All Things in Moderation

Vital Statistics:

Stocks are higher this morning as we head into a 3 day weekend. Bonds and MBS are flat. Note the bond market closes early today.

Personal Incomes fell 13.1% in April, which was driven by March stimulus checks. Personal spending rose 0.5%, while the savings rate came in at 14.9%. The Personal Consumption Expenditures index (inflation) rose 0.6%, and 0.7% ex-food and energy. On a YOY basis it was up 3.6% overall and 3.1% ex-food and energy. We will see elevated annual figures for the next several months as COVID lockdowns a year ago introduce noise into the numbers.

The US savings rate has been elevated since the COVID lockdowns were imposed. I suspect a lot of this has been due to reduced spending on experiential stuff – i.e. vacations, eating out, etc. The economic consensus seems to be that the elevated savings rate will reverse this year and that higher spending will drive growth in the second half of the year. That said, the Atlanta Fed’s GDP now tracker for the second quarter has been trending down, having just fallen from 10% to 9%.

Pending Home Sales fell 4.4% in April, according to NAR numbers. On a YOY basis, however sales were up 51.7%. “Contract signings are approaching pre-pandemic levels after the big surge due to the lack of sufficient supply of affordable homes,” said Lawrence Yun, NAR’s chief economist. “The upper-end market is still moving sharply as inventory is more plentiful there.”

Loans in forbearance increased according to numbers out of Black Knight Financial. The number rose 16k to 2.2 million homes. This is 4.1% of homeowners.

Fannie Mae’s new “Refinance Now” program opens June 5. These are basically high LTV refis. They will be limited to primary borrowers at lower than 80% of the area median income income, and will be subject to the GSE high risk loan limits. They also must have a DTI under 65% and an LTV below 97. The minimum FICO is 620.

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Vital Statistics:

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

The second estimate for Q1 GDP was unchanged at 6.4%. On the other hand, personal consumption was revised upward from 10.7% to 11.3%. The personal consumption expenditures index (the preferred inflation index by the Fed) rose 3.7% in the first quarter. Ex-food and energy, it rose 2.5%. This is above the Fed’s 2% target.

Corporate profits were flat in the first quarter. Note the stock market was up 9% over the quarter while the 10-year bond picked up 83 basis points in yield during the same period. The stock market looks like it is over its skis a little

Initial Jobless Claims came in at 406,000 last week. While the number is going in the right direction, it is still almost double where we were pre-COVID. These sorts of numbers were what we saw in the bad old days of 2009-2010

Durable goods orders fell 1.3% in April. Ex-transportation they rose 1%. Core capital goods (a proxy for business capital investment) rose 2.3%.

Luxury builder Toll Brothers reported a 21% increase in revenues in its second quarter earnings. EPS rose 71% while backlog hit a record. Higher input prices are evidently not a factor as gross margins increased and the company is guiding for them to increase further.

Newco-spelled-backwards bought a $48 billion servicing portfolio from Amerihome which was recently bought by Western Alliance.

Is real estate really an inflation hedge? Investors are piling into real estate right now, at least on the residential side. Academic studies have looked at the 1970s as kind of a test for this hypothesis. During the 70s, stocks languished while real estate rose in price. The big question however concerns rent growth and that is a tougher issue. Apartment REITs have struggled to raise rents over the past year, however that is certainly COVID-19 related.

The 1970s also corresponded to the baby-boom’s first housing purchases, while the inflation of the 1970s was pretty much unrelated to demographics (OPEC and declining productivity was the culprit in the 70s).

Investors IMO are buying SFR real estate because the cap rates (mid-single digits) are attractive enough in this low interest rate environment, and when you add in double-digit home price appreciation, you have an outsized return compared to the other asset classes out there. Multi-fam is probably less attractive, given the current political environment.

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Vital Statistics:

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

Mortgage applications fell 4.2% last week as purchases increased 2% but refis fell 7%. “Mortgage applications decreased last week as mortgage rates increased to 3.18 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinances dropped 7 percent as a result, driven by declines in both conventional and government refinance activity. “Purchase applications increased for the second time in three weeks, rebounding after a rather weak April with mostly weekly declines.”

