pace. Lawrence Yun, the association’s chief economist, said the latest data represent a “powerful recovery” in existing home sales, driven by lower interest rates and increased inventory. A strong labor market and wage growth are also underpinning the housing market, he said.

Last Week’s Fed Announcement (Brief)
*FED SIGNALS NO RATE HIKE THIS YEAR WITH ONE INCREASE IN 2020
*FED LEAVES RATES UNCHANGED, SAYS ECONOMIC GROWTH HAS SLOWED
*FED: LABOR MARKET STILL STRONG, JOB GAINS SOLID
*FED SEES SLOWER HOUSEHOLD SPENDING, BUSINESS INVESTMENT
*FED SAYS ECONOMIC GROWTH HAS SLOWED FROM SOLID 4Q
*FED: MKT-BASED INFLATION COMPENSATION STAYED LOW ON BALANCE
*FED: OVERALL INFLATION HAS DECLINED, LARGELY DUE TO ENERGY
*FED SEES 2019 GDP GROWTH 2.1% VS 2.3% IN PRIOR EST.
*FED FUNDS FUTURES SHOW INCREASED ODDS OF RATE CUT THIS YEAR

Courtesy of Sotheby's International Realty's in-house Lender Simon Atik, 310.880.8414, Simon.Atik@grarate.com, Vice President of Mortgage Lending, Guaranteed Rate Affinity.

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