All Things in Moderation

Vital Statistics:

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

Home prices rose 1.6% MOM and 17.4% YOY, according to the FHFA House Price Index. We saw torrid price appreciation in several MSAs including Boise, Austin, and Salt Lake City. As we saw from the latest FOMC minutes, the Fed is focusing on home price appreciation and how its MBS purchases affect it. Separately, the Case-Shiller Home Price Index rose 2.2% MOM and 18.6% YOY.

Home Price appreciation is driving up asking rents for single family homes. They are up 13% YOY for SFR, while up only 8.3% for apartments. We have seen all sorts of institutional money flood into the SFR space over the past year, as high cap rates and home price appreciation create returns that are hard to replicate elsewhere. While eviction moratoriums have been an issue, many investors are targeting higher-income renters who have been less affected by COVID job losses.

The share of loans in forbearance was unchanged last week at 3.25% or about 1.6 million homeowners. “The share of loans in forbearance changed little once again this week, as both new requests and exits remained at a slow pace,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “We expect a sharp increase in forbearance exits over the next month as many borrowers reach the 18-month mark and see their forbearance plans end. For those borrowers who have exited in August, the majority either enter deferral plans or obtain modifications.”

While the Federal Government’s eviction ban was shot down by SCOTUS, several states still have eviction moratoriums in place, including California, New Jersey, and DC.

Latest from Fannie Mae regarding homeowners affected by Hurricane Ida. “We urge everyone in the path of the storm to focus on their safety,” said Cyndi Danko, Vice President, Single-Family Risk Management, Fannie Mae. “Fannie Mae is committed to ensuring assistance is available to homeowners and renters in need and we encourage residents impacted by this storm to seek assistance as soon as possible.”  

Consumer confidence slipped in July, according to the Conference Board. While the employment situation remains strong, consumers were less optimistic about present and future business conditions.

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Vital Statistics:

Stocks are higher this morning after Jerome Powell’s speech on Friday contained no negative surprises for the markets. Bonds and MBS are up.

The big takeaway from Powell’s speech on Friday is that tapering (or the reduction of asset purchases) is on the horizon, but rate hikes are not.

We have said that we would continue our asset purchases at the current pace until we see substantial further progress toward our maximum employment and price stability goals, measured since last December, when we first articulated this guidance. My view is that the “substantial further progress” test has been met for inflation. There has also been clear progress toward maximum employment. At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.

 

The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.

Interestingly, MBS spreads remain surprisingly tight given that language. During the 2013 “taper tantrum” MBS spreads widened to 150 basis points as mortgage rates rose 120 bps ahead of the first reduction. I think we are sitting around 70-ish. I am not sure what that implies, however my guess is that in 2013, the markets were anticipating that the Fed could actually sell its portfolio into the market. They never did that, and couldn’t even go as far as to let prepayments do the job. This time around, sales are probably off the table, and the Fed will probably re-invest maturing proceeds from MBS as well, so the anticipated future shock is much l0wer. That is probably the reason why MBS investors are sanguine this time around.

The Fed Funds futures bumped up the probability of no change in rates in 2022 from 39% to 48% on Powell’s speech. Here is the latest handicapping in the markets:

The trend is looking dovish. Note the Atlanta Fed’s GDP Now index is turning down sharply as well. The index is much more bearish than the Street right now.

The upcoming week will have a lot of data, with home prices on Tuesday, ISM on Wednesday and Friday and the jobs report on Friday. The Street is looking for 740,000 jobs to have been created in August.

The Biden Administration’s end-around extension of the eviction moratorium was shot down by SCOTUS last week, so the issue goes back to Congress. It doesn’t look like Congress has the votes to pass legislation on it, so we are at the posturing and finger-pointing stage.

Pending home sales fell in July, according to NAR.

