All Things in Moderation

Vital Statistics:

Stocks are lower this morning after disappointing earnings from Amazon. Bonds and MBS are up.

Personal Incomes rose 0.3% in March, while spending was flat. The all-important PCE Price Index rose 0.1% MOM while the core rate rose 0.3%. The headline number rose 4.2% YOY while the core rate was up 4.6%. Inflation continues to move down, although it is well above the Fed’s target range.

This probably won’t change the Fed’s plans to hike 25 basis points next week. The market sees a 90% chance for another 25 basis points next week, and then a 25% chance of another 25 in June. After that, the betting is that rate cuts soon follow.

Employment costs rose 1.2% in the first quarter, according to the BLS. On an annualized basis, employment costs rose 4.5%. Private industry workers saw a 4.8% increase in compensation. Service workers saw increases up to 6%. The rise in service wages is a particular focus for the Fed.

The National Multifamily Housing Council reports that the apartment market is beginning to loosen. “Apartment operators reported an uptick in vacancies and concessions this quarter,” noted NMHC’s Vice President of Research Caitlin Sugrue Walter. “And while some of this softness can be attributed to seasonality, investors remain concerned about the coming wave of supply in some markets and the prospect of slower economic growth in 2023. Only 11% of Quarterly Survey respondents believe that the Fed will be able to achieve a soft landing this year in its effort to rein in inflation. The transaction market, meanwhile, remains at a virtual standstill, with current apartment owners unwilling to offer buyers the lower prices necessary to compensate for both this diminished economic outlook and the elevated cost of debt.”

You can see below how much multifamily units have been coming onto the market. We are at levels last seen since the mid 80s.

Filed under: Economy | 8 Comments »

Vital Statistics:

Stocks are higher this morning after Meta’s numbers surprised to the upside. Bonds and MBS are down.

GDP growth fell to 1.1% in the first quarter, according to the BEA. This was a substantial miss as the Street was looking for a 2% gain. Interestingly, yesterday’s Atlanta Fed GDP Now estimate was spot-on, although the prior week’s estimate was 2.5%.

A slowdown in inventory and homebuilding were drags on GDP growth, while increases in income and spending were positive components. The PCE price index rose 4.2% in the first quarter compared to 3.7% in the fourth quarter. If you strip out food and energy, Q1’s PCE rose 4.9% compared to 4.4% in Q4.

Pending Home sales fell by 5.2% in March, according to the NAR. “The lack of housing inventory is a major constraint to rising sales,” said NAR Chief Economist Lawrence Yun. “Multiple offers are still occurring on about a third of all listings, and 28% of homes are selling above list price. Limited housing supply is simply not meeting demand nationally.”

That said, it isn’t all bad as NAR is more optimistic about the rest of the year: “Sales in the second half of the year should be notably better than the first half as job gains continue and more favorable mortgage rates are expected,” said Yun. “Sales of new homes are already matching 2019 pre-COVID activity and are expected to increase in 2023, largely due to plentiful inventory in this segment of the market.”

Do you think next week will be the last Fed rate increase? Recent comments from Fed officials run the gamut from hawkish to dovish and tightening credit conditions in the wake of recent bank failures contrast with surprisingly resilient economic indicators. What will it mean for the mortgage industry if this is the final rate hike? Register for the first Agile Trader Talk webinar as Tawab Abawi explores these questions with industry veterans Chris Maloney of BOK Financial and Ian Lyngen of BMO Capital Markets. Agile is working to create a better MBS market through digital platforms and industry analysis; register for the End of QT? Mortgage Markets & the Fed Webinar and subscribe to the Agile newsletter to stay in touch with future coverage.  

Sandra Thompson at FHFA put out a statement on the new LLPAs for Fannie and Freddie. These LLPA changes (increasing for high FICO, decreasing for low FICO) have garnered a lot of attention in the media. FHFA says that these LLPA adjustments are being made to better take into account the risk profiles of these loans – in other words low FICO LLPAs were too big in the past. Of course they are basing this on expected performance, and since the COVID-19 pandemic delinquencies have in fact been low. Whether that will continue into the future is an open question given that forbearance might be messing with the numbers.

