All Things in Moderation

Vital Statistics;

Stocks are lower this morning as the May FOMC meeting begins. Bonds and MBS are up.

Fed-whisperer Nick Timaros of the Wall Street Journal says the Fed is planning to signal to the markets that it is comfortable keeping rates higher for longer, while stopping short of introducing the possibility of raising rates further.

“Firmer-than-anticipated inflation in the first three months of the year has likely postponed rate cuts for the foreseeable future. As a result, officials are likely to emphasize that they are prepared to hold rates steady, at a level most of them expect will provide meaningful restraint to economic activity, for longer than they previously anticipated.”

“But a hawkish pivot, suggesting an increase in rates is more likely than a cut, appears unlikely, for now. Any such shift is likely to unfold over a longer period. It would require some combination of a new, nasty supply shock such as a significant increase in commodity prices; signs that wage growth was reaccelerating; and evidence the public was anticipating higher inflation to continue well into the future.”

The article suggests the Fed is close to tapering its balance sheet reduction (quantitative tightening) by reducing the runoff of its Treasury securities. In other words, this won’t affect mortgage backed securities. The runoff for mortgage backed securities continues, albeit at an organic pace driven by relocation and a few cash-out refis.

Compensation costs for civilian workers increased 1.2% in the first quarter, according to the Employment Cost Index. Wages increased 1.1%, as did benefit costs. For the past 12 months, compensation costs rose 4.8%. On a quarter-over-quarter basis, compensation costs rose from 0.9% to 1.2%, driven largely by an increase in benefit costs. Note this kind of contradicts the CPI data which claims that health insurance costs fell 15% in March.

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Vital Statistics:

Stocks are higher as investors like Tesla’s numbers. Bonds and MBS are down.

New Home Sales rose 8.8% MOM in March to a seasonally adjusted annual rate of 693,000. This is up 8.3% on a year-over-year basis. The median new home price fell 2% on a YOY basis to $430,700. There is an 8.3 month supply of homes for sale.

Pulte reported earnings per share that rose 32% compared to a year ago. Revenues rose 10% to $3.8 billion. Gross margins expanded 50 basis points YOY to 30%. CEO Ryan Marshall said this on the earnings conference call:

Against generally favorable demand conditions, the supply of available housing remains tight. We have a long-term structural issue resulting from a decade of under-building that has the country short approximately 4 million housing units. At the same time, the available inventory of existing homes for sale continues to be low as homeowners remain locked into their low mortgage rates. Life happens, so we are seeing some additional existing homes come to market, but the numbers remain well below historic rates.

As a homebuilder, this is a great operating environment as we are supplying a product that a lot of people need and want. I appreciate, however, that our country’s housing shortage can create hardships for today’s consumers as the lack of supply keeps housing prices high. In fact, some of our recent buyers said that they made the decision to buy now because they couldn’t wait any longer for rates to roll back.

In a market where home prices are high and because of limited inventory, they will likely continue moving higher. Our company’s ability to offer targeted incentives, particularly mortgage rate buy-downs, is a powerful tool that can help bridge the affordability gap. For example, in the first quarter, approximately 25% of our home buyers used our national rate program. In a world where the consensus is that interest rates will be higher for longer, our interest rate incentives likely become an even greater competitive advantage, especially relative to the existing home seller.

The environment for homebuilders couldn’t be better. The chart below looks at new home sales divided by the number of households in the US: Look how much we have underbuilt since the bubble years:

Like D.R. Horton, Pulte spent capital buying back stock instead of plowing every cent back into the business. I understand housing is cyclical, but when your ROE is 27%, buying back stock doesn’t make sense.

Mortgage applications fell 2.7% last week as purchases rose 0.2% and refis fell 6%. “Mortgage rates continued to move higher last week, reaching their highest levels since late 2023 and putting a damper on applications activity. The 30-year fixed rate increased for the third consecutive week to 7.24 percent, the highest since November 2023,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications declined, as home buyers delayed their purchase decisions due to strained affordability and low supply. The ARM share of applications increased to 7.6 percent, consistent with the upward trend in rates, as buyers look to reduce their potential monthly payments.”

