All Things in Moderation

Vital Statistics:

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

The upcoming week should be relatively quiet as many participants are on vacation or taking some time off. Economically, we don’t have much in the way of market-moving data, although we will get home price data tomorrow and pending home sales on Wednesday. The bond market will close early on Friday.

The markets are relatively sanguine over Omicron. While the variant is supposedly not as deadly as other variants, it is causing staffing shortages, and it caused about 1,000 flights to be canceled over the weekend. I suppose in the short term, this will cause additional supply chain bottlenecks which will bump up inflation.

Crypto.com will be running super bowl ads this year. I wonder if this marks some sort of top in cryptocurrencies in general. Historically, super bowl advertising has been dominated by consumer products like snacks and beer or cars. However, you do tend to see interlopers at the height of a bubble or boom. In 2006, mortgage companies were big advertisers in the super bowl. In the late 90s, it was dot.com flameouts.

In 1999, internet holding company CMGI (who’s only business was a minority stake in erstwhile search engine Lycos) bought the rights to rename Foxboro stadium to CMGI stadium. In 2001, after the bloom came off the internet bubble rose, CMGI was relegated to the pink sheets (think of it as skid row for stocks) and traders joked that the stadium should be renamed CMGIQ Stadium to represent the company’s new digs in the trash heap of bygone high-flyers.

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Vital Statistics:

Stocks are flattish this morning on the last trading day before a long weekend. Bonds and MBS are flat as well.

Personal incomes rose 0.5% in November, and personal consumption expenditures rose 0.6%. Both numbers were a decrease from October and came in below expectations.

The PCE Price index rose 5.7% on a headline basis and 4.7% if you strip out food and energy. The PCE inflation index is the Fed’s preferred measure of inflation, so it is running hot.

The MBA is out with their latest forecast for 2022. Here are the main highlights:

• Purchase originations will rise from $1.6T to $1.7T
• Refinance originations will fall from $2.3T to $.9T
• 30 year fixed rate mortgage will rise from 3.1% to 4%
• Home price appreciation will fall form 16% to 5%
• Housing starts will rise from 1.6MM to 1.7MM

Initial Jobless Claims came in at 205k. We are back more or less to pre-pandemic levels.

New Home Sales rose to an annualized pace of 744k last month, according to Census. This was a touch below expectations, although this number is historically quite volatile with large sampling errors.

Regarding new home sales, I find the MBA’s forecast of housing starts maintaining current levels to be pessimistic. Historically, housing starts have been around 1.5 to 1.6 million, however we have seen starts spike well above 2 million several times. Given the supply and demand imbalance, I wouldn’t be surprised to to see starts hit those sorts of levels in the next few years, especially if commodity prices decline and more younger workers enter the skilled trades.

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Vital Statistics:

Stocks are flattish as investors start getting ready for the Christmas holiday. Bonds and MBS are down small.

Third quarter GDP was revised upward to 2.3% as consumption was increased to 2%. Fourth quarter GDP estimates are a lot higher. Separately, the economy decelerated in November, according to the Chicago Fed National Activity Index.

Existing home sales rose 1.9% to 6.46 million, according to NAR. The median home price rose 13.9% to $353,900. Current housing inventory is down 13% to 1.1 million, or about a 2.1 month supply at the current pace. This represents a highly imbalanced market – six months is roughly a balanced market.

“Determined buyers were able to land housing before mortgage rates rise further in the coming months,” said Lawrence Yun, NAR’s chief economist. “Locking in a constant and firm mortgage payment motivated many consumers who grew weary of escalating rents over the last year.

Yun’s point is important – rents have been increasing at a fast clip, rebounding after the foreclosure and eviction moratoriums of the COVID pandemic. FWIW, NAR does see rates rising, with the 30 year fixed rate mortgage rising to 3.7% by the end of next year.

