All Things in Moderation

Vital Statistics:

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

Jerome Powell is scheduled to speak in front of the Senate Banking Committee this morning. Here are his prepared remarks. One sentence caught the market’s attention: “The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.” The market took this as bullish for bonds, which is why rates fell late yesterday.

The Fed Funds futures are getting a little more dovish compared to a week ago. The central tendency is now looking at 50 bps in hikes next year versus 75 a week ago.

Home prices rose 18.5% in the third quarter, according to the FHFA. This number will supposedly determine the new conforming limits for next year. I am hearing conflicting interpretations however. If you divide the Q321 index level by the Q320 index level, you get a 18.05% increase. This would put the new conforming loan limits at $647,200. If they use the headline number, then it would come in at $649,700. We should get the official numbers in a day or two.

“House price appreciation reached its highest historical level in the quarterly series,” said William Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “Compared to a year ago, annual gains have increased in every state and metro area. Real estate prices have risen exceptionally fast, but market momentum peaked in July as month-over month gains have moderated.”

Separately, the Case-Shiller Home Price Index rose 19.5%.

Consumer confidence slipped in November, according to the Conference Board. “Consumer confidence moderated in November, following a gain in October,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Expectations about short-term growth prospects ticked up, but job and income prospects ticked down. Concerns about rising prices—and, to a lesser degree, the Delta variant—were the primary drivers of the slight decline in confidence. Meanwhile, the proportion of consumers planning to purchase homes, automobiles, and major appliances over the next six months decreased. The Conference Board expects this to be a good holiday season for retailers and confidence levels suggest the economic expansion will continue into early 2022. However, both confidence and spending will likely face headwinds from rising prices and a potential resurgence of COVID-19 in the coming months.”

The pipeline for MSR sales is heavy, with a bunch of sellers trying to ring the register as servicing valuations improve ahead of an expected increase in rates. Both Rocket and United Wholesale made big bulk sales of servicing in the third quarter.

If the Omicron variant of COVID causes rates to fall, it will be good news for refis, but it will be awful for servicing valuations. We have seen this movie before: People pile into servicing ahead of an expected increase in rates, and then something like Brexit, COVID or Omicron causes rates to fall, not rise. Falling rates are bad for MSR valuations, it causes a double-whammy of lower modeled values and writedowns as MSRs are refinanced away.

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Vital Statistics:

Stocks are rebounding today after getting smacked on Friday. Bonds and MBS are down.

Stocks were hit hard late last week on news about a new variant of COVID – Omicron. The moves were probably exaggerated given that many participants were taking Friday off, so we’ll see if this move has legs.

Black Friday sales were up 48% compared to last year’s depressed level. That said, they were below 2019. Lots of Black Friday sales make me wonder if demand is slipping. With all of the apparent shortages out there, I thought retailers would not need to cut prices to get business.

We have a big week for data. The most important numbers will probably be the FHFA House Price Index tomorrow, which will determine the conforming loan limits for 2022. The jobs report on Friday will be big, along with ISM data and construction spending. Jerome Powell also speaks tomorrow.

More Fed officials are comfortable with increasing the pace of tapering and raising rates more quickly. “Various participants noted that the (policy-setting) Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives,” the Fed said in the minutes.

Pending Home Sales rose 7.5% in October, according to NAR. “Motivated by fast-rising rents and the anticipated increase in mortgage rates, consumers that are on strong financial footing are signing contracts to purchase a home sooner rather than later,” said Lawrence Yun, NAR’s chief economist. “This solid buying is a testament to demand still being relatively high, as it is occurring during a time when inventory is still markedly low. The notable gain in October assures that total existing-home sales in 2021 will exceed 6 million, which will shape up to be the best performance in 15 years.” The hottest markets were Jacksonville, Tampa, Dallas and Nashville.

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Vital Statistics:

Stocks are lower this morning after some inflation data came in higher than expected. Bonds and MBS are down.

The second estimate for third quarter GDP was revised upward to 2.1%. The PCE price index was unchanged at 5.3%. Ex-food and energy, it rose 4.5%. The PCE price index is the Fed’s preferred measure of inflation, and it is obviously higher than their 2% target rate. Wages and salaries were revised upwards as well.

Personal incomes rebounded in October by 0.5% after falling 1% in September. Consumption rose 1.3%. The PCE inflation index rose 5%, and if you strip out food and energy rose 4.1%. Note that this is below the averages for the third quarter (which we saw in the GDP report). This is at least one indication that inflation is beginning to moderate.

