Volume 112 | October 13, 2022

Guardian Asset Management

Weekly Newsletter

Guardian endeavors to provide you with the latest in housing, industry and market news from Washington D.C. and around the country. It is our goal as your industry partner to be informative, relative and topical.

From the General

Counsel's Desk

With mortgage rates near 7%, the housing party is over.

Now it's hangover time.

These days Andrea and Mike Johansen are not living their best life. It's temporary but the couple is crammed into a small camping trailer at her parents farm in western Massachusetts, across from a barn with 100 very noisy chickens.

"It starts at like 4:30 in the morning," Andrea says. "You're trying to have zoom calls for work and when the sun starts going down, they start all over again... going bonkers." 

The Johansens thought they'd be in a newly built house by now. But with supply chain delays it's not finished. And so what was supposed to be a quick stay in the camper between homes is dragging on.

Total mortgage application volume fell 14.2% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

Refinance volume, which is most sensitive to weekly interest rate moves, dropped 18% for the week and was 86% lower than the same week one year ago.

Mortgage applications to purchase a home fell 13% for the week and were a steep 37% lower year over year.

ATTOM, Irvine, Calif., reported September foreclosure activity rose by 3 percent in the third quarter and by 104 percent from a year ago.

The company’s third quarter U.S. Foreclosure Market Report found 92,634 properties with foreclosure filings. It also reported 31,836 U.S. properties with foreclosure filings in September, down 8 percent from the previous month but up 62 percent from a year ago.

Will hotter inflation data trigger more rate hikes?

On Thursday, the Bureau of Labor Statistics (BLS) reported that Consumer Price Index (CPI) inflation came in hotter than expected, and people are scared that the Federal Reserve will now be more aggressive with their rate hikes. Personally, I believe the Fed knows that rental inflation data can lag so at this point of the rate hike cycle, they won’t act in a more aggressive fashion. Here’s why.

The extra heat of this report was primarily due to how hot shelter inflation has been coming in on the data line. I recently discussed how shelter inflation has legs in 2022 but should change in 2023 on the CPI reports. The way BLS accounts for shelter inflation has a noticeable lag to more recent data.

In the eyes of housing bulls, the Pandemic Housing Boom entered 2022 with a lot of gas left in the tank. Work-from-home buying was still going strong. The U.S. housing market was still amid the five-year stretch that would see millennials born during the generation's five largest birth years hit the all-important first-time home buying age of 30, and it remained underbuilt by a number somewhere in the millions. Finally, tight lending standards coupled with a strong economy meant the potential for distressed selling was null.

Fast forward to October, and the housing bulls clearly got it wrong. Not only has the Pandemic Housing Boom fizzled out, but Fed Chair Jerome Powell says it has been replaced by a "difficult correction." Simply put: The combination of favorable demographics, tight supply, and "plain vanilla" lending wasn't enough to stave off a housing correction.

Economists predict "ugly" fourth quarter

for US housing market

Whether the U.S. is already in a recession remains up for debate, but one thing real estate economists agree on is that the housing market is in for a rough stretch.

After a “respectable” start to the year, the third and fourth quarter home sales figures will be “ugly,” predicted Lawrence Yun, the National Association of Realtors’ chief economist, at the National Association of Real Estate Editors’ annual conference in Atlanta.

Signed contracts will continue to fall, Yun said, and home sales could be down 15 percent by the end of the year. But unlike the run-up to the 2008 crash, when the housing market was awash in unsold inventory, the supply of available homes this time around remains extremely low, and Yun’s co-panelists said millennials will drive continued demand in the coming years.

The combination of high inflation, monetary policy tightening, and a slowing housing market is still projected to tip the economy into a "modest recession" in the first quarter of 2023, according to the October 2022 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.

The ESR Group expects real gross domestic product (GDP) to grow 2.3% annualized in the third quarter of 2022, before contracting 0.7% annualized in the fourth quarter as the effects of that activity wane.

Fannie Mae said headline GDP growth is expected to remain negative through the third quarter of 2023, as the economy enters a modest recession. The group forecasts negative 0.1% real GDP growth on a full-year basis for 2022, a slight change from their prior month prediction of 0%. However, the group maintained its expectation for a 0.5% contraction in real GDP in the new year.