High mortgage rates continue to weigh on the nation’s homebuilders, leading to an increase in price cuts to lure buyers. But builders are cautiously optimistic about recent signs that interest rates may move lower soon.
Homebuilder sentiment fell six points to 34 in November on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Anything below 50 is considered negative. Analysts had expected the number to come in unchanged from October.
“The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out of the market,” NAHB Chair Alicia Huey said in the release. “Moreover, higher short-term interest rates have increased the cost of financing for home builders and land developers, adding another headwind for housing supply in a market low on resale inventory.”
This marks the fourth straight month of declines. Sentiment is down 22 points since July and is now at the lowest level since the end of last year. The builders did note that nearly all of the monthly data for November was collected before the monthly consumer price index, released earlier this week, showed inflation moderating.
“While builder sentiment was down again in November, recent macroeconomic data point to improving conditions for home construction in the coming months,” Robert Dietz, NAHB’s chief economist, said in the release.
“In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%,” he said. “Given the lack of existing home inventory, somewhat lower mortgage rates will price in housing demand and likely set the stage for improved builder views of market conditions in December.”
Of the index’s three components, current sales conditions fell six points to 40, sales expectations in the next six months dropped five points to 39, and buyer traffic fell five points to 21.
More builders reported cutting prices in November – 36%, up from 32% in the previous two months. That is the highest share in this cycle tying the previous high two years ago. The average price cut was 6%.
NAHB forecasts a roughly 5% increase for single-family starts in 2024, “as financial conditions ease with improving inflation data in the months ahead,” according to the release.
James Gorman, chairman and chief executive of Morgan Stanley, speaks during the Global Financial Leader’s Investment Summit in Hong Kong, China, on Tuesday, Nov. 7, 2023. The de-facto central bank of the Chinese territory is this week holding its global finance summit for a second year in a row. Photographer: Lam Yik/Bloomberg via Getty Images
Bloomberg | Bloomberg | Getty Images
SINGAPORE — Morgan Stanley Chairman and CEO James Gorman said his firm will be able to cope with “any form” that new banking regulations end up taking, but added he expects some watering down before the final rules are confirmed.
U.S. regulators on Tuesday defended their plans for a sweeping set of proposed changes to banks’ capital requirements, speaking in front of the U.S. Senate Banking Committee. They are aimed at tightening regulation of the industry after two of its biggest crises in recent memory — the 2008 financial crisis, and the March upheaval in regional lenders.
These proposed changes in the U.S. seek to incorporate parts of international banking regulations known as Basel III, which was agreed to after the 2008 crisis and has taken years to roll out.
Regulators say the changes in the proposals are estimated to result in an aggregate 16% increase in common equity tier 1 capital requirements — which is a measure of an institution’s presumed financial strength and is seen as a buffer against recessions or trading blowups.
“I think it will come out differently from the way it’s been proposed,” Gorman told CNBC Thursday in an exclusive interview on the sidelines of Morgan Stanley’s annual Asia-Pacific conference in Singapore.
“It’s important to point out it’s a proposal. It’s not a rule, and it’s not done.”
“I think [the U.S. banking regulators] are listening,” Gorman added. “I’ve spent many years with the Federal Reserve. I was on the Fed board in New York for six years and I just think they are trying to find the right answer.”
“I’m not sure the banks need more capital,” Morgan Stanley’s outgoing CEO said. “In fact, the Fed’s own stress test says they don’t. So there’s that … sort of purity of purpose and in pursuit of perfection that can be the enemy of good.”
Whatever the outcome though, Gorman said his New York-based bank will be able to manage.
“We have been conservative with our capital. We run a CET1 ratio, which is among the highest in the world, significantly in excess of our requirements, so we’re ready for any outcome. But I don’t think it will be as dire as most of the investment committee believes it will be,” Gorman said.
Led by Gorman since 2010, Morgan Stanley has managed to avoid the turbulence afflicting some of its competitors.
While Goldman Sachs was forced to pivot after a foray into retail banking, the main question at Morgan Stanley is about an orderly CEO succession.
There will likely be some continuity with the bank’s focus on building out its wealth management business in Asia.
“We think there’s going to be tremendous growth,” Gorman said Thursday.
“So we would like to do more. We have. If I was staying several years, we would very aggressively be pushing our wealth management in this region. And I’m sure my successor would do the same.”
On the issue of inflation, Gorman said central bankers have brought surging inflation under control.
“Give the central banks credit. They moved aggressively with rates,” Gorman said. “I think they were late —that’s my personal view — but it doesn’t matter. When they got there, they really got going. Took rates from zero to five and a half percent. The Fed did five, five and a half percent in almost record time, fastest rate increase in 40 years. And it’s had the impact.”
U.S. Federal Reserve Chairperson Jerome Powell said last Thursday that he and his fellow policymakers are encouraged by the slowing pace of inflation, but more work could be ahead in the battle against high prices as the central bank seeks to bring inflation down closer to its stated 2% target.
The U.S. consumer price index, which measures a broad basket of commonly used goods and services, increased 3.2% in October from a year ago despite being unchanged for the month, according to seasonally adjusted numbers from the Labor Department on Tuesday.
“Are we done? We’re not done,” Gorman said.
“Is 2% absolutely necessary? My personal view is no, but directionally to be heading in that to around 2, 3% — I think is a very acceptable outcome given the cards that they were dealt with.”
— CNBC’s Hugh Son and Jeff Cox contributed to this story.
Former St. Louis Fed President Jim Bullard says the Federal Reserve still has “a ways to go” in fighting inflation and that there is still a risk that prices pick up once again.
Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the Fed funds rate from a target range of 0.25-0.5% to 5.25-5.5%, and inflation has since fallen substantially.
Although markets now believe interest rates have peaked and have begun looking forward to cuts next year, Bullard — who stepped down as head of the St. Louis Fed in August — suggested the central bank’s work is far from over.
“It’s been so far so good for the FOMC. Inflation has come down, core PCE inflation on a 12-month basis down from 5.5% to 3.7% — pretty good but that’s still only halfway back to the 2% target so you’ve still got a ways to go,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference in London.
“I think you have to watch the data carefully and it’s very possible that inflation will turn around and go the wrong way.”
October’s consumer price index slated for release Tuesday is expected to show an increase of 0.1% month-on-month and 3.3% annually, according to a Dow Jones poll of economists.
“That’s just one month’s number, but still I think the risk for the FOMC is that the nice disinflation that we’ve seen over the last 12 months won’t persist going forward and then they’ll have to do more,” Bullard said.
U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, U.S, September 20, 2023.
Evelyn Hockstein | Reuters
UBS expects the U.S. Federal Reserve to cut interest rates by as much as 275 basis points in 2024, almost four times the market consensus, as the world’s largest economy tips into recession.
In its 2024-2026 outlook for the U.S. economy, published Monday, the Swiss bank said despite economic resilience through 2023, many of the same headwinds and risks remain. Meanwhile, the bank’s economists suggested that “fewer of the supports for growth that enabled 2023 to overcome those obstacles will continue in 2024.”
UBS expects disinflation and rising unemployment to weaken economic output in 2024, leading the Federal Open Market Committee to cut rates “first to prevent the nominal funds rate from becoming increasingly restrictive as inflation falls, and later in the year to stem the economic weakening.”
Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%.