The decrease in refinance activity makes some sense, but with home prices appreciating so rapidly, equity is being created at a rapid clip. This is a fertile environment for borrowers to do cash-out refis to pay off a HELOC or credit card debt.

Is the Fed’s policy of buying mortgage backed securities fueling the rise in home prices? At least some are making that argument. The Fed’s buying is pushing mortgage rates lower than they would otherwise be, and that is permitting people to buy more house than they otherwise would be able to. Even Boston Fed President Charles Evans thinks that the MBS purchases might be unnecessary at this point.

“The Federal Reserve’s asset purchases artificially lower interest rates and financing costs, which reinforces the buyer’s need to pay higher prices. It is even further detrimental because the higher price means that the buyer is borrowing more and taking on additional leverage,” said Michael O’Rourke, chief market strategist at JonesTrading, in an interview.

It is an interesting point, however in the context of close to $4 trillion in origination last year (according to the MBA) it is hard to imagine that $40 billion a month is moving the needle all that much. I have to imagine that competitive behavior between the big originators is having a much bigger impact.

Of course the bigger question is whether the Fed’s MBS purchases are necessary in the first place, and originators were fending off margin calls from their brokers on a daily basis a year ago, which was partially driven by the Fed’s buying.

I think it is a stretch however to link the Fed’s buying to home price appreciation. That is due to a fundamental supply / demand imbalance in the housing market, driven by over a decade of under-building. Once the COVID-19 driven supply shocks work their way through the system, we should see housing starts return to a level to meet the demand out there.

That said, does the Fed’s policy in general push up asset prices? I would argue that it does, however that goes back to the dual mandate, which is a law passed over 40 years ago. It says that the Fed must maximize employment in the context of controlling inflation. While a well-intentioned policy, like most everything the government does, there have been unintended consequences. In practice, the policy tells the Fed to keep the pedal to the metal as long as inflation (as measured by consumer prices) is behaving. What about asset price inflation? Doesn’t count. The dual mandate coincides with the mother of all bull markets in stocks, bonds, and real estate. The Fed inflated a stock bubble in the 9os, and inflated a residential real estate bubble in the aftermath. They now have a sovereign debt bubble (not just the Fed, central banks globally following the same asset support playbook). I don’t see how you can look at the German Bund with over 2 years of negative yields and think otherwise.

Speaking of COVID-19 driven supply shocks, it looks like lumber prices might have peaked. Descending lower highs are usually a technical signal that the party is over and it is time to find your coat and call your Uber.

Wall Street CEOs head to the Hill today to get grilled by Democrats over income inequality. Elizabeth Warren says it will be “fun.” Expect to see a focus on loan servicing.

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Vital Statistics:

Stocks are higher this morning after dovish comments from Fed officials yesterday. Bonds and MBS are up small.

New Home sales fell 5.9% MOM, but are up 48% on a YOY basis according to Census. The seasonally-adjusted annual rate came in at 863,000. At the end of April, there were 316,000 houses for sale, which represents a 4.4 month supply at the current pace. The median home price rose just under 5% to 336,900. This number is a surprise given the rising price of lumber and the increases in existing home prices.

Loans in forbearance fell 3 basis points to 4.19% last week, according to the MBA. “The decline was smaller than the prior week due to a slower pace of forbearance exits,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Although the overall share is declining, there was another increase in forbearance re-entries. Currently, 5.3 percent of loans in forbearance are homeowners who had canceled forbearance but needed assistance again.”

House prices rose 12.6% in the first quarter on a year-over-year basis according to the FHFA House Price Index. “House price growth over the prior year clocked in at more than twice the rate of growth observed in the first quarter of 2020, just before the effects of the pandemic were felt in housing markets,” said Dr. Lynn Fisher, Deputy Director of FHFA’s Division of Research and Statistics. “In March, rates of appreciation continued to climb, exceeding 15 percent over the year in the Pacific, Mountain and New England census divisions.”

These growth rates are staggering, although I would be careful putting too much stock into them as lockdowns from a year ago are probably introducing some noise into the data.

