Here’s how low mortgage rates must go to restore the frozen US housing market.

Nvidia’s results and guidance were released and continue to be analyzed early Thursday. Save for a few stragglers, it all brings the curtain down on the second-quarter earnings season.

This should allow for even greater focus on macroeconomic market catalysts, particularly the likely pace of interest rate cuts at the Federal Reserve.

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But that raises a crucial question for investors, according to UK fund manager M&G Investments: “If recent interest rate hikes have not significantly slowed the economy, how can we expect traditional rate cuts to actually boost it? And how low do rates have to go to have an impact?”

In a new note, M&G fund manager Richard Woolnough and chief investment officer Carlo Putti argue that the US housing market, with its impact on consumer sentiment and wealth, and its importance as an economic multiplier, is a key channel for the transmission of monetary policy.

Simply put, this monetary mechanism does not work normally due to the unique nature of today’s housing market. In particular, as the graph below shows, there is a bifurcation between the average time on market of new and existing homes.

Why is that? “On the one hand, existing homeowners who have locked in historically low mortgage rates have little incentive to move because doing so would mean giving up those competitive rates. On the other hand, new home buyers are willing to buy but can’t afford it because high mortgage rates have made housing largely unaffordable for them,” investors say.

So what level of interest is needed to rebalance the housing market and stimulate all related activity?

For first-time buyers, affordability is near all-time lows. As the following chart shows, to restore market affordability—allowing the average family to have just enough income to get a mortgage on a median-priced home—the line would need to return to the 100 level.

The story continues

“To achieve this, we calculate that mortgage rates would need to fall to 3.4% (assuming all other factors remain constant),” the team says.

It’s far. According to Freddie Mac, the average 30-year fixed-rate mortgage was 6.46%.

For existing owners the situation is different. Affordability is largely a non-issue given their lower loan-to-value ratios. It’s a matter of incentive for them, the team says, the most reluctant to move and give up low mortgage rates.

“To incentivize most existing owners to move, rates would need to fall to levels similar to where they were initially stuck. That would be around 3.5%, which is the average mortgage rate available around the time of COVID-19, when many either bought. a home or refinanced their existing debt,” they say.

In conclusion, the pair argues that since the interest rate pass-through mechanism has been attenuated in the restrictive phase and will likely also be less effective in an easing phase, then to effectively stimulate the economy through the housing market , mortgage rates may have to drop significantly.

“Our analysis indicates that to restore activity in the housing market, mortgage rates may need to fall to around 3.5%. Historically, this would correspond to a reduction in the 10-year US Treasury yield, potentially to 2%, depending on broader economic conditions and Federal Reserve policy,” they say.

BX:TUBMUSD10Y 10-year yielded 3.83% Thursday morning. It seems that the sclerosis in the real estate market will remain for a while.

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US stock index futures ES00 YM00 NQ00 are higher as benchmark Treasury yields BX:TUBMUSD10Y rise after stronger-than-expected GDP data. The DXY dollar index is up, while CL.1 oil prices are rising and GC00 gold is trading around $2,510 an ounce.

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Shares of Nvidia NVDA fell about 4% after it provided guidance that failed to meet heightened expectations.

Shares of CrowdStrike CRWD fell 1 percent despite the cybersecurity company beating earnings, while Salesforce CRM shares rose nearly 6 percent after the software group boosted its margin outlook.

Shares of Dollar General DG are down 25% after the discount retailer reported fiscal second-quarter profit and sales that missed expectations and cut its full-year guidance.

Second-quarter US GDP was revised higher from 2.8% to 3%, while weekly initial jobless claims came in at 231,000, roughly in line with forecasts.

US pending home sales for July will be released at 10:00 AM

Atlanta Fed President Raphael Bostic will speak at 3:30 p.m

Companies reporting earnings after the close include Dell Technologies DELL, lululemon athletica LULU and Ulta Beauty ULTA, the latter a new holding company of Warren Buffett’s Berkshire Hathaway.

The Treasury will release the results of a $44 billion auction of 7-year notes at 1 p.m.

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graph

As noted above, the monetary policy transmission mechanism is weaker than in the past, and despite the federal funds rate being at its highest level in decades, capital spending by the Magnificent Seven is at record levels, as this chart from Torsten Sløk, chief economist Apollo shows.

“Fed hikes have a much smaller than normal negative impact on business investment decisions because of the strong appetite of firms to invest in AI,” says Sløk.

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