“The market may be starting to cool slightly, but at the moment there is not enough supply to match the demand from would-be buyers,” said Lawrence Yun, NAR’s chief economist. “That said, inventory is slowly increasing and home shoppers should begin to see more options in the coming months. Homes listed for sale are still garnering great interest, but the multiple, frenzied offers – sometimes double-digit bids on one property – have dissipated in most regions,” Yun said. “Even in a somewhat calmer market, a number of potential buyers are still choosing to waive appraisals and inspections.”

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Vital Statistics:

Stocks are flattish as we await Jerome Powell’s speech at Jackson Hole. Bonds and MBS are up small.

Personal Incomes rose 1.1% in July, which was well above the 0.3% consensus. Personal consumption expenditures rose 0.3%, in line with the Street. The headline inflation reading (Personal Consumption Expenditure Index) rose 0.4% MOM and 4.2% YOY. The core PCE price index increased 0.3% MOM and 3.6% YOY.

The PCE Price index is the Fed’s preferred inflation indicator, and we are seeing more and more Fed Presidents advocate for a reduction in asset purchases.

The Supreme Court again upheld the concept of property rights and re-blocked the CDC’s eviction moratorium. “The equities do not justify depriving the applicants of the District Court’s judgment in their favor,” the justices wrote in an unsigned order. “The moratorium has put the applicants, along with millions of landlords across the country, at risk of irreparable harm by depriving them of rent payments with no guarantee of eventual recovery.”

The Biden Administration responded: “The Biden Administration is disappointed that the Supreme Court has blocked the most recent CDC eviction moratorium while confirmed cases of the Delta variant are significant across the country,” White House press secretary Jen Psaki said in a statement. “As a result of this ruling, families will face the painful impact of evictions, and communities across the country will face greater risk of exposure to COVID-19.”  

Supposedly this kicks the issue to Congress now, unless we are about to see an eviction moratorium issued by the Navy.

Refinance activity is declining, but it might not be for the reason people think. According to a Bankrate survey, almost 40% of borrowers don’t even know what rate they are paying and how much they can save. According to Black Knight, about 15 million borrowers can save by refinancing, and the number is really more if you delve into their numbers. Bottom line: Interest rates aren’t the issue; education is.

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Vital Statistics:

Stocks are flattish this morning after the GDP and jobless claims numbers. Bonds and MBS are down.

The second revision to Q2 GDP inched up 0.1% to 6.6%. This was in line with Street expectations. Personal Consumption Expenditures rose to 11.9%, which was a tad higher than expectations.

Initial Jobless Claims came in at 353,000. This is still elevated compared to pre-COVID, but is the lowest since.

Corporate profits rose 69% in Q2, which is benefiting from easy comparisons from a year ago.

St. Louis Fed President James Bullard thinks the central bank should begin the tapering process soon and end it by March 2022. “We do have a new framework we did say that we would allow inflation to run above target for some time, but not this much above target. So for that reason I think we want to get going on taper. Get the taper finished by the end of the first quarter next year,” he continued. “And then we can evaluate what the situation is and we’ll be able to see at that point whether inflation has moderated and if that’s the case we’ll be in great shape. If it hasn’t moderated, we’re going to have to be more aggressive to contain inflation.”

He also mentioned house prices: “I think that there is worry that we’re doing more damage than helping with the asset purchases because there is an incipient housing bubble in the U.S. The median house price, at least the number I saw, was approaching $400,000,” he said. “We got into a lot of trouble in the mid-2000s by being too complacent about housing prices, so I think we want to be very careful on that this time around.”

FWIW, I don’t think we have a housing bubble, since the necessary conditions for one (a belief that an asset can’t fall in price that is shared by buyers, lenders, and regulators) simply aren’t in place – the memories of 2008 are still fresh. Not only that, something like 90% of all origination is government-guaranteed. You will never get the forced selling since there will be little to no credit losses borne by the financial sector.

That said, the torrid pace of home price appreciation should begin to abate as we bump up against affordability constraints.

