All Things in Moderation

Vital Statistics:

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

Personal incomes rose a whopping 21% in March, driven by stimulus payments. Personal spending rose only 4.2%, which is another indication that people are saving their stimulus checks, not spending them. Saving includes debt payments, which is probably what people are doing with the money.

The Personal Consumption Expenditure price index rose 2.3% in March. Ex-food and energy it rose 1.8%. This is the inflation index the Fed pays the most attention to, and it is really the core index (excluding food and energy) that the the Fed focuses on. Note the “market based” index, which is a supplemental index that excludes some other bootstrapped readings, rose 1.6% ex-food and energy. Bottom line, inflation remains below the Fed’s target rate, and that means policy is going nowhere for the time being.

The employment cost index rose 0.9% in the first quarter and 2.6% on a year-over-year basis. Wages and salaries rose 2.7%, while benefits costs rose 2.5%.

Pending Home Sales rose 1.9% in March, according to the National Association of Realtors. Year-over-year contract signings were up 23%, however they were unusually depressed last year due to COVID. NAR projects that existing home sales will increase by 10% to 6.2 million in 2021, and home prices will rise about 9%. They see housing starts rising to 1.6 million in 2021 and 1.7 million in 2022. That might not be enough to meet demand however.

New Construction accounts for a quarter of homes for sale, according to a study by Redfin. This is due to both increased homebuilding and fewer existing homes for sale. “New construction has typically been a good option for buyers who don’t want to deal with bidding wars because builders don’t usually set deadlines for offers. Buyers also like that they can often buy a new home for what it’s actually listed for rather than having to offer way over the asking price to win,” said Melanie Miller, a Redfin real estate agent in Houston. “However, inventory for new construction is very low and prices are now rising for many new and pre-construction homes because lumber prices have gone up. I had one buyer who came to terms with a builder at a certain price. The builder called us the next day and said they can’t do that price anymore because their suppliers just increased prices.”

The soaring costs of sticks and bricks are a big reason why new home costs are rising so much. For anyone who has swung by the Home Despot to work on a home improvement project, lumber costs are through are up almost fivefold over the past year:

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Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.

The Fed left interest rates unchanged at its meeting yesterday. Bonds had zero reaction to the press release. The Fed is still concerned about COVID and its effect on the economy:

Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.

The statement stressed that the Fed wants to see inflation at 2% over the long-term and says inflation has been running “persistently below this goal.” In addition, note the “transitory” characterization about inflation in the statement. The runup in commodity prices is due to COVID supply chain disruptions and shortages, which should dissipate as the year goes on.

First quarter GDP grew at 6.4%, according to the BEA. This is the advance estimate and it will be revised twice. Personal consumption expenditures and government spending drove the increase. Investment fell, largely driven by inventory depletion.

Inflation rose to 3.5% in the first quarter compared to 1.5% in the fourth, so inflation is accelerating. Excluding food and energy, PCE inflation rose 2.3%. Supply chain bottlenecks are causing shortages. Again, inflation numbers for the next several months are going to look exaggerated due to the lockdowns a year ago.

Initial Jobless Claims were more or less unchanged last week at 553k.

Professional Real estate investors beware: the new tax plan by the Biden Administration looks to severely restrict the 1031 exchange, which means capital gains taxes will be due immediately after a property sale, even if you buy another property in the next six months. He also wants to double the capital gains rate as well, and increase inheritance taxes. I have to imagine the net result of gutting the 1031 exchange will be to shrink home inventory even more.

Freddie Mac released a statement on the FHFA’s new refi program for low-income borrowers. “Millions of homeowners have benefited from refinancing to reduce their monthly mortgage payment and build long-term wealth. Freddie Mac’s new Refi Possible mortgage creates more equitable opportunities by making it easier for homeowners in lower income brackets to refinance their mortgage. Refi Possible reaches many homeowners who can benefit from refinancing and provides flexibilities that incentivize our clients to serve these eligible borrowers moving forward. Our goal is to expand access to credit responsibly and make sure we are supporting sustainable homeownership.”

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Vital Statistics:

Stocks are flat this morning as earnings come in. Bonds and MBS are down as we await the FOMC decision at 2:00 pm

Morgan Stanley is out with a call saying that optimism for the economy out of the Fed could be bearish for stocks. The fear is that the Fed will begin removing accomodation before the economy has fully recovered. FWIW, the December Fed Funds futures are handicapping a 12% chance of a rate hike this year.

