All Things in Moderation

Vital Statistics:

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.

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.

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.

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Vital Statistics:

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 realtor.com 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.

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Vital Statistics:

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.

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Vital Statistics:

Stocks are higher this morning in anticipation of further stimulus out of DC. Bonds and MBS are flat.

The FOMC will meet this week. There should be no changes to monetary policy, but perhaps there will be discussions about further measures the Fed could take to support the economy.

Aside from the Fed, we will get the first pass at second quarter GDP on Thursday. The consensus is a decline of 35%. Friday will have personal income and outlays. We will also get consumer confidence numbers this week.

Black Knight is acquiring Optimal Blue from Cannae Holdings. “Optimal Blue is a business that we have respected for many years. By bringing Optimal Blue into the Black Knight family, we will be adding industry-leading product, pricing and eligibility (PPE) capabilities to our already robust set of solutions and enhancing our already comprehensive data and analytics capabilities,” said Anthony Jabbour, CEO of Black Knight. “In addition to Optimal Blue’s high-quality and passionate management team, we are pleased and honored to be partnering with two experienced and successful investors in Cannae and THL, both of which we have known and respected for a long time and are confident will provide meaningful value-add.” Cannae is trying to acquire CoreLogic, which just reported earnings this morning.

1 in 3 homeowners could save $300 a month on their mortgage payment by refinancing. This works out to be 15.6 million homeowners. That said, many are unable to refi due to tighter credit these days. “Mortgage lenders are being exceptionally cautious about who they lend to, in part due to a fear of borrowers who immediately request forbearance on the loan, before the loan can be sold on by the issuer,” said Jeff Tucker, economist at Zillow.com. “This is putting pressure on lenders to effectively narrow their credit box, especially reducing access for borrowers with FICO scores below 700.”

Jumbo mortgages are no longer the cheapest mortgages around. In mid-July, the average rate on a jumbo was 3.77%, about 40 basis points higher than the typical conforming rate. This reversed a trend that had been in place since 2015. Blame COVID and the resulting stress in the financial markets. Jumbo and non-QM securitizations dried up in March and have yet to return. Forbearance is an issue as well, with 10% of jumbos in forbearance versus 8% for all mortgages.

The Trump Administration reversed a particularly aggressive reading of the Affirmatively Furthering Fair Housing rule implemented by the Obama Administration which attempted to Federalize local zoning restrictions. Despite all the howling in the media, we are just going back to the standard that existed from 1968 through 2015.

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Vital Statistics:

Stocks are lower this morning on weakness in overseas markets. Bonds and MBS are flat.

New Home Sales rose to a seasonally-adjusted annual rate of 776k, an increase of 14% from March and 7% from a year ago. Despite the big increase, we are still way below historical levels, which are insufficient to keep up with population growth and incremental demand.

The index of leading economic indicators improved in June, but still exhibited weakness for the economy overall.

“The June increase in the LEI reflects improvements brought about by the incremental reopening of the economy, with labor market conditions and stock prices in particular contributing positively,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “However, broader financial conditions and the consumers’ outlook on business conditions still point to a weak economic outlook. Together with a resurgence of new COVID-19 cases across much of the nation, the LEI suggests that the US economy will remain in recession territory in the near term.”

Wells Fargo supposedly put people into forbearance who were merely interested in getting information about it. This prevents borrowers from refinancing their mortgages. Apparently, it is hard for borrowers to get out of forbearance, even if they want to. Note that Elizabeth Warren is on the shortlist for Joe Biden VP candidates, which means the financial sector will get plenty of vitriol out of DC heading into the election. Wells has already cut its dividend 80%, and may have to suspend it in order to keep the politicians and activists happy.