New Rez has completed its purchase of Caliber Home Loans. “The completion of the Caliber acquisition is another significant step in growing a leading mortgage company with tremendous earnings power within New Residential,” said Michael Nierenberg, Chairman, Chief Executive Officer and President of New Residential. “We are very pleased to reach this milestone and officially welcome Caliber into the New Residential family. With this acquisition we have extended our ability to offer a broad spectrum of mortgage products to borrowers throughout their homeownership journey. We expect the combination of Caliber and Newrez to contribute meaningfully to New Residential’s growth in 2021 and beyond.”

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Vital Statistics:

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

Durable goods orders fell 0.1% last month. Ex-transportation, they rose 0.7%. Core Capital Goods (which is a proxy for business capital expenditures) was flat. “Core capital goods orders have made a remarkable comeback over the past year and have shown little signs of slowing,” said Sam Bullard, a senior economist at Well Fargo in Charlotte, North Carolina. “While overall durable goods orders may cool in the coming months as consumers pull back on goods spending and the auto sector contends with supply problems, businesses’ desire to invest and restock inventories should provide a solid demand floor.”

Mortgage Applications rose by 1.6% last week as purchases increased 3% and refis increased 1%. “Treasury yields fell last week, as investors continue to anxiously monitor if the rise in COVID-19 cases in several states starts to dampen economic activity,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting.  “Mortgage rates slightly declined as a result, with the 30-year fixed rate decreasing for the first time in three weeks. Lower rates led to an increase in refinance applications, with government loan applications jumping 10 percent to the highest level since May 2021.”

Independent mortgage banks reported a net gain of $2,023 on each loan they originated in the second quarter, down from $3,361 in the first quarter. Average pre-tax production profit slipped to 73 bps, down from 124 bps in Q1 and 167 bps a year ago. Average volume fell 6% QOQ to $1.35 billion. Secondary marketing income fell to 297 bps from 331 in Q1.

iBuyers and fintechs are pushing up the percentage of cash purchases, according to NAR. Cash sales were 23% of all sales, compared to 15% a year ago. There are also several types of companies which will back a buyer with cash. For example, OpenDoor launched a program in March which will allow the buyer to submit a non-contingent offer on a house. This is separate from companies like Zillow which will buy houses outright.

Aid to landlords and renters continues to be disbursed at a slow pace. Since December, just $4.7 billion of the $46 billion allocated to rental aid has been delivered to renters and landlords. The program is managed by Treasury, however it relies on state and local governments to help distribute it, which is causing bottlenecks.

It turns out that the labor shortage isn’t strictly an American problem. China has the same issue as well. This was exacerbated by the country’s one-child policy. This has the potential to create global wage-push inflation, which we haven’t seen since the 1970s.

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Vital Statistics:

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

New home sales rose 1% MOM to a seasonally-adjusted annual rate of 708,000 in July, according to Census. This was down 27% compared to July of 2020, when people were escaping the cities. The median price rose 18.5% to $390,500. New Home prices have been on a tear.

The number of loans in forbearance fell 1 basis point last week to 3.25% of servicers’ portfolios. “The share of loans in forbearance was little changed this week, as both new requests and exits were at a slower pace compared to the prior week. In fact, exits were at their slowest pace in over a year,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “There were more new forbearance requests and re-entries for portfolio and PLS loans, leading to a 10-basis-point increase in their share. Portfolio and PLS loans now account for almost 50% of all depository servicer loans and almost 40% of IMB servicer loans in forbearance, which highlights the importance of this investor category.”

The Urban Institute thinks that Fannie Mae’s new policy of including rental history will expand access to home ownership. That said, Fannie expects few borrowers to actually benefit from this new system. This is because lenders cannot request bank statements directly from the banks due to PI restrictions, and banks will be reluctant to release the data to lenders due to the information security risks.

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Vital Statistics:

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

We have a pretty heavy week of data coming up, with new home sales, GDP, and personal incomes / outlays. The annual Fed Jackson Hole conference is this week as well. Jerome Powell speaks on Friday.

