They are out: Nvidia’s numbers and guidance. They are still being analyzed as of early Thursday morning. With only a few companies still to report, the second quarter earnings season is almost over.
This should make it possible to pay even more attention to global market drivers, especially how fast the Federal Reserve is likely to cut interest rates.
U.K. fund manager M&G Investments says this brings up a very important question for investors: “If recent rate hikes have not really slowed the economy down, how can we assume that traditional rate cuts will really boost it?” How low do rates have to get for it to matter?”
In a new note, Richard Woolnough, fund manager at M&G, and Carlo Putti, investment director, say that the U.S. housing market is an important way for monetary policy to reach consumers because it affects their wealth and mood and grows the economy.
Simply put, the way this money system works is not normal because of the way the home market is right now. As the chart below shows, there is a difference between the average length of time that new and used homes stay on the market.
Why does this happen? On the one hand, homeowners who have locked in record low mortgage rates do not have much reason to move because they would have to give up those low rates if they did. New homebuyers, on the other hand, want to buy but can not because high interest rates make housing mostly out of reach for them, say the investors.
So, what interest rate level is needed to get the housing market back in balance and get all the related activity going?
For first-time sellers, the cost of homes is almost at an all-time low. The next chart shows that the line would have to go back to 100 in order for the market to be affordable again. This means that a median family would need to make just enough money to get a mortgage on a median-priced home.
The team says that in order to reach their goal, mortgage rates would have to drop to 3.4% (assuming nothing else changes).
That is a very long way away. Freddie Mac said that the average interest rate on a 30-year fixed-rate mortgage was 6.46%.
For people who already own their own homes, things are different. Low loan-to-value rates mean that affordability is not a big problem for most people. As the team says, it comes down to motivation. Most of them do not want to move and give up their low mortgage rates.
“For most current homeowners to move, rates would have to drop to levels similar to the ones they locked in at the start.” The usual mortgage rate around COVID-19, when a lot of people bought homes or refinanced their debt, was about 3.5%, so this would be about that, they say.
In the end, they say that the transmission mechanism of interest rates has been slowed down during the restrictive phase and will probably be even less effective during the easing phase. This means that mortgage rates may need to drop a lot in order to effectively stimulate the economy through the housing market.
“Our research shows that mortgage rates might need to drop to around 3.5% in order to get the housing market going again.” In the past, this would have caused the 10-year U.S. Treasury yield to drop, possibly to 2%, based on the state of the economy as a whole and Federal Reserve policy, they say.
On Thursday morning, the 10-year TMUBMUSD10Y 3.865% had a yield of 3.83%. It looks like the home market will stay weak for a while.
Market
Futures on U.S. stock indexes ES00 0.11% YM00 0.02% NQ00 0.22% are higher as benchmark Treasury yields TMUBMUSD10Y 3.865% rise after GDP data that was better than expected. The dollar index (DXY) is going up by 0.27%, oil prices are going up by 0.11%, and the price of an ounce of gold is going up by 0.27% to $2,510.
| Key asset performance | Last | 5d | 1m | YTD | 1y |
| S&P 500 | 5592.18 | -0.51% | 1.27% | 17.24% | 23.86% |
| Nasdaq Composite | 17,556.03 | -2.03% | -0.25% | 16.95% | 25.23% |
| 10-year Treasury | 3.825 | -3.20 | -15.70 | -5.59 | -28.61 |
| Gold | 2552.5 | 1.27% | 2.47% | 23.20% | 29.79% |
| Oil | 74.27 | 1.77% | -3.46% | 4.12% | -11.14% |
