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Mortgage Rates Soaring

Mortgage Rates Are Soaring

Mortgage Rates Are Soaring. After a brief ray of hope, the August inflation rate report dashed the possibility of only a 0.50% rate increase by the US Federal Reserve. The overall rate was 8.3%, less than the 8.5% in August, but price increases for food, new cars, apparel, and housing show no sign of slowing down. In addition, electricity and natural gas prices are accelerating. Only gas and used car prices were lower.

One result is that the Fed’s probability of a 0.75% rate increase is effectively 100%. Another consequence is mortgage rates are soaring higher, as seen in the below chart. The 30-year fixed rate mortgage (FRM) is now more than 6%, the 15-year FRM is 5%+, and the 5/1-year adjustable-rate mortgage (ARM) is nearing 5%.

Mortgage Rates
Source: FreddieMac

These rates are the highest in a decade. In fact, one needs to go back to just before the Great Recession during the subprime mortgage crisis to find higher rates. Granted, the rates are not high compared to historical numbers. However, many home buyers have never experienced the soaring mortgage rates and instead were used to sub-4% rates.

Mortgage Rates Historical
Source: FreddieMac
Mortgage Rates Soaring
Mortgage Rates Are Soaring

Home Sales Are Slowing

Soaring mortgage rates are affecting home sales. According to the National Association of Realtors, existing home sales were down sequentially (-5.9%) in July 2022 from June 2022 and (-20.2%) from one year ago. Similarly, according to the US Census Bureau, new home sales in July 2022 were down (-12.6%) from June 2022 and fell (-29.6%) from July 2021. After about two years of elevated home buying, new home sales are below pre-pandemic levels.

New Home Sales
Source: US Census Bureau

The August data has not yet been reported, but it is likely to show double-digit declines.

Impact on the Stock Market

High inflation negatively impacts total stock returns. Housing-related stocks are usually more affected. They have taken a hit in 2022 because of rising mortgage rates and slowing existing and new home sales. The chart below from Stock Rover* shows the price declines of stocks. The homebuilder stocks are down about (-41%) as a group. 

Of these stocks, M.D.C. Holdings (MDC) may be of interest because of its higher dividend yield of nearly 7% combined with a conservative payout ratio of ~21%.

Related Article: 5 Income Stocks for Retirees

Homebuilder Stocks
Source: Stock Rover*

Recession Risk is Elevated

Higher interest and soaring mortgage rates are causing an increase in recession risk. The last time the US and the world had a significant and protracted recession was because of high-interest rates. Hence, many leading economists predict a recession.

Also, inversion of the yield curve is viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession. The 10-year US Treasury bond and 3-month US Treasury bill are nearing inversion, and the spread between these two rates is a relatively good indicator of recessions.

However, unemployment is still low, and jobs are plentiful, both signs of a robust economy. In recessions, unemployment spikes, and job openings plunge. Furthermore, banks had poor lending standards during the subprime mortgage crises, which is not the case today. Most large banks have healthy balance sheets and are periodically stress tested to prevent a repeat of the Great Recession.

That said, states dependent on low-interest rates and home building will struggle in a high-interest rate environment. In addition, many homes were bought recently at high prices. If credit card and personal loan rates go up further, consumers may find it harder to service mortgage debt. Homeowners with an ARM should consider paying off the mortgage early.

Final Thoughts on Mortgage Rates Are Soaring

Mortgage rates are soaring. They will probably increase further before dropping again. It will take a persistent and downward trend in inflation toward the Fed’s goal of 2% to stop and potentially reverse rate increases. Alternatively, a recession that causes a jump in unemployment would also cause the Fed to change course.


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The Stock of the Week

Today we highlight Mondelez International (MDLZ), the maker of Oreos, Chips Ahoy, Halls, etc. According to Stock Rover*, the stock price was down only 8.0% year-to-date but is up 1.9% in the past 1-year, making it one of the better-performing stocks and Dividend Challengers in 2022. In a rough market, Mondelez is increasing revenue and earnings. The company is focusing further on biscuits and chocolate by divesting its gum and Halls businesses.

The forward dividend yield is about 2.32%, and the price-to-earnings ratio is about 20.74X, below the 5-year and 10-year ranges. The dividend is supported by a modest payout ratio of 46%, allowing the dividend to grow at a double-digit rate.

MDLZ Dividend Growth
Source: Stock Rover*

Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of August 2022. As a result, the number of companies on the list has risen to 569. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Six new additions indicate companies are experiencing solid profits and cash flow in August.

The new additions were Mativ Holdings (MATV), Newtek Business (NEWT), Southern Copper (SCCO), Weber (WEBR), Encompass Health (EHC), and Healthcare Realty Trust (FR).

Market Indices

09/17/22

Dow Jones Industrial Averages (DJIA): 30,822 (-4.14%)

NASDAQ: 11,448 (-5.48%)

S&P 500: 3,873 (-4.77%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 19.57X, and the Schiller P/E Ratio is about 28.99X. These multiples are based on trailing twelve months (TTM) earnings.

Note that the long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent market correction and a bear market. Earnings multiples of more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

SP500 PE Ratio
Source: multpl.com

Shiller PE Ratio History

Shiller PE Ratio
Source: multpl.com

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was up about 3.5 points at 26.30. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 Index options. It is commonly referred to as the fear index.

CBOE VIX
Source: Google

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

10-Year Bond minus 3-Month Bill
Source: NY Fed
Spread Between 2-Year and 10-year US Treasuries
Source: St. Louis Fed

Economic News

Over the last 12 months, the all items index is up 8.3% before seasonal adjustment. It has remained above the 8% level for six straight months. Increases in the shelter (+0.7%), food (+0.8%), and medical care (+0.8%) indexes were the largest contributors to the seasonally adjusted all items increase. Offsetting the increase was a (-10.6%) decline in the gasoline index. The energy index declined (-5.0%) for the month. The food index increased (+0.8%). The food at home index increased (+ 0.7%), up 13.5% year over year, the largest 12-month increase since March 1979. Contributing to the increase were indexes for motor vehicle repair (+1.7%), household furnishings and operations (+1.0%), new vehicles (+0.8%), personal care (+0.6%), education (+0.5%), and apparel (+0.2%). Indexes that saw declines included airline fares (-4.6%), communication (-0.2%), and used cars and trucks (-0.1%). The annual rate of core CPI inflation was reported at 6.3%, up from 5.9% in July.

The US Energy Information Administration reported US commercial crude oil stockpiles increased by 2.4M barrels to 429.6M barrels (2% below the five-year average) for the week ending September 9th. Crude oil refinery inputs averaged 16.0M barrels per day, an increase of 94K per day compared to the previous week’s average. Gasoline inventories decreased by 1.8M barrels (6% below the five-year average). Refineries operated at 91.5% of their operable capacity.

The Commerce Department reported advanced US retail and food services sales rose 3% to $683.3B in August. July’s sales were revised to a decline of 0.4%, reflecting the first drop in seven months. Retail sales are up 10.1% year over year. Contributing to the headline number was a 2.8% increase in the sales at motor vehicle and parts dealers. The continued decline in gas prices led to a 4.2% drop in gas station sales. Sales increased at home centers (+1.1%), clothing stores (+0.4), and grocery stores (+0.2%). Receipts fell in the categories of home furnishings (-1.3%), internet retail (-0.7%), health-care products (-0.6%), and electronics and appliances (-0.1%). The only services category, bars and restaurants increased (+1.1%). Retail sales for gas stations and autos were excluded. Retail sales increased 0.3%.

Thanks for reading Mortgage Rates Are Soaring – Week in Review!


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