The Chicago Fed National Activity Index showed the economy expanding well above historical trends in July. The CFNAI is a sort of meta-index of a bunch of disparate economic indicators.

Private label securitizations hit $42 billion in the second quarter, which was about the highest number since the 2008 financial crisis. This was driven by Fannie and Freddie’s limits on investment properties and second homes. Non-QM was a part of this as well, but the growth is coming from NOO properties that F&F won’t insure. This was the whole point of Mick Mulvaney’s caps on F&F, and it looks like it worked.

Existing home sales rose 2% in July to a seasonally-adjusted annual rate of 6 million properties, according to NAR. “We see inventory beginning to tick up, which will lessen the intensity of multiple offers,” said Lawrence Yun, NAR’s chief economist. “Much of the home sales growth is still occurring in the upper-end markets, while the mid- to lower-tier areas aren’t seeing as much growth because there are still too few starter homes available.”

Inventory increased 7.3% to 1.7 million properties, which represents a 2.6 month supply. The median home price rose 18% to 359k. “Although we shouldn’t expect to see home prices drop in the coming months, there is a chance that they will level off as inventory continues to gradually improve,” said Yun.

The first time homebuyer accounted for 30% of all sales, and 23% of transactions were all-cash sales.

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Vital Statistics:

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

United Wholesale is accepting cryptocurrency for mortgage loans. “We’ve evaluated the feasibility, and we’re looking forward to being the first mortgage company in America to accept cryptocurrency to satisfy mortgage payments,” CEO Mat Ishbia said in the company’s second quarter earnings call on Monday. “That’s something that we’ve been working on, and we’re excited that hopefully, in Q3, we can actually execute on that before anyone in the country because we are a leader in technology and innovation.” I am not sure what this buys UWM or a borrower for that matter, but there it is.

Rent prices have soared past pre-pandemic levels, according to Zillow. Rents grew 9.2% YOY in July, the fastest recorded pace since Zillow started tracking these numbers in 2015. When the eviction moratorium ends, many renters are going to face sticker shock when they try and find a new place. Zillow also predicted that home price appreciation will begin to cool off, however keep in mind that almost every index has been predicting that for the past year, and prices keep rising.

The increase in home price appreciation is a concern at the Fed as well, and that is one big reason for scaling back MBS purchases. The Fed probably isn’t worried about a bubble (they just don’t happen that often), but they are worried about affordability, and the impact that its MBS purchases are having on it. The real bubble is in global sovereign debt, not real estate. As they say, generals always fight the last war.

What will MBS tapering do to mortgage rates? Well, during the taper tantrum of 2013, MBS spreads widened to 150 basis points or so. MBS spreads are (very roughly) the difference in yield between a mortgage backed security and its corresponding maturity Treasury. If spreads widen, it could mean that mortgage rates increase even if Treasuries go nowhere.

Note that in 2013, most of the widening took place before the Fed actually started tapering. The spread actually peaked in late summer of 2013, well before the Fed started reducing purchases at the December 2013 FOMC meeting. As they often say in markets, buy the rumor, sell the fact.

My personal view is that the economy is not going to strengthen the way the media and the government is hoping, and Treasury rates will probably work lower. The inflation data will also begin to moderate as commodity shortages abate. This will probably keep a floor on mortgage rates, as I suspect they will probably stay around here even if rates work lower.

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Vital Statistics:

Stocks are lower this morning after the FOMC minutes showed the central bank could begin curtailing bond purchases this year. Bonds and MBS are up small.

The minutes of the July FOMC meeting had a long discussion on tapering. Overall, it looks like the consensus is that the Fed will start reducing asset purchases late this year or early next year.

Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum employment goal. Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee’s “substantial further progress” standard or because of uncertainty about the degree of progress toward the price-stability goal. Participants agreed that the Committee would provide advance notice before making changes to its balance sheet policy.

