All Things in Moderation

Vital Statistics:

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

Initial Jobless Claims came in a little higher than expected – 1.5 million versus 1.3 million expected. Meanwhile, the Philly Fed survey was way stronger than expected.

The Conference Board Index of Leading Economic Indicators improved 2.8% in May versus the Street expectation of 2.3%. “In May, the US LEI showed a partial recovery from its sharp decline over the previous three months, as economic activity began to pick up again,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The relative improvement in unemployment insurance claims is responsible for about two-thirds of the gain in the index. The improvements in labor markets, housing permits, and stock prices also buoyed the LEI, but new orders in manufacturing, consumers’ outlook on the economy, and the Leading Credit Index™ still point to weak economic conditions. The breadth and depth of the decline in the LEI between February and April suggest the economy at large will remain in recession territory in the near term.”

Homebuyer mortgage demand spiked to an 11-year high. “The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said MBA economist Joel Kan.

Homebuilder Lennar reported better than expected earnings and re-introduced its guidance for the year. On the conference call, the company talked about how the markets turned around in May:

In May, our new orders increased each week sequentially and were up 7% over the prior year. Our cancellation rate in May also dropped from 18% — dropped to 18% from the 23% high in April. More importantly, our increase in sales was generally achieved while raising prices and reducing incentives throughout the month of May. We rarely comment on sales activity outside of the quarter we are reporting. However, given these fluid market dynamics, I will give you some insight on June. For the first two weeks of June, our new orders were up 20% over the same period last year. 

Now some of that might be catch-up from the March and April weakness, but it does point to a robust homebuilding market, certainly better than yesterday’s housing starts number would suggest.

The FHFA extended the eviction moratorium until August 31.

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Vital Statistics:

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

Housing starts rose 4% MOM in May to 974,000. This is still 23% below last year. Building Permits rose 14% MOM but are down 9% YOY. Shelter-in-place orders were still in force for most of the country in May. Despite the drop in May, homebuilder confidence rebounded in June.

Jerome Powell heads to Capitol Hill for his second day of Humphrey-Hawkins testimony. Powell was cautious yesterday about how quickly jobs would come back. That said, investors ignored him, pushing stocks higher. Note that the Fed was consistently over-optimistic about the economy during the Obama Administration and has been consistently over-pessimistic about the economy during the Trump Administration. Note the COVID epidemic has swelled the Fed’s balance sheet even more. The Fed now holds $7.2 trillion in assets. Before the Great Recession, it held about $800B.

Mortgage REIT MFA Financial reported earnings yesterday. On the conference call, the company talked about how bad things got in the MBS market in late March:

January, February and the first two weeks of March were very normal and a good start to the new year. And in only a few days, the financial markets and the mortgage market in particular completely collapsed. With the onset of the COVID-19 pandemic, pricing dislocations for markets and residential mortgage assets was so extreme that liquidity evaporated. Prices of legacy non-agencies, which had not changed by more than 3 points in the last two to three years, were suddenly lower by 20 points. CRT securities dropped as much as 20 points to 50 points and MSR-related asset prices were lower by 20 points to 30 points, all in a few days. MFA received almost $800 million in margin calls during the weeks of March 16 and March 23 and over $600 million of these were on mortgage-backed securities. In contrast, we received $7 million of margin calls on these portfolios during the entire week of March 2 and $37 million during the week of March 9. And during the months of December, January, and February, we received a total of six margin calls, all related to factor changes with a total aggregate amount of $4 million.

MFA received almost $800 million in margin calls, and entered the year with about $70 million in unrestricted cash. This was the dislocation in the market that caused the Fed to react so aggressively to support the MBS market. Of course they almost killed the smaller originators and TBA brokers in the process….

Mortgage Applications increased 8% last week as purchases rose 4% and refis increased 10%. “The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates dropped to another record low in MBA’s survey, leading to a 10 percent surge in refinance applications. Refinancing continues to support households’ finances, as homeowners who refinance are able to gain savings on their monthly mortgage payments in a still-uncertain period of the economic recovery.”

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Vital Statistics:

Green on the screen this morning as Jerome Powell heads to Capitol Hill for Humprey-Hawkins testimony. Bonds and MBS are down.

Retail Sales came in way better than expected, rising 17.7% versus expectations of a 8% gain. Last month was revised from -16.4% to -14.7%. The control group, which excludes gas, autos, and building materials rose 11% versus expectations of a 4.7% increase.

Industrial production rose 1.4% in May, a little better than expected. Capacity Utilization rose to 64.8% and manufacturing output rose 3.8%.

