All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,159	-4.8
Oil (WTI)	61.02	-0.37
10 year government bond yield		1.57%
30 year fixed rate mortgage		3.18%

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.

Filed under: Economy, Morning Report |