The Case-Shiller Home Price Index reported that prices rose 13.2% in March. Phoenix home prices were up 20%, while San Diego was 19% and Seattle was 18%.

With such rapid price appreciation, buyers are competing with each other for property. Non-contingent bids (especially cash offers) are one way to do that. According to the NAR, cash bids are now 25% of purchases. The difficulty of getting FHA and VA loans means that these buyers are at a disadvantage.

Consumer confidence was essentially unchanged in May, according to the Conference Board. “After rebounding sharply in recent months, U.S. consumer confidence was essentially unchanged in May,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ assessment of present-day conditions improved, suggesting economic growth remains robust in Q2. However, consumers’ short-term optimism retreated, prompted by expectations of decelerating growth and softening labor market conditions in the months ahead. Consumers were also less upbeat this month about their income prospects—a reflection, perhaps, of both rising inflation expectations and a waning of further government support until expanded Child Tax Credit payments begin reaching parents in July. Overall, consumers remain optimistic, and confidence should remain resilient in the short term, as vaccination rates climb, COVID-19 cases decline further, and the economy fully reopens.”

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Vital Statistics:

Stocks are higher this morning as commodity prices fall. Bonds and MBS are flat.

China has vowed to crack down on commodity speculation and this is having reverberations throughout global commodity markets, especially the metals. Since commodities generally correlate, we could see some pressure on lumber, which would be welcome in the US.

We have a big week of economic data, with real estate prices, new home sales, GDP and personal income / spending. We will also have a lot of Fed-speak.

Economic activity moderated in April, according to the Chicago Fed National Activity Index. Production-related indicators added to the index while consumption and housing deducted from it. This is consistent with some of the weaker data we saw in April, especially retail sales and employment.

Shortages – of land, lumber, gypsum and labor – are restricting development of new homes. The number of actively selling subdivisions is off 30% compared to 2019. As one developer noted: The “L’s: location, location, location” now mean “lumber, lumber, lumber.” Builders are now paying about $48,000 in softwood lumber for the average priced home.

The MBA updated its origination forecast. The advocacy group now predicts that 2021 origination will come in at $3.4 trillion before dropping to $2.3 trillion in 2022. Purchase originations will continue to increase while refis will fall off a cliff. They forecast that the 30 year fixed rate mortgage rate will average 3.5% in 2021 and 4.2% in 2022. Interestingly, the mortgage rate will increase faster than the 10-year bond yield. I am not sure what would drive that, given that the big mortgage originators (Rocket, United Wholesale, etc) are girding for a price war.

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Vital Statistics:

Stocks are higher this morning on overseas strength. Bonds and MBS are up.

Existing home sales fell 2.7% in April, according to NAR. The median home price rose 19.1% (!) to $341,600. Not sure what to make of that number. I am guessing that the lower price tier is completely picked over, and people are reaching for luxury properties, but who knows? The median price a year ago was $286,600 so perhaps that number was depressed a little? Year-over-year comparisons are going to be a bit wonky across the board for the next few months.

The seasonally-adjusted annual pace of sales hit 5.85 million, which was up big compared to lockdown-depressed numbers a year ago. There were only 1.2 million units in inventory, which represents a 2.4 month supply. These are record lows going to back to the early 80s. Days on market fell to 17.

First time homebuyers represented 31% of sales, and they are struggling to compete with cash buyers and investors who are snapping up properties. All-cash transactions were 25% of sales compared to 15% a year ago.

Delinquencies fell below 5% in April, according to Black Knight’s First Look. Total delinquencies fell to 4.66%, which is down 7% from March and 28% from a year ago. 30 day DQs did tick up compared to March however. Foreclosure starts were only 3,700, however that is being affected by the foreclosure moratorium. Once that is lifted, we should see a wave of foreclosures as there are 1.8 million loans in the seriously delinquent status. This is an increase of 1.3 million from a year ago.

If we do see an uptick in foreclosures, the big difference from 2010 would be the home equity. Anyone who bought a home 2 or 3 years ago should have enough equity to sell the home, close out the existing mortgage, and move somewhere cheaper.

