China and the Fed, Both Front and Center…
Rates had a rough week September 20th through the 24th, as they increased across the board to their highest rates since April. It’s all relative as rates are still extremely low but it was a rough week regardless. So why the big move and what’s moving the markets? I’m glad you asked! Let’s get to it!
From China we received news Monday that Evergrande is 300 billion dollars in debt and today they missed a deadline for a $83.5 million interest payment. They now have 30 days to make the payment or they will be in default. So why does Evergrande matter? Evergrande is the second largest real estate company in China owning more than 1,300 properties and managing nearly 2,800 projects. Since China’s government had been pushing so hard for development there was an understanding that China would step in to support these developers if needed. The big picture context is that there’s concern that Evergrande could be China’s version of Lehman Brothers which was the canary in the coal mine for the 2008 recession. There’s still hope that China will step in and bail Evergrande out but then they are establishing a precedent. Since all markets are intertwined stocks retreated on Monday and Friday.
On Wednesday the Fed wrapped up their meeting and in it they hinted that the Fed will likely begin tapering their Mortgage Back Securities purchases as soon as November as the “test is all but met” on full employment. It was also indicated that they foresee the tapering to end around the middle of 2022. So what does that mean in English? Since March of 2020 the Fed has been buying at least 40 billion dollars’ worth of Mortgage Back Securities and 80 billion dollars’ worth of treasuries each month which caused rates to drop and the markets to stabilize. As soon as November the Fed will begin to slow down (taper) their rate of purchases with the intent of stopping those purchases by mid 2022. The announcement from the Fed wasn’t all that surprising but the rate of the taper was quicker than some had hoped. The Mortgage Backed Securities market reacted unfavorably and it’s why rates jumped .125% - .250% across the board.
In housing news, single family sales are down 3% year over year. Inventory is down 13% year over year. Cash buyers are up to 22% of all transactions and that’s up big from 16% last year. It’s a reflection of the market being more competitive so cash being offered as a way to win the deal. A couple other interesting stats… 37% of all homes are owned free and clear while 63% have mortgages. Only 1.4% of all homes have negative equity.
Next week should hopefully be quieter as only appreciation data, pending home sales and inflation data are on the docket.
(courtesy of Aaron Staufer | Mortgage Loan Officer; Elevations CU)
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