All Things in Moderation

Vital Statistics:

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

Initial Jobless Claims came in at 2.1 million, about in line with expectations. At a minimum we need to see this number fall back to the six digit area to have any prayer of a recovery.

Luxury homebuilder Toll Brothers beat on the top line and the bottom line. This quarter ended on April 30, so half of the quarter was pre-COVID and half was post-COVID. Revenues fell 11% YOY, while signed contracts were down 22%. Backlog was flat YOY. CEO Doug Yearley noted that deposit activity rebounded in May and was up YOY. This is a leading indicator of housing demand.

“While net signed contracts in the first four weeks of May were down 37% year-over-year, we are very encouraged by recent deposit activity. Our deposits, which typically precede a binding sales contract by about three weeks and represent a leading indicator of current market demand, were up 13% over the past three weeks versus the same three-week period last year. Importantly, our recent deposit-to-contract conversion ratio has remained consistent with pre-Covid-19 levels. Web traffic has also steadily improved from the lows we experienced in mid-March and has returned to the same strong activity we enjoyed pre-Covid-19 in February. These early trends suggest the housing market may be more resilient than anticipated just two months ago.”

Homebuilding is an early-cycle play, so you should expect to see a turnaround in that sector first. Overall, it sounds like the builders have been pleasantly surprised at how the sector has held up during the crisis.

First quarter GDP was revised downward to -5% from -4.8% in the second estimate. Inflation continues to be tame, with the headline number up 1.3%. Ex-food and energy it rose 1.8%. In other economic news, Durable Good Orders fell 17% in April. Most of this data is pretty much irrelevant to stock prices right now. The stock market is looking over the valley.

Ex-Obama staffer Jason Furman predicts that we are about to see the best economic numbers the country has ever seen. FWIW, I agree with his sentiment. The COVID Crisis is about 3 months old. There was nothing wrong with the economy going into the crisis, and the shock to the economy should feel more like a natural disaster than a traditional bubble-driven recession. If we have passed the bottom (admittedly a big “if”) then the economy could be on fire by late summer / early fall. And speaking of “fire,” the government poured a few trillion gallons of fiscal gasoline on it.

Pending Home Sales fell 22% in April, according to NAR. “While coronavirus mitigation efforts have disrupted contract signings, the real estate industry is ‘hot’ in affordable price points with the wide prevalence of bidding wars for the limited inventory,” NAR Chief Economist Lawrence Yun said. “In the coming months, buying activity will rise as states reopen and more consumers feel comfortable about homebuying in the midst of the social distancing measures. Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded for both home sales and prices, with home sales to decline by only 11% in 2020 with the median home price projected to increase by 4%,” Yun said. “In the prior forecast, sales were expected to fall by 15% and there was no increase in home price.”

Those hoping to snap up recession-driven bargains in the real estate market may be disappointed. That said, the bargains (if any) would be in the higher priced area, not the more affordable price points. “The mix of homes that are on the market now is a little bit different,” says Ratiu. “What’s really selling at a premium are lower-priced homes. The higher-priced homes are sitting on the market longer.”

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Vital Statistics:

Stocks are higher this morning on news of further global stimulus and optimism that the COVID crisis is in the rear view mirror. Bonds and MBS are flat.

The MBA reported that 8.4% of mortgages are in some sort of forbearance plan right now.  “Although job losses continue at extremely high rates, mortgage servicers are reporting only modest increases in the share of loans in forbearance as of May 17,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The decline in employment and income is hitting FHA and VA borrowers harder, leading to 11.6 percent of Ginnie Mae loans currently in forbearance.”

Mortgage Applications increased 2.7% last week as purchases increased 3% and refis declined by 0.2%. “The home purchase market continued its path to recovery as various states reopen, leading to more buyers resuming their home search,” said Joel Kan MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications increased 9 percent last week – the sixth consecutive weekly increase and a jump of 54 percent since early April. Additionally, the purchase loan amount has increased steadily in recent weeks and is now at its highest level since mid-March.”  Home purchase applications have increased 54% since early April.

Job losses from COVID show a pretty large regional distribution, with the Northeast and the Midwest bearing the brunt of the losses versus the South and West.

