What is an inverted mortgage rate curve [+ recession fears]

Inverted mortgage yield curve
by Team Stessa, posted in Newsletter

Blair duQuesnay of The Belle Curve broke an interesting story last week citing BankRate data showing that the rates on 5/7/10 year ARMs are higher than the 30-year fixed rate. Why pay more and take interest risk for 5-10 years with an ARM when you can get a 30-year fixed rate for lower? It doesn’t make sense.

inverted mortgage yield curve

Source: BankRate

As you know, ARMs—adjustable-rate mortgages—typically offer the benefit of lower interest rates because of the risk of your rate increasing in the future. No more it seems.

Diana Olick of CNBC offers some insight, noting that the current inverted yield curve—where long-term bond rates are lower than short-term ones—has translated to the mortgage markets, where we are seeing shorter-term loans on par or lower than long term loans.

This brings us to a familiar topic these days—a looming recession. Alarm bells abound, beginning with Thomas Franck of CNBC reporting this week that Morgan Stanley has warned clients that the risk of a global recession is high and rising, as a result of trade headwinds and economic slowdowns.

Edna Curran of Bloomberg reports also playing a role with recession watchers pointing to Hong Kong as a worrisome flashpoint for the world economy. Hong Kong is facing a housing bubble, and, turmoil there could have ripple effects throughout Asia. According to Harvard economist Carmen Reinhart, Hong Kong’s turmoil is a potential point that “could trigger a very significant global slowdown, or even recession.”

For housing, several key points emerged last week that are worth noting, starting with foreign buyers. Yan Zhang of USA TODAY reported that despite lower mortgage rates, “foreign buyers, particularly the Chinese, have pulled back sharply from the U.S. real estate market.” As of March, foreign buyers purchased 36% fewer homes in the U.S. compared to the previous 12-month period. This comes amidst an escalating trade war with China that further exacerbates global economic uncertainty.

In commenting on the looming recession, Robert Hacket of Fortune quotes Tim Mayopoulos, former chief executive of Fannie Mae, as saying: “I’m much less worried about the state of housing and home prices than I was 10 years ago. I think when the next recession comes, we’ll be able to weather that actually pretty well, from a housing market perspective.”

Mortgages update

Bob Mason on Yahoo! Finance reported this week that mortgage rates continued to decline– 30-year fixed rates fell by 5 basis points to 3.55%, from 3.6% last week. Rates are now at their lowest level since late 2016.

Not everyone is as optimistic about the housing market as the former CEO of Fannie Mae. Blair Schiff of Fox Business published a provocatively titled piece, Could resurgence of risky mortgages cause another financial crisis? In reference to a Wall Street Journal (subscription required) report which cites that mortgages are increasingly being issued to borrowers with poor credit and high consumer debt, Schiff quotes industry leaders as being “worried” that this situation may fuel the next recession.

In a sign that lower interest rates have been positive for the economy, Jason Lange of Reuters notes that “U.S. home sales rose more than expected in July, boosted by lower mortgage rates and a strong labor market, signs the Federal Reserve’s shift toward lower interest rates was supporting the economy.”

#PropTech Update: WeWork’s IPO

WeWork released its IPO prospectus two weeks ago, and the commentary has been non-stop. In a great analysis from Stratechery, they note that WeWork’s massive expansion shows that of their 300+ locations, more than half are losing money. This helps to explain why WeWork’s expenses are double its revenue.

Jim Edwards of Bloomberg reviewed the IPO and had some interesting commentary, particularly that WeWork losses are ahead of revenue, has negative cash flow, isn’t profitable even on its preferred metrics, and that “no part of this company makes money, and it is difficult to see a path to profitability.”

Riley McDermid of Bisnow gives us some interesting numbers on WeWork, starting with the company’s $47B valuation, and its overall stated occupancy rate of 90%. Surprisingly, 39% of WeWork’s customers are employees of companies with 500+ employees. Finally, WeWork’s operating loss in the first half of 2019 totaled $1.37B.

Co-working is indeed a growing trend among employees everywhere—not just freelancers and startups. Last week, Sylvia O’Regan of The Real Deal noted that WeWork competitor Industrious raised $80 million in its latest round of funding, bringing its total funding to more than $220 million. As opposed to WeWork’s traditional lease strategy, Industrious focuses on landlord and building owner partnerships through management contracts.