Vital Statistics:

Stocks are lower this morning as investors worry about the Delta variant of COVID. Bonds and MBS are up.

Personal incomes rose 0.1% in June, which was higher than expectations. Personal consumption expenditures rose 1%, which beat the Street as well. The inflation numbers are elevated, with the PCE price index (the Fed’s preferred measure of inflation) coming in at 4% on the headline number and 3.5% on the core number.

The employment cost index rose 0.7% in the second quarter. Wages and salaries increased 0.9%, while benefit costs increased 0.4%. For the year, employment costs are up 2.9%, with a 3.2% increase in wages and a 2.2% increase in benefits. The increase in inflation is probably transitory as the Fed has said a million times, but bears watching.

Biden asked Congress to extend the eviction moratorium that expires on Saturday. A court ruled that CDC didn’t have the authority to impose an eviction moratorium, so the government can’t play that card any more. While the House is planning on taking up the issue today, the chance of getting a legislative extension in place this late in the game is a pretty heavy lift, so we should assume the moratorium will end on Saturday.

Home price appreciation is fastest at the valuation extremes, according to Redfin. Luxury prices rose 26%, while the most affordable bucket rose 19%. Luxury is playing catch up after languishing ever since the bubble burst. The most affordable segments are prime rental stock, so first time homebuyers are competing with professional investors.

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Vital Statistics:

Stocks are higher after GDP missed. Bonds and MBS are down.

The advance estimate for second quarter GDP came in at 6.5%, which was below the Street’s 8.5% estimate. First quarter GDP was revised downward by 0.1% to 6.3%. Despite the tremendous lack in real estate, housing was again a drag on GDP.

Initial Jobless Claims came in at 400k, higher than expectations.

Yesterday’s FOMC announcement was largely uneventful, however the language regarding asset purchases changed.

Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.

This statement about making progress (bolded and italicized) is new and indicates that the Fed is beginning to think about tapering. MBS spreads have been widening in anticipation of this event over the past quarter, so at least some of the adjustment has been made already.

Ex-MBA President Dave Stevens penned an article discussing the new Ginnie Mae proposal for increased capital requirements. This capital proposal basically imposes Basel capital requirements for non-banks. It would impose a 250% capital requirement on Ginnie Mae mortgage servicing rights, which would push lower-capitalized non-bank Ginnie Mae servicers out of the business of Ginnie Mae servicing. The government’s use of the False Claims Act in the aftermath of the financial crisis pushed a lot of banks out of the FHA business, and now the government wants to chase non-banks out of FHA servicing.

The punch line is that this missive is going to whack Ginnie Mae MSR valuations, which is only going to make FHA loans more expensive. If the government wants to see more credit extended to first time / marginal borrowers, this is a strange way to go about it.

Pending Home Sales decreased 1.9% in June, according to NAR. “Pending sales have seesawed since January, indicating a turning point for the market,” said Lawrence Yun, NAR’s chief economist. “Buyers are still interested and want to own a home, but record-high home prices are causing some to retreat. The moderate slowdown in sales is largely due to the huge spike in home prices,” Yun continued. “The Midwest region offers the most affordable costs for a home and hence that region has seen better sales activity compared to other areas in recent months.”

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Vital Statistics:

Stocks are flattish this morning as we await the FOMC decision at 2:00 pm. Bonds and MBS are down small.

Home price appreciation continues its torrid pace as the Case-Shiller Home Price Index rose 17% YOY in May. Given that May of 2020 was lockdown time, the numbers are probably distorted by small sample sizes, however all indicators point to higher prices. The FHFA House Price Index (which measures only homes with conforming mortgages) rose 18%. The real estate market is simply on fire right now.

Mortgage applications rose 5.7% last week as purchases decreased 2% and refis rose 9%. “The 10-year Treasury yield fell last week, as investors grew concerned about increasing COVID-19 case counts and the downside risks to the current economic recovery,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Refinance applications jumped, as the 30-year fixed mortgage rate declined to its lowest level since February 2021, and the 15-year rate fell to another record low dating back to 1990.”

Mortgage REIT AGNC Investment recently reported second quarter earnings, which were dinged up by widening mortgage backed securities spreads. Widening spreads means that the difference between the yield on mortgage backed securities and Treasuries is increasing. In practical terms, this means that mortgage rates are not falling as much as the 10 year yield is.