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Vital Statistics:

Stocks are higher this morning on optimism about the economy re-opening. Bonds and MBS are flat.

The upcoming week is somewhat data-light. The big numbers will be the second revision to GDP and construction spending.

Home prices rose 1.7% in the first quarter and were up 5.7% on a YOY basis, according to the FHFA House Price Index.  That said, the report noted that the data in the report probably doesn’t take into account the effects of COVID. The Mountain states led the charge, with Idaho, Montana, and Wyoming posting double-digit gains.

The Case-Shiller index reported a 4.4% annual gain. The difference between the FHFA and Case-Shiller indices? FHFA is limited to transactions with a conforming mortgage, while Case-Shiller includes all sales.

New Home Sales came in at 623,000 which was up from March, but down 6.7% on a YOY basis. Since April was the worst of the crisis, this is an encouraging number. Note that these are estimates with wide confidence intervals. So there is a chance these could get revised lower. I listened to pretty much every homebuilder earnings call and pretty much every one said that the second half of April was unexpectedly strong.

I went to a restaurant in Connecticut last night. Outdoor seating, long line out the door to get a table. Sample size of 1, but it looks like people are antsy to get out of the house and put COVID behind them. Barring any sort of second wave of infections, I think the economy rebound by the 4th of July and will have shaken off most of the economic damage by Labor Day.

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Vital Statistics:

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

Initial Jobless Claims came in at 2.4 million. which was a touch higher than expectations.

3.6 million Americans were past due on their April mortgage payment according to Black Knight Financial Services. This is the largest number since January 2015. Foreclosure starts and completions were at record lows due to government-imposed moratoriums. Miami, NYC and Las Vegas were the hardest hit cities. Note that sales in NYC are down 61%. I suspect we are going to see a mass exodus to the suburbs after this is over.

The Census Bureau estimates that almost half of all households has lost employment income during the pandemic. States that rely heaviest on tourism like Nevada and Hawaii saw close to 60%.

Existing home sales fell 18% in April, according to NAR. The median home price rose 7.4% YOY. Inventory was down 1.3% from March and down 19.7% from a year ago. “The economic lockdowns – occurring from mid-March through April in most states – have temporarily disrupted home sales,” said Lawrence Yun, NAR’s chief economist. “But the listings that are on the market are still attracting buyers and boosting home prices.”

The index of leading economic indicators came in at -4.4, better than expected, and an improvement from the March number.

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Vital Statistics:

Stocks are higher this morning as retailer earnings are coming in better than expected. Bonds and MBS are flat.

The FHFA put out new guidance yesterday on forbearance and refinances. Essentially, you will will be eligible to refinance your property provided you are current with whatever repayment plan you negotiated for 3 months after exiting forbearance. “Homeowners who are in COVID-19 forbearance but continue to make their mortgage payment will not be penalized,” said Director Mark Calabria. “Today’s action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.” According to the MBA, 4.1 million borrowers are in forbearance right now and over 70% don’t need the help. That is a huge number, but i guess it is to be expected since there is no requirement to demonstrate hardship.

Mortgage Applications fell 2.6% last week as purchases increased 6% and refis fell 6%. “Applications for home purchases continue to recover from April’s sizable drop and have now increased for five consecutive weeks,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity – which was 35 percent below year-ago levels six weeks ago – increased across all loan types and was only 1.5 percent lower than last year. Government purchase applications, which include FHA, VA and USDA loans, are now 5 percent higher than a year ago, which is an encouraging turnaround after the weakness seen over the past two months. As states gradually reopen and both home buyer and seller activity increases, we will be closely watching to see if these positive trends continue, or if they reflect shorter-term, pent-up demand.”

41% of home sales had bidding wars, according to Redfin. “Demand for homes has picked back up after hitting rock bottom in April, and that uptick paired with a lack of supply is a recipe for bidding wars,” said Redfin lead economist Taylor Marr. “Homebuyers are getting back out there, searching for more space as they realize using their home as an office and school may become the norm. But sellers are still holding off on listing their homes, partially due to economic uncertainty and concerns of health risks. In some hot neighborhoods, there may only be one or two homes for sale, with multiple homebuyers vying for them.”

