All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,122	-33.50
Oil (WTI)	78.38	-0.18
10 year government bond yield		3.82%
30 year fixed rate mortgage		6.49%

Stocks are lower this morning after inflation at the wholesale level came in stronger than expected. Bonds and MBS are down.

Inflation at the wholesale level grew at the fastest rate since June of 2022, according to the Producer Price Index. This was after two months of declines in November and December. The index rose 6.0% on an annual basis. Energy costs were the big driver. This was higher than Street expectations.

Stripping out food, energy and trade services, the index rose 0.6% month-over-month and 4.5% year-over-year. This monthly increase was the fastest in nearly a year.

So, between the jobs report, the CPI report, retail sales and the PPI, we have evidence that growth accelerated in January. The Atlanta Fed’s GDP Now estimate has ticked up as well. The March Fed Funds futures see a 85% chance for a 25 basis point hike and a 15% chance for a 50 basis point hike. The projection materials and dot plot will be interesting.

Is there any gloom? Sure, housing. Housing starts fell to a seasonally-adjusted annual pace of 1.3 million in January. This is a 21% annual decline and the lowest level since June of 2020.

Chris Whalen has a great editorial about how FHFA is changing the rules for servicers as a result of COVID. Essentially loans in forbearance during COVID won’t be offered the same sort of reps and warrants relief as typically granted during a natural disaster. This creates an open-ended liability stream for mortgage bankers. Essentially the government asked servicers to offer forbearance and can now slug them for it.

He also mentions that a lot of banks are sitting on big unrealized losses on their portfolios of mortgages originated in 2020 and 2021. This includes Fannie Mae and Freddie Mac, which might explain the change in policy. He stated that banks have a $350 billion deficit for available for sale securities and loans. Many of these securities and loans are now trading at 15-20 point discounts in the market and might have to be sold. Hedge funds which are flush with cash might be able to pick up a good trade if that happens.

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Credit Suisse is spinning off its investment bank First Boston, which hasn’t existed for 25 years. Makes me wonder if other spin-offs might be in the cards. Synchrony spinning off Kidder Peabody, Bank of America spinning off Merrill Lynch, Deutsche Bank spinning off Bankers Trust, Citi spinning off Salomon Brothers and Smith Barney?

Investors bought 48,445 homes in the fourth quarter of 2022, which is the second biggest quarterly decline. “A lot of investors are on hold because they still see home prices declining,” said Elena Fleck, a Redfin real estate agent in Palm Beach, FL. “The investors who are in the market are selective and aggressive. Many of them are only offering around 60% of the asking price since it’s so difficult to make a profit when flipping homes right now.”

Note that there is a lot of political sturm and drang over investors purchasing single family homes as rentals. In the context of existing home sales (5 million units per year) 50k in a quarter seems like small beer.

“It’s possible that investors will start to wade back into the market this year given that mortgage rates have ticked down from their 2022 high—especially if home prices show signs of bottoming. But it’s unlikely that investors will return with the same vigor they had in 2021. That’s good news for individual buyers, who are still grappling with high housing costs but no longer losing bidding war after bidding war to investors.” Maybe the first time homebuyer might be able to get involved this Spring Selling Season.

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