Tag Archives: investing

Mixed Signals

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To forecast Fed policy, one needs to weigh the key forces pulling in opposite directions:

Inflation concerns

  • Inflation — especially core inflation — remains elevated and sticky, in part due to tariff effects, supply chains, and broad-based price pressures. Some Fed officials are sounding alarms about giving too much leeway too soon. Reuters+1
  • The Fed has emphasized that it wants to see stronger evidence that inflation is slowing sustainably before cutting aggressively.

Labor market & economic softness

  • On the flip side, labor market indicators are showing signs of weakening. Unemployment has drifted upward from the recent lows, and hiring is less robust.
  • Consumer sentiment is under pressure, and business outlooks are cautious.
  • Some Fed minutes and statements show that many members are already concerned about downside risks to growth and employment. AP News+1

Internal Fed division & communication (forward guidance)

  • Fed officials are split: some lean more hawkish (resisting cuts) and others more dovish (pushing for easing).
  • How the Fed frames its “dot plot” projections, its economic outlook, and its forward guidance will matter a lot. If they signal “data dependence” or caution, markets may interpret it as a slower path of easing.
  • The communication risk is high: any signals that cuts are coming too fast could spook markets if inflation reverses.

What I expect for the next Fed meeting

Given the current evidence, my projection is:

  • Probability of a 25 basis point (bps) cut is quite high — it seems largely “priced in” by markets.
  • A 50 bps cut is unlikely, unless there is a dramatic worsening in data (e.g. a shock drop in jobs, major growth contraction).
  • The Fed will likely adjust its projections downward for growth and upward for unemployment (or “less favorable” labor market assumptions).
  • The Fed’s forward guidance will matter: I expect them to emphasize that further cuts will be “data dependent” or “gradual,” possibly tempering market expectations for aggressive easing.
  • The “dot plot” may show a modest number of cuts for the rest of the year, but perhaps fewer than current market expectations.

If I had to put a single outcome: a 25 bps cut, along with a somewhat cautious tone about further cuts, is the most probable result.

Risks / alternative scenarios

  • Downside surprise (dovish surprise): If the economic data before the meeting worsen sharply (jobs collapse, consumer spending tanks, inflation softens more than expected), the Fed might signal more aggressive cuts ahead or even surprise with a 50 bps move.
  • Upside surprise (hawkish surprise): If inflation rebounds strongly or supply shocks emerge, the Fed might pull back, delay cuts, or even consider pausing easing, surprising markets on the hawkish side.
  • Stalemate / hold: Though less likely under current conditions, there is a risk the Fed holds rates steady if the data are mixed and if they prefer more clarity before acting.

What this implies for markets

  • If the Fed delivers a 25 bps cut and leans dovish, rate-sensitive sectors (housing, credit) may rally, fixed-income yields could decline, and equities might get a boost.
  • Conversely, if the Fed turns more cautious or hawkish, that could generate volatility (especially in bond markets) and dampen equity gains.
  • Forward expectations could shift: markets may revise their pricing of how many cuts remain this year.

Meanwhile

  • Home loan rates are low. With decent credit virtually any down payment will get you a mortgage rate in the 5%’s.
  • Home loan rates have been wiggling in a very tight range. Mixed economic signals will maintain the current range until a (interpreted) new direction reveals itself sending home loan rates suddenly up or slowly down

Are you in the market for a new home? Great! Negotiate a favorable transaction, lock in your pre-approved loan and march to closing, If rates drop later, take advantage, it’s a free market in the USA!

Privatize Fannie & Freddie?

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The privatization of Fannie Mae (FNMA) and Freddie Mac (FHLMC) with the guarantee fee (g-fee) structure intact would have significant implications for the U.S. housing finance market. Here’s a breakdown of potential effects:

Key Concepts:

  • Guarantee Fees (G-Fees):
    • These are fees charged by Fannie Mae and Freddie Mac to guarantee the payment of principal and interest on mortgage-backed securities (MBS).
    • They cover the risk of borrower defaults, administrative costs, and a return on capital.
  • Privatization:
    • This would mean removing Fannie Mae and Freddie Mac from government conservatorship, allowing them to operate as fully private entities.