Lennar reported second quarter earnings yesterday, with a 27% increase in earnings per share. Lennar is on a November fiscal year, so the quarter included both March and April, the worst months of the economic pandemic. That said, everything turned around in May, with CEO Stuart Miller saying this in the press release: “Business rebounded significantly in May, and by quarter’s end, our total new orders declined by only 10%, and deliveries ended flat year-over-year. In sync with the market rebound, we resumed starts and land spend to match the improving market conditions, and this rebound has continued into the first two weeks of June.” He also mentioned the effect COVID has had on demand: “While unemployment increased throughout the quarter due to impacts from the COVID-19 pandemic, customers moved from rental apartments and from densely populated areas to purchase homes, and home sales grew steadily, as record-low interest rates and low inventory levels drove a favorable rebound in the homebuilding industry.” Finally, the company re-instituted its 2020 guidance.

The MBA reported that new home purchase applications increased 26% MOM in May and 11% on YOY basis. “The solid increase in new home purchase applications in May is another indication of a recovery in the housing market,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “MBA estimates that new home sales rebounded 26 percent last month – a healthy turnaround after three months of declines. Homebuyer traffic is rising, and homebuilders are continuing to ramp up production following the COVID-19 pandemic-related restrictions. We expect to see additional near-term strength in the coming months from the resumption of delayed sales activity caused by the social distancing and stay-at-home orders during March and April.”

The MBA reported that the share of mortgages in forbearance has leveled out at 8.55%. “Results from the first week of June showed a slight uptick in the overall share of loans in forbearance, but this increase was primarily driven by a larger share of portfolio and PLS loans in forbearance,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Half of the servicers in our sample saw the forbearance share decline for at least one investor category. Although there continues to be layoffs, the job market does appear to be improving, and this is likely leading to many borrowers in forbearance deciding to opt out of their plan.” Given the way the CARES Act was drafted, there was almost no penalty for taking forbearance, and it sounds like many took it pre-emptively. Ginnie loans was flat at 11.8%, while GSE loans came in at 6.4% and private label mortgages were 10.2%.

The housing market outside New York City is booming. Local builders are getting slammed with inquiries and are selling homes at a rapid pace. “People who are now in the Hudson Valley looking for homes, many of them have never been to the Hudson Valley before,” Mr. Petersheim said. “That’s new to the marketplace, that urgency.” I guess being cooped up for 3 months in an 800 square foot studio that costs 5 grand a month will wear on anyone.

Fed Head Robert Kaplan says the economy will experience a historic contraction before rebounding in the second half of the year. From the sound of it, the economy is already bouncing back.

I will be doing a podcast for the Information Management Network this morning. I will be discussing economics, housing, and the markets. I will leave a link once I get one.

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Vital Statistics:

Stocks are lower this morning as investors fret about a second wave of COVID-19 cases. Bonds and MBS are flat.

We don’t have a ton of economic data this week, but Jerome Powell will be speaking on Tuesday and Wednesday.

Homebuying demand is even stronger than a year ago, according to Redfin. Supply is still restricted, with many opportunistic sellers pulling their homes off the market because of health concerns. “It’s just bananas, with so few listings and so many buyers,” said Ms. Shakur, the Redfin agent in Maryland. “Having lived through the 2008 bubble, I just want to be cautious. Maybe it’s nowhere near the same size as it was in ’08, and maybe it’ll turn out not to have been a bubble at all. But buyers are desperate. If a property is in a desirable neighborhood, buyers will overpay. Bidding wars, escalations, no inspections, agreement to pay over appraised value, all of that’s becoming the norm.” Adds Mr. Palmer, the Redfin agent in Seattle. “Anything I’m pricing correctly right now is flying off the shelf.”

The COVID-19 crisis, along with civil unrest, and the ability to work from home will cause a flight to the suburbs, similar to what we saw in the 1970s and 1980s.

Building permit growth is robust as builders recognize the opportunity in front of them. The South is seeing double-digit growth in permits, while the West is up about 6%. Surprisingly, multi-family is much weaker, but the multi-family series tends to have a lot of month-to-month volatility for some reason.

What would Quicken’s valuation be in an IPO? Some are suggesting tens of billions of dollars. The big question: would it be valued like a fintech company, or a plain old mortgage bank?

Consumer confidence is coming back. “The turnaround is largely due to renewed gains in employment, with more consumers expecting declines in the jobless rate than at any other time in the long history of the Michigan surveys,” Richard Curtain, Chief Economist said.

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Vital Statistics:

Stocks are rebounding after yesterday’s bloodbath.  Bonds and MBS are down small.

CNBC reported that Quicken Loans is planning an IPO. I guess the S4 was filed confidentially, so we can’t tell much about the company’s financials. The company said that it originated $52 billion in the first quarter. Certainly the timing for a sale is right, with what looks to be a record period for refinances as far as they eye can see.

