September is expected to be a rocky month for Wall Street, with lingering issues in Syria and uncertainty around mortgage rates and home prices going forward.
Whatever the market does this month could shape housing’s fate in the latter part of 2013, analysts say.
The emerging trends will also set the tone for equity and emerging markets.
To put it into perspective, equities posted their worst month since May in August. Bonds also had their fourth consecutive month of negative performance, explained NewOak CEO and cofounder Ron D’Vari.
Additionally, emerging markets — particularly countries with currently high deficits — also declined substantially as currencies plunged, which has been further aggravated by the high likelihood of military strikes in Syria.
On a similar note, the upcoming debate over Syria is expected to push the announcement of the Federal Reserve chair nomination to the end of September or early October.
“We doubt that the president will announce his nominee to head the Federal Reserve while his administration has the full-court press on for Syria,” said Compass Point political analyst Isaac Boltansky.
He added, “Therefore, we do not expect the White House to announce its Federal Reserve Chair nominee until the week of September 16 at the earliest.”
Additionally, the White House will expend a significant amount of political capital in the upcoming debate over the use of military force in Syria, which may lessens its capacity to force other issues such as Rep. Mel Watt’s, D-N.C., nomination to head the Federal Housing Finance Agency.
“We have remained pessimistic regarding Rep. Watt’s nomination due to a number of factors and note that the lessening of President Obama’s political capital due to the Syria debate reinforces our view that Rep. Watt will not become FHFA Director,” Boltansky stated.
September will also bring further evidence of the Federal Reserve’s tapering of its asset purchases, which many investors are anxiously watching.
As a result, the central bank’s bond-buying program has suppressed volatility in bond prices, equities and emerging market currencies until this May. Stronger-than-expected August job figures may also accelerate the tapering strategy, according to NewOak.
“Relaxation of the artificial restraints by tapering QE will undoubtedly bring further volatility to the markets until it adjusts to its intrinsic new equilibrium,” D’Vari noted.
He added, “The emerging markets are rather sensitive to higher U.S. interest rates as it leads to further erosion of developing countries’ currencies and capital inflows that are badly needed to finance their faster pace growth.”
The most critical effects that will gradually creep in on economic volatility are components of the housing market — specifically mortgage rates and consumer confidence in light of higher rates.
For instance, a 20% swell in financing costs is already cooling demand for new purchases as higher rates, coupled with higher prices, continues to push down home affordability, according to NewOak.
Several big banks have announced mortgage finance staff reductions, eliminating thousands of jobs, as refinance volumes continue to sharply plunge.
Bank of America (BAC) was the latest to fall in line with other lenders, cutting more than 1,000 jobs in home loan fulfillment and consumer banking services.
The actions reflect ongoing efforts to keep up with market realities, including declining refi volumes as interest rates pick up.
Meanwhile, the impact of the number of Dodd Frank-related housing finance regulations are in the works, gearing up for implementation at the first of the year.
The mortgage industry received a new proposed Qualified Residential Mortgage rule last week, lessening the requirements for lenders who want to sell mortgages off to the secondary market without having to retain a slice of the credit risk.
“Collectively these factors may counter other positive factors impacting the fragile job market and dampening of the economic growth,” D’Vari said.
He added, “As a result the Federal Reserve may have to pause its QE tapering as they have said they will be data driven.”
Nonetheless, volatility is here to stay until the markets can truly pull themselves off the central bank’s ultra-easy monetary stimulus and rates achieve an evenness consistent with economic growth.