Home asking prices are up 13% from last year, according to Redfin. The ratio of sales price to asking price hit a record of 99% in early July, while the number with a price drop hit an all-time low at 34.4%. Not only that, the late summer slowdown doesn’t look like it is going to happen either: “The housing market usually slows down in July and August when people take time off for vacations,” said Washington, D.C. area Redfin agent Kris Paolini. “This year though, a lot of vacations have been cancelled, and buyers who had previously given up their search are being lured back by low mortgage rates. The market has stayed hot through the summer and it doesn’t look like we’ll see the typical slowdown in August, either.” If schools are closed this fall, the whole seasonal dynamic of moving kind of disappears.

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Vital Statistics:

Stocks are flattish as earnings continue to pile in. Bonds and MBS are flat.

Initial Jobless Claims increased last week as we saw a wave of new COVID-10 cases. New claims increased from 1.3MM to 1.4MM

Despite the new COVID fears, the housing recovery is in full swing. Existing home sales rose 21% in June, to an annualized pace of 4.72 million. according to NAR. This is still down 11% on a YOY basis, but we are getting a lot of data points that show a meaningful recovery.

“The sales recovery is strong, as buyers were eager to purchase homes and properties that they had been eyeing during the shutdown,” said Lawrence Yun, NAR’s chief economist. “This revitalization looks to be sustainable for many months ahead as long as mortgage rates remain low and job gains continue.”

The median home price rose 3.5% YOY to $295,300, while inventory is at 4 months’ worth. The first time homebuyer percentage is approaching normalcy, at 35%. Historically it has been closer to 40%.

Speaking of housing, homebuilder Meritage Homes reported second quarter numbers yesterday. Orders increased 32% year-over-year. May and June were record selling months for the company, which focuses on entry-level homebuyers.

“Demand for new homes is being driven by historically low mortgage interest rates, a shortage of used homes for sale, and an increased need for homes that can accommodate entire families working from home more than ever before. Many of those families are choosing safe suburban communities rather than crowded urban centers and many often prefer to purchase a home virtually rather than physically,” he explained. “That is exactly what Meritage offers. 100% of our communities are open for both in-person and virtual sales, and our virtual selling capabilities have been very beneficial. More than half of our communities are designed for the entry-level market with a wide selection of affordable homes ready for quick move-in, while our streamlined design selection process in Studio M  allows first move-up customers to move quickly into a new home.”

The company took up guidance for full year earnings to about $9 bucks a share, when the Street was looking for about $6.

A record number of people are leaving the expensive urban areas to move to cheaper locations with more outdoor space and better weather. Phoenix, Sacramento, Austin, and Las Vegas are growing, while buyers flee New York City, Los Angeles and Sacramento. The subtext to all of this is remote working, which is a game-changer. From one realtor:

“We’re seeing tons of interest from clients moving to Austin from major cities on both coasts, particularly tech workers,” Vallejo said. “Buyers who have discovered they don’t love being quarantined in an apartment building in San Francisco or New York and can work remotely are looking for a house, and they can afford that here in Austin. I have a client moving from the Bay Area who just closed on a home site unseen, and another client from Portland who is in the process of buying a home here.”

Democrats are promoting a bill that would prohibit the GSEs and Ginnie Mae from charging fees for forbearances. Fannie and Fred introduced the idea of adding big LLPAs for loans in forbearance. The unintended consequence of forbearance has been a tightening of credit, particularly for government lending. Part of this is due to low or even negative servicing values for FHA and VA loans.

Home sellers are reaping gains of almost $76k according to ATTOM Data Solutions. Taking into account time held, this represents a return of 36% compared to the original purchase price. Of course if you take into account the equity you actually contributed, it is probably much higher.

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Vital Statistics:

Stocks are flattish as earnings continue to come in. Bonds and MBS are up after the Trump Administration took steps to close the Chinese Consulate in Houston.

