Tommy Campbell Supervielle
Copyright: LinkedIn. ..
Tommy Campbell Supervielle has been promoted to Business Development Head for Citi Latin America’s private banking division.
Based in Miami, Supervielle will look to grow the unit by working alongside its Institutional Clients Group and providing financial solutions to Citi clients, he posted on LinkedIn.
Campbell joined Citi in 2007 and served in roles in different sections until 2012 when he was promoted to team leader in Miami for Citi Private Bank.
In that role, he led a team of specialists for clients in Latin America and Mexico, according to the social network.
In 2017, he became head of LatAm origination for Citi Private Bank’s lending unit and in 2020 was promoted to investment finance, head of the region for Latin America, a position he held until March of this year.
He studied business and management at Texas A&M University – Mays Business School.
Percy Moreira assumed the leadership of Itaú USA and Itaú Private International in Miami.
“It is with great joy that I assume the position of Head of Itaú USA and Itaú Private International, after years of great learning and achievements at Itau BBA. In this new challenge, under the leadership of Fernando Mattar Beyruti, I will be leading an operation that ended 2021 surpassing the 200 billion reais (approximately $43.3 billion) mark under management,” Moreira posted on his LinkedIn account.
Itaú’s international division has offices in São Paulo, Lisbon, Miami, as a strategic center in the U.S. with a focus on Latin America, and Zurich (focal point for Latin Americans seeking to have resources managed by a bank in Europe).
“Our focus will continue to be the process of consolidating the overseas expansion strategy to satisfy our clients in all their demands,” Moreira added.
He takes over from Fernando Mattar Beyruti, who was promoted to Global Head of Itaú Private and to whom Moreira will report in his new position.
Moreira, who has more than 20 years of experience, worked at Citi, J.P. Morgan and Merrill Lynch, according to his LinkedIn profile.
Sanctuary Wealth welcomes Fuentes Hondermann Wealth Management, the latest internationally-focused team to join the partnered independence network.
Based in Sanctuary’s Miami office, the three-person team with $250 million in client assets under management was previously affiliated with Morgan Stanley Wealth Management and consists of Managing Director, Senior Wealth Advisor Luis Fuentes, Executive Director, Senior Wealth Advisor Rosario Hondermann, and Executive Director, Senior Wealth Advisor Chris Fuentes.
“We created Sanctuary Global specifically as a platform for teams who provide wealth management services to a mix of high-net-worth domestic and international clients. Wealth is a global phenomenon, and Sanctuary is committed to serving every aspect of the wealth management universe”, said Jim Dickson, CEO, and Founder of Sanctuary Wealth.
The principals at Fuentes Hondermann Wealth Management estimate their business as being about 30% from US clients and 70% international with a concentration in the Argentina/Uruguay region as well as Mexico.
The three partners have been together as a team for more than 25 years, first with Merrill Lynch and then, starting in 2012, with Morgan Stanley Wealth Management before deciding that independence offered the most benefits to their clients.
“When we decided to declare our independence, we looked around the industry at large platforms and boutique firms, but none of them aligned with our needs the way Sanctuary Wealth does,” explained Luis Fuentes, Managing Director, Senior Wealth Advisor at Fuentes Hondermann Wealth Management.
Fuentes add: “Sanctuary gives us the freedom and flexibility to run our business in a way that provides the maximum benefit to our clients, backed with the support and resources of a much larger organization. While we are the owners of our business, we are also part of a global company that understands our clients’ unique situation.”
Luis Fuentes, the senior member of the team, was born in Havana, and spent 41 years of his career with Merrill Lynch as an international financial advisor, leading and mentoring various teams during his tenure and serving wealthy families and institutions in the United States, Latin America, and Europe.
He is a graduate of the University of Miami with a degree in Business Administration and majors in Finance, Economics, and Marketing. He has also completed studies in Portfolio Modern Theory & Risk and Wealth Planning at the Wharton School of Business, University of Pennsylvania.
