All Things in Moderation

Vital Statistics:

Stocks are flattish this morning despite some positive economic data. Bonds and MBS are flat.

The final revision for Q2 GDP came in at -31.4%. Personal Consumption Expenditures fell by 34.1%.

The ADP Jobs report indicated the economy added 749,000 jobs in September, which was higher than the 650k expectation. The Street is looking for 900k jobs in Friday’s report. Note that the ADP numbers have been coming in well below the actual BLS numbers. Meanwhile, companies like Disney and mall operator Brookfield are shedding jobs.

Mortgage Applications fell 5% last week as purchases declined 2% and refis fell by 7%. “Despite the decline in rates, refinances fell over 6 percent, driven by a 9 percent drop in conventional refinance applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “There are indications that refinance rates are not decreasing to the same extent as rates for home purchase loans, and that could explain last week’s decline in refinances. Many lenders are still operating at full capacity and working through operational challenges, ultimately limiting the number of applications they are able to accept.” 

A group of about 85,000 landlords filed a suit challenging the Center for Disease Control’s edict to ban evictions.

New York Fed President John Williams thinks it will take about 3 years to get back to full employment. When asked about the Fed’s 2% inflation target, he responded: “We need to make sure that we’re purposely overshooting that moderately for some time to get that balance,” Williams told reporters. “To me, success is not some arithmetic or some formula but it’s really this notion of inflation expectations, how people think about what’s inflation going to be in the future.” The Fed is desperately trying to avoid what Japan has experienced, which is deflationary expectations being anchored for a generation. Young people in Japan are notorious savers, and consumption drives the economy.

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Vital Statistics:

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

New Home sales topped the 1 million seasonally adjusted annual rate in August, according to Census. This is the highest number since June 2006. There are only 282,000 new homes for sale at the moment, which translates into a 3.3 month supply.

The rise in new home sales should hopefully trigger a similar increase in housing starts. Housing has been the missing piece of the puzzle in the US economy since the bust of 12 years ago.

Loan Depot filed to go public yesterday. That makes Rocket, United Wholesale, and Loan Depot as big mortgage banking IPOs in 2020. Loan Depot planned to go public about 5 years ago, and scrapped the plan at the last minute. Initial estimates would value the company at somewhere between $12 and $15 billion. While the mortgage origination business is certainly hot, stock market valuations are not. Quicken is trading at a 2020 P/E of about 6, and PennyMac is trading with a 2020 P/E of about 3.5. Like Quicken, it looks like Loan Depot is going public with a dual voting class structure.

Durable Goods orders rose 0.4% last month, which was a bit below expectations. The core capital goods orders number, which is a proxy for capital expenditures, rose 1.8%.

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Vital Statistics:

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

Quicken’s crosstown rival United Wholesale is going public via one of those Special Acquisition Corporations (SPACs). The deal will value the company at $16 billion. When do we get to rebrand The Motor City as the Mortgage City?

Existing home sales rose 2.4% MOM to 6 million, according to NAR. They were up 10% YOY, and the median home price rose 11% to $310,600.

“Home sales continue to amaze, and there are plenty of buyers in the pipeline ready to enter the market,” said Lawrence Yun, NAR’s chief economist. “Further gains in sales are likely for the remainder of the year, with mortgage rates hovering around 3% and with continued job recovery.”

Total housing inventory sits at 1.49 million units, or about 3 month’s worth of inventory. Historically, 6.5 months worth was considered a balanced market. In addition to the dearth of inventory, NAR believes that remote work will be a growing feature of the US economy, even after a COVID vaccine is found. You can see below we are pretty much in record territory as far as housing supply goes.

Mortgage Applications rose 7% last week as purchases rose 3% and refis rose 9%. “Mortgage applications activity remained strong last week, even as the 30-year fixed-rate mortgage and 15-year fixed-rate mortgage increased to their highest levels since late August,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications were up over 25 percent from a year ago, and the demand for higher-balance loans pushed the average purchase loan size to another record high.”

Rocket’s big announcement (which it has been hyping for weeks now) is the rebranding of its broker business from Quicken Loans Mortgage Services to Rocket Pro TPO. It will allow for e-signature technology, better visibility into loan status and allow borrowers to upload documents electronically.