Things are indeed bad in the office commercial real estate space. The Wall Street Journal has a piece on a building in San Francisco which is for sale and might trade 80% lower than its estimated value in 2019. It is 75% vacant. Nearly 30% of San Francisco’s office space is vacant – about 6x the pre-pandemic level. “We’re all really on the edge of our seats to see the first office trade in San Francisco,” said J.D. Lumpkin, executive managing director at real estate services firm Cushman & Wakefield.

Office REIT Vornado recently suspended its common stock dividend for the rest of the year, and might pay its end-of-2023 dividend with cash or a combination of cash and stock. Interestingly, they authorized a $200 million buyback, as if that will mollify shareholders. Suspend the dividend, but authorize a buyback? Weird.

Office real estate will almost certainly weigh on bank balance sheets, and will probably make banks a little more risk-averse.

Filed under: Economy | 2 Comments »

Vital Statistics:

Stocks are higher this morning after good numbers from Microsoft. Bonds and MBS are up.

Durable Goods orders rose 3.2% in March, which was well above Street expectations. If you strip out transportation, they rose 0.3%. Core Capital Goods, which can be considered a proxy for business capital expenditures fell 0.4%.

Mortgage Applications rose 3.7% last week as purchases rose 4.6% and refis increased 1.7%. “Both conventional and government home purchase applications increased last week. However, activity was still nearly 28 percent below last year’s pace, as high mortgage rates and low supply have slowed the market this year, even as home-price growth has decelerated in many markets across the country,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Refinance applications also increased last week but remained at half of last year’s levels. Although incoming data points to a slowdown in the U.S. economy, markets continue to expect that the Fed will raise short-term rates at its next meeting, which have pushed Treasury yields somewhat higher. As a result of the higher yields, mortgage rates increased for the second straight week to their highest level in over a month, with the 30-year fixed rate now at 6.55 percent.”

Small cities in the Midwest topped the list of the Wall Street Journal’s Emerging Housing Markets Index. These markets include many in Indiana, including Elkhart, Fort Wayne and Lafayette. With remote work becoming more of a permanent fixture in American life, it was probably only a matter of time before people started fleeing the expensive urban areas and moved to the much more affordable South and Midwest. “While it has become more expensive, it is still more affordable than a lot of other areas of the country,” said Brett Lueken, managing broker at Century 21 The Lueken Group in Lafayette.

Fears of an implosion in the commercial real estate space haven’t yet shown up in Blackstone Mortgage Trusts’s numbers. The mortgage REIT which focuses on CMBS reported an increase in book value per share and earnings which comfortably covered the dividend. The stock yields 14%.

Homebuilder Taylor Morrison reported an increase in first quarter earnings as gross margins improved. The cancellation rate fell to 14%, which is still elevated but approaching more normal levels.  “Following a strong early start to the year, positive sales momentum accelerated further into March, consistent with typical seasonal patterns despite the uncertainties facing the market. In total, during the quarter, our gross sales orders improved to a healthy monthly pace of 3.4 per community, the highest level since the third quarter of 2021, while our cancellation rate declined to more normalized levels at 14% of gross orders. This drove our monthly net sales pace to 2.9 per community as compared to 1.9 in the fourth quarter and 3.1 a year ago. This momentum has carried through the first three weeks of April, with our sales running at a pace of approximately 3.1 net orders per community. Meanwhile, leading indicators—including sales traffic, mortgage pre-qualifications and digital home reservations, which remained our top conversion source at a rate of 40% in the first quarter—point to continued strength.”

Luxury apartment landlord Equity Residential reported an increase in earnings per share. Same store rental increase came in at 3.9%, which is interesting given that Equity Residential has a lot of West Coast exposure (especially in expensive California urban MSAs) and real estate prices have been falling there.

Filed under: Economy | 7 Comments »

Vital Statistics:

Stocks are lower this morning as tech earnings continue to come in. Bonds and MBS are up.

