Morning Report: Homes selling at a record pace

Vital Statistics:


Last Change
S&P futures 3356 25.6
Oil (WTI) 42.44 0.82
10 year government bond yield 0.68%
30 year fixed rate mortgage 2.85%


Stocks are higher this morning on no real news. Bonds and MBS are down.


Inflation remains muted. The producer price index (which measures wholesale inflation) rose 0.6% month-over-month, but is down 0.4% on a year-over-year basis. The consumer price index rose 0.6% MOM and is up 1% YOY. This is well below the Fed’s target of 2%.


Mortgage applications rose 6.8% last week as purchases increased 2% and refis increased 9%. “Mortgage rates fell across the board last week, as investors grew less optimistic of the economic rebound given the resurgence of virus cases,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Loan types such as the 30-year fixed, 15-year fixed, and jumbo all reached survey lows. Refi activity responded to these lower rates, with the refi share reaching almost 66 percent of all applications, its highest level since May. And the refi index jumped 9 percent, reaching its highest level since April, as both conventional and government applications for refinances increased.”


United Wholesale is offering a 1.99% 30 year mortgage. Of course you are going to have to pay points to get that rate, and some of it will depend on broker comp.


Solution to the affordable housing issue? Converting COVID-driven office and hotels to affordable housing. “That’s going to free up a lot of commercial space, which can be converted to affordable housing,” U.S. Housing and Urban Development Secretary Ben Carson said of the pandemic in a June 24 Fox News interview. “We are very much looking at that right now, looking at ways to be able to facilitate that transformation.” This model was used in the Rust Belt to help revitalize abandoned downtown areas.


The pace of homebuying is accelerating. According to Redfin, 46% of sellers are accepting an offer within two weeks. Home sale prices were up 9% YOY to a new high of $311,000. Meanwhile, on the supply side, listings are down 2.7% and the active inventory of homes for sale is down 28%. The list-to-sale ratio is 99%, a record.

Morning Report: M&A in the mortgage space

Vital Statistics:


Last Change
S&P futures 3372 23.6
Oil (WTI) 42.83 0.52
10 year government bond yield 0.63%
30 year fixed rate mortgage 2.85%


Stocks are higher this morning on no real news. Bonds and MBS are down.


Job openings increased to 5.9 million at the end of June according to the JOLTs jobs report. Hires fell to 6.7 million, but that was the second-highest reading for the series. The quits rate fell to 1.9%, which is to be expected during a recession.


Small Business optimism slipped in July, according to the NFIB. “This summer has been challenging for many small business owners who are working hard to keep their doors open and remain in business,” said NFIB’s Chief Economist Bill Dunkelberg. “Small business represents nearly half of the GDP and this month we saw a dip in optimism. There is still plenty of work to be done to get businesses back to pre-crisis numbers.”


The Intercontinental Exchange bought Ellie Mae from private equity firm Thoma Bravo for $11 billion last week. Note Thoma Bravo paid $3.7 billion for Ellie Mae just a year before. The Intercontinental Exchange is best known for owning the New York Stock Exchange, but it has been building a mortgage business. ICE owns MERS and Simplifile, and believes the acquisition of Ellie Mae gives it access to the entire mortgage value chain, from origination to post-closing. Analysts did raise their eyebrows on the announcement conference call regarding the price, but it does make strategic sense for ICE to do the acquisition. That said, Ellie Mae is expected to do about $470 million in EBITDA this year, and 23x EBITDA is not cheap.


Black Knight is buying Optimal Blue as well. On the earnings conference call, Black Knight explained some of the reasoning behind the acquisition:

Sure. Good morning Tien-Tsin. Thank you. Yeah, we’re obviously very excited with Optimal Blue. We think that there are a lot of opportunities there. In addition to the reasons that we’re excited to acquire them, they’ve got a really sticky network effect in their marketplace where they bring mortgage originators and investors together. And we see a lot of cross-sell opportunity in terms of us selling some of our capabilities into their client base and for them to sell some of those capabilities to our client base. So as we look at it, from that perspective, we think there are, as you can imagine with any acquisition, you always find the obvious. And then there’s always hidden gems, we always look for, and we see some of those as well, such as, the trading platform that they have. We’ve been talking about that for a while, adding our loans — seasoned loans on top of that, as well as all of our data and our analytics that have tremendous insight into those loans and facilitating trading. So we see a lot of areas of revenue synergy from that perspective.


Meanwhile, CoreLogic continues to be pursued by Cannae (which sold Optimal Blue to Black Knight). Cannae is offering $65 in cash for Corelogic, and hopes to call a special meeting of stockholders to replace half of CoreLogic’s Board.