22% of builders reduced home prices to move inventory, according to the NAHB. This is much less than the housing recession of 2008, which was about 50%.

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Vital Statistics:

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

Fed Chairman Jerome Powell and Treasury Secretary Steve Mnuchin head to Capitol Hill to testify in front of the Senate today.  In his prepared remarks, Jerome Powell basically laid out everything the Fed has done so far, so it doesn’t look like anything new is going to come out of this.

Social distancing took a bite out of housing starts in April, falling 30% to 891 thousand. Building Permits also fell 19% from March. Separately, the NAHB Housing Market index increased in May to 37 from 30.

CNBC explains why this isn’t the Great Depression, even though the unemployment numbers are up there. The simplest explanation – there was no economic rot that caused the drop in the economy. No asset bubbles, no bad investments, no bank failures – it isn’t comparable. This was a healthy economy that was put in a deep freeze in response to a pandemic. Recessions generally exist because bad debt needs to be written off, excess inventory needs to be sold, and bad businesses liquidated. There isn’t any of that this time around. Just like the predictions of millions of deaths in the US from COVID turned out to be overly pessimistic, I think many of the predictions of a long, drawn out recovery will be too.

The Despot missed earnings expectations this morning, but maintained its dividend. It also withdrew its guidance for the rest of the year. The company took some actions to help its employees including paid time off, bonuses, and healthcare expense help which hit earnings by 60 cents a share. Meanwhile, WalMart reported strong numbers this morning as shoppers stockpile necessities.

It looks like the “forbearance curve” is flattening. “The pace of forbearance requests continued to slow in the second week of May, but the share of loans in forbearance increased,” said Mike Fratantoni, MBA’s chief economist. “There has been a pronounced flattening in loans put into forbearance – despite April’s uniformly negative economic data, remarkably high unemployment, and it now being past May payment due dates.”

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Vital Statistics:

Stocks are higher this morning on positive news for a COVID vaccine. Bonds and MBS are down.

The upcoming week should be relatively quiet, with no major economic news. Jerome Powell speaks tomorrow and we will get the FOMC minutes, but that is about it. Markets will be closing early on Friday for the Memorial Day weekend.

The MBA sent a letter to Congress stressing the need for a liquidity facility for non-bank servicers. In order to work, Ginnie must be given legal authority to approve pledges of an issuer’s future reimbursements on servicing advances. The MBA also points out that allowing everyone to get forbearance regardless of circumstances was not the smartest idea. While FHFA has stated that borrowers who seek forbearance will not be required to repay everything at once, that doesn’t necessarily apply to non-government-backed paper.

About 9% of US mortgages are in forbearance right now. This works out to be $1 trillion in unpaid principal. By the end of June, Black Knight estimates that 10% – 12% of the mortgage market will be in forbearance. 12% would work out to be 6.3 million borrowers. That is a lot of advances. Separately, the National Multifamily Housing Council reported that 88% of renters made their May payment through May 13.

Jerome Powell warned on the economy turning around: “There is a growing sense that the recovery may come more slowly than we would like, but it will come. And that may mean that it’s necessary for us to do more.” He is advocating for Congress to provide more fiscal stimulus, which doesn’t seem like it will be forthcoming. The House has passed a liberal wish-list, but Mitch McConnell doesn’t seem all that eager to take it up. The big trade will be liability protection for business in exchange for vote-by-mail.

The MBA says buyers will return by summer as lockdown ends. “We expect that heading into the summer, more prospective homebuyers will gradually return to the market.” FWIW, “summer” is only a month away, but I think this is already happening. I was listening to the American Homes 4 Rent conference call, and they said that traffic was slower in the second half of March, but by the second half of April, traffic was up 25% year-over-year. They had 9,500 showings is five days which worked out to be six tours per available property. While these are for rentals, it does show that people who are living in crowded urban areas want to escape to the suburbs, where social distancing is easier. The company even mentioned on the call that COVID is driving traffic. I have to imagine the same thing happening for purchase activity. We will get a better idea on April numbers this week when existing home sales comes out on Thursday.

