Evergrande, MBS Decline, Fed Dot Plot, Home Equity Galore

One of China’s largest real estate developers is struggling to service its debt payments. They help sustain nearly 4M jobs and own approximately 1,300 projects in 280 cities. It’s invested in EV, sports & theme parks, and the food & beverage sectors as well. They’ve racked up over $300B in debt and are now experiencing cash flow issues. Some speculators are asking if this it the next Lehman Brothers. I called a college classmate of mine who majored in economics and lives in Nanjing and he predicts a value correction or stagnation in RE appreciation but no major economic collapse as the government has plenty of ammunition to spend (they haven’t been doing the same quantitative easing and rates are higher there). Values have been growing for 20 years there and there is quite a bit of supply. He told me that if wanted to purchase the apartment he lives in it would cost $1.1M (USD) but it only costs him $21K to rent annually.

Rates increased this week as Mortgage Backed Securities (MBS) dropped significantly on Thursday after the Fed’s Statement and Press Conference. Fed Chair Jerome Powell said that in his eyes that employment situation has been all but met and he doesn’t need to see an extremely strong jobs report to taper (slow down their purchasing of MBS). Once the Taper begins it is expected they will decrease their purchasing by $15B per month (currently at $180B) As the Fed is by far the largest buyer in the MBS market this will have a negative impact on the price of MBS and cause rates to go up. Interested rates are up approximately 1/8% from this time last year.

Fed Dot Plot – Fed voting members aren’t anticipating a real hike in the Fed Funds Rate, the overnight rate that banks lend each other money at, until 2023.

Inflation – the Fed expects inflation to drop 2.2% next year to their target of 2%, a rather significant decline. Time will tell if that is an accurate prediction with the wage pressured inflation and continued shipping bottlenecks.

Core Logic released their Home Equity report and it showed the average homeowners gained over $50K in home equity between Q2 of 2020 and Q2 of 2021. This represented a nearly 30% increase in home equity year over year translating to $2.9T. The number of homes with negative equity decreased by 30% year over year down to 1.2M homes or 2.3% of all mortgage properties. Only 63% of properties are mortgaged in the US.

Mortgage Applications to purchase homes rose 2% last week but are down 12% year over year. Cash buyers are up significantly in the same time frame. Refinances are up 7% from last week and down 5% year over year.

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