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Headwinds keep coming as debt ceiling looms

By: Movement Staff
May 19, 2023

The latest bogey in the world of the housing industry looms in the form of a June 1 deadline for Congress to raise the debt ceiling or risk the United States defaulting on its debt obligations. Should the U.S. essentially become unable to pay its bills, it's highly likely gross domestic product would decline in a very significant manner and job losses would be prevalent, leading to a massive disruption in the bond market domestically and around the world.

The way it affects housing is the one thing we discuss with regularity in this blog which is the 10-year Treasury note yield. As the risk of a potential government default looms, investors become wary of investing in government-backed bonds like the 10-year Treasury note (we explained how this affects mortgage rates in last week's blog in case you missed it!). Investors were slightly assuaged when both House Speaker Kevin McCarthy and President Biden intimated there would be a deal before the June 1 deadline, leaving 10-year yields relatively steady.

What pushed the 10-year note higher were comments from Dallas Federal Reserve President Lorie Logan. Logan said in prepared statements, "After raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we have made some progress. The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren't there yet."

Headwinds keep coming as debt ceiling looms

The main piece of data released during the week that Logan could have been referencing was retail sales from the Commerce Department. Retail sales rose by 0.4% month-over-month which was less than expected but the first positive reading since January. The core retail sales data, which excludes the more volatile products like gas and building materials, rose by 0.7% against expectations of a 0.4% increase. 

Logan's comments left the door open for yet another federal funds rate hike which spooked investors and drove the 10-year Treasury yield up by about 7 basis points to 3.65%. The 2-year yield also moved higher, hitting 4.26%. The 10- and 2-year note yields have been inverted since June 2022 which is a major indicator of a recession. When short-term debt is more profitable than long-term government debt, that means investors are not as bullish on the long-term health of the economy. 

A rising 10-year yield does not bode well for mortgage interest rates as mortgage rates typically follow the trajectory of the 10-year yield. Freddie Mac's 30-year fixed-rate mortgage average moved back up ever so slightly to 6.39%. This average has been keeping within a range of about 10 basis points over the last several weeks which is a nice change from the extreme rate volatility of the last 12 months. 

Freddie Mac economists said in their release, "After the substantial slowdown in growth last fall, home prices stabilized during the winter and began to modestly rise over the last few months. This indicates that while affordability remains a hurdle, homebuyers are getting used to current rates and continue to pursue homeownership."

Demand is still present although not in the same concentration it was when mortgage rates were near rock bottom. The National Association of Realtors' monthly existing home sales report showed sales down 3.4% in April from March. One silver lining in the report showed that home inventory increased by 1% annually putting us at a current 2.9-months supply. 

The NAR's Chief Economist, Lawrence Yun, noted that the demand is still strong enough to keep this a seller's market, saying, "Roughly half of the country is experiencing price gains. Even in markets with lower prices, primarily the expensive West region, multiple-offer situations have returned in the spring buying season following the calmer winter market. Distressed and forced property sales are virtually nonexistent.”

The demand is not entirely equal, however, as lower-priced homes continued to see the most competition. In an article by CNBC, Realtor Noah Herrera is quoted saying, "Under $350,000 and $400,000, there's multiple offers. You'll see eight or nine people just trying to get into the house to buy the actual house. Over $500,000, it slows down a little bit."

Author: Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.