Stocks and Mortgage Bonds are both higher so far this morning. After Wednesday’s strong 10-year Treasury Note Auction, we saw a slightly below average 30-year Auction yesterday. Fortunately, it was not market moving.
Next week will be highlighted by the Fed, with the release of their statement, Jerome Powell Press Conference, and Summary of Economic Projections (SEP) coming on Wednesday starting at 2:00pm ET.
We anticipate the Fed to cut 25bp, which is priced into the market. The key will be the Fed’s tone and guidance. The Dots plot chart will show us where the Fed members believe the Fed Funds Rate will be this year, next year, and in the longer run. Additionally, their SEP will give us their forecasts on inflation, GDP, and the Unemployment Rate. We accurately used their Unemployment Rate forecasts to determine that the Fed would cut rates once it rose above 4.1%, as 16/19 Fed members did not see it going above that level in 2024. We will make sure to break down the new SEP in detail next week to hep us determine how economic data may drive the Fed.
Bottom line – Even though we believe the Fed will cut 25bp instead of 50bp, it’s the beginning of a rate cut cycle. The market is expecting 1% of cuts this year and another 1.25% of cuts next year…meaning the Fed will be much less restrictive on the economy and we should see mortgage rates continue to drift lower, albeit not in a straight line. Things are finally starting to turn!
News Next Week
Tuesday: Retail Sales, NAHB Housing Market Index, 20-year Bond Auction
Wednesday: Mortgage Apps, Housing Starts, Fed Decision
Thursday: Initial Jobless Claims, Existing Home Sales
Demographics are Destiny
After a deep analysis of consumer demographics, we believe that home prices should be well supported into the future.
On the supply side, it’s a very tight inventory environment. We have seen an increase since last year, but it’s from very low levels and way less than we had pre-pandemic. At the same time, population keeps increasing from births and immigration. There is a lot more need for housing, but builders are not keeping up.
Looking at the different generations, by age 30, the homeownership rate for Boomers was 48%, 42% for Gen X, and 33% for Millennials. It has clearly fallen over time as people are taking longer to get married, have kids, and buy a home. A lot of Millennials also may have been impacted by the Great Recession, which made it harder to find a job once out of school. But by age 40, those numbers increase significantly and Millennials catch up to Gen X and Boomers.
There are 69M individuals that are Gen Z, or those between the ages of 12-27. Their homeownership rate is only 8%, mostly because they are so young. But over the next 10 years, if they follow Millennials, we should see that increase by roughly 25% to 33%.That means that about 17M of them will be purchasing a home, which is a lot of demand.
There are 73M Millennials that are aged 28-43, with a homeownership rate of 33% by age 30 and 55% by age 40. Those aged 25-35 are mostly Millennials, and 17% of them or 8M are still living home with their parents, the highest level since 1941.In 2010 this figure was at 15% and between 2012-2016 we accurately forecasted that home price appreciation would be strong because of this, while the media was calling for a crash. Of those 8M people, 55% should be homeowners by the time they are 40 based on the Millennial homeownership rates. That means we should see Gen Z demand of 17M and Millennial demand of 4.4M over the next several years…which is significant.
This doesn’t count renters who transition to homeowners or immigration, and of course we will see some of the older generations pass, but it does appear that there will continuously be a shortage of supply as we are not building enough. This bodes well for housing the investment and continued home price appreciation over time.
Technical Analysis
Mortgage Bonds are slightly higher, once again taking a run at overhead resistance at 101.52. This level has rejected Bonds several times over the past week, but if we are able to break above it, the next stop is over 30bp higher at 101.83. On the other hand, if Bonds are pushed lower, there is about 25bp of room for Bonds to fall until reaching support at 101.18.
The 10-year is slightly lower at 3.66%, which is right on an important Fibonacci floor. Yields have tested this level several times over the last week but have been unable to convincingly break beneath it. If yields get rejected, they could move as high as 3.80%. But if yields can under support, the next stop is 3.57%. Next week’s Fed meeting will likely be the catalyst, one way or another.
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