A wealth manager for more than 20 years, Rosario Hondermann holds degrees in both law and political science from Universidad Nacional Mayor de San Marcos in Lima, Peru. Although born in Lima, she has lived in Miami, Florida with her family for more than 30 years and provides financial solutions and advice to high-net-worth clients and institutions in Latin America, Europe, and the United States.
With more than 25 years of experience as an international financial advisor, Chris Fuentes started his career in 1998 after graduating from the University of Miami, School of Business Administration. Chris specializes in the creation and implementation of global portfolio strategies and asset allocation and like his partners is fluent in Spanish and English.
Pixabay CC0 Public Domain. Tres escenarios para Ucrania-Rusia y valores de recuperación de los bonos para Ucrania, Rusia y Bielorrusia
In this article, we focus on what we think are the three most likely scenarios of how the war could end, while acknowledging that within each of these stylized scenarios there are also multiple variants. This framework allows us to think clearly of the potential recovery values for Russian, Ukrainian, and Belarusian bonds. As always, our subjective probabilities will be reassessed as the facts change on the ground.
Scenario 1: Peace deal in the short-term (35% probability)
Russia and Ukraine are currently engaged in negotiations for a peace deal. It appears that the involved parties are not yet ready for an immediate compromise, but a deal within the next two months appears plausible. The details are yet to be defined, but based on publicly available information, one could expect Russia to agree to withdraw its troops from Ukraine in exchange for the latter giving up its NATO membership ambitions, recognizing Crimea as part of Russia, and limiting the future size of its military.
A kind of Minsk III agreement would be needed to resolve the struggle with Ukrainian separatists in Donetsk and Luhansk – a conflict that has been ongoing since 2014. Ukraine could potentially recognize the independent People’s Republics of Donetsk and Luhansk (DPR and LPR) under the protection of Russian peacekeepers. Alternatively, DPR and LPR could be granted some independence within Ukraine’s sovereignty. Either way, Ukraine would preserve most of its territorial integrity.
Ukraine avoids default or conducts a market-friendly restructuring. This would be possible on the back of significant financial assistance that is currently being provided by western partners that has, so far, allowed Ukraine to continue servicing its external debt. This large financial assistance will also allow for a quick rebuilding of the nation. For example: Iraq’s economy expanded by a cumulative 178% in 2003 and 2004 after the 2003 invasion, Kuwait’s rose by 147% in the two years following the 1991 invasion. The recovery value of Ukraine’s sovereign bonds could be between 70% and 100% depending on whether there’s a restructuring or not.
Russia may also avoid default depending on potential sanction relief. Russia’s sovereign and corporates have been demonstrating their willingness and ability to avoid default so far, but current US sanctions would prevent bondholders from receiving sovereign bond repayments after 25 May, 2022 (see OFAC General License 9A). If the peace deal occurs before this date and it is acceptable for the US, then there’s a possibility that this and other economic sanctions could be eased allowing Russia’s sovereign to avoid default. This is far from granted though and up to the US to decide. If Russia manages to obtain sanctions relief to avoid default following a satisfactory peace deal, then we would expect Belarus to avoid default as well.
A large majority of Russia’s corporate issuers avoid default. Only a few corporate issuers that see their revenues severely disrupted could conduct market-friendly restructurings with high recovery values.
Scenario 2: A prolonged war (45% probability)
The war could go on for several months if the involved parties fail to reach a peace deal in the short-term. This would inflict much larger infrastructure and humanitarian damage on Ukraine. Russia would likely increase its territorial control of Ukraine, forcing the latter to give up a larger share of its territorial integrity. Some variants of this scenario could see Ukraine divided in two with Russia having control over eastern Ukraine and a legitimate democratic government controlling western Ukraine.
Ukraine restructures its external debt; the recovery is highly uncertain. The recovery of Ukraine sovereign bonds will depend on how much of Ukraine’s territorial integrity is preserved as well as on the length of the war, which will determine the degree of infrastructure damage as well as a likely large loss of human capital mainly due to migration.
In the most optimistic case within this scenario, Ukraine preserves most of its territorial integrity and large financial assistance from western partners allows a quick recovery. A market friendly restructuring sees a recovery between 50% and 70%.