The reason for this is anyone’s guess, but it is probably due to fears that the Fed will start tapering MBS purchases sooner rather than later. The Fed is looking at the increase in housing values and asking the question whether their MBS purchases are exacerbating it.

My guess is that they are not driving the hot housing market (that is supply and demand issue) but the purchases are probably not necessary any more. That said, with fears of another round of COVID, the Fed is probably going to err on the side of caution.

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Vital Statistics:

Stocks are lower this morning on resurging COVID fears. Bonds and MBS are up.

New home sales fell to 676,000 in June, according to Census. This is 6.6% below the May reading and 19% below last year’s reading. The Street was looking for 800k, so this is a sizeable miss. That said, the margin for error in new home sales estimates is pretty large, so this one might be revised upward in the future.

The big event this week will be the FOMC meeting on Tuesday and Wednesday. No changes in rates are expected, although the market will be looking for language regarding tapering bond and MBS purchases. Aside from the FOMC meeting, we will have some important data with durable goods, personal incomes / spending and GDP.

While the headline inflation numbers seem high compared to recent history, much of this is simply due to COVID-19 – related factors, and should therefore prove to be temporary. The market seems to agree, as longer-term inflationary expectations are falling, at least if you look at the difference between normal Treasuries and inflation-indexed Treasuries. This should give the Fed at least some comfort that inflation isn’t getting out of hand.

Of course the inflation that we have had since the 1970s has been asset inflation, not goods and services inflation. In other words, we have had too much money chasing too few assets, not too much money chasing too few goods. Increased productivity and globalization have also helped keep goods and services inflation low.

IMO the big question re inflation will be wages. Wage-push inflation has largely been non-existent since the 1970s. Union contracts were a big factor in baking in inflationary expectations, and a resurgence of private sector unions probably isn’t in the cards anymore. Job descriptions (and compensation) are way too customized today.

The US population appears to have crested. It looks like the US population grew 0.35% for the year ending July 1 2020. “The economy of the developed world for the last two centuries now has been built on demographic expansion,” said Richard Jackson, president of the Global Aging Institute, a nonprofit research and education group. “We no longer have this long-term economic and geopolitical advantage.”

Economically, an aging population (which is the flip side of low fertility rates) is not inflationary in the least. Old people have bought their stuff already, and their consumption falls. The model is Japan, which has had little to no economic growth (and a debt to gdp ratio of 2.3x) for a generation.

The post-COVID economy will be a test of the Reinhardt-Rogoff model which says that a high level of debt relative to GDP acts as an anvil on economic growth. If the model is correct, we may see flat GDP growth for another decade or two, which is deflationary, not inflationary.

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Vital Statistics:

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

The Biden Administration put out a press release in anticipation of the foreclosure moratorium which will expire at the end of July. Servicers will be required to offer new payment options with the goal of reducing P&I payments by 25%. HUD will offer 40 year terms and silent seconds to help, and FHFA will permit the GSEs to do the same. Missed payments will be tacked on to the end of the mortgage.

The Conference Board’s Index of Leading Economic Indicators rose 0.7% in June, which was below Street expectations. “June’s gain in the U.S. LEI was broad-based and, despite negative contributions from housing permits and average workweek, suggests that strong economic growth will continue in the near term,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “While month-over-month growth slowed somewhat in June, the LEI’s overall upward trend—which started with the end of the pandemic-induced recession in April 2020—accelerated further in Q2. The Conference Board still forecasts year-over-year real GDP growth of 6.6 percent for 2021 and a healthy 3.8 percent for 2022.” These numbers compare to the Fed’s estimate of 7% growth in 2021 and 3.3% in 2022.

Speaking of the Fed, the June projections showed 18 members saw no rate increases in 2022, while 7 did see a rate hike. However, if you look at the Fed Funds futures contracts, the market is forecasting a better-than-50% increase in rates.

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Stocks are flat this morning after initial jobless claims rose. Bonds and MBS are down.

Initial Jobless Claims ticked up to 419,000 last week, which was well above expectations. I feel like a broken record, but it is surprising to see such elevated initial claims when it seem like every business has a “help wanted” sign in its window.

