Good Morning on this fantastic Friday,

The news this morning was mixed but tilting toward being unfriendly to bonds. Bond prices are pulling back somewhat but again, this should not be a surprise. The Mortgage bonds tested resistance as it has many times in the past. The price failed to break through, also as it has many times in the past. We should always make locking and trading decisions with the knowledge that price fails to break out many more times than it does breakout. At this point we are on the upward trendline, and it is crucial that we remain above that line. If we fail to hold, we will likely test the bottom of the range quickly. Long weekend with MLK day on Monday.

Below is a snippet from a US News piece on property values. Here is a link to the story in case you would like to share it When Will Housing Prices Drop? | Real Estate | U.S. News (usnews.com).

What Do Dropping Prices Mean?

When you hear about home prices dropping, it can mean one of a few different things. Clarify which type of dropping price it could be:

• Listing price drops. If a house is sitting on the market and not getting much interest, the listing agent and seller will likely have a conversation about dropping the home’s asking price. “If we don’t get the traction and we’re doing everything we can … the market will tell us what we need to do,” says Mary Anne McMahon, broker owner of Re/Max Posh Properties in Austin, Texas. When you see more listing price drops on a larger scale, it’s a sign that a tight seller’s market is easing up and potentially starting to favor buyers. Listing price drops often coincide with longer median days on the market.
• Deceleration of sale price increases. Home sale prices can still see year-over-year increases, but at a much slower rate than previously. In the final four weeks of 2022, the median home price was $350,000, 0.5% higher than the final four weeks of 2021, according to Redfin.
• Month-over-month home price declines. If the median home sale price in June was lower than in May, for example, that’s considered a declining month-to-month price. However, because of the largely seasonal nature of the housing market, month-to-month numbers are often considered too volatile to indicate changing trends unless placed into a larger context.
• Declining home values. A declining home value occurs when the appraised market value is less than the price a buyer paid for it. A homeowner is only underwater if the market value of the home drops below the amount owed on the property through mortgages or other liens. “If you gain 40% (in home value) and your price comes down 5%, you’re still well ahead,” Bailey says.

Lots of smart people calling for lower rates:

The MBA said it expects mortgage rates to move lower over the course of the year, which should bring more homebuyers back into the market. MBA’s latest forecast is for the 30-year rate to reach 5.2% at the end of 2023. 

And…

An as-expected cooling in US inflation further fanned the flames of a fight between the market and the Federal Reserve. Short-dated Treasury yields plunged Thursday in the wake of a 6.5% reading for year-over-year December consumer prices — down from a peak of 9.1% in June — with swaps markets now pricing in a peak Fed rate of 4.9%. That’s out of step with the policy makers’ projections of a destination above 5% — which was reiterated by St. Louis Fed president James Bullard in the aftermath of the data. So who wins? In the eyes of DoubleLine Capital LP chief investment officer Jeffrey Gundlach, the obvious answer is the bond market. “My 40 plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says,” Gundlach said on a webcast Tuesday. That builds on a tweet he sent last week: “There is no way the Fed is going to 5%. The Fed is not in control. The Bond Market is in control.”

And if we’re listening to the bond market, it’s also worth noting that traders are pricing in about a half-point worth of rate cuts next year in addition to a lower ceiling. Again, that’s at odds with the Fed’s projections which indicate they plan to hold rates through the end of 2023 after reaching terminal. Perhaps unsurprisingly, Minneapolis Fed president Neel Kashkari thinks you should take the central bank’s side. In a New York Times profile, author Michael Steinberger asked Kashkari about the fact that markets are pricing in rate cuts:

“I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic,” Kashkari replied. I said it seemed almost as if the markets were playing chicken with the Fed. Kashkari laughed. “They are going to lose the game of chicken, I can tell you that,” he said.

Please remain safe and stay healthy, enjoy the long holiday weekend, and first, make today great!