30 day delinquencies increased in May to 7.3% of all mortgages, according to CoreLogic. Frank Martell, CEO of CoreLogic had this to say:

“Government and industry relief programs have helped to cushion the initial financial blow of the pandemic for millions of U.S. homeowners. COVID-19 and the resulting pressures continue to influence the economic activity of many households. Barring additional intervention from the Federal and State governments, we are likely to see meaningful spikes in delinquencies over the short to medium term.”


Meanwhile, the number of mortgages in forbearance fell for the 8th straight week, according to the MBA. Forbearances fell by 23 basis points to 7.44% of homes with a mortgage. Many borrowers who were making payments while in forbearance decided to exit their plans.

Morning Report: Bidding wars continue

Vital Statistics:


Last Change
S&P futures 3346 3.6
Oil (WTI) 41.83 -0.52
10 year government bond yield 0.55%
30 year fixed rate mortgage 2.85%


Stocks are flattish this morning on no real news. Bonds and MBS are flat.


The week after the jobs report is usually data-light and this week is no exception. We will get inflation data and productivity, but neither should be market-moving. We will also have Fed-Speak on Monday, Tuesday and Wednesday.


PennyMac reported strong second quarter earnings, with EPS rising from $0.92 to $4.39 per share. Production was $37.6 billion and the company earned $538 million in pretax income from origination, or about 143 basis points. Servicing was a drag however, losing $62 million.


79% of renters had paid their August rent by the 6th, according to the National Multifamily Housing Council. “Over the past few months apartment residents have largely been able to meet their housing obligations. In no small part, this is due to the enhanced unemployment benefits enacted under the CARES Act and significant steps by apartment owners and operators to help their residents. These unemployment benefits that have proven so important to so many households have now lapsed, meaning greater financial distress for millions and the potential worsening of America’s housing affordability crisis,” said David Schwartz, NMHC Chair, and CEO and Chairman of Chicago-based Waterton.


Bidding wars continue, according to Redfin. Over half of their offers were competitive. “Bidding wars may slow down if interest rates tick up again, which could happen if we get good news about a coronavirus vaccine or more clarity around the outcome of the upcoming U.S. presidential election,” said Redfin chief economist Daryl Fairweather. “At the same time, we may still be in the early innings of the pandemic migration wave. If coronavirus cases continue to climb, more employers will likely make flexible remote work policies standard procedure, which will drive further migration out of large, expensive cities. As a result, we may see bidding wars gain more traction in suburban areas and small towns.”



Morning Report: The rocket launches

Vital Statistics:


Last Change
S&P futures 3331 -13.6
Oil (WTI) 41.63 -0.52
10 year government bond yield 0.53%
30 year fixed rate mortgage 2.85%


Stocks are lower this morning after the jobs report. Bonds and MBS are flat.


Jobs report data dump:

  • Nonfarm payrolls up 1.7 million
  • Unemployment rate 10.2%
  • Average hourly earnings up 0.2% MOM / 4.8% YOY

Overall, it shows the job market is on the mend, although it is probably taking longer than people would like. At this point, smaller businesses (especially restaurants and retail) are folding.


Rocket Mortgage priced its IPO yesterday after it was downsized by 43%. The stock performed reasonably well, popping 20% on the day. With the stock trading here, Quicken is valued at $43 billion, with a P/E of 47 and a price to book of almost 12. I guess the question here is how much you are willing to pay for the steak and how much for the sizzle. Last year Quicken originated $145 billion in loans, while PennyMac Financial originated. $118 billion. Quicken earned 62 basis points on that origination to PennyMac’s 33 bps. Yet Quicken’s market cap is almost 11 times PennyMac’s. There are some companies that trade at huge premiums to their competitors: Tesla versus Ford, versus Barnes and Noble back in the day. A huge multiple doesn’t necessarily imply a lousy investment. But you are paying up for the sizzle here. When the Fed starts hiking rates, Quicken will suffer a drop in volume just like everyone else will.


Intercontinental Exchange (the parent company of the New York Stock Exchange) just bought Ellie Mae from private equity firm Thomas Brave for $11 billion. ICE also owns MERS and Simplifile, so this continues the company’s expansion into the mortgage space.