Mortgage applications fell 2% last week as purchases fell 5% and refis fell 1%. The 30 year fixed rate mortgage fell for the third week in a row. “Mortgage applications decreased last week, even as mortgage rates dropped for the third week in a row,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Even with a few weeks of lower rates, most borrowers have likely already refinanced, which is why activity has decreased in seven of the last eight weeks. The purchase market’s recent slide comes despite a strengthening economy and labor market. Activity is still above year-ago levels, but accelerating home-price growth and low inventory has led to a decline in purchase applications in four of the last five weeks.”

The CFPB has officially delayed the new QM rule until October of next year. This was the rule that changed the relevant metric from a 43% debt to income ratio to something based on a mortgage’s proximity to the average mortgage rate. It also keeps the GSE patch in place, although FHFA has told Fannie and Freddie to limit their 43 DTI + loans, so I guess this really isn’t going to make a substantial difference unless the FHFA letter to Fan and Fred from last January is rescinded.

The homeownership rate ticked down in the first quarter, according to the Census Bureau. FWIW, it is still artificially high due to the foreclosure moratorium. I am not sure what drove the Q220 and Q320 spike, but it looks strange and I suspect it is some sort of data issue.

Consumer confidence rose in April, according to the Conference Board. We are back to pre-lockdown levels as consumers’ current assessment of conditions increased.

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Vital Statistics:

Stocks are flattish this morning as we head into Fed week and the meat of earnings season. Bonds and MBS are down small.

Flagstar Bank reached a deal to be acquired by New York Community Bank in an all-stock merger. Based on Friday’s closing prices, the deal is a 6% premium, which isn’t massive. It sounds like the rationale for this merger is not the typical cost-cutting one since there is no overlap of branches. It look like more of a strategic deal where NYCB wants to transition away from its roots as a thrift bank and add commercial banking heft. Lee M Smith of Flagstar will continue to run the mortgage operations, so it sounds like NYCB envisions keeping everything there. NYCB stock is up pre-open so it looks like the Street likes the deal.

The week ahead will have quite a bit of economic data with GDP on Thursday and Personal Incomes / Personal Spending on Friday. We will also have the FOMC meeting on Tuesday and Wednesday. No changes in policy are expected, however if the statement is unusually positive on the economy, bond prices could be vulnerable.

The next test for the Fed will be introducing the idea of returning to a more normal policy. The Fed wants to avoid a repeat of the “taper tantrum” when it made its first attempt to get off the zero bound. In the statement from the March meeting, it said that it wanted to see “substantial progress” towards full employment, and if you look at the employment-population ratio, it gives you kind of an idea what they need to see.

Pre-COVID, the employment-population ratio was 61.1% and it is now 57.8%. To get back to that level, we need to see about 11 million more jobs created. Given that inflation was still below the Fed’s target rate at that level, I think we have to assume that they are probably targeting that level again before they even think about increasing rates (or perhaps even tapering). I think the Fed feels like they were too aggressive last time around and will be less fearful of an inflationary surge. FWIW, CPI inflation was routinely in the 3% – 4% range during the mid- 1980s and 1990s, and most of us remember that period as pretty comfortable economically.

Durable Goods orders rose 0.5% in March, following a 0.9% decline in February. This was below the Street consensus of a 1.5% gain. Core Capital Goods orders (which are a good proxy for business capital expenditures) actually fell by 4.7% (excluding national defense). Inventory build was also minimal, which was another surprise.

The Biden Admin signed a mortgage relief bill that helps delinquent borrowers with their taxes and insurance bills. It will be distributed to states based on their unemployment rates.

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Vital Statistics:

Stocks are higher as we round out the week. Bonds and MBS are up small.

New Home sales rose 21% MOM and 69% YOY to a seasonally-adjusted average of just over 1 million homes. The increases are exaggerated by bad weather in February and COVID lockdowns last year.

The MBA updated its forecasts for 2021, with total originations expected to fall 14% from a record $3.8 trillion in 2020 to a still-robust $3.28 trillion. This would be the third highest on record. Purchase originations are expected to increase to $1.78 trillion. Refis are expected to fall by a third.

Exiting home sales fell 3.7% from February to a seasonally-adjusted annual rate of 6.01 million units. The median home price rose a record 17.2% to $329,100. Inventory rose slightly to 1.07 million units, but is still down 28% on a YOY basis. Lack of inventory was the constraint on sales, and it represents about a 3 month supply. We are at record lows for inventory since NAR started tracking this data in 1982.

The typical 30 year mortgage rate rose 27 basis points in March to 3.08%, according to Freddie Mac’s survey. Higher prices and higher mortgage rates are definitely affecting affordability.