The central bank has since held at that level, prompting markets to mostly conclude that rates have peaked, and to begin speculating on the timing and scale of future cuts.
UBS noted that despite the most aggressive rate-hiking cycle since the 1980s, real GDP expanded by 2.9% over the year to the end of the third quarter. However, yields have risen and stock markets have come under pressure since the September FOMC meeting. The bank believes this has renewed growth concerns and shows the economy is “not out of the woods yet.”
“The expansion bears the increasing weight of higher interest rates. Credit and lending standards appear to be tightening beyond simply repricing. Labor market income keeps being revised lower, on net, over time,” UBS highlighted.
“According to our estimates, spending in the economy looks elevated relative to income, pushed up by fiscal stimulus and maintained at that level by excess savings.”
The bank estimates that the upward pressure on growth from fiscal impetus in 2023 will fade next year, while household savings are “thinning out” and balance sheets look less robust.
“Furthermore, if the economy does not slow substantially, we doubt the FOMC restores price stability. 2023 outperformed because many of these risks failed to materialize. However, that does not mean they have been eliminated,” UBS said.
“In our view, the private sector looks less insulated from the FOMC’s rate hikes next year. Looking ahead, we expect substantially slower growth in 2024, a rising unemployment rate, and meaningful reductions in the federal funds rate, with the target range ending the year between 2.50% and 2.75%.”
UBS expects the economy to contract by half a percentage point in the middle of next year, with annual GDP growth dropping to just 0.3% in 2024 and unemployment rising to nearly 5% by the end of the year.
“With that added disinflationary impulse, we expect monetary policy easing next year to drive recovery in 2025, pushing GDP growth back up to roughly 2-1/2%, limiting the peak in the unemployment rate to 5.2% in early 2025. We forecast some slowing in 2026, in part due to projected fiscal consolidation,” the bank’s economists said.
Worst credit impulse since the financial crisis
Arend Kapteyn, UBS global head of economics and strategy research, told CNBC on Tuesday that the starting conditions are “much worse now than 12 months ago,” particularly in the form of the “historically large” amount of credit that is being withdrawn from the U.S. economy.
“The credit impulse is now at its worst level since the global financial crisis — we think we’re seeing that in the data. You’ve got margin compression in the U.S. which is a good precursor to layoffs, so U.S. margins are under more pressure for the economy as a whole than in Europe, for instance, which is surprising,” he told CNBC’s Joumanna Bercetche on the sidelines of the UBS European Conference.
Meanwhile, private payrolls ex-health care are growing at close to zero and some of the 2023 fiscal stimulus is rolling off, Kapteyn noted, also reiterating the “massive gap” between real incomes and spending that means there is “much more scope for that spending to fall down towards those income levels.”
“The counter that people then have is they say ‘well why are income levels not going up, because inflation is falling, real disposable incomes should be improving?’ But in the U.S., debt service for households is now increasing faster than real income growth, so we basically think there is enough there to have a few negative quarters mid-next year,” Kapteyn argued.
A recession is characterized in many economies as two consecutive quarters of contraction in real GDP. In the U.S., the National Bureau of Economic Research Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” This takes into account a holistic assessment of the labor market, consumer and business spending, industrial production, and incomes.
Goldman ‘pretty confident’ in the U.S. growth outlook
The UBS outlook on both rates and growth is well below the market consensus. Goldman Sachs projects the U.S. economy will expand by 2.1% in 2024, outpacing other developed markets.
Kamakshya Trivedi, head of global FX, rates and EM strategy at Goldman Sachs, told CNBC on Monday that the Wall Street giant was “pretty confident” in the U.S. growth outlook.
“Real income growth looks to be pretty firm and we think that will continue to be the case. The global industrial cycle which was going through a pretty soft patch this year, we think, is showing some signs of bottoming out, including in parts of Asia, so we feel pretty confident about that,” he told CNBC’s “Squawk Box Europe.”
Trivedi added that with inflation returning gradually to target, monetary policy may become a bit more accommodative, pointing to some recent dovish comments from Fed officials.
“I think that combination of things — the lessening drag from policy, stronger industrial cycle and real income growth — makes us pretty confident that the Fed can stay on hold at this plateau,” he concluded.
Correction: Between March 2022 and July 2023, the FOMC enacted a run of 11 rate hikes to take the fed funds rate from a target range of 0%-0.25% to 5.25%-5.5%. An earlier version misstated the range.
Credit ratings agency Moody’s changed its outlook on the U.S. to negative from stable on Friday, citing concerns over fiscal risks and increased political divisions that it said could “constrain” policymakers from taking actions needed to get the world’s largest economy on the right path with budgetary policy.
Moody’s is the only ratings agency that has yet to downgrade the U.S. In August, Fitch lowered the country’s rating to a notch below its top level, following the deadlock in Washington over raising the debt ceiling, suggesting that such disagreements undermined confidence in fiscal policymaking.
Newsweek reached out for comment from Johnson’s office via email.
“At a time of weakening fiscal strength, there is an increased risk that political divisions could further constrain the effectiveness of policymaking by preventing policy action that would slow the deterioration in debt affordability,” Moody’s said on Friday.
It cited the debt limit drama, former Speaker Kevin McCarthy‘s ouster, the paralysis in choosing his replacement and a looming government shutdown as examples of disagreements that could undermine policymaking.
“These risks underscore rising political risk to the US’ fiscal position and overall sovereign credit profile,” the ratings agency said. “In Moody’s view, such political polarization is likely to continue.”
The credit ratings agency Moody’s changed its outlook for the U.S. to negative from stable on Friday. JOEL SAGET/AFP via GETTY IMAGES
U.S. current debt of $33 trillion is increasingly becoming less affordable amid elevated interest rates, Moody’s said. Without reforms, fiscal deficits—meaning government spending is higher than its revenues—will hit 8 percent of economic activity in about a decade, fueled by high interest payments on the debt and spending on entitlements. This is more than double the 3.5 percent the average deficit was between 2015 and 2019, Moody’s said.
What that means is the country’s debt will balloon to 120 percent of gross domestic product, from 96 percent last year. “In turn, a higher debt burden will inflate the interest bill,” Moody’s said.
Washington policymakers have struggled to grapple with this challenge, compared with other highly rated countries, like Canada and Germany. As a result, the top-notch credit rating the U.S. enjoys has been put in jeopardy.
“The more short-term focus of U.S. fiscal policymaking, along with limited fiscal flexibility…exacerbates already fractious bipartisan politics around a relatively disjointed and disruptive budget process,” the ratings agency said. “As annual debt service costs continue to rise, fiscal flexibility will diminish even further.”
The central place the U.S. has in the global economy, its currency and its “formidable credit strengths” have protected it from a downgrade, Moody’s said, and allowed it to retain its triple-A rating.
Deputy Treasury Secretary Wally Adeyemo said in a statement that President Joe Biden‘s administration disagreed with Moody’s shift in outlook. “The American economy remains strong,” he said, according to Reuters.
The government has managed to get $1 trillion in deficit reduction, Adeyemo added, arguing that the White House’s budget proposals would cut the deficit by nearly $2.5 trillion over the next 10 years.
One Republican lawmaker placed the blame for Moody’s action on Biden’s policies.