Mortgage Applications rose 4% last week as purchases rose 2% and refis rose 5%. “Mortgage applications increased last week despite mixed results from the various rates tracked in MBA’s survey. The average 30-year fixed rate mortgage rose slightly to 3.20 percent, but some creditworthy borrowers are being offered rates even below 3 percent. As a result, these low rates drove a 5 percent weekly gain in refinances and a robust 122 percent increase from a year ago,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “There continues to be strong homebuyer demand this summer, as home shoppers have returned to the market in many states. Purchase activity increased again last week and was up 19 percent compared to last year – the ninth straight week of year-over-year increases.”

Home prices fell 0.3% MOM, but are still up 4.9% YOY, according to the FHFA House Price Index. “U.S. house prices posted a small decrease in May compared to April but remained 4.9 percent higher than a year ago,” according to Dr. Lynn Fisher, Deputy Director of the Division of Research and Statistics at FHFA. “The May HPI results are based on contracts for sale signed in late March and throughout April, which was a period when many states announced stay-at-home orders. The number of transactions powering the FHFA HPI in May was down by just over 30 percent compared to a year ago, reflecting the early effects of COVID-19 shutdowns. Based on the rebound in mortgage applications for home purchases and pending home sales in May, we expect the number of transactions increased somewhat in June.”

The number of Americans considering a new home purchase has been relatively unaffected by COVID, at least according to numbers by the NAHB. I guess there is a push-pull effect going on. On one hand, COVID and the riots are pushing renters out of the cities, but on the other hand, economic uncertainty is making potential buyers more cautious.

Chris Waller and Judy Shelton were approved by the Senate Banking Committee to join the Federal Reserve Board. Judy Shelton has expressed support for the gold standard, and has questioned whether bank deposits should be insured. These thoughtcrimes make her toxic for Democrats. The two now go to the Senate for a full vote.

Note we will have the FOMC meeting next week, where further stimulus measures will be discussed. The credit tightening in the mortgage market will almost certainly be an issue, although I don’t know what the Fed can do about that since it is being driven by the CARES Act, not necessarily financial markets.

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Vital Statistics:

Stocks are up this morning on stimulus talks in Europe and positive news on a COVID vaccine. Bonds and MBS are up.

Happy half century birthday to Freddie Mac. “As our company celebrates 50 years, we stand on the threshold of a new stage in our evolution as an organization, leading an industry poised for fundamental transformation and playing a critical, stabilizing role during a time of extreme volatility for our country,” said David Brickman, CEO of Freddie Mac.

Economic growth accelerated in June, according to the Chicago Fed National Activity Index. Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +4.11 in June from +3.50 in May. Three of the four broad categories of indicators used to construct the index made positive contributions in June, and two of the four categories increased from May. The index’s three-month moving average, CFNAI-MA3, moved up to –3.49 in June from –6.36 in May.

FHFA has maintained the same goals for Fannie and Fred in the upcoming year. 24% of mortgages should be from low income borrowers, while 14% of mortgages have to come from low income areas.

Forbearance rates fell to a 2 month low, according to the MBA. 7.8% of mortgages are in forbearance. By source, Fannie and Freddie forbearance numbers are 5.6%, government are 10.3% and non-government guaranteed mortgages were 10.4%. This was the biggest drop in forbearances since they began tracking them.

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Vital Statistics:

Stocks are flattish as we head into the heart of earnings season. Bonds and MBS are flat as well.

Aside from earnings, we should have a quiet week on the data front, with only new home sales on Friday. There will be no Fed-speak ahead of the FOMC meeting next week.

Quicken disclosed that it earned between $3.35 and $3.55 billion in the second quarter, according to its updated prospectus.

The US median home price rose 3% in June, according to Redfin. “The market has remained very competitive even as we’re getting towards the late summer months when things usually begin to cool off,“ said Redfin Detroit agent Tony Orlando. “We saw a spike in homebuying immediately after real estate reopened in May, and ever since then we’ve been busy. At this point, homebuyers are assuming that they’ll have to pay a lot more for a home than they initially expected due to all the competition. Today’s record-low mortgage rates help with that some, but the upfront costs are still a tough pill to swallow.”

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