THE FULL SCOOP

*POWERED BY MBS HIGHWAY*

9/9 - 9/13

MORE ON JOBS DATA

Last Friday’s Jobs report was weak, but the only part that appeared to ​be a little better was the unemployment rate, which declined from 4.3% ​to 4.2%. But if you really inspect the numbers, the actual July reading ​was 4.25%, which was rounded to 4.3%. August’s figure was 4.22% and ​rounded to 4.2%, but it was only 0.03% lower!

There were many in the media claiming that July’s weak Jobs Report was ​due to Hurricane Beryl and that it was temporary, but we know that it ​just shows a weakening in the labor market.

June was revised down to 118,000, July revised even lower to 89,000, and ​August is 142,000 before negative revisions even hit. We said last month ​that the BLS even stated it was not due to weather and that the sectors ​that would be impacted performed OK.

MORTGAGE APPLICATION DATA

The MBA (Mortgage Bankers Association) reported that interest rates dropped ​from just under 6.5% to 6.29% last week and were 1% lower than this time last ​year. Purchase volume rose 2% last week, rising for the second week in a row, and ​is now down 3% year over year.

Refinance activity rose 1% last week and is up a strong 106% year over year. ​Refinances made up almost 47% of total application volume.

FANNIE MAE AND PULSENOMICS HOME ​PRICE EXPECTATIONS SURVEY

We have been steadfast that housing would continue to provide a ​meaningful wealth creation opportunity this year. So far, that has held true. ​We partake in the Fannie Mae and Pulsenomics housing survey, where we ​have won the Crystal Ball Award three times.

The latest data from the top 150 economists in the US was just released, ​showing the following appreciation forecasts, with the impact on a $500,000 ​home in parenthesis:

2024

1. Average: 4.73% ($23,650)

2. Most Optimistic Quartile: 6% ($30,000)

3. Most Pessimistic Quartile: 4% ($20,000)

Next 5 years:

1. Average: 20% ($100,000)

2. Most Optimistic Quartile: 32% ($160,000)

3. Most Pessimistic Quartile: 8% ($40,000)

Housing should continue to be a great investment – Make sure to share this ​with your customers and also explain why they shouldn’t wait for rates to ​come down further.

YIELD CURVE UN-INVERTS

The longest yield curve inversion in history has ended, with the 10-year Treasury yield now ​higher than the 2-year Treasury Yield. The yield curve remains highly inverted if we look at the ​shortest end of the curve, with the 3-month Treasury yield still exceeding the 10-year Treasury ​yield by over 1.4%.

Historically, recessions begin after yield curve inversion ends:

1. March 2007: recession began 10 months later

2. December 2000: recession began 4 months later

3. June 1989: recession began 13 months later

4. October 1981: recession began 2 months earlier

5. May 1980: recession began 3 months earlier

If we see history repeat itself or rhyme, and we are in fact heading for or already in a ​recession, that does bode well for inflation and rates, as they always move lower during times ​of economic slowdown/recession.

CORELOGIC HOME PRICE INSIGHTS

CoreLogic reported that home prices were flat in July after rising ​0.3% in June, 0.6% in May, 1.1% in April and 1.2% in March. ​Appreciation gains have clearly slowed slow, but they have been ​strong. CoreLogic forecasted that it would rise by 0.3%, so this was ​beneath their estimate.

Year over year, home prices are now up 4.3%, which is down from ​4.7% in the previous report.

CoreLogic forecasts that in August home prices will rise 0.2% and ​anticipates that home prices will rise 2.2% over the next year, which ​is likely conservative.

NFIB SMALL BUSINESS OPTIMISM INDEX

The August NFIB Small Business Optimism index fell from 93.7 to 91.2, which is a three-month low.

Plans to Hire fell 2 points to a 4 month low at 13%. Those that Expect a Better Economy weakened by 6 points and those that Expect Higher Sales weakened by 9 points, the lowest ​since May 2023.

Higher Selling Prices, which is a gauge on inflation, were down by 2 points to the least since January 2021.

The NFIB’s read on the economy sounded dismal: "The mood on Main Street worsened in August, despite last month's gains. Historically high inflation remains the top issue for ​owners as sales expectations plummet and cost pressures increase. Uncertainty among small business owners continues to rise as expectations for future business conditions ​worsen."

CONSUMER PRICE INDEX

The August Consumer Price Index (CPI) report showed that overall inflation rose 0.2% for the month, in line with estimates. Year over year, inflation decreased from 2.9% to ​2.5%, which was softer than the 2.6% expected. Helping the headline was an 0.8% decline in energy prices and 0.6% decrease in gasoline prices.

The Core rate, which strips out food and energy prices, increased by 0.3%, which was slightly hotter than estimates of 0.2%. Year over year, Core CPI declined remained at ​3.2%, which was as expected.

If you annualize the last three months of headline readings, the year over year inflation rate would be 1.14%. If you annualize the last three months of core readings, the year over ​year reading would be 2.04%. This clearly shows that the trend is favorable and the core rate is on track for what the Fed wants to see.

The inflation data was good today, despite Shelter costs, which makes up 45.7% of the core index. Shelter rose 0.5% last month and 5.2% year over year, which is an increase ​from 5.1% in the previous report. The monthly reading was disappointing, showing that shelter has yet to catch up and reflect the real world. Shelter alone made up roughly 82% ​of the monthly inflation rise in August.

Motor Vehicle Insurance has been the other culprit that has been contributing to inflation. It rose 0.6% last month, which is a moderation from what we have been seeing, but ​still high. Year over year MV Insurance decreased from 18.6% to 16.5%, but that is down from over 23% months ago. Today’s monthly reading annualized is 7.2%, so more similar ​readings would help this component continue to moderate.