Texas Senator John Cornyn posted on X (formerly Twitter): “Bidenomics: United States credit-rating outlook was changed to negative from stable by Moody’s Investors Service, which said the downside risks to the country’s fiscal strength have increased.”
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Big streak The Nasdaq Composite recorded its longest winning streak since January, closing out Monday with gains of 0.3%. Stocks in the U.S. built on the positive momentum from last week, with the S&P 500 gaining 0.18% and the Dow Jones Industrial Average closing 0.1% higher. The tech-heavy index rose for seven straight days, while the Dow and S&P 500 rose for six straight days for the first time since July and June, respectively. In Asia, South Korean stocks fell 3%, leading losses, while investors also assessed trade data from China and a rate hike by the Reserve Bank of Australia.
Deep job cuts Citigroup‘s 240,000 employees were on edge as fears grow around CEO Jane Fraser‘s massive corporate overhaul to cut costs that would result in an undisclosed number of layoffs. “We’ll be saying goodbye to some very talented and hard-working colleagues,” she said in a memo in September. Now, the reorganization, which is referred internally by its code name, “Project Bora Bora,” could see job cuts of at least 10% in several major businesses, according to people with knowledge of the process.
AI arms race heats up During its first in-person event on Monday, Microsoft-backed OpenAI announced its latest and most powerful GPT-4 Turbo artificial intelligence model yet. It also unveiled a new option that will allow users make custom versions of its viral ChatGPT chatbot and is cutting prices on the fees that companies and developers pay to run the software.
China imports surprise China’s imports unexpectedly rose in October from a year ago, but exports recorded a worse-than-expected drop. Data showed imports rose by 3% in U.S. dollar terms for the month, above a Reuters’ forecast for a 4.8% drop. Exports fell 6.4% last month in U.S. dollar terms, worse than an expected 3.3% drop.
[PRO] Growth stocks that are set for bigger leaps Higher-for-longer interest rates are bad for growth stocks but, investor hopes were reignited after the U.S. Federal Reserve kept rates unchanged for the second consecutive meeting. This led stocks to bounce back last week and for those eager to get back into such growth names, CNBC Pro screened for stocks you should look at.
Markets started the week on a high note as major averages closed out Monday’s session with some big winning streaks.
The Nasdaq rose for the seventh straight day, its longest winning streak since January, while the Dow and S&P 500 gained for six straight days for the first time since July and June, respectively.
Wall Street indexes had strong momentum following their best week of 2023, propelled by a soft monthly jobs report that drove bond yields lower, boosting equities.
“The stock market has had a strong start to November, and the move seems deserved in light of what we’re seeing in most, though admittedly not all, of our sentiment indicators,” wrote Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.
“Generally, our view over the last month or so has been that if the surge in yields stopped soon, US equities could escape without incurring too much additional damage,” she added.
Shifting focus to the fast-paced AI arms race, viral ChatGPT chatbot owner OpenAI announced its most powerful GPT-4 Turbo artificial intelligence model yet to stay ahead of rivals like Anthropic, Google and Meta.
GPT-4 Turbo now provides answers with context up to April 2023, accepts more input and supports text-to-speech. Which means you can narrate and summarize an entire book, without having to lift a finger.
NEW YORK, NEW YORK – MARCH 05: A view of the skyline with The Trump Tower and Federal Hall on Wall Street in Downtown Manhattan on March 05, 2021 in New York City. (Photo by Roy Rochlin/Getty Images)
Roy Rochlin | Getty Images Entertainment | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Big streak The Nasdaq Composite recorded its longest winning streak since January, closing out Monday with gains of 0.3%. Stocks in the U.S. built on the positive momentum from last week, with the S&P 500 gaining 0.18% and the Dow Jones Industrial Average closing 0.1% higher. The tech-heavy index rose for seven straight days, while the Dow and S&P 500 rose for six straight days for the first time since July and June, respectively. European markets closed lower on Monday, with the Stoxx 600 index down 0.2%.
Deep job cuts Citigroup‘s 240,000 employees were on edge as fears grow around CEO Jane Fraser‘s massive corporate overhaul to cut costs that would result in an undisclosed number of layoffs. “We’ll be saying goodbye to some very talented and hard-working colleagues,” she said in a memo in September. Now, the reorganization, which is referred internally by its code name, “Project Bora Bora,” could see job cuts of at least 10% in several major businesses, according to people with knowledge of the process.
AI arms race heats up During its first in-person event on Monday, Microsoft-backed OpenAI announced its latest and most powerful GPT-4 Turbo artificial intelligence model yet. It also unveiled a new option that will allow users make custom versions of its viral ChatGPT chatbot and is cutting prices on the fees that companies and developers pay to run the software.
Intensive diplomacy The U.S. Treasury Department announced Monday that Treasury Secretary Janet Yellen will host her Chinese counterpart, Vice Premier He Lifeng, just ahead of the Asia Pacific Economic Cooperation forum next week, for “intensive diplomacy.” The meetings will be held in San Francisco on Nov. 9-10 and is part of a broader push between American and Chinese officials to make progress on specific issues. This arrives ahead of an expected meeting between President Joe Biden and Chinese President Xi Jinping on the sidelines of APEC.
[PRO] Leaders of the market comeback Stocks have kicked off November on a positive note, with the major averages coming off their best weeks of the year. Now, CNBC Pro deep dives into which winning names investors should look at that could be poised to lead any rally in the coming week. These include stocks in the S&P 500 that are up 10% or more off of their 52-week lows and have gained 10% or more in the past month.
Markets started the week on a high note as major averages closed out Monday’s session with some big winning streaks.
The Nasdaq rose for the seventh straight day, its longest winning streak since January, while the Dow and S&P 500 gained for six straight days for the first time since July and June, respectively.
Wall Street indexes had strong momentum following their best week of 2023, propelled by a soft monthly jobs report that drove bond yields lower, boosting equities.
“The stock market has had a strong start to November, and the move seems deserved in light of what we’re seeing in most, though admittedly not all, of our sentiment indicators,” wrote Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.
“Generally, our view over the last month or so has been that if the surge in yields stopped soon, US equities could escape without incurring too much additional damage,” she added.
Shifting focus to the fast-paced AI arms race, viral ChatGPT chatbot owner OpenAI announced its most powerful GPT-4 Turbo artificial intelligence model yet to stay ahead of rivals like Anthropic, Google and Meta.
GPT-4 Turbo now provides answers with context up to April 2023, accepts more input and supports text-to-speech. Which means you can narrate and summarize an entire book, without having to lift a finger.
A Chinese flag flies outside a residential compound in Beijing on April 30, 2017.
Greg Baker | Afp | Getty Images
Chinese companies have gained ground in global patent holdings in the cybersecurity technology sector amid growing U.S.-China tensions, according to a report from Nikkei Asia on Sunday.
Chinese firms such as Huawei and Tencent accounted for six of the top 10 global patent holdings in the cybersecurity technology sector as of August, based on data compiled by Nikkei in cooperation with U.S. information services provider LexisNexis. The data took into account patents registered across 95 countries and regions.
The report said that U.S. computer manufacturer IBM came out top with 6,363 patents followed by Huawei and Tencent with 5,735 and 4,803 patents respectively.
Among the top 10 include Alibaba’s financial arm Ant Group in sixth place with 3,922 patents, as well as Alibaba Group Holding with 3,122 patents, the Nikkei said. Sovereign wealth fund China Investment Corp. had 3,042 patents, it added.
