| | | | | | | | | | | Axios Markets | | By Matt Phillips and Emily Peck · Aug 17, 2022 | | Good morning folks. If the Fed is going to wrestle down inflation, it's going to have to quell the housing boom first. It's well on its way. 📕 Also, has anybody read any markets-related books that are worthwhile? Send it along! I still haven't given up on the idea of an Axios Markets book club. Today's newsletter, edited by Kate Marino, is 1,102 words, 4.5 minutes. | | | | | | 1 big thing: Fed hikes hammer housing affordability |  | | | Illustration: Annelise Capossela/Axios | | | | The Fed has hit the breaks on the economy, in an attempt to slow inflation. Housing is where the rubber meets the road, Matt writes. Why it matters: Since the pandemic, the hot housing market — and associated boomlets in renovations and new construction — have been key contributors to the post-COVID economic recovery. That's changing. Driving the news: The number of newly started homes plunged in July. - Starts of single-family homes fell 10% from the prior month, hitting their lowest point since June 2020 near the depths of COVID-era uncertainty.
How it works: Fed rate hikes have helped push mortgage rates sharply higher, making purchasing a new home much more expensive. - The 30-year fixed mortgage rate, which was hovering around 3% last November, exploded to over 6% in June. (It's since eased back to around 5.2%.)
- Since home prices are up over 30% over the last couple of years, the surge in mortgage rates was the perfect cocktail for a collapse in affordability.
- In fact, housing affordability — as measured by an index produced by the National Association of Realtors — is the lowest since 1989 (see the chart below).
- Since fewer people can buy a new house, homebuilders are making fewer.
The big picture: This might be a bad thing for economic growth and employment, but by slowing housing demand, the Fed hopes that house prices eventually start to edge lower. - If that happens it should take some of the sting out of a key measure of inflation — the Consumer Price Index — which is heavily skewed toward housing costs.
- But so far there's been little sign of a slowdown in prices. Prices for existing homes — the vast majority of the homes sold — were up 16% since year-end, as of June.
What we — and everyone else — are watching: Home prices, obviously. And not just on Zillow. - An update on existing home sales — and prices — is due tomorrow at 10am ET.
|     | | | | | | 2. Charted: Affordability cliff |  Data: National Association of Realtors; Note: An index of 100 means the typical family has exactly enough income to qualify for a mortgage on the median-priced home; Chart: Axios Visuals | | | | | | | | 3. Catch up quick | | 📈 U.K. inflation tops 10% amid a gloomy outlook for Europe. (WSJ) ⬇️ Chinese tech giant Tencent posts first ever revenue decline. (CNBC) 🎯 Target earnings miss again after inventory adjustments. (Yahoo Finance) 📱 Wall Street firms expected to pay $2 billion in fines over WhatsApp communications. (Bloomberg) | | | | | | | | A message from Axios | | Get your first Axios Pro newsletter tomorrow | | |  | | | | Subscribe to Axios Pro today to see everything you've been missing. How it works: Axios Pro delivers exclusive scoops and analysis, while also giving you a quick, comprehensive look at everything shaping your industry. Use code PRO200 at checkout to get $200 off your subscription. | | | | | | 4. A subrogation devoutly to be wished |  | | | Illustration: Sarah Grillo/Axios | | | | Citibank says that Revlon owes it $500 million. Revlon — currently operating under bankruptcy protection — would love to not owe Citi anything. So Citi has sued Revlon, in an attempt to get a judge to say that the debt is real, Axios' Felix Salmon writes. Why it matters: Citi lost $500 million thanks to its own antiquated technology and a key legal precedent involving a French institution with the glorious name of Banque Worms. Now it wants to use another legal concept — subrogation — to ensure it can claw back at least some of that money from Revlon. State of play: Citi didn't lend Revlon the money. Instead, it accidentally and unilaterally paid off a group of Revlon lenders. Citi is still trying to get its money back from those lenders, but it hasn't had much luck so far, and if it fails on that front, it wants to be able to chase Revlon for the money instead. - What they're saying: "It has become crystal clear that the Revlon Group and other constituencies have refused to acknowledge Citibank's subrogation rights," says Citi in its lawsuit, adding: "As of the date of this filing, Citibank is subrogated to the rights of the Non-Returning Lenders. Period."