Just one quick note on inflation – home price appreciation does get incorporated into the inflation data via rents and “owner’s equivalent rent” which is a proxy for homeowners. That said, it generally shows up with a 12 – 18 month lag, so the current inflation numbers have yet to capture the torrid price appreciation we have been seeing this year.

It is important to note that inflation is as much a psychological phenomenon as it is a monetary one. It is more than simply “too much money chasing too few goods.” It is people wanting to get ahead of demand as well. Say for example, if you heard COVID cases were rising and we might be heading towards another lockdown, would you stock up on TP? Of course you would. So would everyone else. That would create shortages and increase prices.

Workers seem to be in the driver’s seat for the first time since the 1970s. Automatic cost-of-living increases were built into union contracts, and even non-union workers began to expect annual cost-of-living wage increases. Depending on how long this worker shortage lasts, these things may become a feature of the landscape going forward. It will be hard for the Fed to hit a 2% inflation target if wages are rising 4% a year.

At any rate, even if commodity prices begin to fall, home price appreciation is going to start showing up in the numbers starting next year. While some of that is certainly not “real” inflation – your cost of living doesn’t increase just because your home value rises – consumers are going to focus on the headline number and demand wage increases going forward. Unless the supply chain issues magically disappear we have the pieces in place for a long-term secular increase in prices.

New Home Sales rose 0.4% MOM in October, but are 23% lower than they were a year ago. The median home price rose 18% to 407,700.

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Vital Statistics:

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

Initial Jobless Claims came in at 268k last week. We are still well above pre-COVID levels, but at least the numbers are trending down.

The index of leading economic indicators increased in October, according to the Conference Board. The index rose 0.9% after increasing 0.7% in August and September.

“The U.S. LEI rose sharply in October suggesting the current economic expansion will continue into 2022 and may even gain some momentum in the final months of this year,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Gains were widespread among the leading indicators, with only the average workweek and consumers’ outlook making negative contributions.

“However, rising prices and supply chain bottlenecks pose challenges to growth and are not expected to dissipate until well into 2022. Despite these headwinds, The Conference Board forecasts growth to remain strong in the fourth quarter at around 5.0 percent (annualized rate), before moderating to a still historically robust rate of 2.6 percent in Q1 2022.”

Here is a good video describing what happened with Zillow Offers and the Orlando housing market. The Wall Street Journal also had a long piece about how Zillow’s algorithm got it so wrong. Zillow was obviously chasing properties in the hottest markets (especially Phoenix) and was overestimating the value that its improvements. It looks like the company is stuck with inventory and will be selling them at a 5% – 7% loss.

New York Fed Head John Williams spoke yesterday about Fed interventions into the Treasury and financial markets. If you were hoping that the Fed might allow the market for interest rates to become, well, a market, then you might be disappointed.

It’s also clear that we need not start from a position of how things are, but instead, how they should be. Let’s not think of how we can reform, but how we can design. Let’s create a system that can better withstand the unforeseeable and the unpredictable.

The problem with “designing a market” is that interest rates are an important input into the economy. They transmit critical information about the supply and demand for capital. For the last 12-13 years, the Fed has been actively intervening in the interest rate markets. God knows how they will handle the disruption if / when the sovereign debt bubble bursts.

The choice for the next Fed Head is between Jerome Powell and Lael Brainard. She is perceived as more dovish than Powell. The market perceives Brainard as more political than Powell: “Powell, I think, will be much less concerned about the midterm elections in determining when they should raise interest rates,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “I’m not saying that’s what Brainard is going to do if she’s in that seat, but that’s going to be the perception.” FWIW, the Fed has historically been loath to make any monetary policy changes late in a Presidential election year, but this is the first time I have heard a mention of midterms.

The impact on the Treasury market would be worse (at least for mortgage bankers) if Biden nominates Brainard. She will be viewed as more inflationary. FWIW, the Fed Funds futures are still handicapping either two or three rate hikes next year. Brainard would mean a steeper yield curve (in other words a bigger difference between long-term and short-term rates).

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Vital Statistics:

Stocks are lower as investors fret about inflation. Bonds and MBS are down.

Housing starts disappointed again, coming in at 1.52 million. Building Permits were a bit better, rising to 1.65 million. Given the shortage of housing in the US, these numbers should be north of 2 million. This has been going on for years, so it cannot be blamed on the supply chain shortages of the past two years.

