Market Comment
Mortgage bond prices finished the week higher which pushed rates lower. Rates started the week lower with no data releases. The positive streak continued after tame housing data. Existing home sales printed at 5.48M units versus the expected 5.54M. Housing prices were unchanged from December to January according to the FHFA Housing Price Index. Overall prices have risen 5.7% in the last year, further proof that owning a home is a good idea. Weekly jobless claims printed at 258K and continuing claims, a summation of all receiving benefits, at 2,000K. Expectations were for claims at 239K and continuing claims at 2,030K. New home sales printed at 592K versus the expected 560K. Mortgage interest rates finished the week better by approximately 3/8 of discount point despite some significant up and down trading.
CRE Commercial real estate (CRE) is one asset class that has seen prices rise to the point that many fear a collapse is in the making. Banks hold nearly $2T in loans backed by CRE and the Federal Reserve is growing concerned about valuations of the underlying asset. Federal Reserve Chair Janet Yellen said, “valuations in the CRE sector appear increasingly vulnerable to negative shocks.”
The danger in the CRE market is the fact that it is highly leveraged, developers have little “skin in the game.” To shore up profits following the 2008 bust banks lined up to provide financing, which caused prices to rise even further. Sound familiar, banks providing easy money to high LTV borrowers? Last time that happened it did not turn out well.
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