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Housing Market Recap (excerpted from Gate House’s weekly note to clients) April 5, 2023

Wednesday, April 5, 2023

Redfin reported more house hunters are returning to the market as mortgage rates and home prices continue to decline, but low inventory is hampering their searches.

Banks continue to borrow from the new bank term funding program, up $10 billion last week to $64 billion while  borrowing from the Fed discount window slowed to $88 billion, down $22 billion according to CNBC’s Steve Liesman.  All told, in the month of March, the Fed increased its balance sheet a net $324 billion, although during this past week the Fed’s balance sheet actually declined as they did let MBS and Treasuries roll off — short of their targets but after rising in recent weeks appears to indicate some calming of the crisis, at least for the time being.

Outflows from small banks slowed to $1 billion, CNBC reported, and we saw outflows from large banks to the tune of $96 billion — $65 billion was transferred to money market funds last week, half the week prior, but it set a new record of $5.2 trillion in money market funds as we see the desire for yield play out. Although they are not insured deposits, those investments are mostly in government securities.

Despite the borrowing from the banks, at least for the Fed discount window, appearing reach a crescendo, there are still signs of further weakness and continued fears of a broader recession. One such marker is the growth in the money supply and the velocity of money, which has slowed significantly. Despite the Fed lending to banks, total outstanding liabilities in the banking system are declining rapidly. Morgan Stanley says bank liabilities are falling at a rate of 7% year-over-year, the biggest decline in more than 60 years, which suggests both economic and earnings growth are likely to remain under pressure.

We mentioned commercial real estate lending last week. Morgan Stanley says 70% of the core CRE debt in the banking sector was originated by regional banks, and much is maturing in the next few years — about $550 billion needing to be refinanced per year until 2027 ($450 billion this year).  Even where the CRE lending is done by other banks, they point out, these small and medium size banks are buyers of senior tranches of agency commercial mortgage-backed securities. “If their ability to buy these securities decreases because of new regulations, this indirectly impacts the prospects for refinancing maturing debt in the sector as well,” Morgan Stanley’s chief fixed income strategist said.