The odds

As my dapper portfolio manager bud Ryan explained here yesterday, rates matter. They hugely impact those preferred shares which suffered when central banks got frisky. They impact bonds, of course, since the capital value of debt falls when yields spike. And they hit stocks, too. When rates rise companies pay more for money, impacting profits and share values. Plus, when rates are high investors drift over into bonds, where yields are fetching and volatility low.

Of course, rates are a massive influence on residential real estate. Or, more accurately, on house buyers – since most people use leverage. Given today’s prices, they must. Debt is massive – now $2.1 trillion in mortgage borrowing alone. In the last year we increased that by ten billion a month. Debt piggies. Can’t help it.

Now real estate is coming alive along with the crocuses, partially on the expectation of lower rates some time in 2024. But when? How much?

“Some of us fear that 0.25% interest rate relief by Bank of Canada will prove too little,” says realtor Bob Eade. “But the lenders (banks et al) have been trimming their rates… which is what matters for home buyers and sellers The “discounted” five year fixed rate is now 4.99% to 5.09% and the Variable rate now floats ~1.25% above that (traditionally the Variable is Lower than the 5 year .. on par with the 1yr 2yr).

“It’s called an INVERTED Yield because Short-term rates are higher than Longer ones… indicating that shrewd folks think that rates will decline as time moves us into the future.”

So what of that future? Where does Mr. Market think we’re headed?

Let’s look south. Because what the Fed does, our guys usually do (at least 91% of the time). According to the CME FedWatch tool, here’s what’s coming, as implied by 30-Day Fed Funds futures pricing data.

There are US rate-review meetings set for ten days from now, May 1, June 12, July 31, September18, November 7 and December 18.

March 20th: Nada. A 96% chance of the Fed staying on pause.

May 1st: Odds are 75% for no change and 23% for a quarter-point drop.

June 12th: A quarter point lower – 57%. And 23% chances of a half-point decline from present.

July 31st: Quarter point lower than now – 365. Half point cut – 44%. Three-quarters – 11%.

September 18th: Half-point lower – 38%. Three-quarters – 39%, Full point – 9%

November 7th: Half lower – 28%. Three-quarters lower – 38%. Full point down – 26%. Drop of 1.25% – 5%.

December 18th: Half lower – 27%, Three-quarters lower – 35%. Full point drop – 21%. More – 4%.

So what does this mean?

First, traders, investors, economists and Fed-watchers as well as CB officials themselves, all expect the price of money and debt will come down throughout 2024. Not this month. Maybe in May. For sure in June and beyond. (That closely matches the projections of Bay Street economists that we’ve detailed here for a few months.)

Notable is what is not expected. A rate increase. Despite unemployment being below 4% month after month, despite robust 3%+ GDP growth, despite robust corporate earnings and record equity markets – rates will be lower, not higher. Meanwhile inflation is expected to trend into the ‘2s’ soon in the US, as has occurred in Canada. We’ll know a lot more on Tuesday, when the latest number drops.

Meanwhile realtor Bob is right. Lenders smell a backing-off in monetary policy coming and are hungry for more originations after a crappy 2023. So we’ve gone from 6%+ mortgage money now down into loans with a 4-handle. Sales have been increasing. Average deal prices have been stable or increasing. This is despite a significant inventory hike. If central bankers actually do what the financial markets predict, a lot more properties will change hands this year. Nobody is seriously expecting a price boom – since a wave of new listings will materialize – but the cost of real estate is not going down. The opposite.

By the way, what’s government doing to trample housing prices, other than making everything worse with a bevy of new taxes?

Behold. Housing starts dropped again recently. And in the GTA (as elsewhere) – where zoning regs were trashed to allow for densification through the construction of garden suites and backyard rentals – a grand total of six have been built. Six. In a population of six million.

Did I ever mention we need new leaders?

About the picture: “Greaterfool follower from the start,” writes Rich in Prince George. “I am answering the call for dog picks. Here’s Otis in various forms of lake recreation. He loves his kingdom. Hopefully one of these is web-worthy.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.