Existing Home Sales rose 1.4% in June, according to NAR. “Supply has modestly improved in recent months due to more housing starts and existing homeowners listing their homes, all of which has resulted in an uptick in sales,” said Lawrence Yun, NAR’s chief economist. “Home sales continue to run at a pace above the rate seen before the pandemic.” Inventory for sale was 1.25 million units, which works out to be a 2.6 month supply. Six months’ worth of inventory is generally considered to be a balanced market. The median home price rose 23.4% compared to a year ago. Last year’s prices were impacted by the COVID-19 lockdowns, so this rate of inflation is probably overstated and should have an asterisk next to it.

Mortgage applications fell 4% last week as purchases fell 6% and refis fell 3%. “The 10-year Treasury yield dropped sharply last week, in part due to investors becoming more concerned about the spread of COVID variants and their impact on global economic growth. There were mixed changes in mortgage rates as a result, with the 30-year fixed rate increasing slightly to 3.11 percent after two weeks of declines. Other surveyed rates moved lower, with the 15-year fixed rate loan, used by around 20 percent of refinance borrowers, decreasing to 2.46 percent – the lowest level since January 2021,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “On a seasonally adjusted basis compared to the July 4^th holiday week, mortgage applications were lower across the board, with purchase applications back to near their lowest levels since May 2020. Limited inventory and higher prices are keeping some prospective homebuyers out of the market. Refinance activity fell over the week, but because rates have stayed relatively low, the pace of applications was close to its highest level since early May 2021.”   

Investor purchases are at a record, according to Redfin. With low rates and rapid home price appreciation, it seems like every private equity firm is raising capital to compete with the likes of Invitation Homes and American Homes 4 Rent. This is putting additional pressure on the first time homebuyer, who is struggling to compete with cash-only bids. The lower-priced tier is also the most popular for the pros, which creates additional issues.

Speaking of rentals, single-family rents increased 6.6% YOY, according to CoreLogic. Surprisingly, rent inflation at the higher-priced tier is faster than the lower priced tier. I am wondering if that is due to eviction moratoriums and landlords forgoing rent increases to keep families in homes.

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Vital Statistics:

Stocks are rebounding this morning after yesterday’s bloodbath. Bonds and MBS are up again.

The drop in rates is a global phenomenon, based on fears of a COVID resurgence and a drop in growth. The German Bund is down to -43 basis points and the Japanese Government Bond is flirting with negative rates again. While global rates don’t correlate exactly, they do move together. Expect mortgage rates to lag the move, as MBS invariably wait for confirmation that the move in the 10-year is real.

The previous forecast of a rip-roaring second half of 2021 is getting off to a rough start. Note the Atlanta Fed’s GDP Now forecast for the second quarter has fallen again to 7.5%. As the Fed has constantly preached, the economy is going to be highly dependent on the course of COVID-19, and many of its forecasts were based on the assumption that we don’t see a resurgence in cases.

One thing that is sure to happen is that mortgage servicing right valuations are about to get softer as rates fall. Since many big lenders tend to use MSR income as a way to augment lower gain on sale income we should see a detente in the margin wars going on right now.

Speaking of servicing valuations, Ginnie Mae servicing is probably going to get whacked again. Why? Ginnie Mae is looking to limit the amount of servicing issuers can hold by introducing a risk-based capital weighting. It gets complicated, but they want to limit the GNMA servicing that an issue can hold relative to its net worth. This appears to be a direct shot at non-bank servicers, and the expected impact will be that many will have to sell off big parts of their GNMA book or raise equity capital.

This (along with falling rates) will probably depress GNMA servicing valuations (and probably servicing valuations across the board). GNMA burned its bridges with the big banks after the financial crisis and now they are contemplating this. If the government wants to increase FHA lending to help lower-income borrowers, this is an odd way of going about it.

Housing starts came in at 1.64 million in June, which was a touch above expectations. Building Permits were 1.6 million, which was somewhat below what the Street was looking for. While lumber prices have eased, labor shortages remain an issue for the industry.

Loans in forbearance fell to 3.5% of servicers’ portfolios last week, according to the MBA. “Forbearance exits edged up again last week and new forbearance requests dropped to their lowest level since last March, leading to the largest weekly drop in the forbearance share since last October and the 20th consecutive week of declines,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The forbearance share decreased for every investor and servicer category.”

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Vital Statistics:

Stocks are lower this morning as investors fret about new COVID-19 cases in Asia. Bonds and MBS are up.