Initial Jobless Claims fell to 348,000 last week. Give the labor shortage we are experiencing it is surprising to see numbers this high. We have record job openings, and are seeing wages increase. On the other hand, the labor force participation rate isn’t really recovering. The Fed seems to believe that this is a COVID-19 driven phenomenon which will go away with time.

The Conference Board’s Index of Leading Economic Indicators rose a strong 0.9% in July. “The U.S. LEI registered another large gain in July, with all components contributing positively,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The Leading Index’s overall upward trend, which started with the end of the pandemic-induced recession in April 2020, is consistent with strong economic growth in the second half of the year. While the Delta variant and/or rising inflation fears could create headwinds for the US economy in the near term, we expect real GDP growth for 2021 to reach 6.0 percent year-over-year, before easing to a still robust 4.0 percent growth rate for 2022.”

Delinquencies fell to 5.47% in the second quarter, according to the MBA. “Much of the second-quarter improvement can be traced to later-stage delinquent loans – those 90 days or past due, but not in foreclosure,” Walsh said. “The 90-day delinquency rate dropped by 72 basis points, which is another record decline in the survey. It appears that borrowers in later stages of delinquency are recovering due to several factors, including improved employment and other economic conditions, the availability of home retention workout options after forbearance, and a strong housing market that is bringing additional alternatives to distressed homeowners.”

The median home price rose 20% in July, according to Redfin. Time on market was 15 days, which is a touch higher than June, but is still well below historical averages. “Home prices are still soaring at an astonishing rate,” said Redfin Chief Economist Daryl Fairweather. “Now that we’re a year out from the post-lockdown rebound, we can no longer explain away the enormous price growth by pointing to the pandemic’s earliest impacts on the housing market. While this ongoing trend continues to fuel an already severe affordability crisis, the market is becoming somewhat less competitive for homebuyers. Demand has softened enough that homes aren’t flying off the market quite as fast or for as much above list price as they were in the spring. Mortgage rates are remaining about as low as they’ve ever been, so buyers who lose out in a bidding war don’t have to fear that they’ve missed their window to buy. As more homes are being listed, it may be worth waiting for the right home at the right price.”

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Vital Statistics:

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

The FOMC minutes will be released at 2:00 pm today. While it probably won’t have much impact on where the 10 year goes, mortgage backed securities will be watching the language regarding tapering closely. Be careful locking around that time.

Housing starts disappointed again, coming in at 1.55 million. Shortages of labor and materials have been a problem, although the lumber market seems to be getting back to normal. On a MOM basis, they fell 7%, and on a YOY basis rose only 2.5%. Don’t forget that July of 2020 was heavily depressed by COVID. Building Permits were a bit better, but that has been the pattern for at least a year – permits look good, but the starts don’t materialize.

Separately, the NAHB / Wells Fargo Housing Market Index (a measure of builder sentiment) decreased to the lowest level in a year.

More evidence that the economy is not accelerating into the end of the year. Retail sales fell 1.1% last month, which was well below Street estimates. Ex-autos and gas, it fell 0.7%. About the only bright spot in the report was restaurants and bars, which increased. We are getting into the critical period of the year with respect to consumer spending, and back-to-school sales are beginning to ramp up.

Industrial Production increased 0.9% in July, while manufacturing production rose 1.4%. Capacity utilization rose to 76.1%

Mortgage Applications fell 4% last week as purchases fell 1% and refis dropped 5%. “Mortgage rates followed an overall increase in Treasury yields last week, which started higher from the strong July jobs report before slowing because of weaker consumer sentiment and concerns about rising COVID-19 cases,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The increase in mortgage rates caused a 5 percent decrease in refinancing, driven by a 7 percent drop in conventional refinance applications. Even though rates are 7 basis points lower than the same week a year ago, the refinance index is around 8 percent lower. The eligible pool of homeowners who stand to benefit from a refinance is smaller now.”

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