We are excited to partner with one of our favorite mortgage minds, Lou Barnes, to bring you his biweekly commentary. Lou is a loan officer in Boulder, CO, but his insight is relevant across the country. Lou's opinions should not be construed as the opinions of CENTURY 21 Redwood Realty or our partner, Day 1 Mortgage.
We hope that you enjoy this series! Our good friends at Day 1 Mortgage are here to answer all of your mortgage needs. You can reach them at 888.973.0624 or online at Day1Mortgage.com.
A big week filled with serious stuff: rates, Fed, data, and inflation. Fortunately also a big week for fans of black humor: Zillow, climate, and politics.
Rates. Have gone down. Not far, but down, the 10-year T-note the lowest since September 23, today 1.45%. However, in the prior interval the 10-year stayed below 1.65%, most of the time in the 1.50s and little change in mortgages.
How is this possible, the Fed tapering its bond-buys, and futures markets predicting three rate hikes next year? And economic data and inflation hot?
The Fed. Chair Powell after this week’s meeting made clear that the Fed is in no hurry. The taper will be gradual, and may be modified after three months, depending on how it goes. The Fed gave no signal of a pending hike in the cost of money (Fed funds).
Please pay no attention to the Fed funds futures market. The 2-year T-note is a far more reliable indicator. Traders of those short-term IOUs must be very good at Fed-forecasting, or will soon have a Domino’s sign on top of the Porsche. 2s have risen in yield (chart below) from the depth of Covid to 0.50%, which signals no hike at all next year.
Another reliable indicator: when investors believe that the Fed is late to fight inflation, long-term rates rise—a “steepening yield curve.” The exact opposite is underway. Recent rises and retreats in long-term rates have resulted from a market fearful of the Fed, trying to estimate hikes, not fearful of sustained inflation.
Data. This morning... 531,000 new jobs in October, 235,000 added to the initial August and September reports, unemployment down to 4.6%... and interest rates fell more.
Nice numbers for jobs, not necessarily new ones, just old ones at which people are finally willing to go back to work. The biggest gain was in the lousiest jobs: hospitality and leisure (ours, not theirs). Wage growth is slowing, not rising (chart below). The employment participation rate stayed the same. And all of these job reports are distorted by seasonal adjustments never calibrated for Covid.
Inflation. The best picture of the economy is still in the ISM surveys—the old purchasing managers’ report. In these we can see the supply chain distortion continuing; however, the very strong overall activity is likely to be more from catch-up than inflationary overheating.
The manufacturing survey for October stayed about the same, hot at 60.8. New orders fell hard, from 66.7 to 59.8. Prices continued to rock, at 85.7 as intense as ever seen, and supplier deliveries still slow. The services survey hit an all-time high at 64.1, up from 61.9, and new orders way up also.
It takes some courage for the Fed to let the supply issues and heat play out, and it’s the right thing to do. The inflation risk is in psychology and impossible to estimate ahead of events. Businesses can now raise prices for the first time in 20 years—will it become a habit, or intercepted soon by competition? Same for wages—has the last year been a one-time event, or will wages enter a continuous ramp?
The port of LA is still packed, despite heroics. That volume says catch-up, not sustained. And the Baltic Dry index of global shipping costs has begun to fall from its spike.
Zillow. Now nearly viral, Zillow’s CEO upon the flop of its flip business: “We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated.” An Obviousman! T-shirt to you, sir.
At Zillow’s beginning 15 years ago came the genius of the Zestimate. Good Realtors have known forever that consumers are interested in one piece of news from brokers, and only one: What is my house worth? Nevermind that Zestimates are wildly approximate re-dos of county assessed valuations, and among other things clueless about improvements or wear and tear.
Realtors foolishly allowed Zillow to aggregate listing data, and Zillow deployed IT far better than MLS practice. Zillow and its clones (Redfin, CoreLogic, Opendoor...) all have had a deeper agenda: how to get those huge commissions which everyone knows that Realtors don’t earn? Zillow’s latest and perhaps last try: to go into the guaranteed buyout biz to grease its role as a broker. Oops.
Realtors earn every dime. Weekends in cars full of people who cannot make up their minds, the broker trying to understand their needs, and to predict the future for the client—no just price, but their happiness.
When I was first licensed in 1978, commissions were often set by local boards at 7%. Brokerages split that gross 60% to the listor, and 40% to the buyer’s agent. Fixed gross commissions became illegal by 1980, and sellers can find every imaginable discount, but the discount is taken entirely by the listor. To this day a buyer agent earns 2.8%, 40% of 7%. Listing agents deserve to be paid to set the proper asking price, and to handle multiple-offer negotiations, but IT has made it much easier to light-up a property for sale.
The buy side is every bit as hard and valuable as 40 years ago. These i-creeps are welcome to join the real estate business, and may do okay so long as they grasp the value that brokers bring.
Climate. COP26 has been a predictable bust. The activists have no plan for their zero aspirations. Send John Kerry and Al Gore to any conference, and narcolepsy will ensue.
One China aspect... rumors from behind the wall say that China has begun energy rationing to get off coal, and has overdone it and suppressed economic activity. Alternate rumor: China is desperate for blue skies for the winter Olympics, hence black-jacket goons in the north going door-to-door to confiscate coal, in addition to industrial rationing.
The absurdity of it all... blue skies or no, nobody will be there because of Covid. If no Covid, would you rather ski Vail, or Xiaohaituo Skiing Field, Yanqing District outside of Beijing?
Politics. Three days later, everybody has gotten Tuesday’s news except Biden and Pelosi. And the progressives, who like all extremists think they lost because insufficiently extreme. This Bingo Bozo Bimbo Bongo Binge... bust it up and try it in pieces. Do not try to enact election promises to do things which a majority of voters do not want.
The Democrats have only months to stop leading with climate and taxes, and culture war which they have lost. Once the center has lost faith in you, it’s very hard to get back. As is, the Dems will lose both houses and we’ll wait for Joe’s retirement announcement.
Tough James Carville, every bone a Democrat and a key advisor to Bill Clinton commented on Tuesday’s results: “Well, what went wrong is this stupid wokeness. These people have to understand... you're not popular. People don't want to ride in the car with you. They don't want to ride next to you in the subway.”
Clinton accepted budget restraint, and the need to fight the early Tea Party by taking small bites. Every Saturday he spoke on the radio to announce an achievement—something, anything, no matter how small. A parody impersonation appeared, Bill saying, “Today I announce a great victory! We have set an all-time record for installation at airports of new paper towel dispensers!!!
But it worked.
The 10-year T-note in the last year, the last two days’ trading added in green:
This chart is the 2-year T-note from January 2015 forward, 2s in blue versus the Fed Funds rate in red. Traders of 2s anticipate well. Notice 2s front-running the hikes from 2015 forward, and then correctly anticipating the Fed reversal, in 2019 trading under the cost of money. BTW: the Fed appeared to stabilize at 1.50% before Covid, but 2s trading at 1.50% at the same time predicted more cuts ahead. The up-wobble in 2s in the last few months to .50% is far more a prediction that the Fed will not cut again than a warning of quick hikes:
The greatest danger of inflation is always a wage spiral—no solution except recession and unemployment. This snip from the BLS is horribly labeled: the X axis is years back to 2011, while the Y is the monthly change in earnings in percent. Earnings gains are still elevated, as of this month 4.5% annualized, but NOT up-ramping, more likely shock recovery on the way back to ten-year baseline:
Thanks for tuning in to our collaboration! Remember that our friends at Day 1 Mortgage are here for you for all of your mortgage needs.