Consumer confidence fell in April, according to the Conference Board. “While consumers’ relatively favorable assessment of the current business environment improved somewhat in April, their expectations fell and remain below the level which often signals a recession looming in the short-term,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board. “Consumers became more pessimistic about the outlook for both business conditions and labor markets. Compared to last month, fewer households expect business conditions to improve and more expect worsening of conditions in the next six months. They also expect fewer jobs to be available over the short term. April’s decline in consumer confidence reflects particular deterioration in expectations for consumers under 55 years of age and for households earning $50,000 and over.”

New Home Sales rose 9.6% MOM in March but were down 3.4% compared to a year ago. The median new home price was $449,800 which was up about 3% compared to a year ago.

House prices rose 0.5% MOM and 4% on a YOY basis according to the FHFA House Price Index. “U.S. house prices increased slightly in February,” said Dr. Nataliya Polkovnichenko, Supervisory Economist, in FHFA’s Division of Research and Statistics. “This increase was, in part, due to a decline in mortgage rates by more than half a percentage point from the peak reached in early November as well as historically low housing inventory.”

The Case-Shiller Home Price Index reported a 0.2% MOM gain in February, and a 2.0% annual increase. “The results released today pre-date the disruptions in the commercial banking industry which began in early March. Although forecasts are mixed, so far the Federal Reserve seems focused on its inflation-reduction targets, which suggests that interest rates may remain elevated, at least in the near-term. Mortgage financing and the prospect of economic weakness are therefore likely to remain a headwind for housing prices for at least the next several months.”

First Republic Bank is down about 30% this morning after disclosing that $70 billion in deposits fled the bank during the first quarter. This was a 35% drop. The bank has suspended its dividend on its common and preferred stock and is taking steps to reduce expenses.

Agency mortgage REIT AGNC Investment reported first quarter earnings yesterday. MBS spreads widened a touch compared to the end of 2022, however they remain tighter than the end of Q3 2022, which represented the widest since the 2008 financial crisis. Tangible Book Value per share fell from $9.84 to $9.41.

AGNC so far has managed to maintain its monthly $0.12 dividend while just about every other mREIT has been forced to cut theirs. Even if the Fed doesn’t pause next month, mortgage rates still can have some downside from tightening MBS spreads. Lower fixed income volatility will help things a lot.

Filed under: Economy | 53 Comments »

Vital Statistics:

Stocks are flattish this morning as earnings continue to come in. Bonds and MBS are down.

The week ahead will have a lot of economic data including house prices, new home sales, GDP and Personal Incomes / Outlays. The Personal Incomes / Outlays report on Friday will contain the Personal Consumption Expenditures index, which is the Fed’s preferred measure of inflation. There won’t be any Fed-speak as we are in the quiet period ahead of next week’s FOMC meeting.

The Fed Funds futures are pricing in a 90% chance of a 25 basis point hike next week. The June futures see a 25% chance for another 25 basis point hike, and the futures start pricing in rate cuts by the end of the year.

The market sees first quarter GDP at 2%. The Atlanta Fed’s GDP Now Index sees Q1 GDP at 2.5%. The Chicago Fed National Activity Index showed the economy growing at a below trend pace in March, similar to February.

Hedge Funds are short Treasuries across the board, with CFTC data showing a record short position in the 10 year Treasuries. This would appear to be a bet that the Fed will keep hiking rates well above the market’s forecast of 5%. That said, if rates kind of stall out here, we could see a short covering rally this summer. We will get a read on MBS spreads tonight when mortgage REIT AGNC Investment reports its earnings.

I spent some time on earnings reports in this week’s Weekly Tearsheet on Substack. Check it out and please consider subscribing.

Is commercial real estate the next shoe to drop in the banking sector? Some market watchers think the commercial real estate market is in for some rough sledding, especially the office market. The office market in particular is struggling as remote work is reducing demand for space. The vacancy rate for office reached 12.9%, which was worse than anytime during the Great Recession.