“We have two pieces of technology that brokers love: One is ‘The Guru,’ and it’s kind of a Google platform for mortgage guidelines – searchable. Brokers love it,” Niemiec said in an interview. “We also have ‘The Answer,’ which is a piece of technology that brokers can interact with to ask questions and it communicates back and forth leading them to the proper answer. We actually partnered with Google over the last few months to create a new piece of technology that merges everything they love about Guru and everything they love about Answer into one tool called Pathfinder by Rocket. We’ll be rolling that out on the day of the announcement.” 

Home prices rose 1% in July and are up 6.5% YOY, according to the FHFA House Price Index.

“U.S. house prices posted a strong increase in July,” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “Between May and July 2020, national prices increased by over 2 percent, which represents the largest two-month price increase observed since the start of
the index in 1991. The dramatic increase in prices this summer can be attributed to the historically low interest rate environment and rebounding housing demand even as the supply of homes for sale remains constrained.”

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Vital Statistics:

Stocks are higher this morning as Jerome Powell heads to Capitol Hill. Bonds and MBS are flat.

Jerome Powell heads to the Hill for his semi-annual Humprey-Hawkins testimony. Here are his prepared remarks.

Economic activity has picked up from its depressed second-quarter level, when much of the economy was shut down to stem the spread of the virus. Many economic indicators show marked improvement. Household spending looks to have recovered about three-fourths of its earlier decline, likely owing in part to federal stimulus payments and expanded unemployment benefits. The housing sector has rebounded, and business fixed investment shows signs of improvement. In the labor market, roughly half of the 22 million payroll jobs that were lost in March and April have been regained as people return to work. Both employment and overall economic activity, however, remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain.

Loans in forbearance fell to 6.93% last week, according to the MBA. Fan and Fred loans decreased to 4.55%, while Ginnies increased to 9.15%. “The share of loans in forbearance has dropped to its lowest level in five months, driven by a consistent decline in the GSE share in forbearance,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “However, not only the did the share of Ginnie Mae loans in forbearance increase, new requests for forbearance for these loans have increased for two consecutive weeks. While housing market data continue to show a quite strong recovery, the job market recovery appears to have slowed, and we are seeing the impact of this slowdown on FHA and VA borrowers in the Ginnie Mae portfolio.”

The MBA and NAR are pushing back against proposed VA funding fee increases for IRRRL loans. “MBA and NAR have consistently registered our opposition to legislation that increases VA home loan funding fees to offset the costs associated with non-housing-related expenditures,” the letter said. “Although this proposed legislation would use the fee increase to fund job training and education programs that both organizations support, we believe the use of the VA home loan program for this purpose is inappropriate, particularly in the midst of a pandemic and a widespread economic downturn. This is exactly the time at which veterans should be encouraged to use streamlined refinancing options, such as IRRRLs, to lower their monthly mortgage payments. These savings are particularly important for those veterans who have suffered temporary job losses or reductions in income.”

The refi wave has the MBA forecasting $1.75 trillion in refis this year. The MBA believes this wave could be cresting. The MBA is forecasting that refinance volume will fall to $722 billion in 2021. That seems hard to square with the numbers out of Black Knight, who estimated that 19.3 million “high quality” refis were out there. 19.3 million loans (with an average loan size of say $350k) works out to be about $7 trillion. Taking away the “high quality” constraints (>20% equity, FICO > 720), there are 32.4 million refis (or over $11 trillion) out there. Currently 75% of homeowners have rates 75 basis points over the Freddie average rate. That 2021 forecast just seems off. The only way it can happen is if mortgage rates drift upward, which will probably require a resurgence of inflation and the Fed to take the foot off the gas with its MBS purchases.

That said, FHA loan spreads have widened compared to conforming loans, which is probably being driven by forbearance fears and the decline in servicing values, especially for FHA.

The jumbo-conforming spread, after spending the last several years at negative levels (in other words, jumbos had lower rates than Fannie / Freddie loans) spreads reverted back to positive numbers and is now around 35 basis points.

Affordable suburbs outside big cities are seeing the hottest real estate markets. Places like Camden County (outside Philly), Fairfield County CT, and El Dorado CA (outside Sacramento) are booming as people can get so much more for their dollar.

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Vital Statistics:

Stocks are lower this morning as the banks are getting hammered over a money laundering report. Bonds and MBS are up.