Twenty years after we founded Intercontinental Exchange to provide a transparent trading platform for the energy industry, and following two decades of providing continued innovation to help customers navigate global markets, we are pleased to announce the acquisition of Ellie Mae, which will help us similarly transform the mortgage marketplace,” said Jeffrey C. Sprecher, Founder, Chairman and CEO of Intercontinental Exchange. “Our planned acquisition represents a one-of-a-kind opportunity to add an extraordinary enterprise with great leadership to our family. It will also enhance ICE’s growth strategy in mortgage technology, with complementary products and a wide array of customers and stakeholders who will benefit from our core and proven expertise in operating networks and marketplaces.


PennyMac Financial reported second quarter earnings yesterday, with production increasing to $37.6 billion. Earnings per share increased from $0.92 in the second quarter of 2019 to $4.39 a share. The company also hiked its dividend by 25%.


While forbearances in general are falling, Ginnie Mae forbearances are still rising.

Morning Report: Quicken IPO prices below expectations

Vital Statistics:


Last Change
S&P futures 3315 -3.6
Oil (WTI) 42.53 -0.52
10 year government bond yield 0.52%
30 year fixed rate mortgage 2.85%


Stocks are lower this morning on no real news. Bonds and MBS are up.


Initial Jobless Claims fell to 1.1 million last week from 1.4 million the week before. Claims are going in the right direction, but claims over 1 million are still super high.


Congress is still negotiating a second relief package. Supposedly the two sides are “trillions of dollars off.” The sticking point is size and the target. Democrats want something along the lines of the initial $3.4 trillion plan, including $1 trillion for state and local governments (read deep blue states and cities). Republicans want something much smaller, and have little interest in bailing out places like Portland, Seattle, and New York City.


Goldman is out with a call this morning that a COVID vaccine could upend the bond markets and cause a rotation out of stocks. FWIW, I don’t see how the bond market can fall off without the Fed ending purchases and a resurgence of inflation. We are certainly seeing anecdotal evidence of inflation, but nothing yet that shows up in the numbers.


Quicken’s IPO Rocket Mortgage (RKT) priced yesterday at $18 per share. The company will sell 100 million shares at that price This was below the initial price talk of 150 MM shares at $20 – $22 a share. I am not sure when it will open for trading. After the IPO CEO Dan Gilbert will control 79% of the vote.


Zillow is back to Zillow Offers in 24 markets. This is where Zillow will buy your house, fix it up for sale and then sell it. The company recently teamed up with homebuilder D.R. Horton to buy the existing homes of people who buy a new one.


Mortgage credit increased in July according to the MBA. “Credit availability rose slightly in July – the first increase in eight months – as the supply of certain types of adjustable rate mortgages (ARMs) and jumbo loans increased. The improvement was more of a leveling off from the precipitous drop earlier this spring. Credit availability is still over 30 percent lower than a year ago and near its lowest level since 2014,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The July data signals that lenders saw conditions improve this summer, as forbearance requests flattened, and record-low mortgage rates spurred strong levels of purchase and refinance activity.”

Morning Report: Sell City, Buy Country

Vital Statistics:


Last Change
S&P futures 3285 26.6
Oil (WTI) 40.23 0.32
10 year government bond yield 0.56%
30 year fixed rate mortgage 2.98%


Stocks are higher this morning on stronger than expected overseas economic strength. Bonds and MBS are flat.


The upcoming week will be mainly about the jobs report. The Street is looking for 2MM jobs to be added in July, with unemployment expected to drop to 10.5%. Other than that, we will still have a lot of earnings reports to deal with.


“Sell City, Buy Country.” Mortgage Applications for suburban homes are surging as people flee the citites, according to the CEO of Caliber Home Loans. Health concerns, the ability to work from home, and the attraction of more space are the big drivers.


Speaking of real estate prices, home price appreciation in late July was up 11%, according to Redfin, which was the fastest home price appreciation since 2011. The sale-to-list ratio was 99%, the highest since 2012.

“One of the first things I have to do with many of my buyers here in Houston is educate them on the reality that many houses are selling for more than asking,” explained Houston Redfin agent Melanie Miller. “You can’t wait around for a price drop. Rather, homes that are priced right are receiving offers at or above full price within three days of being listed, so serious buyers need to be ready to act quickly.”

“The shortage of homes for sale makes people think ‘maybe I should wait until things get cooler’, but unless we start to see a huge surge of new listings, things aren’t going to cool down much,” said Dosch. “Even new construction is selling out faster than it is being built. The shortage has extended into rentals too. A lot of people are living with family and friends now because it’s too hard to enter the market.”

Home prices


Zillow just announced that its workers are permitted to work from home indefinitely.

Morning Report: Housing’s contribution to GDP hits a 13 year high.

