All Things in Moderation

Vital Statistics:

Stocks are flattish this morning as we round out the first quarter of 2021. Bonds and MBS are up small.

The economy added 517,000 jobs in March, according to the ADP jobs report. Leisure and hospitality accounted for 169k, with professional & business services adding another 92k. Note the Street is looking for 625,000 new jobs in this Friday’s employment situation report.

Mortgage applications fell 2.2% last week as purchases decreased 2% and refis fell 3%. This is the third week in a row with a decline in mortgage applications. “After seven consecutive weeks of increasing mortgage rates, the 30-year fixed rate declined 3 basis points to 3.33 percent, which is still almost half a percentage point higher than the start of this year,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage applications for refinances and home purchases both declined, but purchase activity was still convincingly higher than the pandemic-induced drop seen a year ago, as well as up 6 percent from the same week in March 2019.”

Consumer confidence jumped in March, according to the Conference Board. “Consumer Confidence increased to its highest level since the onset of the pandemic in March 2020,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions and their short-term outlook improved significantly, an indication that economic growth is likely to strengthen further in the coming months. Consumers’ renewed optimism boosted their purchasing intentions for homes, autos and several big-ticket items. However, concerns of inflation in the short-term rose, most likely due to rising prices at the pump, and may temper spending intentions in the months ahead.”

Despite COVID, HUD has no intentions of raising the FHA’s mortgage insurance premium charges. The insurance fund is at $80 billion and is above the 2% minimum capital requirement. That said, we have a foreclosure moratorium, which is delaying insurance filings, so the health of the insurance fund is overstated.

Biden intends to unveil a $2.3 trillion infrastructure plan this afternoon, which will target roads and bridges and will build out an electric vehicle charging network. The plan will be paid for by raising corporate taxes.

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Vital Statistics:

Stocks are flattish as we head into the last week of the quarter. Bonds and MBS are down.

A major hedge fund blew up last week, and so some of the weakness you may be seeing in certain names is a result of it. Most of the risk appears to be overseas.

Some of the weakness in Treasuries is due to the Supplemental Liquidity Ratio issue that expires at the end of the month. Banks may be selling Treasuries and MBS into the end of the quarter to get their weightings in line.

Annaly Capital (a big mortgage REIT) just reached a deal to sell its commercial real estate business for about $2.3 billion. It will re-deploy that cash back into the agency and residential loan space. I have to imagine mREITs like Annaly will be drawn to the potential returns in AUS-compliant / non-guaranteed mortgages, and they will be a source of demand for that paper.

Home prices are still rising at double-digit rates. The Case-Shiller Home Price Index rose 11% YOY, while the FHFA Home Price index rose 12%. With inventory levels at all-time lows, and lots of institutional money flooding into the space looking for rentals home prices will have an upward trajectory.

Forbearances fell again last week, according to the MBA. The total number in forbearance fell below 5% to 4.96%. “More than 17 percent of borrowers in forbearance extensions have now exceeded the 12-month mark.” Fratantoni noted. “Many homeowners need this support, even as there are increasing signs that the pace of economic activity is picking up as the vaccine rollout continues. Those who have an ongoing hardship due to the pandemic and want to extend their forbearance beyond the 12-month point need to contact their servicer. Servicers cannot automatically extend forbearance terms without the borrower’s consent.”

The Center for Disease Control extended the eviction ban to June 30. “The COVID-19 pandemic has presented a historic threat to the nation’s public health,” said CDC Director Dr. Rochelle Walensky. “Keeping people in their homes and out of crowded or congregate settings — like homeless shelters — by preventing evictions is a key step in helping to stop the spread of COVID-19.”

The SEC and FICC are proposing higher margin amounts for TBA trading firms. In the wake of the bond market volatility a year ago, when the Fed pushed rates down to 0%, a wave of margin calls hit the industry. This worried the regulators, so they are looking to prevent this from happening again by requiring additional margin up front. The punch line is that when you ask your TBA broker for more capacity, don’t be surprised if they ask for you to drop your margin threshold in exchange.

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Vital Statistics:

Stocks are higher this morning as markets rallied overnight. Bonds and MBS are down.