This comes as escalating tensions between the U.S. and China have pushed the latter and its homegrown firms to seek self-reliance in science and technology. For example, the U.S. recently tightened restrictions on artificial intelligence chip exports to China over growing concerns that Beijing could use those chips to advance its military capabilities.
Hiroko Osaka, head of marketing in Asia for LexisNexis Japan’s intellectual property department, was quoted as saying there’s been a “dramatic increase in filings by Chinese firms in general, especially since 2018.”
Huawei has been at the center of U.S. sanctions aimed at securing U.S. networks and supply chains since the U.S. tightened export controls on high-tech firms five years ago. //ok?
“The importance of IP protection was reaffirmed in the battle for supremacy over advanced technology and data, which may have sparked the surge of application filings by Chinese firms,” Osaka told Nikkei Asia.
Read more about China’s growing patent filings in the Nikkei Asia report.
The Federal Reserve left its target federal funds rate unchanged for the second consecutive time Wednesday.
Even so, consumers likely will get no relief from current sky-high borrowing costs.
Altogether, Fed officials have raised rates 11 times in a year and a half, pushing the key interest rate to a target range of 5.25% to 5.5%, the highest level in more than 22 years.
“Relief for households isn’t likely to come soon, at least not directly in the form of a cut in the fed funds rate,” said Brett House, economics professor at Columbia Business School.
The consensus among economists and central bankers is that interest rates will stay higher for longer, or until inflation moves closer to the central bank’s 2% target rate.
The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
To a certain extent, many households have been shielded from the brunt of the Fed’s rate hikes so far, House said. “They locked in fixed-rate mortgages and auto financing before the hiking cycle began, in some cases at record-low rates during the pandemic.”
However, higher rates have a significant impact on anyone tapping a new loan for big-ticket items such as a home or a car, he added, and especially for credit card holders who carry a balance.
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rose, the prime rate did as well, and credit card rates followed suit.
Credit card annual percentage rates are now more than 20%, on average — an all-time high. Further, with most people feeling strained by higher prices, more cardholders carry debt from month to month.
“Rising debt is a problem,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics.
“Consumers are using a lot of credit card debt and paying very high interest rates,” Sohn added. “That doesn’t bode well for the long-term economic outlook.”
For those borrowers, “interest rates staying higher for a longer period underscores the urgency to pay down and pay off costly credit card debt,” said Greg McBride, chief financial analyst at Bankrate.com.
Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
The average rate for a 30-year, fixed-rate mortgage is up to 8%, the highest in 23 years, according to Bankrate.
“Purchase activity has slowed to a virtual standstill, affordability remains a significant hurdle for many and the only way to address it is lower rates and greater inventory,” said Sam Khater, Freddie Mac’s chief economist.
Prospective buyers attend an open house at a home for sale in Larchmont, New York, on Jan. 22, 2023.
Tiffany Hagler-Geard | Bloomberg | Getty Images
Other home loans are more closely tied to the Fed’s actions. Adjustable-rate mortgages and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year after an initial fixed-rate period. But a HELOC rate adjusts right away. Now, the average rate for a HELOC is near 9%, the highest in over 20 years, according to Bankrate.
Still, Americans are sitting on more than $31.6 trillion worth of home equity, according to Jacob Channel, senior economist at LendingTree. “Owing to that, many homeowners could benefit from tapping into the equity they’ve built with a home equity loan or line of credit.”
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But undergraduate students who take out new direct federal student loans are now paying 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.
The government sets the annual rates on those loans once a year, based on the 10-year Treasury.
If the 10-year yield stays near 5%, federal student loan interest rates could increase again when they reset in the spring, costing student borrowers even more in interest.
“Borrowers are being squeezed, but the flipside is that savers are benefiting,” McBride said.
While the Fed has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.46%, on average, according to the Federal Deposit Insurance Corp.
“Average rates have risen significantly in the last year, but they are still very low compared to online rates,” added Ken Tumin, founder and editor of DepositAccounts.com.
Some top-yielding online savings account rates are now paying more than 5%, according to Bankrate, which is the most savers have been able to earn in nearly two decades.
“Savings are now earning more than inflation, and we haven’t been able to say that in a long time,” McBride said.
In the U.S., 516 publicly listed firms have filed for bankruptcy from January through September 2023. Many of these firms have survived for several years with surging debt and lagging sales.
“The share of zombie firms has been increasing over time,” said Bruno Albuquerque, an economist at the International Monetary Fund. “This has detrimental effects on healthy firms who compete in the same sector.”
“A really healthy, well-capitalized banking system and financial sector is one of the most important factors in ensuring that unhealthy firms are wound down in a timely way rather than being propped up,” said Kathryn Judge, a professor of law at Columbia University.
Economists say that zombie firms may become more prevalent when banks or governments bail out unviable firms. But the Federal Reserve says the share of firms that are zombies fell after the Covid-19 emergency stimulus measures were implemented. The Fed says banks are refusing to keep weak firms in business with favorable extensions of credit.
The Fed economists point to healthy balance sheets at U.S. firms, despite the increasing weight of interest rate hikes. The effective federal funds rate was 5.33% in October 2023, up from 0.08% in October 2021.
“The biggest implication of the rapid rise in interest rates that we’ve seen the last five or six quarters, actually, is that it reestablished cash,” said Lotfi Karoui, chief credit strategist at Goldman Sachs. “That actually puts some constraints on risk assets.”
The Fed says it thinks interest rates will remain higher for longer. “Given the fast pace of tightening, there may still be meaningful tightening in the pipeline,” Fed Chair Jerome Powell said at an Economic Club of New York speech Oct. 19.
Watch the video above to learn more about the Fed’s battle with unviable zombie firms in the U.S.
Some firms sustain their businesses by taking on more debt that they can repay. Economists call them zombie companies. When compared to their peers, zombies are smaller in size and deliver lower returns to investors. These companies distort markets, keeping resources from their fundamentally sound competitors. Banks and governments keep zombie firms alive with bailout loans. As the Federal Reserve resets the economy with higher interest rates, many zombie firms are filing for bankruptcy.
An Amazon.com Inc worker prepares an order in which the buyer asked for an item to be gift wrapped at a fulfillment center in Shakopee, Minnesota, U.S., November 12, 2020.
Amazon.com Inc | Reuters
The initial third-quarter report on gross domestic product showed consumer spending zooming higher by 4% percent a year, after inflation, the best in almost two years. September’s retail sales report showed spending climbing almost twice as fast as the average for the last year. And yet, bears like hedge-fund trader Bill Ackman argue that a recession is coming as soon as this quarter and the market has entered correction territory.
For an economy that rises or falls on the state of the consumer, third-quarter earnings data supports a view of spending that remains mostly good. S&P 500 consumer-discretionary companies that have reported through Oct. 25 saw an average profit gain of 15%, according to CFRA — the biggest revenue gain of the stock market’s 11 sectors.
“People are kind of scratching their heads and saying, ‘The consumer is holding up better than expected,'” said CFRA Research strategist Sam Stovall said. “Consumers are employed. They continue to buy goods as well as pursue experiences. And they don’t seem worried about debt levels.”
How is this possible with interest rates on everything from credit cards to cars and homes soaring?