Vital Statistics:


Last Change
S&P futures 3255 6.6
Oil (WTI) 40.23 0.32
10 year government bond yield 0.55%
30 year fixed rate mortgage 2.98%


Stocks are higher as earnings continue to come in. Bonds and MBS are flat.


Personal incomes fell 1.1% in June while consumer spending rose 5.6%. The inflation numbers are all well below the Fed’s 1% target.


I saw a piece yesterday discussing the jump in the homeownership rate. The 2.9 percentage point increase in the rate was highly unusual (in statistical parlance, an 8 sigma event) which almost certainly points to measurement or data errors. For one thing, we don’t have anywhere near that amount of existing home sales during the quarter to justify that move. While the direction is almost certainly correct, the number looks overstated and probably will be revised downward later.


homeownership rate


Regardless of the homeownership rate measurement issues, demand is so strong that nearly half the home sales last year were never seen in person by the buyer. This is the highest share since 2015, when professional investors were the big buyers, looking to fix and rent single family properties. “Sight-unseen offers will likely continue to climb in the coming months,” said Redfin Chief Economist Daryl Fairweather. “By the end of the 2020 homebuying season, the majority of homebuyers will have made a sight-unseen offer. The pandemic has changed the way many people view homes, and on top of that, the market is highly competitive. If you aren’t using this strategy, another buyer who is could beat you to the punch.”


Housing as a percentage of GDP climbed to a 13 year high, albeit in a pretty unusual GDP print. Housing contributed 16.2% of GDP, as opposed to sub 15% in the prior quarter. Note that we are still way below historical levels. There is incredible pent-up demand.

housing GDP


Some borrowers who went into forbearance are finding themselves hit with unexpected bills when the period ends. Not sure if this is a one-off, but Washington will almost certainly try and make hay with these sorts of situations.

Morning Report: Annualized GDP falls by a third

Vital Statistics:


Last Change
S&P futures 3218 -38.6
Oil (WTI) 40.23 -1.12
10 year government bond yield 0.55%
30 year fixed rate mortgage 2.98%


Stocks are lower after a lousy GDP print. Bonds and MBS are up.


Today is a big day for earnings, with heavyweights such as Google, Amazon and Apple all reporting.


GDP fell by 32.9% in the second quarter, which was driven by a 34.6% drop in consumer spending, partially offset by 18% increase in Federal spending. Note that these are annualized growth rates, so the economy didn’t really shrink by 33% in the second quarter. Still it was probably the worst print since the Great Depression. NPR puts the quarter from hell in perspective:




The FOMC didn’t make any changes in its FOMC statement, although Jerome Powell mentioned that the rate of improvement in the economy is decelerating, which many are taking to mean he expects a double-dip recession.


Initial Jobless Claims came in at 1.4 million again.


Pending Home Sales increased 16% according to NAR. “It is quite surprising and remarkable that, in the midst of a global pandemic, contract activity for home purchases is higher compared to one year ago,” said Lawrence Yun, NAR’s chief economist. “Consumers are taking advantage of record-low mortgage rates resulting from the Federal Reserve’s maximum liquidity monetary policy.”  Consumers are beating feet out of the cities. The Northeast reported a 54% increase in pending home sales from May to June, but sales are still just about flat YOY.


The demand is pushing home prices to record highs. “When the pandemic helped tip the U.S. economy into recession, most homeowners and home buyers braced for falling house prices,” says Chief Economist Danielle Hale. “That’s what happened in the last recession. But that’s not what we’re seeing in today’s market. We had a housing shortage already, and the pandemic has created conditions that have only worsened it.” It kind of amazes me that people are comparing this recession to the last one, which was caused by a burst residential real estate bubble. The two aren’t remotely comparable, at least as far as housing is concerned.

Morning Report: Homeownership rate surges

Vital Statistics:


Last Change
S&P futures 3221 8.6
Oil (WTI) 41.33 -0.12
10 year government bond yield 0.58%
30 year fixed rate mortgage 2.98%


Stocks are flattish as we await the Fed’s decision at 2:00 pm this afternoon. Bonds and MBS are up.


Mortgage Applications fell 0.8% last week as purchases declined 2% and and refis fell 0.4%. “Mortgage rates remained near record lows for conventional loans last week, and refinances in the conventional sector continued to slightly increase. However, rates on FHA loans rose, leading to an almost 18 percent drop in FHA refinances,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Homebuyers stepped back slightly, and there was a larger drop in purchase application volume for FHA, VA, and USDA loans. This trend, along with the fact that average loan sizes are increasing, indicate that prospective first-time buyers are being impacted more by the rising economic stress caused by the resurgence in COVID-19 cases, as well as the uncertainty on how the next round of government support will take shape.”