Bank stocks are getting slammed this morning after a report alleges that over $2 trillion in transactions were flagged as possible money laundering.

We don’t have much in the way of market-moving data this week, although we will get some housing numbers with existing home sales, new home sales, and the FHFA Home Price Index. Jerome Powell will be speaking Tuesday, Wednesday and Thursday this week.

The average homeowner gained $9,800 in home equity in the second quarter according to CoreLogic. There are still about 1.7 million homes with negative equity. Negative Equity still remains a problem in a few states, but the home price appreciation of the past decade has largely solved the issue.

The housing market remains red hot according to Redfin. The median home price rose 13% YOY to $319k. Active listings fell 28% to an all-time low, while sales prices were 99.3% of listing prices, which is an 11 year high.

“Seasonality is going to become more noticeable now that schools have started and Labor Day is over,” said Redfin lead economist Taylor Marr. “There is still a lot of room for more homes for sale to hit the market to make up for lost ground during the pandemic. This increase in supply is likely to drive more strong year-over-year growth in home sales. Leading indicators of home sales like mortgage applications and pending sales are still showing tremendous strength as we head into fall.”

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Vital Statistics:

Stocks are higher this morning as we await the Fed announcement at 2:00 pm. Bonds and MBS are up

The Fed is expected to maintain rates at 0%, however the action will be in the projection materials. Most market-watchers expect the Fed to keep rates at this level until 2023. In June, the Fed was predicting unemployment would end 2020 at 9.3%, and we are already well below that. They were also predicting GDP would fall 6.5% this year. What would make stocks happy? Big upward revisions in the economic predictions, along with a commitment to hold rates at 0% through 2022.

Retail Sales came in a little below expectations, rising 0.6%. Ex-vehicles and gasoline, they rose 0.7%. The control group, which also excludes building materials fell 0.2%. Note that lumber is on a tear these days.

The retail sales numbers don’t bode well for the holiday shopping season, as back-to-school is often a good predictor. One other interesting data point: the banks have been reporting credit card delinquency rates are actually falling, which means people are paying down debt and not spending. I am guessing less entertainment spending is driving this, however it is something to keep an eye on.

Mortgage Applications fell 2.5% last week as purchases fell 1% and refis fell 4%. The week did contain an adjustment for the Labor Day holiday, so that could be introducing some noise into the numbers. “Mortgage rates held steady last week, and the 30-year fixed rate – at 3.07 percent – has now stayed near the 3 percent mark for the past two months,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “A 5 percent decline in conventional refinances pulled the overall index lower, but activity was still 30 percent higher than last year. With the flurry of refinance activity reported over the past several months, demand may be slowing as remaining borrowers in the market potentially wait for another sizeable drop in rates.”

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Vital Statistics:

Stocks are higher this morning on good overseas economic news. Bonds and MBS are flat

The FOMC meeting begins today. We will get the official policy announcement tomorrow afternoon. There is talk that the Fed will change its inflation targeting policy from managing a single point in time to an average over time. The practical effect will be for the Fed to let inflation build before raising rates.

August new home purchase applications rose 33% YOY, according to the MBA. “The housing market continued to exceed expectations in August, as housing demand for new homes stayed strong and the job market continued to recover,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite economic uncertainty and the pandemic’s distortions to typical seasonal patterns, the comparisons to August 2019 show strength.”

The number of loans in forbearance fell by 15 basis points to 7.01% of mortgage servicers’ portfolio. Fannie and Freddie loans fell to 4.65%. Ginnie Mae loans fell to 9.12% and non-QM / portfolio rose to 10.71%. Part of the reason for the big drop in Ginnies / increase in portfolio loans was due to early buyout activity, where investors buy delinquent Ginnie loans out of the pool and portfolio them.

“The beginning of September brought another drop in the share of loans in forbearance, with declines in both GSE and Ginnie Mae forbearance shares,” said MBA Chief Economist Mike Fratantoni. “However, at least a portion of the decline in the Ginnie Mae share was due to servicers buying delinquent loans out of pools and placing them on their portfolios. As a result of this transfer, the share of portfolio loans in forbearance increased. Forbearance requests increased over the week, particularly for Ginnie Mae loans. With just under 1 million unemployment insurance claims still being filed every week, the lack of additional fiscal support for the unemployed could lead to even higher increases of those needing forbearance.”