It’s the anecdotes from bellwether companies across key industries that tell the real story: Delta Air Lines and United Airlines sharing how their most expensive seats are selling fastest. Homeowners using high-interest-rate-fighting mortgage buydowns. Amazon saying it’s hiring 250,000 seasonal workers. A Thursday report from Deckers Outdoor blew some minds — in what has been a tepid clothing sales environment — by disclosing that embedded in a 79% profit gain that sent shares up 19% was sales of Uggs, a mature line anchored by fuzzy boots, rising 28%.
The picture they paint largely matches the economic data — generally positive, but with some warts. Here is some of the key evidence from from the biggest company earnings reports across the market that help explain how companies and the American consumer are making the best of a tough rate environment.
How homebuilders are solving for mortgages rates
No industry is more central to the market’s notion that the consumer is falling from the sky than housing, because the number of existing home sales have dropped almost 40% from Covid-era peaks. But while Coldwell Banker owner Anywhere Real Estate saw profit fall by half, news from builders of new homes has been pretty good.
Most consumers have mortgages below 5%, but for new homebuyers, one reason that rates are not biting quite as sharply as they should is that builders have figured out ways around the 8% interest rates that are bedeviling existing home sellers. That helps explains why new home sales are up this year. Homebuilders are dipping into money that previously paid for other incentives to pay for offering mortgages at 5.75% rather than the 8% level other mortgages have hit. At PulteGroup, the nation’s third-biggest builder, that helped drive an 8% third-quarter profit jump and 43% climb in new home orders for delivery later, much better than the government-reported 4.5% gain in new home sales year-to-date.
“What we’ve done is simply redistribute incentives we’ve historically offered toward cabinets and countertops, and redirected those to interest rate incentives,” PulteGroup CEO Ryan Marshall said. “And that has been the most powerful thing.”
The mechanics are complex, but work out to this: Pulte sets aside about $35,000 for incentives to get each home to sell, or about 6% of its price, the company said on its earnings conference call. Part of that is paying for a mortgage buydown. About 80% to 85% of buyers are taking advantage of the buydown offer. But many are splitting the funds, mixing a smaller rate buydown and keeping some goodies for the house, the company said.
Wells Fargo economist Jackie Benson said in a report that builders may struggle to keep this strategy going if mortgage rates stay near 8%, but new-home prices have dropped 12% in the last year. In her view, incentives plus bigger price cuts than most existing homes’ owners will offer is giving builders an edge.
At auto companies, price cuts are in, and more are coming
Car sales picked up notably in September, rising 24% year-over-year, more than twice the year-to-date gain in unit sales. But they were below expectations at electric-vehicle leader Tesla, which blamed high interest rates, and at Ford.
“I just can’t emphasize this enough, that for the vast majority of people buying a car it’s about the monthly payment,” Tesla CEO Elon Musk said on its earnings call. “And as interest rates rise, the proportion of that monthly payment that is interest increases.”
Maybe, but that’s not what’s happening at General Motors, even if investor reaction to good numbers at GM was muted because of the strike by the United Auto Workers union.
GM beat earnings expectations by 40 cents a share, but shares fell 3% because of investor worries about the strike, which forced GM to withdraw its fourth-quarter earnings forecast on Oct. 24. Ford, which settled with the UAW on Oct. 25, said the next day it had a “mixed” quarter, as profit missed Wall Street targets due to the strike. Consumers came through, as unit sales rose 7.7% for the quarter, with truck and EV sales both up 15%. GM CEO Mary Barra said on GM’s analyst call that the company gained market share, posting a 21% gain in unit sales despite offering incentives below the industry average.
“While we hear reports out there in the macro that consumer sentiment might be weakening, etc., we haven’t seen that in demand for our vehicles,” GM CFO Paul Jacobson told analysts. But Ford CFO John Lawler said car prices need to decline by about $1,800 to be as affordable as they were before Covid. “We think it’s going to happen over 12 to 18 months,” he said.
Tesla’s turnaround plan turns on continuing to lower its cost of producing cars, which came down by about $2,000 per vehicle in last year, the company said. Along with federal tax credits for electric vehicles, a Model Y crossover can be had for about $36,490, or as little as $31,500 in states with local tax incentives for EVs. That’s way below the average for all cars, which Cox Automotive puts at more than $50,000. But Musk says some consumers still aren’t convincible. .
“When you look at the price reductions we’ve made in, say, the Model Y, and you compare that to how much people’s monthly payment has risen due to interest rates, the price of the Model Y is almost unchanged,” Musk said. “They can’t afford it.”
Most banks say the consumer still has cash, but not Discover
To know how consumers are doing, ask the banks, which disclose consumer balances quarterly. To know if they’re confident, ask the credit card companies (often the same companies) how much they are spending.
In most cases, financial services firms say consumers are doing well.
At Bank of America, consumer balances are still about one-third higher than before Covid, CEO Brian Moynihan said on the company’s conference call. At JPMorgan Chase, balances have eroded 3% in the last year, but consumer loan delinquencies declined during the quarter, the company said.
“Where am I seeing softness in [consumer] credit?” said chief financial officer Jeremy Barnum, repeating an analyst’s question on the earnings call. “I think the answer to that is actually nowhere.”
Among credit card companies, the “resilient” is still the main story. MasterCard, in fact, used that word or “resilience” eight times to describe U.S. consumers in its Oct. 26 call.
“I mean, the reality is, unemployment levels are [near] all-time record lows,” MasterCard chief financial officer Sachin Mehra said.
At American Express, which saw U.S. consumer spending rise 9%, the mild surprise was the company’s disclosure that young consumers are adding Amex cards faster than any other group. Millennials and Gen Zers saw their U.S. spending via Amex rise 18%, the company said.
“Guess they’re not bothered by the resumption of student loan payments,” Stovall said.
The major fly in the ointment came from Discover Financial Services, one of the few banks to make big additions to its loan loss reserves for consumer debt, driving a 33% drop in profit as Discover’s loan chargeoffs doubled.
Despite the fact that U.S. household debt burdens are almost exactly the same as in late 2019, and declined during the quarter, according to government data, Discover chief financial officer John Greene said on its call, “Our macro assumptions reflect a relatively strong labor market but also consumer headwinds from a declining savings rate and increasing debt burdens.”
At airlines, still no sign of a travel recession
It’s good to be Delta Air Lines right now, sitting on a 59% third-quarter profit gain driven by the most expensive products on their virtual shelves: First-class seats and international vacations. Also good to be United, where higher-margin international travel rose almost 25% and the company is planning to add seven first-class seats per departure by 2027. Not so good to be discounter Spirit, which saw shares fall after reporting a $157 million loss.
“With the market continuing to seemingly will a travel recession into existence despite evidence to the contrary from daily [government] data and our consumer surveys, Delta’s third-quarter beat and solid fourth-quarter guide and commentary should finally put the group at ease about a consumer “cliff,” allow them to unfasten their seatbelts and walk about the cabin,” Morgan Stanley analyst Ravi Shanker said in a note to clients.
One tangible impact: United is adding 20 planes this quarter, though it is pushing 12 more deliveries into 2024, while Spirit said it’s delaying plane deliveries, and focusing on its proposed merger with JetBlue and cost-cutting to regain competitiveness as soft demand for its product persists into the holiday season.