Yesterday’s 7-year auction wasn’t a disaster, but it wasn’t great either, and that pushed 10 year yields up about 6 basis points or so.

Personal Incomes fell 7.1% in February, which was driven by stimulus check comparisons. Personal Consumption expenditures fell by a percent as well. The PCE Price Index rose 1.6% YOY and the core PCE Index rose 1.4% YOY. While we did see an uptick in inflation in the CPI numbers, the Fed prefers PCE, and so far it seems to be where it has been for the past year.

The homebuying market is competitive enough as it is, with homes sitting on the market for an average of only 20 days. Potential homebuyers have their hands full competing with each other, and now we have a new entrant. Homebuilder Lennar has partnered with Centerbridge Partners spend $4 billion on a build-to-rent strategy. Not sure if this also includes existing homes as well, but this have the effect of taking supply off the market, whichever way you look at it. Other SFR rental REITs like American Homes 4 Rent and Invitation Homes are also building up their inventory.

Separately, Lennar announced first quarter earnings of $3.20 per share, compared to $1.27 a year go. Not only were revenues up big, but margins exploded, with gross margins rising to 25% from 20.5% a year ago. Note Lennar is on a November fiscal, so last year’s quarter was entirely pre-COVID. New orders and backlog were up 31% and 32% respectively.

Homebuilder KB Home also announced earnings, however they saw more muted results, with revenues up only 6%. That said, KB’s earnings rose 62% driven by higher margins as well. Orders are up 23%.

The big jump in margins is surprising given that lumber prices have tripled over the past year and skilled labor is supposedly in short supply and expensive. We aren’t seeing the massive jumps in average selling prices though – KB’s ASP was up only 2%, and Lennar’s ASPs actually fell. IMO this is a product mix-driven change as starter homes are in especially short supply.

The rapid increase in home prices has people talking about a potential housing bubble, or at least the possibility of a correction. I think the talk of a bubble can be dismissed out of hand, since housing bubbles generally come around every third or fourth generation and the pieces simply aren’t in place for one.

Can we see a correction? That is certainly a possibility, however IMO the supply and demand dynamics simply aren’t there. Lennar’s new venture with Centerbridge is illustrative of why. Professionally managed money is flooding the sector, drawn to the high potential returns. Think about it: Resi real estate cap rates are in this high single digits, plus the entire sector is appreciating at close to double digits. Where else are you going to get that sort of return? Stonks? Even corporate high-yield debt is only mid single digits. Homes may be overpriced on a multiple-to-income basis, but so what? That won’t change until (a) rates rise and (b) supply increases. It will take years of housing starts above 2 million for that to happen.

There is one potential issue with investment properties and that is the government. Rumor has it that the eviction moratorium will be extended another year. That said, this issue will fade in importance as the economy recovers and leases expire. Note that with Fan and Fred’s changes on investment property loans that cap rates will probably fall a touch, although there will be a bid for these loans, especially on the mREIT side. Investor demand will still be high. Again, compare the potential returns on SFR rentals with the investment universe. The money has to go somewhere.Posted

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Vital Statistics:

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

Fourth quarter GDP was revised upward to 4.3%, while consumption was revised downward to 2.3%. The PCE price index rose 1.5%, which is below the Fed’s 2% target rate. Ex-food and energy, the PCE index rose 1.3%, so despite all of this talk about growing inflation it isn’t really showing up in the data yet. For the full year 2020, GDP fell 3.5%, and the inflation index rose 1.2%.

Initial Jobless Claims rose 684k last week, which is a post-pandemic low. The labor market is on the mend, however these numbers are still wildly above any sort of historical norm.

Jerome Powell said that the economy is improving better than expected. He did mention the eventual tapering. “As we make substantial further progress toward our goals, we’ll gradually roll back the amount of Treasuries and mortgage-backed securities we’ve bought,” Powell told NPR’s “Morning Edition” in a live interview. “We will very gradually over time and with great transparency, when the economy has all but fully recovered, we will be pulling back the support that we provided during emergency times.”

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Vital Statistics:

Stocks are lower this morning as Jerome Powell heads to the Hill for two days of testimony. Bonds and MBS are up.