Potential Impacts:

  • Market Dynamics:
    • Risk Pricing:
      • In a privatized environment, these companies would likely have more flexibility in setting g-fees based on perceived risk. This could lead to more dynamic pricing, with higher fees for riskier loans.
      • The market would be more susceptible to the private markets risk assesments.
    • Competition:
      • Privatization could foster greater competition among mortgage guarantors, potentially leading to innovation and efficiency. However, it could also lead to concentration if one or two entities dominate.
    • Capital Requirements:
      • Private Fannie and Freddie would need to maintain sufficient capital reserves to absorb potential losses. The adequacy of these reserves would be crucial for market stability.
  • Impact on Borrowers:
    • Mortgage Rates:
      • Changes in g-fees would directly affect mortgage rates. Increased g-fees could lead to higher borrowing costs for homeowners.
      • The stability of mortgage rates could be less stable, and more reactive to economic swings.
    • Access to Credit:
      • Depending on how risk is priced, some borrowers, particularly those with lower credit scores, might find it more difficult to obtain mortgages.
  • Financial Stability:
    • Systemic Risk:
      • The role of Fannie and Freddie in the housing market means that their financial health is crucial for overall financial stability.
      • Private entities would have to be very well regulated, to avoid the systemic risk that they have posed in the past.
    • Regulatory Oversight:
      • Strong regulatory oversight would be essential to prevent excessive risk-taking and ensure the safety and soundness of these entities.

Important Considerations:

  • The specific effects of privatization would depend heavily on the regulatory framework put in place.
  • Maintaining the g-fee structure provides a degree of continuity, but the level and variability of those fees would be key factors.

In summary, privatizing Fannie Mae and Freddie Mac with g-fees intact would introduce market-driven pricing and potential competition, but it would also require careful regulation to mitigate risks and ensure stability.

Privatizing without g-fee’s is another story. Stay tuned.

2025 Housing Forecast (Generally Speaking)

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The 2025 housing forecast predicts several key trends that will likely shape the housing market:

1. Interest Rates and Mortgage Rates

  • Higher Mortgage Rates: Following 2023’s significant rate hikes, mortgage rates are expected to remain elevated throughout 2025, although they may gradually decline. Higher borrowing costs will likely continue to limit affordability for buyers and slow down home purchases. However, the pace of rate increases may slow, which could provide some relief to buyers and the housing market overall.

2. Housing Inventory

  • Low Inventory: Housing inventory is expected to remain tight due to homeowners’ reluctance to sell amid higher mortgage rates, which means they would have to give up lower rates on their current mortgages for more expensive ones. This will keep competition high for available homes, particularly in desirable areas.
  • New Construction: New home construction may increase slightly but will still struggle to meet demand due to factors like construction costs and labor shortages. In many markets, builders may focus on higher-end properties, exacerbating affordability issues.

3. Home Prices

  • Moderate Growth or Stabilization: Home prices are expected to show slower growth, especially in markets that have experienced significant increases in the last few years. Some areas may see a slight decline in prices, particularly in overheated markets, but most major markets are expected to stabilize.
  • Regional Variations: Price trends will vary significantly by region. For example, more affordable markets in the Midwest and South may see moderate price increases, while expensive coastal cities like San Francisco and New York may experience slower growth or even price corrections.

4. Renting vs. Buying

  • High Rent Prices: Rent prices are expected to stay elevated due to ongoing housing shortages and high demand in many cities, making it more difficult for renters to save for a down payment. This will continue to push some people toward homeownership despite high interest rates.
  • Rentals as a Safe Haven: As a result of high mortgage rates, more people may opt to rent for longer periods, pushing rental demand up, especially in urban areas with limited new construction.

5. Remote Work and Housing Preferences

  • Suburban and Rural Growth: Many workers will continue to embrace remote and hybrid work, which may lead to increased demand for homes in suburban and rural areas. People may be willing to commute less frequently and seek larger homes with more space for remote work, resulting in higher demand for properties outside city centers.
  • Urban Revitalization: While suburban areas are growing, some cities may see revitalization as developers target underutilized urban areas for residential and mixed-use projects.

6. Affordability Challenges

  • Continued Affordability Crisis: Affordability will remain a significant issue, particularly for first-time buyers. Despite slight improvements in the housing market, the combination of high mortgage rates and home prices will continue to limit options for many buyers. This is expected to result in increased demand for affordable housing solutions, such as government-subsidized programs, multi-family properties, and shared equity models.

7. Technology and Innovation

  • Tech Integration: The housing market will continue to embrace technological innovation, including smart home features, digital real estate platforms, and the use of AI and data analytics to streamline buying, selling, and financing processes. These technologies may help mitigate some inefficiencies in the housing market.
  • Sustainability: Green building practices, energy-efficient homes, and sustainable development will become more prominent, as consumers and builders continue to prioritize environmentally friendly and cost-saving features in homes.

8. Government Policy and Regulation

  • Policy Interventions: Governments at both the federal and state levels may introduce new policies to address housing affordability and supply constraints. This could include incentives for first-time homebuyers, funding for affordable housing projects, or zoning reforms to allow for more dense and varied housing options.

9. Economic Factors

  • Inflation and Economic Uncertainty: While inflation may ease somewhat, the overall economic uncertainty in 2025 could affect the housing market, especially if there are any disruptions to the labor market or global economic conditions. Economic volatility could also impact consumer confidence and spending power.

In summary, 2025 is likely to be a year of slow but steady recovery in the housing market, marked by high interest rates, continued affordability challenges, and regional disparities in pricing and demand.