As has been the case throughout much of 2023, richer consumers — who contribute the greater share of spending — are doing better than moderate-income families, Sundaram said.
The goods recession is for real
Whirlpool, Ethan Allen and mattress maker Sleep Number all saw their stocks tumble after reporting bad earnings, all of them experiencing sales struggles consistent with the macro data.
This follows a trend now well-entrenched in the economy: people stocked up on hard goods, especially for the house, during the pandemic, when they were stuck at home more. All three companies saw shares surge during Covid, and growth has slacked off since as they found their markets at least partly saturated and consumers moved spending to travel and other services.
“All of the stimulus money went to the furniture industry,” Sundaram said, exaggerating for effect. “Now they’ve been falling apart for the last year.”
Ethan Allen sales dropped 24%, as the company said a flood in a Vermont factory and softer demand were among the causes. At Whirlpool, which said in second-quarter earnings that it was moving to make up slowing sales to consumers by selling more appliances to home builders, “discretionary purchases have been even softer than anticipated, as a result of increased mortgage rates and low consumer confidence,” CEO Marc Bitzer said during Thursday’s earnings call. Its shares fell more than 20%.
Amazon’s $1.3 billion holiday hiring spree
Amazon is making its biggest-ever commitment to holiday hiring, spending $1.3 billion to add the workers, mostly in fulfillment centers.
That’s possible because Amazon has reorganized its warehouse network to speed up deliveries and lower costs, sparking 11% sales gains the last two quarters as consumers turn to the online giant for more everyday repeat purchases. Amazon also tends to serve a more affluent consumer who is proving more resilient in the face of interest rate hikes and inflation than audiences for Target or dollar stores, according to CFRA retailing analyst Arun Sundaram said.
“Their retail sales are performing really well,” Sundaram said. “There’s still headwinds affecting discretionary sales, but everyday essentials are doing really well.
All of this sets the stage for a high-stakes holiday season.
PNC still thinks there will be a recession in early 2024, thanks partly to the Federal Reserve’ rate hikes, and thinks investors will focus on sales of goods looking for more signs of weakness. “There’s a lot of strength for the late innings” of an expansion, said PNC Asset Management chief investment officer Amanda Agati.
Sundaram, whose firm has predicted that interest rates will soon drop as inflation wanes, thinks retailers are in better shape, with stronger supply chains that will allow strategic discounting more than last year to pump sales. The Uggs sales outperformance was attributed to improved supply chains and shorter shipping times as the lingering effects of the pandemic recede.
“Though there are headwinds for the consumer, there’s a chance for a decent holiday season,” he said, albeit one hampered still by the inflation of the last two years. “The 2022 holiday season may have been the low point.”
Most credit cards come with a variable rate, which hasa direct connection to the Fed’s benchmark rate.
After the previous rate hikes, the average credit card rate is now more than 20% — an all-time high. Further, with most people feeling strained by higher prices, balances are higher and more cardholders are carrying debt from month to month.
Even without a rate hike, APRs may continue to rise, according to according to Matt Schulz, chief credit analyst at LendingTree. “The truth is that today’s credit card rates are the highest they’ve been in decades, and they’re almost certainly going to keep creeping higher in the next few months.”
Although 15-year and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
The average rate for a 30-year, fixed-rate mortgage is up to 8%, the highest in 23 years, according to Bankrate.
“Rates have risen two full percentage points in 2023 alone,” said Sam Khater, Freddie Mac’s chief economist. “Purchase activity has slowed to a virtual standstill, affordability remains a significant hurdle for many and the only way to address it is lower rates and greater inventory.”
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But undergraduate students who take out new direct federal student loans are now paying 5.50% — up from 4.99% in the 2022-23 academic year and 3.73% in 2021-22.
Private student loans tend to have a variable rate tied to prime, Treasury bill or another rate index — and that means that those borrowers are already paying more in interest. How much more, however, varies with the benchmark.
“Borrowers are being squeezed but the flipside is that savers are benefiting,” said Greg McBride, chief financial analyst at Bankrate.com.
While the Fed has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.46%, on average, according to the Federal Deposit Insurance Corp., or FDIC.
However, top-yielding online savings account rates are now paying over 5%, according to Bankrate — which is the most savers have been able to earn in nearly two decades.
“Moving your money to a high-yield savings account is the easiest money you are ever going to make,” McBride said.
About 2 in 3 Americans say their household expenses have risen over the last year, but only about 1 in 4 say their income has increased in the same period, according to a new poll from The Associated Press-NORC Center for Public Affairs Research.
Steve Shapiro, 61, who works as an audio engineer in Pittsburgh, said he’d been spending about $100 a week on groceries prior to this past year, but that he’s now shelling out closer to $200.
“My income has stayed the same,” he said. “The economy is good on paper, but I’m not doing great.”
About 8 in 10 Americans say their overall household debt is higher or about the same as it was a year ago. About half say they currently have credit card debt, 4 in 10 are dealing with auto loans, and about one in four have medical debt. Just 15% say their household savings have increased over the last year.
Tracy Gonzales, 36, who works as a sub-contractor in construction in San Antonio, Texas, has several thousand dollars of medical debt from an emergency room visit for what she thought was a bad headache but turned out to be a tooth infection.
“They’ll treat you, but the bills are crazy,” she said. Gonzales said she’s tried to avoid seeking medical treatment because of the costs.
Relatively few Americans say they’re very or extremely confident that they could pay an unexpected medical expense (26%) or have enough money for retirement (18%). Only about one-third are extremely or very confident their current financial situation will allow them to keep up with expenses, though an additional 42% say they’re somewhat confident.
“I’ve been looking forward to retirement my entire life. Recently I realized it’s just not going to happen,” said Shapiro, of Pittsburgh, adding that his wife’s $30,000 or so of student debt is a financial factor for his household. The couple had hoped to sell their house and move this past year, but decided instead to hold on to their mortgage rate of 3.4%, rather than facing a higher rate. ( The current average long-term mortgage rate reached 7.79% this month. )
About 3 in 10 Americans say they’ve foregone a major purchase because of higher interest rates in the last year. Nearly 1 in 4 U.S. adults have student debt, with the pandemic-era payment pause on federal loans ending this month, contributing to the crunch.
Will Clouse, 77, of Westlake, Ohio, said inflation is his biggest concern, as he lives on a fixed income in his retirement.
“A box of movie candy — Sno-Caps — that used to cost 99 cents is now a dollar fifty at the grocery store,” he said. “That’s a 50% increase in price. Somebody’s taking advantage of somebody.”
Americans are generally split on whether the Republicans (29%) or the Democrats (25%) are better suited to handle the issue of inflation in the U.S. Three in 10 say they trust neither party to address it.
Geri Putnam, 85, of Thomson, Georgia, said she’s been following the ongoing auto strikes with sympathy for the workers’ asks.
“I don’t think it’s out of line, what they’re asking for, when you see what CEOs are making,” she said. “I think things have gotten out of control. When you can walk into a store and see the next day, across the board, a dollar increase — that’s a little strange. I understand supply and demand, the cost of shipping, et cetera. But it seems to me everyone’s looking at their bottom lines.”
Putnam also said she sees her six children struggling financially more than her generation did.
“They all have jobs and have never been without them,” she said. “They’re achievers, but I think at least two or three of them will never be able to buy a home.”