This is in some ways a replay of the 1970s, when people fled the cities to the suburbs and companies relocated operations. In other words, this is a secular change, not a cyclical one. Lower interest rates might not make all that much of a difference.

Filed under: Economy | 30 Comments »

Vital Statistics:

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are up small.

The economy is accelerating again, according to the Flash Composite PMI report from S&P Global. “The latest survey adds to signs that business activity has regained growth momentum after contracting over the seven months to January. The latest reading is indicative of GDP growing at an annualized rate of just over 2%. Growth is also reassuringly broad-based, led by services thanks to a post-pandemic shift in spending away from goods, though goods producers are also reporting signs of demand picking up again. Jobs growth has accelerated alongside the resurgence of demand, aided by reports of vacancies being more easily filled, reflecting improved supply of candidates and higher wages. However, the upturn in demand has also been accompanied by a rekindling of price pressures. Average prices charged for goods and services rose in April at the sharpest rate since September of last year, the rate of inflation having now accelerated for three successive months. This increase helps explain why core inflation has proven stubbornly elevated at 5.6% and points to a possible upturn – or at least some stickiness – in consumer price inflation.”

The national delinquency rate fell below 3% for the first time, according to the latest info from Black Knight. There is generally a seasonal aspect to this as DQs fall in March due to tax refunds. Foreclosure starts and rates increased however we are still well below pre-pandemic levels. I suspect that mortgage forbearance is still playing a part in distorting the numbers.

The Fed is re-thinking its decision to loosen the stress test requirements for banks with under $250 billion in assets. Under the relaxed rules, only the bigger banks were required to add unrealized gains / losses to their portfolio of available for sale securities. The Feds think this might have allowed Silicon Valley Bank to hide its problems. That said, Silicon Valley Bank wasn’t hedging the interest rate risk on its portfolio and that was the issue. The rule change might have tipped off regulators and the markets that something was wrong a bit earlier but the bank would still have failed.

Despite the decrease in median home prices in NAR’s Existing Home Sales report, asking prices are still up about 2.5% on a year-over-year basis. That said, any positive pricing momentum in the real estate market seems to be fading as affordability constraints remain an issue.

Active inventory continues to rise, with the number of homes for sale increasing 49% on a year-over-year basis.

Filed under: Economy | 18 Comments »

Vital Statistics:

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are up.

Existing home sales fell 2.4% in March, according to the National Association of Realtors. Sales were down 22% on a year-over-year basis. “Home sales are trying to recover and are highly sensitive to changes in mortgage rates,” said NAR Chief Economist Lawrence Yun. “Yet, at the same time, multiple offers on starter homes are quite common, implying more supply is needed to fully satisfy demand. It’s a unique housing market.”

The median home price fell 0.9% on a YOY basis to $379,300. Days on market fell to 29 days.

The Conference Board’s Index of Leading Economic Indicators fell by 1.2% in March. “The U.S. LEI fell to its lowest level since November of 2020, consistent with worsening economic conditions ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The weaknesses among the index’s components were widespread in March and have been so over the past six months, which pushed the growth rate of the LEI deeper into negative territory. Only stock prices and manufacturers’ new orders for consumer goods and materials contributed positively over the last six months. The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”

The Fed’s Beige Book showed the economy deteriorated in recent weeks. Overall, we are seeing evidence that pricing pressures are abating and the labor market is softening.

“Overall economic activity was little changed in recent weeks. Nine Districts reported either no change or only a slight change in activity this period while three indicated modest growth. Expectations for future growth were mostly unchanged as well; however, two Districts saw outlooks deteriorate. Consumer spending was generally seen as flat to down slightly amid continued reports of moderate price growth…On balance, residential real estate sales and new construction activity softened modestly. Nonresidential construction was little changed while sales and leasing activity was generally flat to down. Lending volumes and loan demand generally declined across consumer and business loan types…Employment growth moderated somewhat this period as several Districts reported a slower pace of growth than in recent Beige Book reports. A small number of firms reported mass layoffs, and those were centered at a subset of the largest companies. Some other firms opted to allow for natural attrition to occur, and to hire only for critically important roles…Overall price levels rose moderately during this reporting period, though the rate of price increases appeared to be slowing. Contacts noted modest-to-sharp declines in the prices of nonlabor inputs and significantly lower freight costs in recent weeks. Nevertheless, producer prices for finished goods rose modestly this period, albeit at a slightly slower pace. Selling price pressures eased broadly in manufacturing and services sectors. Consumer prices generally increased due to still-elevated demand as well as higher inventory and labor costs. Prices for homes and rents leveled out in most Districts but remained at near record highs. Contacts expected further relief from input cost pressures but anticipated changing their prices more frequently compared to previous years.”

