30-year mortgage rates just eclipsed 8 percent. With higher mortgage rates, housing affordability tumbles. And, not surprisingly, the Mortgage Bankers Association (MBA) mortgage application index is at a multi-decade low, as shown below (graph on the right). Per the MBA, “Applications decreased to their lowest level since 1995, as the 30-year fixed mortgage rate increased for the sixth consecutive week to 7.70 percent – the highest level since November 2000.” 8 percent mortgages make home buying exceedingly tricky for first-time home buyers and those looking to sell a current house and move up to a more desirable and expensive house.
The graph on the left shows how 8 percent mortgage rates are crushing home buyer affordability. Before the pandemic, one could buy a house for $668k, assuming a 3k mortgage payment. When mortgage rates fell below 3% in 2020, the same 3k payment could service a $750k mortgage. Today, with mortgage rates above 8 percent, a 3k monthly payment affords a homeowner a $408k house. Typically, when rates rise, home prices decline. However, sellers are rare today, as many homeowners do not wish to replace low mortgage rates with an 8 percent mortgage. As long as the housing market remains locked down, house prices will go nowhere. However, the potential for declining house prices is a real threat.
What To Watch Today
Market Trading Update
The market has cracked the 200-DMA, triggering the MACD “sell signal”. Normally, this would suggest reducing equity risk. However, we want to give the market a little bit, not a lot, of room to work here. First, the break of the 200-DMA needs to be confirmed by closing the week below that level. Secondly, the MACD signal is occurring at a low level, suggesting a limited downside, which is also confirmed by the RSI reading at low levels.
The sentiment is very negative, and today, we start getting earnings from the Mega-Cap names along with the “buyback window” reopening. While the technical backdrop is worrisome, there is a risk of a reversal, so be careful reacting to the initial break of the 200-DMA. We will be watching market action over the next couple of days for confirmation of continued selling pressure.
Tough Earnings Season So Far
We are still relatively early in the third quarter earnings announcements. Still, the graph below shows that stocks are trading down regardless of whether a company beats or misses earnings expectations. In fact, the current quarterly instance is only the second quarter since 2019, in which those companies exceeding expectations are losing ground. In aggregate, market reactions to earnings are the worst this quarter than any in the last five years. Take the analysis with a grain of salt. The market has generally been trading lower over the last two weeks. As such, these stocks may be trading lower with the market and not necessarily earnings results.
Chevron Is Buying Hess
On the heels of Exxon’s $60 billion purchase of Pioneer Natural Resources, Chevron is offering Hess shareholders $53 billion in Chevron stock for its shares. Like Exxon, Chevron is looking to diversify its assets. The more important takeaway from Chevron and Exxon is that they must believe that demand for oil, despite the push for green energy, will remain robust for decades. Taking it a step further, the risk of more restrictions on drilling will also curtail supply, creating a floor on oil prices.
In addition to Hess’s shale holdings in North Dakota, Chevron is also very interested in Hess’s investment in Guyana. Hess is a one-third partner with Exxon and CNOOC (China) in Guyana’s oil wells. Per the Wall Street Journal:
The biggest prize for Chevron, though, isn’t Hess’s remaining shale acreage, but its position holding nearly one-third of the estimated 11 billion barrels of oil and gas found off Guyana. Exxon and its partners, Hess and China’s Cnooc, have revved up Guyana’s oil production from nothing in 2019 to 400,000 barrels a day.
The partners expect to be pumping 1.2 million barrels a day by 2027, making it one of the world’s fastest-ever oil developments. By then, the former British colony will be the source of $180 billion in market value for the consortium, some analysts have said.
Despite the news, Hess shares opened flat on the day, and Chevron started the day about 3% lower. Hess shares are up about 12% this past month, while Chevron shares are relatively flat.
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