The Great Inversion
A Trend Flip in Jobs Data, Fed's Pivot and Improved Mortgage Limits
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There was a recurring phrase heard in the discussion surrounding the post-pandemic economy: K-type recovery. This was when different sections of the economy recovered at different rates, i.e. while tech and other large-cap firms bounced back quickly and zoomed (pun intended :-)) past their post-pandemic highs, small businesses like entertainment and the hospitality industry suffered the brunt of the Covid pandemic with job losses and permanent closures.
However, a look at the recent jobs data suggests that we might be seeing an inversion of this trend (an inverted-K, if you will). Right now, the tech industry is going through what many consider to be a second dot-com bust with more than 50,000 jobs lost this November alone. In stark contrast, the November jobs report showed an addition of more than 263,000 jobs, with leisure and hospitality industries adding more than 80,000 jobs.
The higher-than-expected jobs report is a hurdle in the fight against inflation and presents a unique challenge to the Federal Reserve, which is set to announce its next rate hike on December 14. To further complicate things, the Federal government has increased the limit on the loans that they will back for mortgages. Let’s take a look.
What does the Fed Say?
Setting the stage for the economic landscape in early 2023, in less than two weeks from now, the Federal Reserve will announce its last rate hike for this year. As I had mentioned a few weeks ago, we might have crossed an inflection point in the battle against inflation, although the unexpectedly high jobs report has made any predictions of the Fed’s strategy unreliable.
In the recently released minutes of the recent Fed meeting, members seemed to admit that there were very few signs that inflation pressures are abating implying that more rate hikes might be in order. However, there is also growing consensus that slowing the pace of rate hikes might be appropriate and if that happens, that would mark a reversal of their rate hike tightening cycle (i.e. a Fed Pivot). With the Yield Curve being the most inverted it’s been since 1999, there is a lot riding on how the Fed is going to approach this tricky situation.
Here’s everything you need to know about the recently released minutes of the Fed’s meeting, three key factors that are likely to affect their next decision, and how all of this is affecting the housing market. Make sure you don’t miss this one!
Housing Affordability Improves
For the first time in history, the Federal government will back housing mortgages higher than $1 Million, ostensibly aimed at lowering costs and improving housing affordability although some critics warn that this will make the housing crisis worse.
In case you didn’t know this, when a bank gives out a mortgage they generally do not hold on to the loan and wait for you to pay it back. Instead, to have access to more liquidity, they sell the loan to investors as ‘mortgage-backed securities’ while making a small profit. Since these loans are federally backed against defaults, buyers like Fannie Mae and Freddie Mac have minimal concerns about making a loss in the long term. With home prices having increased throughout last year, the Federal government has increased the loan limits by 12%, equating to an additional $79,000 that buyers can borrow for their mortgages.
In this video, I discuss why some analysts are wrong to assume that this will lead to a repeat of the 2008 crisis, why Blackstone’s real estate fund has hit the redemption limit and how this is a sign that wealthy investors are expecting diminishing future returns from the housing market. Check it out and let me know what you think!
So that’s it for my Sunday round-up. For the new folks here, in this newsletter, I give a quick recap of whatever you may have missed over the week on Sunday, and on Wednesday, I will be doing my deep-dive article on one of these topics.
See you next week with another bunch of exciting videos!
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