Just like the talking heads overestimated the whole COVID-19 crisis, I think they are also overestimating the economic fallout from it. There just weren’t too many problems with the economy going into the crisis, and this recession wasn’t caused by economic rot or inflation. It was like taking a healthy person and putting him into a medically induced coma. All of the economic models are based on history – in other words, recessions which were caused by asset bubbles or the Fed. It would be like comparing our healthy patient’s coma recovery to someone who was put into a medically-induced coma because of an illness. Without an underlying condition that needs to heal, the recovery should be faster, all things being equal.

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Vital Statistics:

Stocks are lower this morning after a lousy retail sales number. Bonds and MBS are up.

Retail sales fell 16.4% MOM and 21.6% YOY, according to Census. Obviously these are unprecedented numbers, never seen before. Apparel, home furnishings, and electronics were down the most.

Joe Biden would support rent forgiveness if elected.  In other words, if you missed rent payments due to COVID, you’ll never have to pay them back. This is just election pandering – the chance of this getting through Congress is pretty much zero. I guess it is a way to encourage the Bernie Sanders supporters to come out and vote for him on election day.

Meanwhile, the FHFA is extending its foreclosures and eviction moratorium until June 30.

Interesting data point: Home buyer demand is higher than it was pre-COVID 19. Meanwhile supply is down 25%.  Big open floor plans are out, home offices are in. “Pre-COVID people wanted a beautiful open floor plan. After a few months in quarantine, buyers want quiet spaces where they can actually get away from everyone else and dedicated space for school and work.”

JP Morgan and American Homes 4 Rent are joining together to build suburban homes. FWIW, COVID-19 might be what makes the white picket fence cool again.

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Vital Statistics:

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

Initial Jobless Claims came in at 3 million last week. This puts the number of jobs lost to COVID at 36.4 million, or about 430 jobs per death.

The FHFA made an announcement yesterday which permits servicers to allow borrowers who enter forbearance to wait to pay back the skipped payments until they either refinance the loan or at maturity.

“For homeowners in forbearance due to COVID-19, payment deferral allows them to make up missed forbearance payments when they sell their home or refinance,” said FHFA Director Mark Calabria. “This new forbearance repayment solution responsibly simplifies options for homeowners while providing an additional tool for mortgage servicers. Borrowers who can pay their mortgage should, because missed payments remain an obligation that will ultimately have to be repaid.”

Servicers are required to evaluate borrowers for one of several repayment options, generally referred to as a “hierarchy” of repayment and loan modification options. The big question is whether the borrower can demand the servicer provide the option they want. Who has the final say on the repayment plan? The borrower or the servicer?  Plus, since Fannie will reimburse the 4 months of advances immediately, does the servicer have any financial incentive to choose one plan or the other?

One of the biggest deterrents to taking forbearance was that you would be unable to refinance your mortgage until the missed payments are made up. But, since this contemplates paying it off on a refi, then I guess that isn’t the case? I am sure FHFA and the GSEs will provide more guidance.

Remember the huge Fannie and Freddie LLPAs for loans that go into forbearance before they are sold to Fannie Mae? Correspondent lenders are removing them. I haven’t seen anything official, but it looks like the government might have backtracked on that one.

While Jerome Powell was greasing the skids for a prolonged recession, that might not be what happens. Don’t forget, there was nothing wrong with the economy to begin with. No bubbles, no buildup of inventory and bad debt, no mal-investments to work off. The economy was put into a medically-induced coma. The real work of recessions – working off excess inventory, disposing of bad assets, trimming bloated payrolls, isn’t applicable here.

The stimulus dollars (along with people being free to not pay their mortgage for a year) will provide an immense jolt to the economy. Think of what you would do if you all of a sudden could just, stop, paying your mortgage for a year. And you didn’t have to pay it off until you refinance or move? That is a lot of additional disposable income.

Even with COVID-19, some of the hottest markets are still going strong. The Denver area is still going strong. FWIW, I was listening to the Equity Residential earnings call the other day, and the company noted that traffic and applications started off down 50% on a YOY basis in March when the government initiated the stay at home orders. Things have improved so much that traffic and applications are now flat YOY. Delinquencies? About 5%. While Equity Residential is mainly affluent renters, this is a pretty interesting data point. Note however that the Multifamily Housing Council reported that 20% of renters have failed to make their May payment as of May 6, so it isn’t all great. But so far so good.

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