Joe Biden proposed raising the capital gains tax to 39.6% for Americans earnings $1 million or more. The money would go to fund childcare and community college and would be separate from the $1.5 trillion infrastructure plan. Meanwhile, Senate Republicans are working on a scaled down $600 billion infrastructure plan.

The Conference Board Index of Leading Economic Indicators rose 1.3% in March. “The U.S. LEI rose sharply in March, which more than offset February’s slightly negative revised figure,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The improvement in the U.S. LEI, with all ten components contributing positively, suggests economic momentum is increasing in the near term. The widespread gains among the leading indicators are supported by an accelerating vaccination campaign, gradual lifting of mobility restrictions, as well as current and expected fiscal stimulus. The recent trend in the U.S. LEI is consistent with the economy picking up in the coming months, and The Conference Board now projects year-over-year growth could reach 6.0 percent in 2021.”

Homebuilder D.R. Horton reported that earnings per share increased 93% to $2.53 per share in the quarter ending March 31. Revenues rose 43%, and homes closed rose 36%. Backlog increased 85%. D.R. Horton’s focus in on homes in the $200k – $500k range, so it is really a barometer of the entry-level and move-up markets. Gross margins rose to 24.6%, so it is clear that the company is able to pass on increased input costs like lumber and labor.

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Vital Statistics:

Stocks are flattish this morning after the European Central Bank decision to maintain current policy. Bonds and MBS are flat as well.

Finally, some economic news this week. Initial Jobless Claims fell to 547k, while the Chicago Fed National Activity Index jumped to 1.71.

Ocwen is buying Texas Capital Bank’s correspondent division and a portfolio of MSRs. Terms were not disclosed, but TCB originated about $2.4 billion in the fourth quarter, and the MSR portfolio is $14 billion in UPB. TCB’s correspondent division and personnel will be absorbed by Ocwen’s PHH unit.

Meanwhile, Redwood Trust is partnering with Churchill Homes to increase its exposure to business purpose mortgages.

Sales of luxury homes jumped 42% in the first quarter of 2021, according to Redfin. This is a change from the typical post-2008 bubble phenomenon where luxury properties (especially on the East Coast) languished for years on the market with no interest. Lower mortgage rates (and rising asset prices) are driving the move. Note that many of these homes are located in California, where a 1,500 square foot ranch can command a couple million bucks and gets lumped in the “luxury” category.

Homebuilder NVR reported first quarter 2021 earnings of $63.21 per share which was up 41%. Revenues rose 29%, and gross margins expanded to 19.7%. For the next few quarters, year-over-year comparisons for Corporate America are going to look great given the easy comparison to COVID-19 numbers.

Average sales prices increased 10% to 410k, which is a surprise to me given the rally in lumber and the increase in gross margins. Perhaps the company is shifting production to smaller homes, or is building in the exurbs where land is cheaper.

Corporate bond spreads are narrowing, as investors worry less and less about the economic backdrop. The average spread to Treasuries for junk bonds is a mere 3.02%, which is testament to the fact that a lot of money is looking for a home. The last time it was this low was 2007. Corporations have raised a lot of capital over the past year, and are pretty cash-rich at the moment. In this environment, expect to see a lot more M&A activity.

That said, corporations (especially retailers) have learned their lesson about running “lean and mean” inventory levels and many will spend some of that cash re-stocking. In fact, the CEO of Prologis said on the company’s earnings call that the current environment for logistics is the best he has seen in his career.

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Vital Statistics:

Stocks are lower this morning as overseas cases of COVID-19 increase. Bonds and MBS are up small.

Mortgage applications finally snapped out of their slump and increased for the first time in 6 weeks. Overall applications increased 6.8%, while purchases increased 6% and refis rose 10%.

FHFA Chairman Mark Calabria spoke at the MBA Spring Conference and said that the Preferred Stock Purchase Agreement (the basic governing doc between the GSEs and the government) will need to be amended again.

“I said in January when the PSPA were signed — there needs to be another set of amendments. January really is a bridge,” he told Wells Fargo‘s Kristy Fercho, chair-elect of the Mortgage Bankers Association, at the trade group’s spring conference. “We knew when the January memo was being signed that Fannie would hit the retained earning caps and the sweep would go into place. And so it was absolutely critical that we ended this sweep so we can continue to build capital. Because again, just as it is at Wells or any other financial institution, with Fannie and Freddie, capital really is the binding constraint on the risk and footprint and activities they can take.”

