Morning Report: Inflation spikes

Vital Statistics:

 LastChange
S&P futures4,084-4.4
Oil (WTI)59.43-0.45
10 year government bond yield 1.68%
30 year fixed rate mortgage 3.26%

Stocks are flattish this morning after a dull overnight session. Bonds and MBS are down.

Inflation at the wholesale level jumped last month, according to the Producer Price Index. The headline number rose 1% month-over-month and 4.2% year-over-year. Ex-food and energy, it rose 0.7% MOM and 3.1% YOY.

The FOMC minutes from Wednesday mentioned that the early days of COVID presented some unusually weak price readings, which will create exaggerated year-over-year comparisons this year. While the Fed focuses on the Personal Consumption Expenditures index instead of CPI / PPI it appears we are seeing this effect here as well. Regardless, bonds don’t like the number and the 10 year tacked on about 5 basis points of yield this morning.

Fannie Mae sent out a letter yesterday regarding non-owner occupied properties. It said:

Effective June 1, all whole loans secured by investment properties must be purchased against the Investment Property commitments in Pricing & Execution-Whole Loan® (PE-Whole Loan). Loan Delivery will allow whole loans for investment properties to only be delivered against a 30yr or 15yr investment property PE-Whole Loan commitment. If an investment property loan is delivered against another commitment type (e.g. 30-Year Fixed Rate, 30-Year Fixed Rate – 110k Max Loan Amount, etc.) a fatal edit will occur.

Essentially, Fannie will limit its purchases of investment properties (and presumably second homes) by rationing its commitments to people. No idea what pricing will look like or anything like that, but that is the latest out of Fannie. I have heard that Freddie is telling lenders they may have to repurchase excess NOO loans if they over-deliver.

Higher borrowing costs are not deterring demand for second / vacation homes, according to Redfin. “The Palm Springs housing market is incredibly busy, with an influx of vacation-home buyers from Los Angeles and San Francisco,” said local Redfin agent Nisa Sheikh. “Many of them are tech workers who can do their jobs remotely, and they enjoy the weather and lifestyle here in the desert. People don’t want to vacation in a hotel room right now, and many of my buyers are planning to turn their second homes into Airbnb rentals and earn some extra income when they’re not in town.”

Redfin noted that home price appreciation was higher in seasonal towns versus non-seasonal towns. Redfin noted that second-home mortgage locks were up 128% in March, which I think was driven by people trying to get in loans before Fan and Fred impose their NOO limits. Look at the price appreciation: 19%.

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