Dear Investors,
Wells Fargo Investment Institute – (11 Real Estate Insights) Mortgage applications have dropped to their lowest level in 28 years
“It is no secret that most real estate industries have struggled this year.”
“And we suspect that most will continue to struggle into year-end as the Fed does not appear to be finished hiking interest rates.”
“While tighter financial conditions have been a headwind for most REITs, some residential sub-sectors have outperformed the broader industry, as low housing affordability has pressured would-be home buyers to rent for longer.”
Highest mortgage rates in 23 years
“These hopeful home buyers today are unfortunately facing the highest mortgage rates in 23 years, which, coupled with record high home prices, have crimped housing affordability.”
“Mortgage applications, understandably, have dropped to their lowest level in 28 years – lower even than the period following the 2007 – 2009 recession.”
“Also problematic for home buyers are existing home inventories, which have continued to slide lower.”
REIT in 2023
“One major consequence to the lack of home affordability is that wannabe buyers have been forced to rent for longer.”
“This trend has helped support select residential REIT sub-sectors in 2023, such as single-family homes and apartments.”
“Year-to-date (as of September 29, 2023), the single-family home (11.02%) and apartment (-2.77%) REIT sub-sectors have both outperformed the broader FTSE NAREIT All Equity REITs Index (-5.61%).”
“The bottom line is that we remain unfavorable on REITs relative to the other 10 S&P 500 sectors, largely due to the current level of interest rates.”
“Within the REITs sector, though, we remain relatively constructive (neutral) on the residential sub-sectors: single-family homes and apartments.”
HSBC – (11 Strategic Updates) Interest rates staying elevated
Global inflation shows further signs of easing
“Most central banks hope they can finally take a breather, but with rising oil prices, uncertainties in labor markets and ongoing demographic and geopolitical shifts many will take a while to cut rates, and it may not be by much.”
“Inflation battle is not over, and monetary policy may need to stay restrictive for a sustained period of steadily lower inflation.”
“Rather than a focus on how much higher interest rates need to go, it is now more a question of how long they need to stay high.”
“Central banks may well still have to raise rates a little more, but the overriding message from both the European Central Bank (ECB) and the Federal Reserve is that even if rates have peaked, rate cuts could still be a way off, a view we tend to share.”
Awaiting the data
“Central banks are emphasising that future rate decisions hinge on the data: they are mindful of policy lags as well as the risks of overtightening.”
“A recession may be required to drive inflation back to target, but current central bank projections are pointing to tolerance for inflation to run above target for 2-3 years as long as it is moving steadily lower.”
“The latest Federal Open Markets Committee (FOMC) projections do not show inflation back at target before 2026.”
Wage are rising quickly
“Wages are still rising quickly in much of the world, and it is the labour market that still poses the biggest risk of inflation persistence and will be the key indicator that tips the balance as to whether policy rates need to rise further.”
“The US has seen wage growth moderate more than elsewhere over the past year, but recent progress has been slower.”
“Pay growth has already been accelerating across much of Europe, underlining the reason why central banks cannot afford to relax on the inflation front any time soon.”
Traditional recession and financial crisis
“We think the US will avoid a traditional recession and financial crisis, and will not start to cut rates before Q3 2024, while the ECB will likely wait until even later in the year.”