Calabria was asked about the 7% investment cap as well. Here is what he said:

“I obviously wish that we were in a better capital position and had a stronger Fannie and Freddie that could support more of the market, and that’s our objective” Calabria replied. “The reality is there will be some short-run pinch, if you will, on the market, while we try to build a stronger Fannie and Freddie that can support the market. I do want to clarify because I think there’s often some misperceptions out there, and to say, the PSPA are lines of credit, Fannie and Freddie cannot legally knowingly take risk against PSPAs. That would be like if Wells said, ‘Well, we’ve got deposit insurance so who cares.’”

I found this statement surprising since the NOO loans are highly profitable for Fannie Mae and Freddie Mac, so limiting them does nothing to improve their capital position. As Calabria mentioned, the PSPA is a line of credit, and this would be the first time I have seen a creditor unilaterally change a debt covenant in a way that is adverse to the creditor. It is possible he is referring strictly to the high risk stuff (i.e. high LTV / low FICO / >43 DTI) and not the investment properties, but the question was specifically about the 7% cap. But certainly, if the overarching goal here is to get Fannie Mae and Freddie Mac better capitalized, limiting investment property loans goes against that goal.

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Vital Statistics:

Stocks are down this morning on overnight weakness in equity markets. Bonds and MBS are down small.

The number of loans in forbearance fell another 16 basis points last week to 4.5% of servicers’ portfolios. Fannie Mae and Freddie Mac loans fell to 2.44% while FHA fell to 6.16%.

Given the investment limits on non-owner occupied loans, non-QM lenders are stepping in to fill the void. It is important to understand that the GSE’s issue with these loans is philosophical, not risk-related. In other words, these investor loans are profitable – that isn’t the issue. This restriction was put in place by Mark Calabria, the current director of FHFA. This is driven by a belief that the government should be supporting first time homebuyers, and helping people get on the first rung of homeownership. It shouldn’t be in the business of helping professional real estate investors.

That said, the limits on high-risk loans (high LTV / low FICO) are being driven by risk concerns. FWIW, if these limits stay in place, I think the high risk stuff is going to go to FHA, while the investor stuff will go to non-QM.

Western Alliance reported strong first quarter numbers, with EPS up 130% YOY to $1.90 per share. The acquisition of Amerihome closed and the bank intends to portfolio a bunch of Amerihome (and presumably Galton) non-QM loans on its balance sheet. The stock has been on a tear, more than tripling over the past year.

Interesting study results out of Fannie Mae regarding remote work. Respondents reported that remote work improved productivity and reduced operating costs. That said, collaboration did seem to suffer. 79% of lenders prefer a hybrid model, where some employees work remotely and some work on-site.

I think the big takeaway from COVID and remote work is that a big source of friction in the economy – the need for workers to be located near their place of work – is disappearing. This should help drive productivity increases in the economy, which is what drives improving standards of living. If you look at the latest NFIB Small Business Sentiment Survey, finding qualified workers remains the biggest concern for small business. The ability to source workers from all over the country will help alleviate that issue.

Note that productivity has always been notoriously hard to measure, and in these days of “free” internet applications it is 10x worse. How do you put a price on your personal data? It isn’t monetary, but it isn’t worthless either. Since productivity and inflation are intertwined, this will become a more important issue going forward.

Speaking of inflation, consumer products giant Proctor and Gamble announced that it will increase prices in September. It appears that prices of paper products is driving the increases. Kimberly-Clark also announced it will increase prices in June.

Speaking of inflation, lumber continues to spike. It is trading now at $1,347. Users of lumber had delayed orders in hopes that prices would fall, and that didn’t happen. Now everyone is competing for supply.

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Vital Statistics:

Stocks are flattish this morning as earnings season begins. Bonds and MBS are flat.

We should have a quiet week data-wise, with existing home sales and new home sales the only really important data. We won’t have any Fed speakers since we have a meeting next week.

According to the CDC, at least half of all adults have received at least one COVID-19 shot. Despite this good news, it looks like overseas countries are battling with a resurgence of cases.

The CFPB is taking aim at servicers. “We are very concerned and we’re watching closely…Our supervision team is robustly asking for more data than ever from servicers….We remain very concerned about a potential wave of borrowers seeking assistance after the emergency protections expire later this year, and we will use our regulatory, enforcement, and supervisory authorities to prevent avoidable foreclosures” said the CFPB spokeswoman.

Apartment market conditions appear to be tightening for the first time in a year and a half, according to the National Multifamily Housing Council. Interestingly, the debt financing conditions continued to weaken. I think this refers more to CMBS transactions, not 1-4 unit residential financing which is facing new caps from Fannie Mae. The CMBS market took some lumps last year as COVID-19 negatively affected many commercial real estate tenants. That might explain why Annaly jettisoned its CMBS portfolio recently.

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