NAR forecasts that home prices will rise 5.7% as rates rise. Like the MBA and Corelogic, they forecast that home price appreciation has been pushed as far as it can. IMO they are downplaying the effect of rising wages, and that will be a powerful increase in buying power – much more important than interest rates.

Mortgage applications decreased by 0.6% last week as purchases fell 3% and refis rose 2%. “Mortgage applications fell last week, driven by a 3 percent decline in purchase applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Both conventional and government purchase applications were down, while the average purchase loan increased for the second straight week to $416,200 – the second highest amount ever. The elevated loan size is an indication that activity is more on the higher end of the market. Home-price appreciation growth remains faster than historical averages and inventory, particularly for starter homes, continues to trail strong demand.”

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Vital Statistics:

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

The number of loans in forbearance fell to 1.67% last week, according to the MBA. “More borrowers were current on their mortgage payments in November compared to October,” Walsh said. “This coincides with continued improvement in the labor market – faster wage growth and the unemployment rate dropping to 4.2 percent. While there was some deterioration in the performance of borrowers in post-forbearance workouts, four out of five overall remained current through November.”

Zillow is out with its 2022 forecast. While the housing market isn’t expected to match 2021’s torrid growth, the company still sees double digit home price appreciation next year. After rising 19.5% in 2021, home price appreciation is expected to decelerate to “only” 11%. Existing home sales are expected to rise to 6.35 million, which would be the best year since 2006.

Ultimately, supply will still lag behind demand. Given the wage gains we are seeing, any hit to affordability will be offset by rising earnings. Shortages of labor and materials will keep homebuilding from meeting the demand out there. Note Zillow sees a 1.35 million home shortage, which is much lower than NAR’s estimate of 5.5 – 6.5 million.

IMO, Zillow’s forecast of home price appreciation makes more sense than CoreLogic’s, which sees prices rising only 2.2%. Housing has historically outperformed inflation, and the supply / demand imbalance is the meta story here.

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Vital Statistics:

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

The upcoming week should be relatively quiet, especially with Christmas Eve on Friday. In terms of economic data, we will get the third revision to Q3 GDP on Wednesday and Personal Incomes / Spending on Thursday. Markets are closed on Friday.

The Index of Leading Economic Indicators increased in November, according to the Conference Board. “Eight of the ten indicators that comprise The Conference Board LEI for the U.S. increased in November. The positive contributors – beginning with the largest positive contributor – were average weekly initial claims for unemployment insurance (inverted), stock prices, the interest rate spread, the ISM^® New Orders Index, building permits, the Leading Credit Index™ (inverted), average weekly manufacturing hours, manufacturers’ new orders for consumer goods and materials*. The only negative contributor was average consumer expectations for business conditions, while the manufacturers’ new orders for nondefense capital goods excluding aircraft* held steady in November.”

Joe Manchin is a no on the Build Back Better bill. It should be a non-event economically, though it does give the Fed a little more breathing room.

Rents are rising rapidly, in tandem with higher home prices. “First inflation came for the for-sale housing market, and now it is coming for the rental market,” said Redfin Chief Economist Daryl Fairweather. “Many people have been priced out of the for-sale market and are looking to rent instead, but that demand is pushing up rents. Anyone who bought a home before this year can pat themselves on the back because their mortgage payments are fixed, meaning their biggest recurring expense is immune to inflation. If you are looking to buy or rent now, there’s nowhere to hide from inflation when it comes to housing costs. The good news is that the tight labor market means it’s a great time to move somewhere more affordable. Chances are good that no matter where you go, you’ll be able to find a new job relatively quickly.”

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Vital Statistics:

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

Bonds continue to rally in the wake of the Fed’s tapering decision. Not sure what is driving this, but it looks like every expert is predicting higher long term rates, and Treasury yields keep working lower. This is even more apparent at the long end of the yield curve (the 30 year Treasury). Not sure why this is the case, but it would indicate that the Treasury market is sanguine about inflation and worried about the longer-term growth of the economy. To put this into perspective, you can lend to the US government for 30 years at a rate of 1.81%, while the CPI is pushing 7%. I wonder if the Chinese real estate implosion is driving demand for US risk-free assets.