Despite a tight inventory picture, RE/MAX reported that April was the strongest in 13 years. RE/MAX reported that there was only 1.1 month’s worth of inventory, and home prices increased 5.9%. Days on market hit a low at 32. “Even with rising home prices, super-quick turnarounds, and fierce competition for available listings, April 2021 saw more home sales than any April in at least 13 years. That’s a clear reflection of overwhelming demand and the resilience of today’s buyers,” said Adam Contos, CEO of RE/MAX Holdings, Inc. “The 32 Days on Market average – a report record – is noteworthy, too. Many listings are being snapped up the day they go on sale – or within just a few days. That pace underscores the importance of an experienced professional who can guide you to smart decisions and quick action – on either side of the transaction.”

Note how much the RE/MAX numbers differ from NAR. 19% home price appreciation versus 6%, 32 days on market versus 17.

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Vital Statistics:

Stocks are weaker this morning as the global sell-off continues. Bonds and MBS are flat.

The FOMC minutes didn’t have anything too earth-shattering. The economic projections prepared for the April meeting were slightly better than the ones for the March meeting. Inflation was expected to increase to above 2% for the rest of the year as COVID depressed prices in 2020, which makes the year-over-year growth exaggerated. Inflation is expected to fall below 2% next year as these YOY comparisons fall away.

The FOMC expects consumption to accelerate this year, driven by pent-up demand. So far, we are not really seeing that in the data – the personal incomes and personal spending numbers show an increase in the savings rate. They believe that the elevated savings rate will translate into higher spending in the future.

The FOMC also mentioned the tight labor market, along with the elevated unemployment rate, but made no effort to try and square the two. Businesses are struggling to find qualified workers (#1 concern of the NFIB Small Business Survey), yet the number of job losses during the pandemic was 10 million and the FOMC considers itself far from achieving its goal of full employment. To me, that is one of the big mysteries right now. It is almost as if these 10 million people exited the labor force and have no intentions of returning. I suspect the answer is a skills mismatch. Skilled labor was hard to find before the pandemic, and that is still the case. That would explain the NFIB data. Unskilled labor should be in a surplus, however it seems like every fast food place and supermarket has a “help wanted” sign on it. Definitely strange.

Regarding real estate, they did note that house prices have accelerated this year, and mortgage credit is bifurcated by credit score. Above 700, one can get a loan easily. Below that level it gets difficult. No mystery there: forbearances explain that.

The conclusion is that the Fed still has a way to go in order to achieve their goal of full employment, but the economy has improved enough that they felt comfortable removing the term “considerable” from its characterization of the downside risks to the economy.

Initial jobless claims are still elevated, with 444k filings last week. Pre-COVID, that number was closer to 200k.

On the subject of inflation, rising housing prices might be a big contributor here going forward. Owner’s Equivalent Rent (which is admittedly an “inside baseball” stat) basically tries to estimate what a homeowner would get for their house if they rented it out. If house prices rise, so does owners equivalent rent. This may sound like a theoretical exercise, and it is, but it is almost a quarter of the Consumer Price Index and 15% of the Personal Consumption Index. It is also a lagging indicator, so this will accelerate the inflation numbers going forward.

Supposedly the Reddit crowd that pushed Gamestop is now chattering about the mortgage bankers, and according to the Detroit Free Press is looking to squeeze the shorts in United Wholesale. This happened to Rocket a month or so ago and pushed it to $40 per share. Note that Loan Depot was up big intraday yesterday as it introduced a quarterly dividend.

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Vital Statistics:

Stocks are lower this morning on COVID and inflation fears. Bonds and MBS are down.

The FOMC minutes from the April meeting are scheduled to be released at 2:00 pm. I doubt we will get anything market-moving out of the release, but you should be aware.

Mortgage Applications rose by 1.2% last week as refinances rose by 4% and purchases fell by 4%. “Mortgage rates increased last week, with all loan types hitting their highest levels in two weeks. Rates  were still lower than levels reported in late March and early April, providing additional opportunity for borrowers to refinance,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite the 30-year fixed rate rising to 3.15 percent, applications for conventional and VA refinances increased. Ongoing volatility in refinance applications is likely if rates continue to oscillate around current levels.”