Homebuilder D.R. Horton reported a 33% decrease in earnings per share, however guidance cheered the Street, which sent the stock up 7%.

“The spring selling season is off to an encouraging start with our net sales orders increasing 73% sequentially from the first quarter. Despite higher mortgage rates and inflationary pressures, demand improved during the
quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions. Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable.”

Filed under: Economy | 45 Comments »

Vital Statistics:

Stocks are lower this morning on disappointing earnings. Bonds and MBS are up.

Mortgage applications fell 8.8% last week as purchases fell 8% and refis fell 10%. “Last week’s increase in mortgage rates prompted a pullback in application activity. With more first-time homebuyers in the market, we continue to see increased sensitivity to rate changes. The 30-year fixed rate increased 13 basis points to 6.43 percent, which led to purchase applications declining 10 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Affordability challenges persist and there is limited for-sale inventory in many markets across the country, so buyers remain selective on when they act. The 10-percent drop in FHA purchase applications, and the increase in the average purchase loan size to its highest level in a month, are other indications that first-time buyers have pulled back. The spread between the jumbo and conforming 30-year fixed rates widened slightly last week to 15 basis points, but this was a much tighter spread compared to the past year. As banks reduce their willingness to hold jumbo loans, we expect this narrowing trend to continue.”

Western Alliance reported first quarter earnings after the close and the stock rallied 16% on the open. Earnings per share came in at $1.28 which was below the Street estimate of $2.04 however adjusted earnings per share came in at $2.30.

The bank saw deposit outflows in the aftermath of the Silicon Valley Bank situation, and ended the quarter with $47.6 billion. In April, the Western Alliance picked up another $2 billion in deposits, which are 73% insured. Immediately available liquidity is 158% of uninsured deposits.

Western Alliance did make some security sales and wrote down some investments. Provisions for credit losses increased, primarily due to a corporate debt security issued by a financial company and increased economic uncertainty. Book value per share increased.

Atlanta Fed President Ralph Bostic said that the FOMC will probably hike another 25 basis points and then pause. “One more move should be enough for us to then take a step back and see how our policy is flowing through the economy, to understand the extent to which inflation is returning back to our target…If the data come in as I expect, we will be able to hold there for quite some time,” he said. “Once we get to that point, I don’t have us really doing anything but monitoring the economy for the rest of this year and into 2024.”

Filed under: Economy | 6 Comments »

Vital Statistics:



Stocks are higher as earnings come in. Bonds and MBS are down.



Stocks continue to rise despite rising rates. Despite the good CPI numbers, the Fed Funds futures are solidly predicting a 25 basis point hike in May.





Housing starts fell 0.8% MOM and 17% YOY to a seasonally adjusted annual rate of 1.42 million. Building permits fell 8.8% MOM and 24.8% YOY to 1.41 million. Single family starts rose while multi-family fell.

Multi-family completions came in at 484k. While housing starts overall have been tepid, multi-family completions has been hovering around 35 year highs. With additional apartment supply coming onto the market, we should see a better balance of housing supply and demand.





Bank of America reported first quarter earnings that came in above expectations. Deposits fell about 3%, and remained above $1 trillion. Mortgage origination fell 25% QOQ to $3.9 billion. This was down 76% from a year ago. Net interest income rose 25%. The stock is up about 2% pre-open.

Bank of America provisioned $931 billion for credit losses, but charge-offs remain below pre-pandemic levels.