A slight majority of all Americans polled (54%) describe their household’s financial situation as good, which is about the same as it’s been for the last year but down from 63% in March of 2022. Older Americans are much more confident in their current finances than younger Americans. Just 39% of 18- to 29-year-olds describe their household finances as good, compared to a majority (58%) of those who are 30 and older. People with higher levels of education or higher household incomes are more likely than Americans overall to evaluate their finances as solid.
About three-quarters of Americans describe the nation’s economy as poor, which is in line with measurements from early last year.
Among those who are retired, 3 in 10 say they are highly confident that there’s enough saved for their retirement, about 4 in 10 are somewhat confident, and 31% are not very confident or not confident at all.
Clouse, of Ohio, said the majority of his money had gone towards caring for his wife for the past several years, as she’d been ill. When she passed away this past year, his household lost her Social Security and pension contributions. He sees the political turmoil between Republicans and Democrats as harming the economy, but remains most frustrated by higher prices at the supermarket.
“Grocery products going up by 20, 30, 40%. There’s no call for that, other than the grocery market people making more money,” he said. “They’re ripping off the consumer. I wish Mr. Biden would do something about that.”
About 4 in 10 Americans (38%) approve of how Biden is handling the presidency, while 61% disapprove. His overall approval numbers have remained at a steady low for the last several years. Most Americans generally disapprove of how he’s handling the federal budget (68% disapprove), the economy (67%), and student debt (58%).
Representative Mike Johnson, a Republican from Louisiana, left, speaks with Representative Kat Cammack, a Republican from Florida, outside of a House Republican caucus meeting on Capitol Hill in Washington, DC, US, on Tuesday, Oct. 24, 2023.
Al Drago | Bloomberg | Getty Images
Republican Rep. Mike Johnson of Louisiana was elected speaker of the House of Representatives on Wednesday, ending a three-week leadership crisis that has paralyzed Congress.
Vice chairman of the House Republican conference, Johnson had maintained a low public profile until he was thrust into the spotlight this week after securing the party’s nomination for speaker.
Johnson was elected unanimously by the 220 Republicans who voted, despite being the fourth nominee tapped by the GOP conference in two weeks, as the deeply divided party repeatedly failed to put forward a candidate who had enough support.
Every Democrat who voted Wednesday cast their ballot for Minority Leader Rep. Hakeem Jeffries, D-N.Y.
Johnson managed to rally the GOP conference behind his bid after recalcitrant Republicans rejected the three previous nominees — House Majority Leader Steve Scalise of Louisiana, Rep. Jim Jordan of Ohio and Majority Whip Tom Emmer of Minnesota.
Johnson’s bid received a boost Wednesday from former President Donald Trump, who encouraged Republicans to vote for the Louisianan.
He also consolidated the backing of several moderate New York Republicans who had been reluctant to support some of the more hardline conservatives who sought the top job.
Johnson, who is serving his fourth term in Congress, will wield the gavel as America faces a looming government shutdown, Israel wages war on Hamas, and Ukraine struggles to beat back Russia’s invasion.
The House needs to pass spending legislation by Nov. 17 to keep the government running, and President Joe Biden has called on Congress to approve emergency security assistance for Israel and Ukraine.
Johnson voted against legislation in September that has kept the government running through November, and he has opposed assistance for Kyiv in the past. The Louisiana Republican said earlier this month that the House needs to take all necessary action to help Israel destroy Hamas.
Johnson is a social conservative who served on Trump’s legal team during the former president’s first impeachment. He previously did legal work for the Alliance Defense Freedom, an ultraconservative advocacy group that litigates to restrict abortion access and prohibit same-sex marriage.
Johnson also participated in Republican efforts to overturn Biden’s 2020 election victory.
He filed a legal brief in support of a lawsuit that sought to block the certification of Biden’s victories in Georgia, Pennsylvania, Michigan and Wisconsin. Johnson then supported objections in Congress to the certification Arizona’s and Pennsylvania’s 2020 presidential election results.
This is a developing story. Please check back for updates.
House Majority Whip Tom Emmer, a Republican from Minnesota, speaks to members of the media following a House Republican caucus meeting on Capitol Hill in Washington, DC, US, on Monday, Oct. 23, 2023.
Al Drago | Bloomberg | Getty Images
Republican lawmakers on Tuesday nominated Rep. Tom Emmer of Minnesota for speaker of the House of Representatives, the third candidate they have selected in recent weeks after the previous two nominees failed to secure enough votes.
Emmer, the Republican majority whip, prevailed over a crowded field of eight GOP candidates after several rounds of voting Tuesday morning.
But the Minnesota Republican does not appear to have the 217 Republican votes needed the secure the gavel on the House floor. He can only afford to lose four GOP votes, as Democrats have lined up in lockstep behind their nominee, House Minority Leader Hakeem Jeffries of New York.
House Republicans are on break to give Emmer time to speak with the roughly two dozen lawmakers who still oppose his nomination, several GOP members told NBC News.
Republicans will return at 4 p.m. ET to resume their closed-door meeting. It is unclear whether Emmer will face a vote on the House floor Tuesday.
The House has been leaderless for nearly three weeks now, which has left Congress paralyzed and unable to move forward with spending legislation as a Nov. 17 deadline looms to avoid a government shutdown. Congress is also unable to respond to President Joe Biden’s call for emergency security assistance for Israel and Ukraine until the House elects a speaker.
Emmer is relative moderate within the GOP, which will likely draw the ire of hard-right members of the party. The Minnesota Republican voted to certify Biden’s 2020 election victory and also voted for spending legislation in September that averted a government shutdown.
Emmer spoke with Donald Trump on Monday in a effort to secure his backing, but the former president slammed the Republican majority whip on social media, deriding him as a “globalist” and not a true Republican.
“Voting for a Globalist RINO like Tom Emmer would be a tragic mistake,” Trump said Tuesday in a post on Truth Social.
Emmer has the backing of former Speaker Kevin McCarthy.
“He sets himself head and shoulders above all those others who want to run,” McCarthy said of Emmer in an interview with NBC News on Sunday. “We need to get him elected this week and move on and bring this not just party together but focus on what this country needs most.”
Rep. Jim Jordan of Ohio was forced to abandon his bid on Friday after his nomination failed in three separate votes. House Majority Leader Steve Scalise, the original nominee, pulled his candidacy before even facing the House floor after it became clear he did not have enough votes.
The House leadership crisis was triggered when a faction of eight Republicans, led by Rep. Matt Gaetz of Florida, ousted McCarthy in a historically unprecedented no-confidence vote. Democrats refused to save McCarthy’s speakership, leading to the California Republican’s downfall.
Today’s housing market is a toxic mix of high mortgage rates, high prices, tight supply and strangely strong pent-up demand — and it’s scaring off buyers and sellers alike.
Prices were already high, driven by supercharged demand during the height of the Covid-19 pandemic. Now the popular 30-year fixed mortgage rate is at 8%, the highest in decades, making things even tougher. Mortgage demand is at its lowest point in nearly 30 years.
“I think it’s painful. I think it’s ugly,” Matthew Graham, chief operating officer at Mortgage News Daily, said on CNBC’s “The Exchange” on Thursday.