Rising lumber prices drove the disappointing housing starts number yesterday. It looks like lumber is starting to head back down again.

Single-family rents increased 4.3% in March, according to CoreLogic. The increase was the biggest in 14 years and was driven by the growth at the high end. There was a marked divergence between growth for SFR and attached units.

There was a wide divergence in metro areas as well, with Boston reporting a 11% decline in rents versus Phoenix which grew 11%. I wonder if the eviction moratorium is introducing noise into the data however.

The anticipated increase in housing inventory failed to materialize in April, according to the latest research by Zillow. Inventory fell 1.4% compared to March and is down 30% from a year ago. This drove prices to increase 11.6% on a YOY basis, which was the fastest increase in the history of the Zillow Home Price Index, which goes back 25 years. The typical home was on the market for only 7 days before accepting an offer. Zillow economists are forecasting another big year for home price growth, expecting to see 11.6% growth through April 2022.

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Vital Statistics:



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



Housing starts came in at 1.57 million in April, which was way below the 1.7 million Street expectation. This is 10% below the March level of 1.73 million. Building Permits came in flat at 1.7 million. Not sure what drove the decline in starts, but it is a surprise. We might see this get revised away in later releases.



The NAHB Housing Market index was flat at 83 in May as well. “Builder confidence in the market remains strong due to a lack of resale inventory, low mortgage interest rates and a growing demographic of prospective home buyers,” said NAHB Chairman Chuck Fowke, a custom home builder from Tampa, Fla. “However, first-time and first-generation home buyers are particularly at risk for losing a purchase due to cost hikes associated with increasingly scarce material availability. Policymakers must take note and find ways to increase production of domestic building materials, including lumber and steel, and suspend tariffs on imports of construction materials.” It may turn out that lack of materials was the reason for the miss in the housing starts number.



Loans in forbearance fell to 4.22% of all mortgages last week according to the MBA. “The rate of new requests dropped to 4 basis points, which is the lowest level since last March,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Of those in forbearance extensions, more than half have been in forbearance for more than 12 months.”



The Home Despot beat earnings estimates as revenues rose 33%. I am sure higher lumber prices are playing into that number. It does speak to the shortage of single family homes – if you cannot find a suitable move-up property, the next best option may be a home renovation. I would be interested to see if HomeStyle and 203k loan volume is up on this. That said, with labor shortages etc, I would imagine managing the construction process would be much more difficult these days.



Dallas Fed Chairman Robert Kaplan thinks we could possibly see a rate hike by the end of 2022. “I haven’t seen anything from that point to today that’s changed my view,” Kaplan said during a virtual town hall conversation organized by the bank. The U.S. labor market has a “good chance” of being at full employment by then and of having inflation at the central bank’s 2% target, Kaplan said.



The Fed Funds futures are still handicapping an 11% chance of a rate hike by the end of 2021.

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Vital Statistics:



Stocks are lower this morning as COVID cases increase in Asia. Bonds and MBS are down small.



The upcoming week won’t have much in the way of market-moving data, however we will get housing info with housing starts and existing home sales. We will also have a lot of Fed-speak and will get the minutes from the April FOMC meeting on Wednesday.



Manufacturing activity was flat in New York State, according to the NY Fed’s Empire Manufacturing Survey. New Orders and shipments improved strongly, although we did see shipment times expand. Prices are also increasing as raw materials get more expensive.



The Atlanta Fed’s GDP Now indicator is forecasting 10.5% GDP for the second quarter.



Three quarters of home offers were competitive situation, according to Redfin. The hottest markets are Spokane, San Diego, Boise, Salt Lake City, and Phoenix. We are seeing all-cash offers win out over offers with a financing contingency. “The homes for sale today are high-quality, desirable homes—a dynamic that’s fueling more competition. This is a contrast from the winter, when most properties coming on the market were bottom-of-the-barrel homes. The difference is that today’s sellers are folks who want to sell, whereas many sellers back in the winter had to sell and didn’t have time to do any upgrades.”

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