US bank earnings revealed ominous clues about the future of the housing market

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By Nicole Goodkind, CNN Business

The largest US banks reported relatively solid third-quarter earnings on Friday. But within those reports, investors found ominous clues about the future of the housing market, underscoring fears of an upcoming crisis.

What’s happening: JPMorgan reported that third-quarter home lending revenue plunged 34% from a year ago, and Wells Fargo logged a drop of 52% over the same period. The declines were due primarily to a spike in interest rates leading to a slowdown in demand for mortgages. Citigroup and Morgan Stanley also reported that mortgage loan growth was moderating.

As the Federal Reserve raised interest rates this year, mortgage rates also spiked to their highest level since 2002. Higher mortgage rates and elevated home prices could quickly lead to an end to the pandemic housing boom, but the Federal Reserve thinks that’s a good thing.

“We’ve had a time of a red-hot housing market all over the country,” Fed President Jerome Powell told me in September. “For the longer term what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level…and people can afford houses again. We probably have to go through a correction to get back to that place.”

Powell’s prescription for what he referred to as a “difficult” housing correction has led to worries of another 2008-esque housing and financial collapse.

Data shows that the market is clearly in slowdown mode.

Home sales declined for the seventh month in a row in August and sales of existing homes — which include single-family homes, townhomes, condominiums and co-ops — were down 19.9% from a year ago, according to a report from the National Association of Realtors.

Home prices are still on the rise, but they’re beginning to ease. Prices grew 15.8% in July from the year before. That’s a smaller jump than the 18.1% growth seen in June, according to the S&P CoreLogic Case-Shiller Index. The 2.3 percentage-point difference between those two months is the largest deceleration in the history of the index.

“This is the sharpest turn in the housing market since the housing market crash in 2008,” said Redfin’s chief economist, Daryl Fairweather, last month.

This isn’t 2008: Market conditions are very different than they were in 2008. Analysts are telling homebuyers and investors not to panic. And housing inventory remains low, which prevents a crash in price as demand tempers.

“There was a housing shortage of around 5 million homes before the onset of the pandemic. That shortage is not going away soon,” said Lawrence Yun, chief economist with the National Association of Realtors trade group, in a report last month.

Homeowners locked into 30-year low-rate mortgages are also reluctant to sell their homes and switch to higher rates.

JPMorgan Chase CFO Jeremy Barnum said in response to a question from CNN Business Friday that he is “not expecting a big crash” in housing along the lines of what happened during the Great Recession of the late 2000s.

Home prices have soared over the last decade, leaving homeowners with a nice cushion to lean on, said Barnum.

Barnum also noted that lending standards have tightened in the past 14 years. The 2008 crisis was exacerbated by very loose oversight of the mortgage market.

Employment and wage growth remains healthy, meaning homeowners can afford their mortgages and aren’t being forced to sell their homes like they were in the great recession of 2008.

What’s next: Investors will next look to housing starts data next week as an indicator of where the housing market is headed.

Kroger and Albertsons are creating a super-supermarket

Kroger announced Friday that it plans to buy Albertsons in a nearly $25 billion deal that could change the US retail industry and impact how millions of customers buy their groceries, report my colleagues Nathaniel Meyersohn and Jordan Valinsky.

The deal, which is expected to close in 2024, would combine two of the largest supermarket chains in the country and create one of its largest private employers. The two companies have a combined 710,000 workers, nearly 5,000 stores and more than $200 billion in sales. The companies say they reach 85 million households.

If the deal is completed, it would be one of the largest mergers in US retail history — dwarfing Amazon’s acquisition of Whole Foods in 2017 for $13.7 billion, and the company would become the third largest retail chain in America by sales. Its combined market share in the $1.4 trillion grocery industry would be 13.5%, according to Morgan Stanley, making it the second largest grocer behind Walmart’s 15.5% share.

The move also comes as companies battle higher costs and food inflation reaches its highest level in decades. Prices at grocery stores continued to soar last month. The food-at-home index, a proxy for grocery store prices, increased 0.7% in September from the month prior and 13% over the last year.

Kroger will buy Albertsons for $34.10 a share — a roughly 30% premium above the grocery chain’s average share price over the course of the past month.

The two companies operate dozens of grocery chains. Kroger operates Ralphs, Harris Teeter, Dillons, Fred Meyer and others, while Albertsons owns Safeway and Vons. The companies said they will spin off nearly 400 stores to form a new rival in an effort to gain antitrust clearance.

Watch this space: The merger still needs approval from the Federal Trade Commission. Consumer watchdogs, unions, and Democrats have already come out strongly against the deal. They say it would harm consumers by raising prices and driving out competition. It could also spur a new wave of consolidation in the industry among smaller companies attempting to compete.

Shoppers are starting to pull back as prices climb

American consumers, who are battling decades-high inflation, are beginning to pull back on purchases amid aggressive rate hikes from the Federal Reserve.

Retail sales for September were unchanged from the previous month, after rising by a revised 0.4% in August. Economists had predicted a 0.2% monthly increase, according to estimates from Refinitiv.

The report showed that consumers pulled spent less last month on cars, furniture, electronics, building materials, sporting goods and gas stations, reports my colleague Alicia Wallace.

The typical American household spent $445 more a month in September to buy the same goods and services they purchased a year ago, according to Moody’s Analytics.

“Inflation is costly,” said Ryan Sweet, senior director at Moody’s.

Up next

Bank of America, Charles Schwab and BNY Mellon report third quarter earnings.

Coming later this week:

▸ The National Association of Realtors reports existing home sales for September.

▸ Third quarter earnings from Goldman Sachs, Johnson & Johnson, United Airlines, American Airlines, Tesla, AT&T, Verizon and Netflix.

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