August 2nd, 2022 - Market Update
Current position: Carefully floating
Stocks and Mortgage Bonds are both lower to start the day.
CoreLogic released their Home Price Index report, showing that home prices rose by 0.6% in June and 18.3% on a year over year basis, which declined from 20.2% in May, but still robust. The 0.6% rise in June was when rates reached their peak, and if it were annualized with compounding, would be around 7.5% year over year.
CoreLogic forecasts that home prices will appreciate 0.6% in July and 4.3% in the year going forward, which is pretty in line with our belief that we will see mid-single digits.
Remember that 4% appreciation can still be meaningful for wealth creation - If someone bought a $400,000 home, and put 10% down, that means they would gain $16,000 in appreciation over the next year and earn a 40% return on their investment due to leverage.
There has been a lot of talk about the increase in foreclosures, especially when considering the first half 2022 vs the first half of 2021, which is a 150% increase. But remember that there were moratoriums last year so it's coming off a very low base. Compared to pre-covid in 2019, foreclosures are still down 50%. Compared to 2010, foreclosures are down 90%.
The 10-year Treasury has moved lower from its peak at 3.48%, now down to 2.58%, which is a 90bp move, all while the Fed has been hiking by 75bp at the last two meetings. When the Fed hikes, if it is perceived as fighting inflation, the 10-year and Mortgage Backed Securities respond well and improve.
The 10-year is in a battle with an important borderline, which is the 2.58% level. A convincing move below this and yields will likely gravitate towards 2.31%. But if this level is broken to the upside, we could see yields give back much of their move lower and retest 2.80%.
Mortgage Bonds are testing their 100-day Moving Average as support once again today, and if they can remain above it, have a lot of room to the upside. Begin the day carefully floating.
Source: MBS Highway
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