Housing starts are stuck around the average level since 1959. When you consider that the US population has risen 85% since then you can see the issue. Below is a chart of housing starts divided by population.

According to the National Association of Realtors, we have a shortage of about 5 million units. That is 3 years of housing starts alone.

Separately, homebuilders sentiment rose 3 points, according to the NAHB / Wells Fargo housing index. “The solid market for home building continued in November despite ongoing supply-side challenges,” said NAHB Chairman Chuck Fowke. “Lack of resale inventory combined with strong consumer demand continues to boost single-family home building. In addition to well publicized concerns over building materials and the national supply chain, labor and building lot access are key constraints for housing supply,” said NAHB Chief Economist Robert Dietz. “Lot availability is at multi-decade lows and the construction industry currently has more than 330,000 open positions.”

Mortgage Applications fell by 3% last week as purchases increased by 2% and refis fell by 5%. “Refinance applications decreased for the seventh time in eight weeks, as mortgage rates moved higher after two weeks of declines.” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Activity has been particularly sensitive to rate movements, and last week’s decline was driven by a drop in conventional and FHA refinance applications, which offset an increase in VA refinance applications. All mortgage rates in MBA’s survey increased, with the 30-year fixed rate climbing to 3.2 percent.”

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Vital Statistics:

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

Retail Sales rose 1.7% in October, according to the Census Bureau. On a YOY basis, they rose 16.3%. Gasoline prices were a big driver of the increase. Electronics retailers also saw decent gains. Ecommerce sales were up 4%.

Overall, this is a good start for the holiday shopping season. Note that Walmart reported third quarter numbers this morning. Same store sales rose 9.2%, which is a strong reading, albeit it is an easy comparison to a year ago.

Industrial Production rose 1.6% MOM in October, while manufacturing production rose 1.2%. Capacity Utilization rose to 76.4% from 75.8%.

Applications for new home mortgages rose 6% from September, but are down 15% compared to a year ago. “The strong monthly gain puts MBA’s estimate of new home sales at its strongest pace since January,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity continues to be dominated by higher loan balance transactions, which pushed the average new home loan size up to over $412,000, another new record in the survey. Recent U.S. Census data show an increasing share of new sales are for homes yet to be built or still under construction, and a shrinking share of completed homes. Housing demand remains strong, and buyers are making quick decisions in a still very competitive market.”

Renters who are exiting from the eviction moratorium are seeing a 10% increase in asking rent. “Single-family rental vacancy rates remained near 25-year lows in the third quarter of 2021, pushing annual rent growth to double digits in September,” said Molly Boesel, principal economist at CoreLogic. “Rent growth should continue to be robust in the near term, especially as the labor market improves and the demand for larger homes continues.”

Rent growth was strongest in Miami, rising 27%. Phoenix and Las Vegas rose 20% and 16% respectively. On the other side was the Northeast, where rents rose under 5% on average.

Real Estate investors bought 18.2% of homes in the third quarter, according to Redfin. This has made it difficult for homebuyers who have to compete with these folks. We are seeing lots of institutional money flood into the space as the potential returns in rentals dwarf anything else in the financial markets.

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Vital Statistics:

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

The upcoming week won’t have much in the way of market-moving data, although we will get some important housing data with housing starts and the NAHB Housing Market Index. The biggest day for non-housing data will be tomorrow when we get retail sales and industrial production.

Mohammed El-Arian says the Fed has a credibility problem when it comes to inflation. “I think the Fed is losing credibility,” El-Erian said Monday. “I’ve argued that it is really important to reestablish a credible voice on inflation and this has massive institutional, political and social implications….We are in this transition of central banks mischaracterizing inflation. The repeated narrative: ‘It is transitory, it is transitory, it is transitory.’ It is not transitory,” El-Erian said, warning the Fed risked making a major policy mistake….We have ample evidence that there are behavioral changes going on….Companies are charging higher prices [and] there’s more to come. Supply disruptions are lasting for a lot longer than anybody anticipated. Consumers are advancing purchases in order to avoid problems down the road — that of course puts pressure on inflation. And then wage behaviors are changing.”

The Atlanta Fed’s GDP Now estimate has fourth quarter GDP accelerating to 8.2%. Much of this will hinge on consumer spending for the holidays and whether supply chain issues work themselves out.

There were 10.4 million job openings at the end of September, according to the JOLTS jobs report. The quits rate, which tends to lead wage growth, rose to a series high of 3%. This will alarm the Fed as we have the pieces in place for a wage-price spiral.

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