Morning Report: Mortgage spreads at 37-year highs

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are down small.

The services economy expanded at a slower pace in May, according to the ISM Services Report. “There has been a pullback in the rate of growth for the services sector. This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the Supplier Deliveries Index) and capacity, which are in many ways a product of sluggish demand. The majority of respondents indicate that business conditions are currently stable; however, there are concerns relative to the slowing economy.”

The prices index continues to decline, which is good news for the Fed. Over the past month, the percentage of companies raising prices has fallen from 35% to 25%. They aren’t cutting yet; the number of companies maintaining prices has risen from 60% to 69%. Employment entered contractionary territory, which should put additional downside pressure on inflation. Sentiment was summarized by: “We are trying to do more with the same staff because margins in the industry have compressed” and “Our company is currently on a hiring freeze until there’s a better understanding of where the economy is headed.”

Home prices rose 2% YOY in April, according to CoreLogic. Home prices were accelerating at 20% last year at this time, so this is a big slowdown. It looks like prices peaked in June of 2022, so we should start seeing YOY declines before long. The reasons for the slowdown are well know: mainly high mortgage rates are keeping potential buyers on the sidelines and potential sellers in their homes.

The top states in terms of percentage gains were Indiana and New Jersey. The losers were all concentrated on the West Coast and in the Mountain states.

The first-time homebuyer has been slammed by affordability issues, and will be negatively affected by the resumption of student loan payments in August. Unfortunately, mortgage rates continue to rise faster than the 10-year. The spread between the 30 year fixed rate mortgage and the 10 year bond yield has surpassed the highs of last year and the 2008 financial crisis and is back at levels last seen when the Smith’s The Queen Is Dead was released.