During the first two years of the Covid-19 pandemic, the Federal Reserve dropped its benchmark rate to zero and poured money into mortgage-backed securities. The result was record-low mortgage rates for two solid years. That drove a buying frenzy, which was also fueled by a sudden urban exodus and the new work-from-home culture. Home prices jumped 40% higher from pre-pandemic levels.
Then, as inflation surged, the Fed hiked rates. That, ironically, made the housing market even more expensive. Usually when rates go up, home prices go down.
But this market is unlike historical ones because it also has a severe lack of supply. The Great Recession of 2008 and the ensuing foreclosure crisis hit homebuilders especially hard, causing them to underbuild for over a decade. They have still not made up the difference.
Would-be sellers, meanwhile, are trapped. They have little desire to trade the 3% rate they currently have for an 8% mortgage rate on a new purchase.
“I don’t think anybody in my community of mortgage originators would disagree that in many ways, this is worse than the great financial crisis in terms of volume and activity,” MND’s Graham said.
He’s also unsure when the market will see a decline in rates. “But we do hear a chorus of Fed speakers, especially last week, in a very notable way, saying that they are restrictive and that they can wait and see what happens with the policy filtering through to the economy,” he said.
Sales of previously owned homes in September dropped to the slowest pace since October 2010, according to the National Association of Realtors. There are stark differences between today’s market and the foreclosure crisis era, however. Foreclosures today are extremely low, and most current homeowners are sitting on historically high home equity. The fact that so many refinanced to record-low interest rates between 2020 and 2022 also means that current homeowners have very affordable housing costs.
So, that leaves potential buyers stuck, too.
“I think people are anxious, and there’s a lot of buyer mentality of, ‘We’re going to wait and see.’ So a lot of people just want to sit tight and see what happens,” said Lisa Resch, a real estate agent with Compass in Washington, D.C.
The NAR is now lowering its 2023 sales forecast to a decline of as much as 20%, from a previous forecast of a 13% drop.
“Prices look to be flat from this point onwards at an 8% rate, despite the housing shortage,” added Lawrence Yun, chief economist for the NAR.
Yun noted that metropolitan markets with faster job growth and relatively affordable prices, however, will see an upswing in sales. He points to Florida markets such as Tampa, Jacksonville and Orlando, as well as Houston, Texas, and Memphis, Tennessee.
Buyers today will likely get the best deals from homebuilders, especially the large production builders such as Lennar and D.R. Horton. The builders are helping with affordability by buying down interest rates for their customers. This is something they have not typically done in the past — at least not at this scale.
“Although our mortgage company has been offering slightly below market rate loans most of this cycle (just to be competitive), the full point buydown for the 30-year life of the loan we’ve been referring to recently as a builder incentive is not something we had done in previous cycles, at least not on the broad, majority basis we are doing so today,” said a spokesperson from D.R. Horton. “You might have found it on select homes in the past on an extremely limited basis.”
Construction of single-family homes is rising slowly, but it is still nowhere near meeting demand. Builder sentiment is dropping further into negative territory, due to higher rates, but the new home market is still more active than the market for existing homes.
On the bright side of housing, apartment rents are finally cooling off, thanks to a record amount of new supply hitting the market. This gives renters less incentive to jump into buying. Demand for rentals, however, is rising.
“It appears slowing inflation and a still-strong job market are boosting consumer confidence and, in turn, spurring household formation among young adults most likely to rent apartments,” said Jay Parsons, chief economist at RealPage.
For those still wanting to upgrade to a bigger home or downsize to a smaller one, they are caught in a conundrum.
Prices are still rising due to the supply and demand imbalance, but sellers are being more flexible. So a buyer could purchase now at the higher rates and hope to get a break on the price, or they can wait until rates drop.
But when they do, there is likely going to be a flood of demand, resulting in bidding wars.
U.S. Treasury yields rose on Wednesday with the 10-year hitting a fresh multiyear high as investors digested the latest economic data and considered the outlook for Federal Reserve interest rates.
The 10-year Treasury yield gained nearly 7 basis points to 4.911%, putting it above 4.9% for the first time since 2007. Meanwhile, the 2-year Treasury yield was trading almost 2 basis points up at 5.231%, around levels last seen in 2006.
Also notably, the 5-year Treasury moved as high as 4.937%, its top level since 2007.
Yields and prices move in opposite directions and one basis point equals 0.01%.
Investors considered fresh economic data as uncertainty about the path ahead for Fed monetary policy grew in recent weeks.
Housing starts accelerated in September, but rose as a slower-than-expected rate, according to data released Wednesday. Building permits fell in the month, but lost less than economists anticipated.
Retail sales figures for September, which were published Tuesday, increased by 0.7% for the month. That’s far higher than the 0.3% anticipated by economists surveyed by Dow Jones, and indicates resilience from consumers in light of higher interest rates and other economic pressures.
The data brought up renewed concerns over the outlook for interest rates, with some investors viewing it as an indication that rates may be hiked further or at least kept elevated for longer.
Markets are still pricing in a 90% chance that rates will remain unchanged when the Fed announces its next monetary decision on Nov. 1, but the probability of a December rate increase rose after Tuesday’s data, according to the CME Group’s FedWatch tool.
In recent days and weeks, various Fed officials have indicated that the central bank may be done hiking, especially as higher Treasury yields are contributing to tighter economic conditions. Further comments from policymakers are expected this week, including by Fed Chairman Jerome Powell, and investors are looking to their comments for hints about their policy expectations.
Upcoming economic data may also influence opinion among both investors and Fed officials.
U.S. President Joe Biden gestures as he boards Air Force One at Delaware Air National Guard Base, in New Castle, Delaware, U.S., April 25, 2022.
Tasos Katopodis | Reuters
WASHINGTON — President Joe Biden will travel to Israel on Wednesday in an effort to mitigate the expansion of the war between Israel and Hamas.
Secretary of State Antony Blinken, who has made two trips to Israel since the war broke out on Oct. 7, announced Biden’s upcoming visit during a press conference at the U.S. Embassy in Tel Aviv.
“President Biden will again make clear, as he has done unequivocally since Hamas slaughter of more than 1400 people, including at least 30 Americans, that Israel has the right and indeed the duty to defend his people from Hamas and other terrorists and to prevent future attacks,” Blinken said following a nearly eight-hour meeting with Israeli Prime Minister Benjamin Netanyahu.
Blinken said Biden will also work to establish a plan for the safe passage of critical humanitarian aid to Gaza.
National Security Council spokesman John Kirby told reporters on a call that Biden’s travel to Israel was thoroughly evaluated for security risks, adding that the “security situation is certainly tense.”
Earlier in the day, Blinken was forced to retreat to a bunker twice while meeting with Netanyahu in Tel Aviv due to air raid sirens. Over the weekend, a U.S. congressional delegation also sheltered in place.
“We’ve sent a message loud and clear that we don’t want to see escalation. We don’t want to see this conflict widen. We don’t want to see any other actor and that includes Iran jumping in here and escalating this conflict,” Kirby said.
Kirby said Biden will also travel to Amman, Jordan where he will meet with Jordanian King Abdullah II bin Al-Hussein, Egyptian President Abdel Fattah El-Sisiand and Palestinian Authority President Mahmoud Abbas.
While in Jordan, Kirby said Biden will discuss regional security and humanitarian needs for the people in Gaza.
“We certainly want to see that humanitarian assistance begin to flow as soon as possible,” Kirby said.