Goldman reported disappointing earnings driven by lower trading revenue. The stock is down about 3% pre-open.



The Silicon Valley Bank situation might be more widely representative than people think, at least according to a new paper that analyzes the use of interest rate swaps at banks. The most interesting takeaway: Banks with the most fragile funding – i.e., those with highest uninsured leverage — sold or reduced their hedges during the monetary tightening. This allowed them to record accounting profits but exposed them to further rate increases. These actions are reminiscent of classic gambling for resurrection: if interest rates had decreased, equity would have reaped the profits, but if rates increased, then debtors and the FDIC would absorb the losses.

The regional banks will start reporting in the next few days, and it will be interesting to see if this is in fact true.



Economic bellwether Prologis reported better than expected earnings this morning. Prologis operates logistics facilities and its results say a lot about consumer demand and manufacturing. “Demand remains healthy, despite some moderating in terms of decision-making. Given the macroenvironment, we continue to operate our business with a degree of caution.”





Filed under: Economy | 26 Comments »

Vital Statistics:

Stocks are flat this morning as earnings come in. Bonds and MBS are down.

The upcoming week won’t have much in the way of market-moving data, but we will get a lot of housing data with housing starts and existing home sales. Bank earnings (particularly the regionals) will be a big focus. This morning we heard from M&T, which reported better than expected earnings and State Street which disappointed.

Homebuilder sentiment improved a touch in March, according to the NAHB / Wells Fargo Housing Market Index. “For the fourth straight month, builder confidence has increased due to a lack of resale inventory despite elevated interest rates,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “Builders note that additional declines in mortgage rates, to below 6%, will price-in further demand for housing. Nonetheless, the industry continues to be plagued by building material issues, including lack of access to electrical transformer equipment.”

“Currently, one-third of housing inventory is new construction, compared to historical norms of a little more than 10%,” said NAHB Chief Economist Robert Dietz. “More buyers looking at new homes, along with the use of sales incentives, have supported new home sales since the start of 2023. And while AD&C loan conditions are tight, there is not significant evidence thus far that pressure on the regional bank system has made this lending environment for builders and land developers worse.”

Today’s homebuyers are exceptionally interest rate sensitive, and most won’t accept a rate higher than 5.5%. The problem is that the typical mortgage rate is about 6.4%. The high rate environment also affects home sellers, who might be inclined to upsize or downsize but find their current mortgage rate is too good to warrant moving.

“Our consulting team has witnessed this across the country, noting that home builders who choose to subsidize buyers’ mortgage rates, bringing the overall rate down below 5.5%, have been achieving the most success. Many of the largest builders in the country have been buying mortgage rates down below 5.0%,” said CEO John Burns and Maegan Sherlock, a senior research analyst, in the report.

Unfortunately, rates need to fall quite a bit lower to start bringing back activity into the mortgage market. “Even if the Fed chooses not to hike interest rates next month, which would likely bring down mortgage rates, the limited supply of homes for sale would remain a major obstacle for would-be buyers,” wrote Daryl Fairweather, chief economist at Redfin, in the report. “Rates dipping below 6% would probably pique the interest of more buyers, but enough homeowners have rates in the 3% or 4% range that we’re unlikely to see a big uptick in new listings.”

Median asking rents fell 0.4% in March to $1,937. A year ago, median asking rent was $1,944. This is after spiking during the COVID-19 pandemic, so it is in some ways just a return of some of the excess froth in the market. Multi-family construction is up, and a lot of units are slated to enter the market. As we have been seeing in the housing starts data, single family is in the doldrums while developers have been building a lot of multi units.

“Rents are falling, but it feels more like they’re just returning to normal, which is healthy to some degree,” said Dan Close, a Redfin real estate agent in Chicago, where the median asking rent in March was 9.2% lower than it was a year earlier. “It’s similar to the cost of eggs. You can say egg prices are plummeting, but what’s really happening is they’re finally making their way back to the $3 norm instead of $5 or $6. Rents ballooned during the pandemic, and are now returning to earth.”

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Filed under: Economy | 12 Comments »