In other economic data, the New York Empire State Survey improved last month, while industrial production rose 0.4% while manufacturing production rose 1%. Capacity Utilization rose to 71.4%.

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Vital Statistics:

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

Initial Jobless Claims were flat last week at 884k. Separately, there were 6.2 million job openings in the US, according to the JOLTs report. This was a big improvement which is at least one bright spot in the labor economy.

Inflation remains well below the Fed’s target according to the producer price index. The headline PPI rose 0.3% MOM and fell 0.2% YOY. The core numbers were up 0.3% MOM and 0.3% YOY. The Fed is sweating bullets about the low inflation numbers as they fear the US slipping into a Japanese-style deflationary stagnation.

New listings are up 7%, according to Redfin. Pending home sales are up 21% YOY and the median price is up 12% to $318,473. 47% of homes had an offer within two weeks – the fastest pace since 2012. What is going on? People are ringing the register as home prices rise. The demand was always there – the persistent issue in the housing market has been limited supply. The sale=to-listing ratio is 99%, and bidding wars are becoming the norm.

Problems for landlords: The National Multifamily Housing Council reported that only 75% of renters had made their September rent payment so far. In August, that number was 79%.

“The initial rent payment figures from September have begun to demonstrate the increasing challenges apartment residents are facing. Falling rent payments mean that apartment owners and operators will increasingly have difficulty meeting their mortgages, paying their taxes and utilities and meeting payroll,” said Doug Bibby, NMHC President. “The enactment of a nationwide eviction moratorium last week did nothing to help renters or alleviate the financial distress they are facing. Instead, it only is a stopgap measure that puts the entire housing finance system at jeopardy and saddles apartment residents with untenable levels of debt. Federal policymakers would have been better advised to continue to provide support as they successfully did through the CARES Act.”

It is possible that the Labor Day weekend is introducing some noise into these numbers, but the trend is a worrisome sign.

Mortgage Credit Availability continues to move south as originators find little appetite for jumbo loans. I wonder if the surprise 50 basis point LLPA affected things as well.

“Mortgage credit supply fell to its lowest level since March 2014, driven by a reduction in supply from both conventional and government segments of the market,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Additionally, both conforming and jumbo sub-indexes fell by almost 9 percent each, with the conforming index declining to the lowest reading since MBA’s series began in 2011. Credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales show a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”

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Vital Statistics:

Stocks are rebounding today after a tech sell-off. Bonds and MBS are flat.

Mortgage applications increased 3% last week as purchases and refis rose by the same amount. Purchase applications were up 40% year-over-year, however there was some noise due to the Labor Day holiday last year.

Black Knight Financial reported that $1.1 trillion worth of mortgages were originated in the second quarter

“Despite the nation being under pandemic-related lockdowns for much of the quarter, a record-breaking surge in mortgage originations occurred in Q2 2020, driven by the record-low interest rate environment,” said Graboske. “Nearly $1.1 trillion in first lien mortgages were originated in Q2 2020, which is the largest quarterly origination volume we’ve seen since first reporting on the metric in January 2000. Refinance lending grew more than 60% from the previous quarter and more than 200% from the same time last year, accounting for nearly 70% of all Q2 originations by dollar value. At the same time, purchase lending declined 8% year-over-year as the traditional spring homebuying season was impacted by COVID-19-related restrictions. However, mortgage loan rate lock data – a leading indicator of lending activity – suggests that the homebuying season was simply pushed forward into the third quarter.

More than half of Redfin offers faced bidding wars in August, according to the company. Competition was most pronounced in San Diego and San Francisco, as well as Phoenix, Austin and Salt Lake City.

“The market is on fire. There just isn’t enough on the market to supply the huge demand for homes,” said San Diego Redfin agent Lisa Padilla. “A lot of military buyers are trying to take advantage of the low interest rates for VA loans. Anything on sale for less than $600,000 has multiple offers, and sometimes they’re getting more than 20 offers. Only condos are a little slow, as most buyers want a home with a yard.”

Forbearance numbers fell to 7.16% from 7.2% last week, which was the lowest level in nearly 5 months. 4.8% of Fan and Fred loans were in forbearance while FHA loans in forbearance rose slightly to 9.62%.

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