When combining Shelter and MV Insurance, it made up 89% of the inflation we saw in August. ALL of the other items only rose 0.03%. On a year over year basis, all of the other ​items are only up 0.2%...which means that most of the inflation has been tamed, besides lagging shelter and MV Insurance.

Bottom line – Today’s report did not change anything in regards to the Fed. The Fed is likely going to cut rates 25bp next week on September 18. There is a 15% chance of a ​50bp based on what the market feels, but it will most likely be 25bp. What’s more important is that this is the beginning of a rate cutting cycle. The market has 100bp of cuts ​priced in this year, which means that if we see 25bp next week, the Fed will have to cut 50bp at either the November or December meeting.

INITIAL JOBLESS CLAIMS

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, was ​little changed and rose 2,000 to 230,000. This report, however, could have been impacted by the Labor ​Day Holiday. We also know around holidays the BLS does a poor job of seasonally adjusting the numbers ​and they are usually lower than they would have been otherwise. We will get some further clarity next ​week, which will not be impacted by any holiday.

Continuing Claims, which measures Individuals continuing to receive benefits after their initial claim, rose ​5,000 to 1.85M, which remains near the highest level since November of 2021. This continues to show ​weakness in the labor market and supports the slowdown in hiring as it’s harder to find a job once let go ​and people remain on benefits for longer.

PRODUCER PRICE INDEX

The Producer Price Index (PPI) report, which measures wholesale or producer inflation, rose 0.2% in August, ​which was slightly hotter than the 0.1% expected. Year over year, Producer Inflation fell from a downwardly ​revised 2.1% (originally 2.2%) to 1.7%. This was a significant decline and was beneath estimates of 1.8%. ​Helping the headline was a decrease of 0.9% in energy prices.

The Core rate, which strips out food and energy prices, rose 0.3% last month, which was also slightly hotter ​than estimates of 0.2%. The July figure, however, was revised lower from 0% to -0.2%. Year over year, Core ​PPI rose slightly from 2.3% to 2.4% after July was revised lower (originally 2.4%). Today’s figure, however, was ​still better than estimates of 2.5%.

Bottom line – Producer inflation is tame, but the monthly readings did cause Bonds to move a bit lower. The ​Figures were slightly hotter monthly, but that is likely due to negative revisions to the previous month. Later this ​month on September 27, we will get the August reading on the Fed’s favorite measure of inflation, PCE ​(Personal Consumption Expenditures). PCE shares some of the same components as the PPI report, so the ​hotter monthly figures could cause for some concern, but we will have to see if the revisions carry over and the ​year over year figures were tame.

CORELOGIC EQUITY INSIGHTS

CoreLogic reported that homeowners with mortgages, which ​is 62% of all properties, saw their equity rise $1.3 Trillion or 8% ​year over year, bringing total home equity to a massive $17.6 ​Trillion. This is the combination of equity gained through ​amortization and appreciation, which has been strong.

On average, homeowners with a mortgage have $315,000 in ​equity, with $200,000 of that being tappable.

As equity increases, negative equity, or those underwater, ​decreases. Negative equity is down 15% year over year – There ​are only 960,000 homes with negative equity, which is only ​1.7% of all mortgaged properties or 1% of all owned ​properties.

Looking at all owned homes, total equity is $40 Trillion. That ​means that the average equity per homeowner is $440,000.

Here are some interesting stats on homeownership in the US:

1. 136M total households in the US

2. 91M homes owned (67% homeownership rate)

3. 56.5M homes currently have a mortgage (62%)

4. 34.5M owned free and clear (38%)

5. 45M homes rented (33%)

DEMOGRAPHICS ARE DESTINY

After a deep analysis of consumer demographics, we believe that home prices should be well supported into the future.

On the supply side, it’s a very tight inventory environment. We have seen an increase since last year, but it’s from very low levels and way less than we ​had pre-pandemic. At the same time, population keeps increasing from births and immigration. There is a lot more need for housing, but builders are ​not keeping up.

Looking at the different generations, by age 30, the homeownership rate for Boomers was 48%, 42% for Gen X, and 33% for Millennials. It has clearly ​fallen over time as people are taking longer to get married, have kids, and buy a home. A lot of Millennials also may have been impacted by the ​Great Recession, which made it harder to find a job once out of school. But by age 40, those numbers increase significantly, and Millennials catch up ​to Gen X and Boomers.

There are 69M individuals that are Gen Z, or those between the ages of 12-27. Their homeownership rate is only 8%, mostly because they are so ​young. But over the next 10 years, if they follow Millennials, we should see that increase by roughly 25% to 33%. That means that about 17M of them ​will be purchasing a home, which is a lot of demand.

There are 73M Millennials that are aged 28-43, with a homeownership rate of 33% by age 30 and 55% by age 40. Those aged 25-35 are mostly ​Millennials, and 17% of them or 8M are still living home with their parents, the highest level since 1941.In 2010 this figure was at 15% and between ​2012-2016 we accurately forecasted that home price appreciation would be strong because of this, while the media was calling for a crash. Of those ​8M people, 55% should be homeowners by the time they are 40 based on the Millennial homeownership rates. That means we should see Gen Z ​demand of 17M and Millennial demand of 4.4M over the next several years…which is significant.

This doesn’t count renters who transition to homeowners or immigration, and of course we will see some of the older generations pass, but it does ​appear that there will continuously be a shortage of supply as we are not building enough. This bodes well for housing the investment and continued ​home price appreciation over time.