Bond yields are falling a little on Jerome Powell’s prepared remarks. While he talked about the recovery, he did mention the further work to be done.

Indicators of economic activity and employment have turned up recently. Household spending on goods has risen notably so far this year, although spending on services remains low, especially in sectors that typically require in-person gatherings. The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also picked up. As with overall economic activity, conditions in the labor market have recently improved. Employment rose by 379,000 in February, as the leisure and hospitality sector recouped about two-thirds of the jobs it lost in December and January. The recovery has progressed more quickly than generally expected and looks to be strengthening. This is due in significant part to the unprecedented fiscal and monetary policy actions I mentioned, which provided essential support to households, businesses, and communities. However, the sectors of the economy most adversely affected by the resurgence of the virus, and by greater social distancing, remain weak, and the unemployment rate—still elevated at 6.2 percent—underestimates the shortfall, particularly as labor market participation remains notably below pre-pandemic levels. We welcome this progress, but will not lose sight of the millions of Americans who are still hurting, including lower-wage workers in the services sector, African Americans, Hispanics, and other minority groups that have been especially hard hit.

The Biden Administration is working on a $3 trillion infrastructure plan which will include roads and bridges, updating the electrical grid, universal broadband, and tax increases. I don’t think any Republican has voted for a tax increase since the George HW Bush “Read My Lips” moment, so hopes of bipartisanship are probably not going to happen. Regardless, Biden is going to try.

The number of loans in forbearance fell to 5.05%, according to the MBA. “New forbearance requests decreased to their lowest level since last March. Combined with a steady pace of exits, this drop in new requests resulted in a larger decline in the share of loans in forbearance across all investor categories,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “More than 11 percent of borrowers in forbearance have now exceeded the 12-month mark. We anticipate that servicers will be busy over the next month, with many homeowners opting for the extension for up to 18 months recently made available for federally-backed loans.”  

Speaking of the MBA, it had issued a letter that urged the government to reconsider the investment caps for Fannie and Freddie. That letter is no longer on the MBA’s website. Could be wishful thinking on my part, but maybe the government is re-thinking this directive? Janet Yellen could write a letter to FHFA rescinding the last letter, and it would be business as usual. I think the last thing the government wants to see is credit get restricted.

New Home Sales fell 18% to a seasonally-adjusted annual rate of 775,000. This is 18.2% below January, but 8% above last February. I suspect this is weather-driven, but higher input prices are having an effect as well.

Dallas Fed Head Robert Kaplan said he was one of the members who would vote for a rate hike in 2022.

The forecast has improved, my forecast has improved meaningfully,” said Kaplan, adding that he is expecting 6.5% growth in gross domestic product in 2021, in line with the median committee estimate. Having said that, we’re still in the middle of the pandemic, and I want to see more than a forecast. I want to see actual evidence that that forecast is going to unfold. As we do, and as we make substantial further progress in meeting our dual mandate goals, I for one am going to be an advocate of beginning the process of moving some of these extraordinary monetary measures and doing it sooner rather than later,” he said. “But I need to see outcomes, not just a strong forecast.

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Vital Statistics:

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

The upcoming week will have a lot of Fed-speak, but should be relatively non-eventful for economic data. We will get personal incomes and spending on Friday, along with the third revision of Q4 GDP.

Congress has allocated money to help struggling landlords who aren’t receiving rent from the their tenants. That said, many landlords are turning down this aid because of the strings attached. “If you have someone who wasn’t upholding their end of the contract…you’re asking the housing provider to sign up for essentially another year of this person being in this unit unable to pay,” said Amanda Gill, government affairs director for the Florida Apartment Association, a landlord trade group.

The Chicago Fed National Activity Index slipped in February, as production and consumption fell. Bad weather was a factor in the production numbers, but shouldn’t have played a part in the consumption area. The idea that we are going to start a rip-roaring recovery in the back half of the year is predicated on spending, particularly stimulus funds. If people use that money to pay bills or reduce debt, the effect will be much smaller.

Existing Home Sales fell 6.6% in February, according to NAR. That said, they still were up 9% on a YOY basis. The median home price came in at $313,000, which was up 16% from a year ago. Inventory stood at just over 1 million homes, which is a 2 month supply.

