Calling the Orkin Pro!

Or is it too late?

Where to begin? Another rate cut from the Fed has come and gone, and the bond market responded yet again with a yawn, if not a middle finger. The 10-Year floated right on back up to that 4.00% handle during the presser and mortgage rates increased. Yet just today someone told me for the billionth time that the Fed was going to cut rates and save the housing market. Using FRED, we actually ended below the 4.00% level 4 times in October which is the most since September 2024 but certainly nothing to write home about. In fact, every time the Fed actually cuts, the move in mortgage rates is in the opposite direction. For perspective, through September, the 30-year mortgage rate averaged 6.73% this year compared to 6.75% through September 2024. Since September of 2024, the Fed has cut rates 5 times to the tune of 150 basis points (bps). Mortgage rates have come down on average since that time period by 2 bps. Ok then. Even Fannie Mae capitulated at the Mortgage Bankers conference this month and told everyone rates were likely not going much lower for some time. In fact, the Fed’s announcement that it would be buying short-dated treasuries instead of mortgage-backed securities (MBS) when MBS runs off means no help coming from the Fed in the near-term.

The bond market is tricksy, and anyone that tells you that they know for certain where it is headed is either overconfident or lying. At this point in the cycle, I find it prudent to just call the balls and strikes as they occur. In my opinion, we are in for a rocky road ahead, and I do not believe anyone knows where we are headed for sure as there are too many grenades going off across the system, with foreign entities who may need to defend their currency or make a point, holding quite a few cards. Speaking of which, how is our little cockroach problem?

Lenders are suing Broadband Telecom and Bridgevoice, accusing the firms of fabricating accounts receivable in a fraud that the collateral agent’s lawyers call “breathtaking” in scope, according to a filing in a New York state court. BNP Paribas SA helped BlackRock’s private-credit arm, HPS, make the loans…

“Breathtaking” in scope, you say? It looks as if the fraud goes back as far as 2018, so pre-COVID. I wager folks we haven’t seen anything yet. In case you missed it another fraud surfaced since we last spoke in trucking where a family ran a cargo theft ring using fraudulent or legitimate trucking companies to bid on shipping contracts.

Once the Singh Operation won those contracts, they

Took possession of the freight (primarily electronics, appliances, and other high-value consumer goods), they diverted and stole the shipments instead of delivering them. The stolen cargo was later distributed through intermediaries or black-market channels, with an estimated loss in the millions of dollars.

I wonder how much property they own? As mentioned last week we are dealing with the baby cockroaches. We know that banks basically stopped lending to Main Street due to Basel III requirements and started lending to non-depository financial institutions (NDFI) instead. What the heck is a NDFI? As

Adam Josephson

explains, NDFIs can be “broker-dealers, hedge funds, private equity/credit funds, securitization vehicles and subprime auto lenders.” The banks this time are certainly exposed through this lending, but I believe they are setting themselves up to be the Off-White Knights. They have a fall guy (NDFI) to turn to when all of the cockroaches are exposed. The big banks will likely “agree” to play savior like last time, backed by support from the taxpayers, while lapping up distressed assets at pennies on the dollar. That’s my current theory anyway. We are only in the second inning if you count SVB and March of 2023 as the first one.

The game is speeding up though as liquidity in the markets evaporate. How could this be when the stock market is at all-time highs? I’ve mentioned several times the suspicious accounting practices underpinning the AI bubble. It’s a confidence game being buoyed by passive flows and those that need to exit stage left, leaving retail and the ill-positioned holding the bag. Every asset class is exposed. For example, what has Jensen Huang been doing with all that cash from the massive amount of Nvidia stock he has sold? Why buying homes of course.

A little fire in one sector is going to burn in another…and on and on it will go. Where it stops, nobody knows. The fraud is rampant and everywhere at once.

Meanwhile, over on Main Street, the layoff announcements in the past few weeks have been staggering:

Amazon - 14,000

UPS - 34,000

Target - 1,800

Nestle - 16,000

These announcements come on the heels of an already active summer where firms like Intel and Microsoft announced reductions as well. Reductions can hit some communities harder than others. The layoffs at Target, for instance, which largely impact its Minneapolis headquarters, will rock that local market. Nonetheless, the effects will be felt across the economy. Just think about those well-paid folks no longer with a job who bought an Airbnb in Las Vegas during the boom or inherited a long-term rental from their aging parents, which is no longer cash flowing. Layer on top of this the government shutdown and workers who will be unable to pay rent or their mortgage. Pretty soon, decisions will need to be made.

And, if SNAP benefits do not get paid in November to the 42 million Americans (one in eight) who receive food stamps, these layoffs will increase as holiday sales will be down, down. Trump recently indicated the issue would be solved, while a Boston judge said she will likely intervene. No one knows exactly how and when these benefits will get paid and to whom. While the USDA has between $5-6B in its contingency fund, the estimated cost for SNAP in November is $8B. If nothing else, fear and insecurity will likely put a crimp in spending with folks not knowing if December will be paid when there are no more emergency funds to tap.

Desperation is increasing which can be sussed from both September’s existing home sales and delinquency results. As forecasted here in my last post, sales were stronger than anticipated, despite rates not being as low this year as they were last year. We of course did not receive new home sales from the Census due to the government shutdown, but John Burns did its own survey and provided a placeholder result which we will discuss below. Additionally, ICE/Black Knight and other agencies reported delinquency for September, showing stress in cohorts that have thus far looked pristine. Finally, we will dive into NAR and Case Shiller results to show you the subtle shift that is occurring which could be evidence of a trend reversal as well as look at the Top 5 city summaries for homes sold, prices, inventory and median days on market.

Before we do so, a quick show note. I will be scheduling the first of what will be a quarterly conference call with Founding Members in the next six weeks. If you are a founding member (thank you), please be on the lookout for an email with suggested times/dates where you will be able to vote for the time that best suits.

Now on to the main event…