THE FED MEETS AGAIN ON MAY 3RD

Oddly enough, most people don’t know were in the midst of a regional banking crisis. Three out of the last four largest bank failures in history have occurred in the last two months. Yet, there is an 86% chance the Fed is still expected to hike rates again on May 3rd. A new Fed Funds Rate of 5.00-5.25% will be the highest since Sep 2007, near the start of the last banking crisis. These is a clear indication that an official recession is near.

What is a banking crisis? 

A banking crisis reflects the problem of liquidity and insolvency of one or more banks in the financial system. Due to the bank's huge losses, it has a liquidity shortage. Without liquidity (cash on hand), the bank can’t pay back their debts and suffers further when depositors make large withdrawals.

Total FDIC Losses by Bank:

• Silicon Valley Bank: $20 billion

• First Republic Bank: $13 billion

• Signature Bank: $3 billion

  
  

This is a no win situation for the Federal Reserve. While the banking crisis is a major issue, its not more important than inflation right now, simply because the depositors are protected. Inflation can only be resolved when prices of goods and services are reduced as a result of less demand. Unemployment rising is also an indicator that inflation will go down, people will have less money to spend. Another rate hike is on the horizon.

Inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond's fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise like we saw throughout much of last year.

The challenge with another rate hike is that the banks will feel more pain. If they don’t hike rates, in support of the banks, we risk inflation spiking. We will not see relief in mortgage rates until inflation has been tamed and trending downward. Its a tough position to be in for the Feds.

When the government creates policy to help banks, or provides bailout money, it comes with more regulation. We will see tighter lending guidelines. It wont be as easy to apply for a personal loan, or secured debt to help with expenses. People have tons of equity, but rising credit card balances. To get through a recession, having less access to money puts a strain on the average household.

The Fed's favorite measure of inflation is Personal Consumption Expenditures (PCE). It showed that headline inflation increased 0.1% in March.  Core PCE, which strips out volatile food and energy prices, also rose by 0.3% with the year-over-year change declining from 4.7% to 4.6%.

Inflation continues to trend lower in the right direction, though last month’s reading would have been even lower if the decelerating shelter costs seen in the real world were better reflected in the PCE report. Once this lagging shelter data catches up in the PCE report, it should cause additional downside pressure to inflation.

Initial Jobless Claims fell 16,000 in the latest week, as 230,000 people filed for unemployment benefits for the first time. The number of people continuing to receive unemployment benefits after their initial claim is filed also fell 3,000 to 1.858 million.

While these numbers can be volatile from week to week, the overall trend has been higher. Initial Jobless Claims have remained above 200,000 since early February while Continuing Claims have now risen by 569,000 since the low reached last September. These numbers are further evidence of workforce reductions, and the challenges people are subsequently facing as they search for new employment.

Lawrence Yun, chief economist for the National Association of REALTORS®, confirmed, “The lack of housing inventory is a major constraint to rising sales. Multiple offers are still occurring on about a third of all listings, and 28% of homes are selling above list price. Limited housing supply is simply not meeting demand nationally."

DOES A CASH-OUT REFINANCE MAKE SENSE?

When personal debt rises, and equity remains solid, homeowners have the option to consolidate debt with an equity line, or a cash-out refinance. The chart below shows an example where the owner consolidates $115K worth of debt into their new mortgage saving $502 a month. For some, this can provide a lot of relief, for others not so much. As mortgage rates decline, it will be an option many owners will seek to lift the burden of their monthly expenses.

CCM EXPRESS HOME EQUITY LOAN

Would you like to improve your home, pay off higher-interest debt, finance education, or pay for other major expenses? A home equity line of credit (HELOC) can provide the money you need using your home equity.

With CCM Equity Express, the process is fast, secure, and fully automated. Simply take 5 minutes to apply and get 100% of your loan amount in as few as 5 days.

HEADLINES COMING THIS WEEK

More housing appreciation data will be reported on Tuesday via CoreLogic’s Home Price Index for March.

Labor reports will also make headlines, starting Wednesday with ADP’s Employment Report, which will give us an update on April’s private payrolls. The latest Jobless Claims data will be reported on Thursday while Friday brings the Bureau of Labor Statistics Jobs Report for April, which includes Non-farm Payrolls and the Unemployment Rate.

The Fed has a two-day meeting which begins on Tuesday. The Monetary Policy Statement and press conference will come on Wednesday. ark Fed Funds Rate, which they have been doing to curb inflation, and their actions and commentary could be market moving.

Stay tuned in for more! Article Written and Provided by Padi Goodspeed of Cross Country Mortgage