“Despite the drop in home sales for February – which I would attribute to historically-low inventory – the market is still outperforming pre-pandemic levels,” said Lawrence Yun, NAR’s chief economist.

“I still expect this year’s sales to be ahead of last year’s, and with more COVID-19 vaccinations being distributed and available to larger shares of the population, the nation is on the cusp of returning to a sense of normalcy,” Yun said. “Many Americans have been saving money and there’s a strong possibility that once the country fully reopens, those reserves will be unleashed on the economy.”

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Vital Statistics:

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

The Fed is allowing the temporary change to the Supplemental Liquidity Ratio to expire at the end of the month. Part of what has been driving rates higher has been banks getting ahead of this expected change. The punch line is that banks were holding a lot more Treasuries and mortgage backed securities than normal and now that will reverse. I am not sure where we are in this unwinding process, but it sounds like it has to end by the March 31.

So far we haven’t seen more guidance out of the GSEs regarding the investment property cap. Aggregators have been adding big hits to second and investment properties to discourage sellers. The most likely result of this will probably encourage the re-launch of the private label securitization market, particularly in non-guaranteed QM loans, which are loans that conform with QM, but are not guaranteed by the government. Re-launching this market will probably be an easier lift than the standard non-QM loans simply because there is a lot of data regarding prepays and defaults.

I wrote about this issue a few years ago, and as far as I can tell, not much has changed since then. The big thing people don’t realize is that there are a lot of issues the buy-side needs resolved in order to bid this paper. It isn’t as simple as the mortgage industry thinks it is. A lot of stuff needs to be ironed out at the SIFMA level regarding the behavior of issuers and servicers. Given there is a need, we will probably see it happen, but this market isn’t about re-materialize overnight.

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Vital Statistics:

Stocks are lower this morning as rates head higher. Bonds and MBS are down.

The Fed maintained the Fed Funds rate at 0%, however the dot plot showed more voting members seeing rate hikes in 2022. You can see the change between December 2020 and March 2021 below:

The economic projections also changed a touch, with the 2021 GDP estimate increasing pretty markedly from 4.2% to 6.5%. They also see the unemployment rate falling to 4.5%, however inflation is expected to be above the Fed’s target by the end of the year. The forecast for headline PCE inflation is 2.4% and the forecast for core PCE is 2.2%. In December, they saw both inflation numbers at 1.8%, so the minutes will be an interesting read to see what has changed in their thinking.

Bonds initially rallied, sold off, and then rallied again after the meeting, however they are well lower this morning. European and Asian bond yields are up this morning, so perhaps the inflation numbers has investors spooked.

Lumber prices have tripled since last year, which is adding about $24,000 to the price of a house, according to the NAHB. COVID-19 related shutdowns in lumber mills drove the increase. “The elevated price of lumber is adding approximately $24,000 to the price of a new home,” Fowke said. “Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.” Not sure how policymakers i.e. government can address the issue aside from price controls and jawboning companies like Weyerhauser about “price gouging,” neither of which will do much.

I do wonder if the drop in February housing starts was driven by commodity / labor shortages or weather. Regardless, the price of new homes is rising, along with the cost of financing them. This is not going to help matters with the supply / demand imbalance.

Speaking of the supply / demand imbalance, 36% of home sales in February were above list, a record. “This is the strongest seller’s market since at least 2006,” said Redfin Chief Economist Daryl Fairweather. “Buyers outnumber sellers by such a huge margin that many homeowners are staying put because they know how hard it would be to find a place to move to. It seems like the only move-up buyers who are confident enough to list their homes are those who are relocating to a more affordable area where they’ll have an edge on the local competition.” Biden’s proposed $15,000 first time homebuyer tax credit will help but not much.

Initial Jobless Claims rose to 770,000 last week. In order to really see a meaningful recovery, these numbers have to get back to normalcy, which is in the 200,000 – 300,000 range. That said, the unemployment rate can fall despite this since anyone who has been unemployed for 6 or more months doesn’t count in the BLS unemployment numbers. The stat to watch for improvement is the employment-population ratio.Posted onMarch 18, 2021Categories

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