Quicken is looking to raise $3.8 billion from its IPO. It intends to sell $150 million shares to the public at $20 to $22 per share. The new shares will trade under the symbol RKT. No formal date for the IPO has been announced yet.


Home prices rose 4.5% annually in May, according to the Case-Shiller Home Price Index. Price increases declined compared to April, however. I suspect that home prices appreciation will re-accelerate in June as lower rates and higher demand push prices back up. Given what companies like Redfin are reporting, bidding wars are now commonplace, and non-contingent offers (without financing or inspections) are winning the day.


HUD is tightening requirements for self-employed borrowers and the use of rental income to qualify, effective immediately.


Consumer confidence fell in July after a big surge in June. Reports of new COVID flare-ups in California, Texas and Florida dampened sentiment. Interesting factoid: despite the unemployment rate and jobless claims, the percentage that think jobs are “plentiful” is higher than those that think jobs are “hard to get.” Not what you would normally expect with double-digit unemployment.


The homeownership rate increased to 67.9% in the second quarter, according to Census. This is the highest percentage rate since 2007. The jump is dramatic and I guess represents the urban renters fleeing to the suburbs. I wonder if there were data issues though and it might be revised downward later.


homeownership rate

Morning Report: The Fed meets

Vital Statistics:


Last Change
S&P futures 322 -10.6
Oil (WTI) 41.45 -0.12
10 year government bond yield 0.6%
30 year fixed rate mortgage 2.98%


Stocks are lower this morning as the FOMC meeting begins. Bonds and MBS are flat.


The FOMC meeting begins today, and we will get the announcement tomorrow. The Fed is considering the idea of basically controlling the entire yield curve, which means it essentially sets interest rates by diktat. The Fed is reaching into its historical toolbox and returning to the Truman Administration, where the Fed pushed down rates to limit the government’s borrowing costs. Japan has experimented with the same policy. Note that the rest of the world more or less relies on the 10 year US bond yield to determine the correct price of risk, and taking that number out of the hands of the market is playing with fire. IMO, we have a sovereign debt bubble of epic proportions, with negative yields all over the globe. Like all bubbles, this one will probably blow up too, once inflation returns. I have no idea what it will look like, but I can almost assure you that politicians, the media, and academia will blame the free market and not a bunch of academics sitting in a room trying to manipulate the price of money the way the Soviets manipulated the price of corn, tractors or gasoline.


Durable Goods orders rose 7.3% last month, which was higher than expectations. Core Capital Goods orders (kind of a proxy for business capital expenditures) rose 3.3%.


The MBA reported that the share of loans in forbearance fell for the 6th straight week. Reported loans in forbearance decreased by 6 basis points to 7.74%, or about 3.9 million homeowners. Ginnie loans ticked up, while Fannie / Freddie loans fell.


The Senate GOP has released their $1 trillion coronavirus relief proposal, which will include another $1,200 payment to individuals, more payroll protection money, but a reduction in the additional unemployment benefits from $600 a week to $200 a week. Democrats are complaining about the drop in unemployment benefits. The increased benefits will probably get get reinstated to get enough support to get it through the House. Both parties realize that as we approach the election, it will get harder to pass anything.


New COVID cases are slowing in Arizona, Texas and Florida.


Homebuilder D.R. Horton reported a 10% increase in revenues for the quarter ended June 30. Net orders were up 38% in units. Orders were up 50% year-over-year in May and June. Note D.R. Horton has a lot of Texas exposure, which is seeing an increase in COVID cases.

The Company believes the increase in demand since May has been fueled by increased buyer urgency due to lower interest rates on mortgage loans, the limited supply of homes at affordable price points across most of the Company’s markets, and to some extent the lower levels of home sales from mid-March through early April which caused some pent-up demand.

D.R. Horton stock is up 4% pre-open


We saw similar order growth for MDC Holdings as well. Orders increased 5% in the June quarter and were up 53% in the month of June.

Our results this quarter reflect the favorable industry dynamics in place today, including a low interest rate environment, a lack of available supply and a highly motivated buyer. They also reflect our continued shift in focus to the more affordable segments of the market and the benefits of our build-to-order strategy, which caters to the wants and needs of a large segment of the buying population. We believe that providing homebuyers with flexibility and choice at an affordable price is a winning strategy for our company. Given the favorable market conditions we are experiencing, we now believe that we may achieve as many as 8,000 home deliveries for the 2020 full year, which would be a 15% increase from the prior year.

MDC stock is trading up 6% pre-open.

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