Realtor.com reports that the summer house shopping season is in full swing, with prices up about 5%. “The big surprise of the housing market is that prices have remained quite resilient,” says realtor.com Senior Economist George Ratiu. He doesn’t expect prices to drop over the next few months. “The summer housing market will be better than expected, but far off the normal pace.” The inventory situation is even worse than before – listings are down 25% from a year ago. That said, it is a bifurcated market, with multiple offers for lower priced homes, and little demand for higher priced ones. “For most people it will be a competitive buying market,” says Lawrence Yun, chief economist of the National Association of Realtors®. “For lower-priced and medium-priced homes, multiple offers will be fairly common. On the luxury end, some price reduction will be required because there’s plentiful inventory.”

More evidence that people are fleeing the cities: May rentals in Manhattan are down 62%. “The supply of available rental units continues to accumulate,” UrbanDigs said in its report, which looked at all five New York City boroughs, “hinting that renters will have the upper hand in negotiability when the market finally reopens.”

Mark Calabria said that the forbearance rates for the GSEs is manageable. “We’ve seen over the last few weeks those numbers start to stabilize,” Calabria said. “Within the GSE portfolio, you see as many borrowers canceling their forbearance programs as you see rolling on. I certainly over the last few months have been concerned about what the direction of the housing market would be coming out of COVID-19,” Calabria said. “I’ve been very pleasantly surprised.”

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Vital Statistics:

Stocks are lower this morning after the Fed maintained interest rates at current levels. Bonds and MBS are up.

The Fed made no changes to interest rate policy  yesterday. The part that got everyone’s attention:

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Fed will also maintain its purchases of Treasuries and MBS at the current pace. The economic projections include a 6.5% expected drop in GDP this year, an unemployment rate of 9.3%, and sub-1% inflation. The dot plot shows the Fed expects to keep rates at zero throughout 2020 and 2021.

The gloomy outlook and the continued asset purchases are what seems to be driving the drop in stocks this morning and the strength in the bond markets. I guess we should expect mortgage rates to continue to ratchet lower as financial conditions thaw and more aggregators begin to get aggressive in pricing.

It seems like yesterday that the mortgage REITs were being thrown overboard. Bellwether Annaly just cut its dividend, which was to be expected, but it wasn’t that bad. In addition, it bought back $100 million worth of stock. With everyone out there deleveraging, I found it interesting that they chose to buy back stock as opposed to buying assets.

Meanwhile, initial jobless claims fell to 1.5 million and the producer price index fell 0.8% on a YOY basis.

The Trump Administration is considering another stimulus bill that would include more direct payments and further aid for small businesses. “We will have a significant amount of unemployment and we’re going to need to look at doing something there,” Mnuchin said. “I think we’re going to seriously look at whether we want to do more direct money to stimulate the economy, but I think this is all going to be about getting people back to work.”

Home Equity rose 6.5% in the first quarter, according to CoreLogic. The number of homes with negative equity fell by 16% to 1.8 million homes.

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Vital Statistics:

Stocks are flattish as we await the FOMC decision. Bonds and MBS are up small.

The FOMC decision is set for 2:00 pm EST. No changes in policy are expected, and the main item will be the economic forecasts.

Small business optimism improved in May, according to the NFIB. “As states begin to reopen, small businesses continue to navigate the economic landscape rocked by COVID-19 and new government policies,” said NFIB’s Chief Economist Bill Dunkelberg. “It’s still uncertain when consumers will feel comfortable returning to small businesses and begin spending again, but owners are taking the necessary precautions to reopen safely.” Needless to say, profits and employment were depressed in May, and few businesses are looking at expansion right now.

Job openings fell to 5 million at the end of April according to the JOLTs jobs report. The quits rate fell to 1.4%.

Inflation decreased slightly in May, with the headline and core CPI indices down 0.1%. Ex-food and energy the CPI is up about 1.1% YOY. This is below the Fed’s target rate, so they will be in no hurry to raise rates.

Mortgage Applications increased 9.3% last week as purchases rose 5% and refis rose 11%. “Fueled again by low mortgage rates, pent-up demand from earlier this spring and states reopening across the country, purchase mortgage applications and refinances both increased,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The recovery in the purchase market continues to gain steam, with the seasonally adjusted index rising to its highest level since January. Purchase activity increased for the eighth straight week and was a notable 13 percent higher than a year ago. Refinances moved higher for the first time in nearly two months, with both conventional and government applications rising and the overall index coming in 80 percent above year-ago levels.”

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Vital Statistics:

Stocks are lower this morning as we head into the Fed meeting. Bonds and MBS are flat.