In the most pessimistic case within this scenario, Ukraine loses a large share of its territory. The lowest recovery of a sovereign restructuring in recent history was Iraq’s following the 2003 invasion, where Paris Club creditors accepted an 80% principal haircut. We see this as a lower bound for Ukraine.
Russia sovereign likely defaults after the 25 May. If the conflict continues for months, we think the US would be less inclined to extend the deadline imposed by General License 9A, which would prevent bondholders from receiving payments even if Russia remains willing and able to pay. Belarus is financially dependent on Russia, thus we see no reason for the former to avoid default if the latter is forced to stop paying.
No restructuring in sight. US sanctions on Russia’s Ministry of Finance, central bank, and national wealth fund would remain in place, which would prevent the sovereign from restructuring its debts in the foreseeable future. Venezuela’s sovereign bonds, which have been in a similar situation used to trade between 20 and 30 cents on the dollar following the November 2017 sovereign default.
Deep recession but not a Venezuelan-style collapse. The Russian economy will inevitably fall into a deep recession this year but an economic collapse like those seen in Venezuela and Lebanon seems highly unlikely in an economy that until now had been well managed, with very low levels of debt and a twin surplus (fiscal and external). Thus, we think that this long default scenario has already been mostly priced in.
Most Russian corporate issuers still avoid default. Economic sanctions will affect the revenues of Russia’s corporate issuers but given that most of them are exporters, have low leverage, and have assets abroad that could be seized by creditors, we believe that most of them will avoid default. Corporates with an important share of domestic revenues and those that see their exports severely curtailed by sanctions will have to restructure, but we expect market-friendly restructurings to prevail.
Scenario 3: A Russia-controlled Ukraine (20% probability)
The strong resistance from the Ukrainian military and population, and the constant military equipment provided by the west make a full conquest of Ukraine unlikely, yet it remains a possible outcome. In this worst-case scenario, Ukraine would be governed by an illegitimate pro-Russian government. Ukraine would thus become sanctioned and lose financial support from the west. All three sovereigns default and restructuring would only occur following regime change. The outlook for Russian corporates becomes more uncertain the longer strong economic sanctions remain. We would expect more corporate restructurings than in the previous scenarios.
Outlook
The situation on the ground in Ukraine is extremely fluid, so the scenarios outlined above will change as more information emerges, and international diplomacy continues. We note that the critical factor for bond investors will be policy decisions around sanctions, so we will continue to watch this closely. We are deeply saddened that a prolonged war seems to be the most likely outcome but remain hopeful that a peaceful outcome can be reached as quickly as possible.
Guest column by Carlos de Sousa, Emerging Markets Strategist, Vontobel AM.
Pixabay CC0 Public Domain. Las aseguradoras planean invertir más en private equity y bonos verdes o de impacto durante 2022
Goldman Sachs Asset Management released the findings of its eleventh annual global insurance survey, titled “Re-Emergence: Inflation, Yields, and Uncertainty.”
The survey of 328 insurance company participants, representing over $13 trillion in globalbalance sheet assets, found that as insurers continue to prioritize yield and ESG factors in investment decisions, they plan to increase their allocation most significantly to private equity (44%) and green or impact bonds (42%) over the next year.
In the Americas and Asia, 53% of investors expected to increase allocations to privateequity, the highest of any asset class, while in Europe, the Middle East and Africa (EMEA), green or impact bonds were the most favored choice at 59%.
The survey found that in a sharp reversal from the past two years, insurers now see rising inflation and tighter monetary policy as the largest threats to their portfolios, with rising interest rates displacing low yields as the primary investment risk cited by insurers.
“Against a complex macroeconomic and geo-political environment, demand for yield remains high, and we expect to see insurers continue to build positions in private asset classes as well as inflation hedges, including private equity, private credit, and real estate.“These assets can prove integral to diversifying portfolios while optimizing capital-adjusted returns,particularly over a longer-term time horizon,” said Michael Siegel, Global Head of Insurance Asset Management for Goldman Sachs Asset Management.