Translated into English: Revlon owed the lenders money; the lenders got paid in full; Revlon didn't pay anybody; so Citibank should be able to "subrogate" for the lenders — which is to say, it can take over their status as Revlon creditors. - Citi's assertion is that Revlon's debt, much like Revlon's perfume, is lasting. (Revlon had been paying Citi interest, up until it filed for bankruptcy.)
The other side: "There isn't a lot of law on this," Columbia University law professor Eric Talley told Bloomberg last month, saying that subrogation rights are much more common in insurance than in finance. Once the debt is paid off, maybe it's just paid off. - If Citibank loses the suit, then Revlon would be relieved of $500 million in liabilities.
The bottom line: If you're in the business of moving trillions of dollars around the world, it's probably a good idea to make sure your software is well-designed. Otherwise, you'll have to rely on judges, and they aren't always predictable. | | | | |  | | | | If you like this newsletter, your friends may, too! Refer your friends and get free Axios swag when they sign up. | | | | | | | | 5. Beltway vs. Bay |  | | | Illustration: Aïda Amer/Axios | | | | Meta's plan to acquire a small virtual reality firm — and the Federal Trade Commission's recent lawsuit to stop the deal — has become a Rorschach test for influential figures in both D.C. and Silicon Valley, Axios' Ashley Gold writes. Why it matters: D.C. and Silicon Valley appear to be speaking different languages when it comes to the role of acquisitions in tech innovation. - The FTC argues Meta's purchase of Within Unlimited, a virtual reality fitness company, is "illegal" because the social networking giant is "already a key player at each level of the virtual reality sector."
- But many tech insiders view deals like this as a sign that the startup game is working as intended.
Most startups have always had two ways to fund growth and pay off their investors: stay independent and try to go public, or sell to another company. - IPOs have always been relatively rare. Companies have to win over bankers and investors — and comply with securities rules.
- Acquisitions are simpler, faster, and much more common. The rise of tech giants over the past 20 years has made "invest, grow, sell to Google/Facebook/anyone" a sensible strategy for a multitude of startups.
FTC chair Lina Khan and other regulators today aim to shift this balance, hoping to give more startups a shot at becoming independent giants themselves. Yes, but: A lot of venture capitalists and startup founders think the current ecosystem works well. - "So many companies that get acquired are great companies, but they're not super viable, they're not going to grow to a billion-dollar company," said Kyle Stanford, an analyst with PitchBook.
The other side: "How do you inspire the next generation of entrepreneurs if your status quo is Big Tech runs everything?" Andy Yen, CEO of Proton, an encrypted email company, told Axios. - "FTC leadership accepts the idea that exit opportunities play a crucial role" for startups seeking funding, Bill Kovacic, former FTC commissioner, told Axios. "What they violently disagree with is the idea that cutting off exit paths that involve Meta, Amazon, Google and Apple will forestall the exit paths that matter the most."
Go deeper. | | | | | | | | A message from Axios | | Get your first Axios Pro newsletter tomorrow | | | | | | | | Subscribe to Axios Pro today to see everything you've been missing. How it works: Axios Pro delivers exclusive scoops and analysis, while also giving you a quick, comprehensive look at everything shaping your industry. Use code PRO200 at checkout to get $200 off your subscription. | | | | 🪵 1 thing Matt's thinking about: Installing a wood-burning stove to help heat the house this winter. Last year's bills were truly terrifying. Thankfully, crude oil costs — and I hope, heating oil — have come down quite a bit recently. But since I'm working from home, feeding a stove wouldn't be such a chore. Plus, I'd get to chop wood a la the great cross-training scene in "Rocky IV." 📫 Was this newsletter forwarded to you? Sign up here for a daily dose! ⚡️ Today's Axios Markets was copy edited by Mickey Meece. |  | | Why stop here? Let's go Pro. | | | | | | Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here.
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