The MBA reported that mortgage credit availability fell to a 6 year low. “Mortgage lenders in May responded accordingly to the increased risk and uncertainty in the economy,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Credit availability continued to decline, with MBA’s overall index now at its lowest level since June 2014. There was a reduction in supply across all loan types, driven by further pullback in investors’ appetites for loan programs with low credit scores and high LTVs. Credit tightening was observed at both ends of the market, with less availability of low down-payment programs designed for first-time homebuyers, as well as for conforming and non-conforming jumbo loans.” So basically low FICO FHA and jumbo, which means forbearance and securitization issues are driving the decrease.

The MBA also reported that the number of mortgages in forbearance increased slightly to 8.53%. “The overall share of loans in forbearance increased by only 7 basis points compared to the prior week,” said MBA Chief Economist Mike Fratantoni. “With the job market beginning to gradually improve, more homeowners are exiting forbearance, and we are seeing declines in forbearance volume among some servicers.”

FWIW, the Fed Funds futures are predicting a 15% chance of a 25 basis point rate hike at the June meeting. That seems to be the consensus going all the way out to March 2021. If the economy rebounds quickly the Fed will probably choose to unwind asset purchases first, so it could be a while before we see rate hikes.

The National Bureau of Economic Research says the US entered a recession in February, which seems strange given the COVID crisis didn’t start until late March and the economic numbers in February were decent. “In deciding whether to identify a recession, the committee weighs the depth of the contraction, its duration, and whether economic activity declined broadly across the economy. … The committee recognizes that the pandemic and the public health response have resulted in a downturn with different characteristics and dynamics than prior recessions,” the committee said in a statement. So in other words, it sounds like they are using some sort of qualitative assessment of the economy to come up with the idea that we entered a recession in February.

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Vital Statistics:

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

The FOMC will meet this week, although no changes in interest rates are expected. They may give some sort of update on the various sundry financial assets they will buy, but that is about it.

The unemployment rate was probably understated in Friday’s jobs report. Apparently there was a misclassification error for people who were employed but absent from work. They should have been classified as “unemployed” but were not, which means the unemployment rate was higher than advertised. Note this doesn’t affect the payroll number, which comes from the establishment survey.

The Fed is launching its Main Street lending program, but it looks like the high minimum amount of $500k is putting some borrowers off.  It has generated some political heat as a bailout for oil and gas industries. “It is far and away the biggest challenge of any of the 11 facilities that we’ve set up,” Fed chair Jerome Powell said last month during a Princeton University webcast in which he also said the central bank is open to adjusting the program.

The FHA gave some more guidance on forbearance. Loans in forbearance are generally ineligible for FHA insurance, but the government is permitting closed loans to be insured provided the lender agrees to indemnify FHA for 20% of the loan amount if the loan goes into foreclosure. “FHA has continually been at the forefront of providing assistance and assurance for borrowers, lenders, and the mortgage market since the coronavirus pandemic began,” said Department of Housing and Urban Development Secretary Ben Carson in a statement, adding the policy change “will give borrowers, lenders, and the market peace of mind as we continue our road to economic recovery in the United States.”

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Vital Statistics:

Stocks are higher this morning after the jobs report showed the economy added jobs in May. Bonds and MBS are down.

Jobs report numbers:

• Nonfarm payrolls rose by 2.5 million.
• Unemployment rate fell to 13.3%
• Average hourly earnings up 6.7% YOY
• Labor force participation rate 60.8%

The message from this report is that the economy turned the corner in May and the recovery has begun. Street expectations for this report were way off. The average forecast for payrolls was a loss of 7.7 million jobs, and the forecast for unemployment was 19.8%. The average hourly earnings numbers are interesting. They were down 0.1% MOM, but up 6.7% YOY. I suspect that the higher paid furloughed workers were brought back first, and now we will see the lower paid workers return as retail and restaurants re-open.

The big takeaway from the jobs report is that the recession probably ended last month. I expect to see big upward revisions in the Q2 economic forecasts.

Black Knight reported that the number of loans in forbearance fell slightly last week. “After rising sharply in April and then leveling off toward the end of May, the number of American homeowners in forbearance plans has now decreased for the first time since the crisis began,” said Jabbour. “There were a net 34,000 fewer homeowners in forbearance as of June 2. The decline was actually greater among government-backed mortgages, which saw 43,000 fewer total forbearance plans than last week, but this was partially offset by an increase of 9,000 new plans on mortgages held in bank portfolios and private-label securities.”

Invitation Homes (a single family home REIT) reported that it collected 97% of historical rent in May, so despite the scary numbers from the survey about New York City rent, the rest of the country seems to be doing much better.

The jobs report sent bonds lower, with the 10 year trading around 0.9%. After such a huge move in the long bond, a retracement was to be expected. That said, mortgage rates might not go anywhere as aggregators fight for business and mortgage backed security spreads tighten.

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