The upcoming week will begin the deluge of earnings reports. In terms of economic data, we will get housing starts and existing home sales. We won’t have any Fed-Speak as we are in the quiet period ahead of next week’s FOMC meeting.

On Friday, the FHFA eliminated the adverse market fee of 50 basis points on refinancings. “The COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money,” said Acting Director Sandra L. Thompson. “Today’s action furthers FHFA’s priority of supporting affordable housing while simultaneously protecting the safety and soundness of the Enterprises.” The fee was supposed to protect the government from credit losses stemming from COVID, however the low number of GSE loans in forbearance and rising home prices have mitigated the need for extra reserves.

The NAR has released a study finding a “dire shortage” of housing which requires a “once-in-a-generation” response. The US housing stock grew at a 1.7% pace from the 1970s through the 1970s, however it has averaged only 1% since, and has fallen to 0.7% over the past decade. They estimate that the supply gap is about 6.8 million units, which would require housing starts of more than 2 million units per year. In 2020, housing starts came in at 1.3 million, however COVID did impact those numbers slightly. Housing starts have returned to historical normalcy, however over the course of this chart, the US population has almost doubled.

The decrease in interest rates appears to be a warning regarding growth going forward. There was a study conducted by Reinhart and Rogoff, which said that a debt to GDP ratio of 90% was sort of a governor on economic growth, which negatively affects GDP growth by at least 1%. Countries with debt to GDP ratios above 90%, generally see growth in the low 2% rates.

This study was a bit of a political football about a decade ago, when leftist economists like Paul Krugman and Robert Reich were agitating for more and more government spending to support the economy. They wanted to avoid austerity, which is a loaded word meant to imply fiscal tightening when that isn’t the case. Austerity really just means spending as a percent of GDP is falling. If the government is spending 150% of GDP and it falls to 149.9% of GDP, that is austerity. In other words, you can still have highly accommodative fiscal policy and austerity simultaneously.

Back in the Great Recession, the US debt to GDP ratio was sitting just around 90%, which made for an interesting debate in Econ Twitter. Fast forward to today, where our debt to GDP ratio is 130%. IMO, this is something that has been absent from discussion (I suspect this is mainly because the press and left Econ doesn’t like the implications), however it will have a big impact on inflation going forward. If you look at the Fed’s economic projections, it sees long-term growth around 1.8% – 2%. This would be consistent with Rogoff and Reinhardt, which is simply not a conducive environment for inflation.

It may turn out that the model for the US going forward is not 1970s style inflation, but something more similar to Eurosclerosis and Japan. I would add that slow, tepid recoveries are a feature of post-residential real estate bubbles, and they typically take decades to play out.

I suspect the fast money shorting bonds right now is going to be disappointed.

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Stocks are up this morning after good retail sales numbers. Bonds and MBS are flat.

Retail Sales rose 0.6% last month, which was better than expectations. If you strip out vehicles and gas, they rose 1.1%.

Ginnie Mae is considering increasing the capital requirements for GNMA servicers. In addition to the $2.5 million and 0.35% of the GNMA servicing book UPB, they are looking at require 0.25% of the UPB of a servicers agency book. When the foreclosure moratorium ends, servicers will have a lot of wood to chop.

DoubleLine bond investors Jeffrey Gundlach sees similarities between the current economic environment and the 1970s. “When you look at real interest rates on long-date Treasurys, it looks like Jimmy Carter area,” said Gundlach. “We’re talking about the CPI at 5.4%, and if we want to use the 10-year Treasury it’s not even at 1.4%, that’s a negative 4% interest rate. That’s Jimmy Carteresque.”

IMO the similarities to the 1970s are not that great. While LBJ’s Guns and Butter policies do resemble today, the big driver of 1970s inflation was probably the Arab Oil embargoes in the early 1970s, which drove oil prices up 6 times over the decade. That would be like oil increasing to $425 a barrel today.

In addition, US factories, which were built in the early 20th century were beginning to show their age and incremental production was more expensive given that capacity utilization was already high. Today, we have much more of an IP-driven economy and low capacity utilization. In addition, globalization was not yet a thing in the 1970s. That started more in the late 80s and 1990s.

To me, the big question is what happens when this big COVID-related rebound is done and the supply chain shortages are fixed. Then what? Does growth return to 3% – 4%? Or does it return to 1% – 2%? If the latter, then the model isn’t the US in the 1970s, it is Japan in the 2000s.

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