Regardless of private equity and sustainable bonds, insurers’ financial managers plan to increase their allocation over the next 12 months to include corporate credit (37%), infrastructure debt (36%), and real estate (31%), among others.
ESG triples in the investment process
According to the survey’s findings, sustainability continues to gain weight among the factors that govern investment decisions and the investment process. Thus 92% of insurance managers take ESG into consideration, almost three times more than in 2017, when only 32% took it into account.
Likewise, now more than one in five respondents (21%) say that sustainability has become a main element. This percentage almost doubles when it comes to companies in Europe, the Middle East and Africa (EMEA), where it is more than 37%.
More than half of global insurers (55%) expect ESG considerations to have a major impact on asset allocation decisions in the coming years, matching in importance what is so far the main factor for investment, regulatory capital requirements.
Asked about possible consolidation movements in the global insurance market, almost 96% expect this dynamic of concentration and new deals to continue. Finally, the 2022 survey has again asked CFOs and CIOs about their investments in insurtech and this year also about cryptocurrencies.
The search for greater operational efficiency has once again led to an increase in insurtech investment in all geographical areas of the world, and in the case of the cryptomarket, its gradual maturation explains why 11% of US insurers say they are already investing in this asset, compared with 6% of Asian companies and just 1% of European ones.
Methodology
The Goldman Sachs Asset Management Insurance Survey provides valuable insights from Chief Investment Officers (CIOs) and Chief Financial Officers (CFOs) regarding the macroeconomic environment, return expectations, asset allocation decisions, portfolio construction and industry capitalization. The survey analyzed responses from 328 participants at global insurance companies representing more than $13 trillion in balance sheet assets, which represents around half of the balance sheet assets for the global insurance sector. The participating companies represent a broad cross section of the industry in terms of size, line of business and geography. The survey was conducted during the first two weeks of February.
Pixabay CC0 Public Domain. Inversión en carbono: una clase de activos emergente
A very important tool in combating climate change is to put a price on carbon emissions. This price factors in the negative externality of climate change and creates an incentive for the invisible hand of the market to move companies and economies away from burning fossil fuels. Achieving Paris Agreement climate targets will require the widespread use of carbon pricing to steer the world onto a low-carbon and sustainable pathway.
Currently, carbon pricing follows two main methods: carbon taxes and cap-and-trade systems (or emissions trading systems, “ETS”). The advantage of an ETS over a carbon tax is that the total amount of CO2 released by participants in the scheme is capped at a pre-determined ceiling, which is subject to annual reductions. In addition, through the use of tradable emissions allowances, CO2 reduction can be facilitated at the lowest total cost to society.
Carbon allowances have become a liquid and investable asset class that traded approximately US$800 billion in 2021 across physical carbon, futures, and options; this was more than double the volume of twelve months earlier. Carbon has exhibited attractive historical returns and a low correlation with other asset classes, making it potentially attractive within a diversified portfolio.
The World Carbon Fund is a unique investment fund that invests across multiple liquid and regulated carbon markets. It is managed by Carbon Cap Management LLP an investment management boutique based in London. Carbon Cap have established a team with industry experience gained across carbon pricing, carbon trading and fundamental carbon markets research.
The Fund’s objectives are to generate absolute returns with a low correlation to traditional asset classes as well as having a direct impact on climate change. The Fund uses long-biased allocations across the carbon markets in order to capture the medium-term positive returns forecast in these markets. It also deploys a range of shorter-term alpha generating strategies including arbitrage and volatility trading.
There is a widespread acknowledgement that the price of carbon needs to continue to appreciate in order to provide sufficient incentive to meet Paris Agreement targets. 2021 saw significant price rises in each carbon market in which the Fund invests which has helped towards a positive return of more than 70% since its launch early in 2020.
The carbon markets can display high levels of volatility and the Fund operates within clearly defined risk framework in order to maximise risk adjusted returns. In general terms there is low correlation between the individual carbon markets and this apparent anomaly can be used both as an alpha source and to manage down overall portfolio risks.