While Treasury yields are falling, mortgage rates are stuck right around current levels. I think this is nothing more than a reflection that the Fed will reduce its purchases of MBS, and investors not wanting to bid up paper. Since we are in the seasonally slow period for MBS issuance, the effect of the Fed’s reduction will be somewhat muted. It will probably become more evident in the Spring when purchase activity picks up again.

Industrial Production rose 0.5% last month, which was a touch below expectations. Capacity Utilization rose to 76.8%. Historically, high capacity utilization numbers generally corresponded with higher inflation. During the 1970s, capacity utilization was around 85%. Capacity Utilization is less important these days since the US economy is driven more by intellectual property and services.

The number 1 reason why mortgages get declined (at 32% of declines) is too-high debt-to-income ratios. The second reason is a low credit score (26% of declines).

Home flipping profits are slowing down, according to ATTOM. “Home flipping produced another round of competing trends in the third quarter of this year as more investors got in on the action but got less out of it,” said Todd Teta, chief product officer with ATTOM. “It’s clear that declining fortunes weren’t enough to repel investors amid a typical scenario of 32 percent profits before expenses on deals that usually take an average of five months to complete. We will see over the coming months whether the amount they can make on these quick turnarounds will still be enough to keep luring them into the home-flipping business or start pushing them elsewhere.”

Still amazing that Zillow managed to lose money flipping houses in this market.

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Vital Statistics:

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

The Fed increased the pace of tapering yesterday, as expected. Bonds didn’t react much to the statement, although stocks rallied. The dot plot was adjusted to more or less match what the Fed Funds futures have been predicting.

The forecast for GDP growth was downgraded for this year, however it was bumped up for next. The inflation forecast was bumped up for this year and next.

Here is the new dot plot:

Initial Jobless Claims rose to 206,000 last week. We are pretty much back to pre-COVID levels.

Housing starts rose to 1.679 million in November, beating estimates. Building Permits ticked up to 1.63 million. Housing starts were up 11.8% MOM and 8.3% YOY. As we saw yesterday, builder sentiment remains elevated, however shortages of labor and materials remain a constraint.

Speaking of materials, lumber is back again on the rise. Sticks and bricks will add to the cost of new houses, so expect prices to continue to rise.

Rising prices for new homes will put upward pressure on existing home prices as well. As long as we have a housing shortage, home prices will continue to rise. In addition, we are seeing strong wage growth, which will more than offset any decline in affordability due to rising rates. Put simply, I am not buying into the forecast that home price appreciation is going to disappear next year.

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Vital Statistics:

Stocks are flattish as we await the FOMC decision at 2:00 pm today. Bonds and MBS are flat.

The market doesn’t anticipate any changes in interest rate policy, however the expectations is that the Fed will step up the pace of tapering, with an eye to wrap up the process by March in order to clear the decks for rate hikes later in 2022.

The Fed Funds futures are predicting 3 rate hikes next year:

Retail Sales rose 0.3% in November, which was way below the 0.8% Street estimate. Gasoline spending increased, while motor vehicles fell. Discretionary spending (electronics, department stores) fell.

Mortgage Applications fell 4% last week as purchases rose 1% and refis fell 6%. “Fewer homeowners have a strong incentive to refinance at current rates,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity increased slightly, as a 1.7 percent rise in conventional applications offset a 1.6 percent decline in applications for government loans. The strength in conventional purchase activity continues to support higher loan balances, which moved back over $400,000. Housing demand remains strong as the year comes to an end amidst tight inventory and steep home-price growth.”

Below is a chart of the MBA refinance index over the past 10 years. We are still pretty elevated compared to pre-COVID history.

Homebuilder sentiment remained strong in December, according to the NAHB Housing Market Index. Housing starts have been gradually increasing, however shortages of labor, lots, and materials remain.

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