This week we had the FOMC members meet for the monetary policy meeting. As expected, the FED held rates steady while signaling one more hike towards year end. The bigger surprise in the meeting was the adjustment to the “dot plot” see below on the anticipated rate cuts moving forward. For 2024, the forecast is for 5.1% and for 2025 median projection is for 3.9%. Higher for longer was the theme and that was primarily driven by the Fed officials optimism around GDP and “sticky” inflation. The Fed adjusted their GDP estimates for year-end to 2.1%, more than double from their estimates in June.
Our view is that as much as the FED has done a great job in the past year in a half in steadying the ship, they are more attuned to making quick changes in projections due to incoming data. This meeting shows that. We believe and continue to reiterate that inflation will continue its deceleration and as shelter costs (a large share of inflation) goes negative into next year, the FED will have no choice but to cut.
In any event, the market did not take this news lightly stocks came down across the board with the three major exchanges down both Wednesday and Thursday. Average 30 year mortgage rates rose to 7.59%, highest rate since December 2020. Refinances are as good as done for the most part in the near term.
On the data side, we had US Housing starts down 11.3% in August to a 1.28mm pace from 1.45mm last month, this was the lowest pace of new builds since June 2020 as builders are focusing more on completing projects. While this can call for caution, we like to look at the more nuanced data as we love to underwrite construction. For one, building permits were strong (up 6.9% to 1.54mm) so this may be just a modest slow down due to current rates. Additionally, looking at jurisdictions, single-family home building was up 8.1% in the South but down a whopping 28.9% in the west. We look at census data and overall economic indicators in the jurisdictions we have high exposures to. We will continue to underwrite construction and will maintain our even keeled process.
Specialty Capital was at the Specialty Finance Lenders Conference in downtown NYC on Monday. We wanted to share a few insights from the conference. There is a lot of money out their chasing low to mid teens in this environment. Billions of dollars were raised in the last 12m alone in the Specialty Finance Credit space. Hearing from seasoned experts who have seen many credit cycles was very helpful for us. One of our favorite thoughts came from the Co-Head of Alternative Credit at Ares, Joel Holsinger, “we are likely in a default cycle and you do not want to be over deployed.” I.E stay disciplined!
Lastly, we wanted to share that we’ve heard from our referral partners that this month has been more challenging in that while active approvals have been very high, conversions remain low. Customers are not pulling the trigger as fast as they were in the months prior.