The Fund is an Article 9 fund under the EU’s SFDR. It seeks, through its investment activities, to contribute directly to the reduction in global CO2 emissions targets. In addition, the investment manager contributes a fixed percentage of performance fees generated to purchasing and cancelling carbon allowances/offsets.
Investors in the Fund are institutions, wealth managers, family offices and private clients. As well as seeking to provide investors with non-correlated returns and climate impact, carbon investing can also act as an inflation hedge as higher carbon prices are seen to be correlated to consumer price indices.
South Hub Investments S.L, a company founded by Carlos Diez, will be responsible for the distribution of the funds in Spain. The company performs this function thanks to an agreement with Hyde Park Investment International LTD, an MFSA-regulated entity, which has 16 years of experience in European fund distribution.
Pixabay CC0 Public Domain. Australia, Países Bajos y EE.UU. se revalidan como los mercados más favorables para los inversores en cuanto a comisiones y gastos de los fondos
The fees investors pay for their funds are falling, according to Morningstar’s latest global report on fees and expenses in the industry. According to the report’s findings, Australia, the Netherlands and the United States receive the best ratings, while Italy and Taiwan are once again the worst performers.
The report Global Investor Experience (GIE) report, now in its seventh edition, assesses the experiences of mutual fund investors in 26 markets across North America, Europe, Asia, and Africa. The “Fees and Expenses” chapter evaluates an investor’s ongoing cost to own mutual funds compared to investors across the globe.
As explained from Morningstar, a key point of this report is the analysis it makes on the running costs borne by an investor for owning mutual funds, compared to other investors around the world. And whose result reflects in a global ranking compared to the last edition of this report in 2019.
Morningstar’s manager research team uses a grading scale of Top, Above Average, Average, Below Average, and Bottom to assign a grade to each market. Morningstar gave Top grades to Australia, the Netherlands, and the United States, denoting these as the most investor-friendly markets in terms of fees and expenses. Conversely, Morningstar again assigned Bottom grades to Italy and Taiwan indicating these fund markets have amongst the highest fees and expenses.
Australia, the Netherlands, and the U.S. earned top grades due to their typically unbundled fund fees. This is the fourth study in a row that these three countries have received the highest grade in this area, according the study.
“The good news for global fund investors is that in many markets, fees are falling, driven by a combination of asset flows to cheaper funds and the repricing of existing investments. The increased prevalence of unbundled fund fees enables transparency and empowers investor success. However, the global fund industry structure perpetuates the use of upfront fees and the high prevalence of embedded ongoing commissions across 18 European and Asian markets can lead to a lack of clarity for investors. We believe this can create misaligned incentives that benefit distributors, notably banks, more than investors,” said Grant Kennaway, head of manager selection at Morningstar and a co-author of the study.
Highlights
The majority of the 26 markets studied saw the asset-weighted median expense ratios for domestic and available-for-sale funds fall since the 2019 study. For domestically domiciled funds, the trend was most notable in allocation and equity funds, with 17 markets in each category reporting reduced fees.
Lower asset-weighted median fees are driven by a combination of asset flows to cheaper funds as well as the repricing of existing investments. In markets where retail investors have access to multiple sales channels, investors are increasingly aware of the importance of minimizing investment costs, which has led them to favor lower-cost fund share classes.
Outside the United Kingdom, the U.S., Australia, and the Netherlands, it is rare for investors to pay for financial advice directly. A lack of regulation towards limiting loads and trail commissions can cause many investors to unavoidably pay for advice they do not seek or receive. Even in markets where share classes without trail commissions are for sale, such as Italy, they are not easily accessible for the average retail investor, given that fund distribution is dominated by intermediaries, notably banks.
The move toward fee-based financial advice in the U.S. and Australia has spurred demand for lower cost funds like passives. Institutions and advisers have increasingly opted against costlier share classes that embed advice and distribution fees. The trend extends to markets such as India and Canada.
Price wars in the ETF space have put downward pressure on fund fees across the globe. In the U.S., competition has driven fees to zero in the case of a handful of index funds and ETFs, and these competitive forces are spreading to other corners of the fund market.
