The pro-business, deregulation-friendly administration is taking office at a time when economic conditions are improving for fintechs and their investors.

Homeowners in areas affected by Hurricane Sandy have already seen growth in their property values lag behind the national median.

The government-sponsored enterprises are increasing their apartment loan limits next year even though market volumes have been well below the current ones.

Some lenders are once again hiring mortgage lenders, but memories of the painful staffing cuts they were forced to make over the past two years remain top of mind.

Those born between 1997 and 2012 will go from making up a scant 6% of today’s market to a 25% share by 2028, and mortgage lenders need to be ready to serve them.

Historically low interest rates may not have guaranteed historically high levels of housing activity, but exceptionally high rates have definitely muted activity in a measurable way.  We’ve cataloged this incessantly when it comes to refinance activity, but there’s a correlation with home sales as well.  The Housing Market Index (HMI) from the National Association of Homebuilders is just another way to see it. A de facto measurement of builder confidence/sentiment, the HMI had been flying high (all time highs, actually) shortly after the initial covid lockdowns.  At the time, rates were at all-time lows and pent-up buying demand was being unleashed.  Notably, that level of confidence was achieved despite housing starts only being about 2/3rds of their 2005 peak. Just as notable, as seen in the chart above, housing starts merely fell back to levels there were still higher than most of 2019 (a time when builder confidence was fairly close to all-time highs). So why would builder confidence swoon so much more than the activity level in the homebuilding sector would suggest? If the title and intro wasn’t a giveaway, we’ll make it clear: RATES!  We could review a chart of rates compared to builder confidence, but that would look like an ink blot test with each line moving in opposite directions.  Instead, the chart below uses the price of mortgage-backed-securities (MBS)–the bonds that dictate mortgage rates.  The convenience of MBS in this context is that they’ll move exactly like mortgage rates, but in the inverse (thus allowing us to more easily see the correlation between rate movement and the confidence swan dive).

The average top tier conventional 30yr fixed rate was just a hair over 7% on Friday afternoon and the same is true at the start of the new week.  Rates are based on bonds, but while bonds move constantly throughout the day, mortgage lenders only adjust rates once per day unless there’s excessive volatility in the bond market.  This concept has been important, recently, because there’s been more intraday volatility than normal.  Intraday volatility came into play on Friday afternoon, but too late in the day for almost any lender to do anything about it.  As a result, the bond market implied slightly higher rates this morning, simply because lenders never got around to raising rates on Friday afternoon. The net effect is modestly paradoxical: the bond market is actually slightly better (i.e. bonds are saying rates should be a bit lower), but the average lender is actually offering slightly higher rates versus Friday.  Fortunately, the difference between “higher” and “lower” in this example is so small that no one will care, but it’s important to understand HOW these things transpire in order to make sense of more serious examples. As for the risk of more serious volatility, the only sure bet is that the first two weeks of December are the most important 2 weeks left in 2024.  This has to do with the economic data on tap and its impact on the Fed announcement that will follow on the 3rd week.  The time between now and then is anyone’s guess.  All we know is that rates have been trending gradually higher without any signs of major reprieve.  That could change in the near term, but not likely in a way that sends rates sharply lower.  In other words, the best victory we could hope for would be for rates to simply avoid making new long-term highs.  In that sense, today was a victory.

Still Waiting For an End to Unfriendly Trend

It was an uneventful Monday for the bond market.  Economic data was limited to the NAHB Housing Market Index (builder confidence)–a report that hasn’t been a market mover since the financial crisis.  And none of the news headlines had an obvious impact on trading levels. Yields started out a bit higher compared to Friday but they began improving almost immediately after the start of the U.S. business day.  Based on the timing of today’s ebbs and flows, European markets were likely a consideration.  Despite the modest gains, bonds remain in the middle of a well-defined uptrend in yields/rates. Until we see a big rally driven by top tier data, the best we could hope for would be for that trend to die of old age.

Market Movement Recap

09:04 AM Weaker start, but pushing back toward unchanged.  MBS down 1 tick (.03) and 10yr up less than half a bp at 4.442.

02:23 PM Decent gains into mid-day hours.  10yr down 2.4bps at 4.416.  MBS up 2 ticks (.06).

03:50 PM Flat afternoon.  MBS near unchanged, up  1 tick (0.03).  10yr down 2.2bps at 4.419

While financial news outlets continue focusing on politics and Trump’s cabinet picks, the bond market is expressing anxiety about the risk that economic data continues coming in hotter than expected.  Even when it comes to the Fed, monetary policy has been and will continue to be dictated by incoming data.  So what’s up with the data?
In not so many words, the jobs report that came out in early October was a major shock, both because it was very strong and also because it revised the previous 2 reports quite a bit higher.  It singlehandedly changed the entire labor market outlook from one of “apprehension about the labor market” to “apprehension about the economy being too strong to warrant the Fed’s rate cut outlook.”

Fed funds futures show exactly the same thing.

And shorter term Fed Funds Futures show exactly where the focus was:

Looking ahead, this week and next represent a bit of a lull in the data cycle.  In addition, there is always a risk of illiquidity-driven volatility surrounding the Thanksgiving holiday–especially since this installment also happens to be “month-end.”  We wouldn’t be reading much into any moderately-sized price movement over these two weeks.  After that, the first 2 weeks of December will be critically important to shaping the next wave of momentum.

“I didn’t make it to the gym again today. That makes five years in a row.” I did, however, make it to the aerodrome over the weekend, which involved travel (not on Spirit) from Ohio to Nevada, and also a look in the mailbag. “Rob, are you hearing something about some states contemplating requiring audited financials from brokers?” I have heard rumblings of it, but no one seems to have any definite information. If the regulatory burden shifts from the federal government to the state level, it wouldn’t surprise me. “Rob, do you know the reason why the Agencies aren’t contemplating having lenders just use one credit bureau rather than going from tri-merge to bi-merge?” I don’t know. You should ask your Fannie or Freddie rep. The three credit bureaus certainly put lenders and investors in an interesting situation currently, especially when costs go up. There is a school of thought that says the industry should have moved from tri-merge, skipped bi-merge, and gone to a single credit bureau’s result. (Today’s podcast can be found here. This week’s is sponsored by PHH Mortgage. If you are looking for a Correspondent Lending partner or an experienced, award-winning subservicer who can manage your forward and reverse, residential and commercial, and performing and non-performing loans look no further than PHH. Hear an interview with First Street’s Matthew Eby and Amanda Johnson on climate risk modeling advancements and how those models impact borrower, lender, and investor behavior.)