Author: Kyle G. Horst

Continuing to forecast an upcoming recession that has been on Fannie Mae’s Economic and Strategic Research Group’s economic outlook for months now, the forecast has been updated this month to take into account turbulence in the banking sector caused by the collapse of Signature Bank and Silicon Valley Bank and troubles with Credit Suisse overseas.  However troubling these events have been however, has not changed Fannie Mae’s outlook for recession conditions to coalesce this year as they already expected a moderate economic contraction to occur this year, and, historically, turbulence in financial markets have been a characteristic of late business cycle dynamics following monetary policy tightening, as the Federal Reserve is continuing to do. Many typical recessions have historically included bank failures as an attribute.  Prior to the collapse of the two banks, data pointed to stronger-than-expected growth during the first quarter of 2023—as a result, Fannie Mae has pushed the recession, which was supposed to occur in the second quarter of 2023, to sometime during the third and fourth quarters of 2023.  Importantly, the ESR Group does not anticipate a repeat of the 2008 Financial Crisis. Instead, it believes the Savings & Loan Crisis from the 1980s to be a better analog, specifically regarding the significant interest rate rises that set in motion banking system stress and the resultant macroeconomic effects that contributed to a modest recession in 1991.  “Inflation has now been joined by financial stability concerns as threats to sustained growth,” said Doug Duncan, SVP and Chief Economist for Fannie Mae. “These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening—but this may well be the catalyst for the modest recession we’ve been expecting since April 2022.”  “While the projected timing has been adjusted, many leading indicators, including extreme weakness in the Conference Board’s Leading Economic Index (LEI)...

Ahead of an expected ruling by the U.S. Supreme Court, a three-judge panel for the U.S. Court of Appeals for the Second Circuit has ruled that the Consumer Financial Protection Bureau (CPFB) independent funding through the Federal Reserve is constitutional.  The ruling, which was unanimous, further solidifies provisions of the Dodd-Frank Act. The CPFB was created in 2008 with the passage of the Dodd-Frank Act, and is funded by the Federal Reserve, not Congress. Since its inception, the CFPB has recovered approximately $15 billion for customers, including a recent record $1.7 billion civil fine, in addition to $2 billion in mandated customer reimbursements, imposed by the CFPB on Wells Fargo for abuses related to customer accounts.  The case at hand deals with the Law Offices of Cristal Moroney PC, a debt collection law firm out of New York, is attempting to get around a civil subpoena issued against them in 2017. Previously, a lower court ruled in the CFPB’s favor in August 2020.  SCOTUS is expected to hear the case on their October 2023 schedule.  The Court of Appeals for the Fifth Circuit previously ruled that the CPFB’s funding violates the Constitution and should be subject to Congressional appropriations.  In its Thursday ruling, the Second Circuit found that there is no supporting evidence to grant validity to the Fifth Circuit’s ruling. 

Down payments, something usually necessary for a traditional mortgage, have eased off post-pandemic highs by 10% in January 2023 to an average $42,375 per new origination. The median down payment was down 35% from the peak it reached in June, but still up more than 30% from pre-pandemic levels.  At January’s levels, the median down payment was equal to 10% of the agreed upon purchase price, down 3.6% year-over-year. Median down payments peaked most recently at 17.5% in May 2022. The last time down-payment percentages were this low was early 2021, before the pandemic homebuying boom drove buyers to put more money down to make their offers more attractive.  Down payments are falling for several reasons, according to Redfin, who has published their most recent findings:   The housing market is slow and there’s not much competition. Most offers for homes written by Redfin agents don’t face bidding wars anymore. That’s a stark difference from the hyper-competitive housing market of 2021 and early 2022. Buyers no longer need to offer a big down payment to prove their financial stability and stand out from the crowd. Now that buyers often have the upper hand, they can offer an amount that works best for their individual circumstances. Diminished competition is also allowing more buyers to use FHA and VA loans, which typically allow for much smaller down payments.  High housing costs and inflation. 6%-plus mortgage rates, still-high home prices and inflation are hitting homebuyers’ pocketbooks hard. Buyers don’t have as much money to allocate to a down payment because monthly housing payments are higher than before; they may also be putting more cash toward a mortgage-rate buydown instead of their down payment. Additionally, buyers may be inclined to hold onto as much cash as possible in these uncertain economic times.  Lower home prices equal lower...

Continuing the most aggressive series of rate hikes since the 1980s, at the end of the March meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) raised the nominal interest rate by 25 basis points to a range of 4.75% to 5.00% due to the easing—but not taming—of inflation which the FOMC is “strongly committed” to returning inflation to its 2% objective.  Notably absent from the discussion after the meeting was that inflation is cooling—the elimination of this topic signals that inflation has not meaningfully fallen to the desired level of 2% and that further rate hikes will be all but inevitable.  This marks the ninth consecutive hike and the biggest string of consecutive rate hikes on record. Since the rate hikes began, the FOMC raised rates in March 2022 (+25 points), May 2022 (+50 points), June 2022 (+75 points), August 2022 (+75 points), September (+75 points), November 2022 (+75 points), December 2022 (+50 points), February 2023 (+50 points), and now March 2023 (+25 points). This is equivalent to a rise of 4.75 percentage points over the last year.  The next FOMC meeting occurs May 3, 2023. Currently, they meet eight times a year—emergency meetings not withstanding.  In a short, prepared statement released at the conclusion of the meeting, the FOMC said:  “Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.”  “The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”  “The Committee seeks to achieve maximum employment and inflation at the rate of...

The Hartford Home Fire Index, published by The Hartford, a property and casualty insurance provider, has released it third index tracking the probability of home fires in the top 150 metropolitan areas, along with other data from the U.S. Census Bureau and the U.S. Fire Administration National Incident Reporting System (NFIRS).  The index, which also polls adults about their fire safety practices, revealed that behaviors known to cause home fines markedly declined since the months immediately preceding the pandemic including:  Leaving a lit candle near drapes or other flammable household items (75% decrease).  Falling asleep with a fire burning in a fireplace (64% decrease).  Leaving matches and lighters in the open with children present (55% decrease).  Overloading electrical outlets (45% decrease).  The survey also noted that more respondents are taking proactive steps that can prevent or limit a fire should one occur than the last time the survey was conducted. Smoke detector use increased 46%, regular battery changes increased by 27%, and having a home escape plan increased 16%.  “While we are encouraged by the improvements we have seen in fire safety and prevention, we know there is still work to be done,” said The Hartford’s Chief Marketing & Communications Officer Claire Burns. “The Hartford is committed to reducing the frequency and impact of home fires in the U.S. through marquee educational initiatives like our Junior Fire Marshal Program that equips children with lifesaving lessons about fire safety. Children play a significant role in keeping homes safe from fire, and we are proud to provide parents and educators with the tools and resources they need to teach the next generation about reducing fire risk.”  According to the index, ranking the top 150 U.S. cities with the highest home fire risk, the top five cities are: Modesto, California; Shreveport, Louisiana; Fresno, California; Montgomery, Alabama; and...