MLK’s Legacy, Inflation Slowing, Yield Curve Inversion

55 years after the assassination of Dr. Martin Luther King and the establishment of the Fair Housing Act, Dr. King’s legacy remains both relevant and necessary. On Thursday the DOJ announced a $31M redlining settlement against LA based City National Bank who refused (or at least the DOJ accused them of refusing) to underwrite mortgages in predominately Black and Latino communities. If you are unfamiliar with the term redlining it’s worth reading about – imagine government employees circling red lines around areas on map they wouldn’t lend to because of the people/communities that lived there. In LA, City National bank didn’t open branches in areas serving people of color and took applications from people of color at 1/6th of the rate nearby banks did. This is the largest settlement with the DOJ and with those funds City National will be required to create a $29.5M loan subsidy fund for Black and Latino borrowers and spend $1.75M on advertising, community outreach, and financial education to reach minority borrowers. This is one of many recent cases that illustrates the continued importance of the Fair Housing Act.

Mortgage Rates – improved slightly this week as the price of Mortgage Backed Securities (MBS) continue their steady climb. Rates are up approximately 2.875% from this time last year.

Inflation – the Consumer Price Index (CPI) declined by 0.1% in December. Year over year the CPI increased 6.5% which is down nearly 10% from last month’s reading of 7.1%. If you strip out the food and energy components of the CPI you get the ‘Core Rate’ which is the Fed’s favorite measure of inflation as their lever (adjusting interest rates) doesn’t impact these prices as much (they are more influenced by politics and weather). The core rate increased by 0.3% but year over year moved down from 6% to 5.7%. Shelter comprises 39% of the CPI core rate, and according to this index rents rose 0.8% in November up 8.3% year over year. As rents are usually delayed in this report, we expect this element to decline in the future months which will continue to help inflation and mortgage rates come down.

Yield Curve Inversioncurrently the 2 Year Treasury Note yields 4.22% while the 10 Year Treasury Note yields 3.5%. Typically, the longer term the better it pays. Currently you can get a better return on short term treasury bonds (so why purchase the longer term?). Historically when the yield is better on shorter term Treasury Notes an economic recession is around the corner. This is the highest inversion since the 80’s.

Mortgage Applications to purchase homes declined 0.5% last week and are down 44% year over year. These numbers are adjusted for seasonality and if they didn’t make that adjustment, they would be up 47%, so this isn’t the best representation of real time activity. Refinances increased by 5% and are down 86% year over year.

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