In markets where banks dominate fund distribution, there is no sign that market forces alone will drive down asset-weighted median expense ratios for retail investors. This is particularly evident in markets like Italy, Taiwan, Hong Kong, and Singapore where expensive offshore fund sales predominate over those of cheaper locally domiciled funds.
The U.K. has introduced annual assessments of value, one of the most significant regulatory developments since the 2019 study. These require asset managers to substantiate the value that each fund has provided to investors in the context of the fees charged.
Methodology
The GIE study reflects Morningstar’s views about what makes a good experience for fund investors. This study primarily considers publicly available open-end funds and exchange-traded funds, both of which are typical ways that ordinary people invest in pooled vehicles. As in previous editions, for this chapter of the GIE study, Morningstar evaluated markets based on the asset-weighted median expense ratio by market in addition to the structure and disclosure around performance fees and investors’ ability to avoid loads or ongoing commissions. The study breaks up the markets into three groups of funds: allocation, equity, and fixed income. The expense ratio calculations consider two perspectives: funds available for sale in the marketplace and funds that are locally domiciled. In this most recent study, we have adjusted the assets used in the weightings for available-for-sale funds in each market to better reflect the propensity of domestic investors to invest in nonlocally domiciled share classes.
You can read the complete study in the following link.
Schroders announced that Milagros Silva has joined the US Offshore team as Sales Director.
In her new role, Mrs. Silva will focus on building Schroders’ ability to directly address client needs and grow the firm’s US offshore distribution efforts, according the company’s memo. She will work on business development for the Schroders brokerage business.
She will report to Nicolas Giedzinski, Head of US Offshore. Calling on her prior experience and extensive knowledge of the industry, Mrs. Silva will work alongside Nicolas and the team to elevate Schroders’ strategies and increase market capitalization across different asset classes, the firm said.
Nicolas Giedzinski, Head of US Offshore commented: “We are excited to welcome Milagros to our team and to further expand Schroders’ footprint in the US Offshore region. Her role will continue to expand our consultant approach to the market – helping to build our capabilities amid the rapidly evolving needs of the industry. Milagros’ deep understanding of this sector will be extremely helpful as we actively maintain our high-quality client services and gain new prospects.”
Silva joins Schroders in 2022 from Unicorn Strategic Partners, where she served as Sales Manager and was responsible for marketing and distribution in the US Offshore market. Her territory coverage included Miami, Texas, California, Canada and the Caribbean.
Previously she was a Hybrid Wholesaler at Legg Mason Global Asset Management, where she served as the primary relationship manager for a select group of preferred partner firms in the broker dealer and RIA channels focused on the offshore market in Miami and South America.
Mrs. Silva spent six years at Alliance Bernstein Wealth Management, where she became Senior Team Leader. As such she was the primary contact for all service-related needs of HNW Private Clients and acted as the direct liaison between the advisors, clients, portfolio managers, legal and compliance departments to complete any new and existing client requests.
Milagros has over 15 years of sales experience. She holds an MBA from McCombs School of Business at UT Austin.
Sanctuary Wealth’s new division, Sanctuary Global, opened its new office in Miami.
The new office located on Brickell Avenue demonstrates the growth of $21 billion in assets with more than 60 partner teams nationwide, the company told Funds Society.
“A year ago we launched Sanctuary Global with a physical presence in Miami to focus on attracting financial advisors who are interested in becoming independent and who also serve international clients. Here we offer them a multi-custody platform that includes broker dealer, RIA and family office model options,” said Elisa Granados, director of Sanctuary Global.
Granados evidenced her team’s enthusiasm for the future of their Miami division.
“We are motivated and look to the future in Miami with a lot of optimism. There is great interest in the market due to the structural decisions made by large firms in recent years. Our value proposition offers financial advisors control over their destiny by guiding them in building and growing their own businesses,” he explained.
The 15-strong staff will be expanded in the coming days with two new teams that, according to the advisor, “recognize the collaborative culture we have formed by enabling financial advisors to grow and gradually plan for the succession of their firms.”
In addition, the firm is flexible about working from home.
“Some are eager to return to a shared office with other teams to exchange ideas and feel part of a culture like ours. Some prefer their offices near their residences or in their own homes. In any case, they are delighted to have access to our conference rooms on Brickell Avenue overlooking the beautiful Biscayne Bay,” concluded Granados.
Mortgage interest rates are now rising, while rising costs are squeezing household budgets. After a more than 30% increase in home prices and construction spending, the housing market risks becoming a drag heading into 2023, says a report from ING Bank.
The U.S. housing market has been a major support for economic activity during the pandemic. Falling mortgage rates as the Fed lowered borrowing costs, combined with work-from-home flexibility that opened up more options for living, spurred a surge in demand.
At the same time, supply was constrained by COVID-19 restrictions, which initially led to a decline in construction activity. For-sale inventory fell to historic lows and, in an environment of excess demand, prices soared.
The S&P Case Shiller housing index is up 30% nationally since the pandemic occurred in February 2020, and even Chicago, the worst performing city, has experienced a 20% rise.
Rising construction contributed strongly to the growth.
Residential construction spending fell 5% between March and May 2020, but as work and traffic restrictions were lifted, construction activity rebounded. It is now up 35% from pre-pandemic levels, with builders’ spirits buoyed by rising selling prices, even as labor and building supply costs rise.
The result is that growth in residential construction investment has outpaced overall GDP growth, so that this sector alone accounts for 3.5% of total economic output.
In the short term, it appears that housing will continue to contribute positively to the economy. Employment and wages are increasing across the country, supporting demand, and new and existing home sales remain strong. This continues to support homebuilder optimism, as housing starts and building permits are at levels not seen in 2006.
Warning signs begin
Mortgage application data showed a small decline in home purchase applications. While the movement was not strong, the problem is that we could be looking at much larger declines in the coming months.
This is because mortgage rates are rising rapidly at a time when runaway inflation is eroding household purchasing power and consumer confidence.
The University of Michigan reported that sentiment is the weakest since 2011 and not far from the lows seen during the 2008 global financial crisis. With potential homebuyers beginning to feel more nervous about the economy, the prospect of sharply higher monthly mortgage payments adds additional reason for caution.
Treasury yields are rising as Fed officials shift to a narrative of wanting to curb inflation, and financial markets now anticipate that the federal funds rate will end 2022 at 2.25%, up 200 basis points from the beginning of the year.
Rising benchmark borrowing costs imply further upside risks to mortgage rates and housing could move from excess demand to excess supply.
Inventory levels remain low by historical standards, with 1.7 months of existing home sales. They are starting to pick up a bit for new homes, with 6.3 months of sales versus 3.5 months at the end of 2020.
But if home sales slow in response to lower demand, these inventory numbers could rise quickly. Let’s also remember that with building permits and housing starts at elevated levels, there are going to be more residential properties coming on the market later this year and early 2023.
Consequently, we see an increasing likelihood that the housing market will begin to move from significant excess demand, which has fueled rising home prices and construction, to one where we are in better balance.
However, with the Fed focused on fighting inflation by raising the fed funds rate and shrinking its balance sheet, we could see mortgage borrowing costs continue to rise rapidly. This would increase the chances that the housing market will tip into oversupply and home prices will start to fall, the bank asserts.
While this in itself is not particularly worrying from a household balance sheet point of view, as household liabilities appear to be low by historical standards, it may translate into further falls in consumer confidence and weaken consumer spending, as well as dampen new residential construction.
On the other hand, the slowdown in the housing market will open the door to Fed rate cuts in 2023, ING experts say.
Housing is not only important from an activity standpoint. The sector also has more than 30% of the weighting of the consumer price inflation basket through primary rents and equivalent rent from landlords.
If housing prices stabilize and may even fall, this could quickly translate into lower inflation readings. This would give the Fed more flexibility to respond with interest rate cuts if they end up rising so much that the economy begins to weaken.