Jamie Dimon is worried that stagflation might be returning to the US. “Yes, I think there’s a chance that can happen again,” he said during an appearance Tuesday at the Economic Club of New York. He is referring to stickier-than-normal inflation along with mediocre growth. Of course the difference the economy in the 1970s bears little resemblance to the economy of today, but it is a risk.

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Vital Statistics:

Stocks are flattish this morning after yesterday’s bloodbath. Bonds and MBS are down again.

Housing starts came in at 1.32 million in March, which was way below expectations. The number was down 14% month-over-month and 4% year-over-year. Building permits fell 4% MOM and rose 1% YOY to 1.46 million. This will not help alleviate the affordability issue, which is as bad as it was in the 1980s.

I discussed home affordability and compared the last bouts of expensive housing in my latest Substack article. Check it out and please consider subscribing.

Builder sentiment was flat in March, according to the NAHB / Wells Fargo Housing Market Index. High mortgage rates continue to be a headwind for the builders as it is keeping buyers on the sideline, hoping for a decline in borrowing costs.

Note the big builders are helping to alleviate that issue by offering buydowns via their captive mortgage originators. Builders generally pencil in about $40,000 in upgrades for their properties – i.e. things like granite countertops, better appliances etc. For a typical loan, $40k is about 10 points, so you can buy down the rate a lot. Plus it keeps the sales price unchanged which means the comps remain high.

Industrial production rose 0.4% in March, according to the Fed. The latest numbers indicate the manufacturing sector is rebounding after slowing from December through February. On a year-over-year basis production was flat, and generally corresponds to the ISM data along with the Fed surveys.

Bank of America reported first quarter earnings that dropped 8.4% if you strip out a special FDIC charge that most banks took in Q1. Higher deposit costs negatively impacted net interest income. Provisions for credit losses increased 14% QOQ and 40% YOY.

Mortgage origination volume fell 13% compared to the fourth quarter and a year ago. HELOC origination fell as well.

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Vital Statistics:

Stocks are flattish after another inflation gauge came in hot. Bonds and MBS are down.

Inflation at the wholesale level rose 0.2% in March and 2.1% YOY, according to the Producer Price Index. If you strip out food and energy, the index rose 0.2% month-over-month and 2.4% year-over-year. While not a disaster like the CPI report yesterday, it isn’t helping the cause, and the 10 year is getting smoked again.

The FOMC minutes from the March meeting did indicate rate cuts were in the near future. While they did note that there might be some seasonality involved with the inflation numbers, the message was steady as she goes.

In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle, and almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected. In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven. They also pointed to the Committee’s policy actions together with the ongoing improvements in supply conditions as factors working to move supply and demand into better balance. Participants noted indicators pointing to strong economic momentum and disappointing readings on inflation in recent months and commented that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent.

In addition to the hotter-than-expected CPI print, we also had a pretty lousy 10 year bond auction. The bid-to-cover ratio was an anemic 2.34x, and dealers were forced to buy 25% of the $39 billion issue, which pushed 10 year yields to 4.56%.

Needless to say, the mortgage banks got roughed up yesterday, with Rocket down 13%, UWM down 7%, and Loan Depot down 5%. Mr. Cooper held up reasonably well due to is heavy MSR exposure.

Between all three hawkish events, the Fed Funds futures moved decisively towards higher rates, with the June futures pricing in only a 17% chance of a rate cut, and the December futures pricing in only 1 cut this year. Check out the probabilities from a month ago – markets saw 100 basis points in cuts.

Asking rents rose 1% in March compared to a year ago, according to data from Redfin. They were little changed compared to February at $1,987. The Midwest and the Northeast saw the biggest increases.

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Vital Statistics:

Stocks are lower this morning as we await comments from Jerome Powell. Bonds and MBS are flat.

Employers added 184,000 jobs in March, according to the ADP Employment Survey. This was 150k higher than the estimate, and a touch lower than Friday’s 200k forecast. Pay increases were flat at 5.1% for job stayers, but rose 10% for job changers.

“March was surprising not just for the pay gains, but the sectors that recorded them. The three biggest increases for job-changers were in construction, financial services, and manufacturing,” said Nela Richardson, chief economist, ADP. “Inflation has been cooling, but our data shows pay is heating up in both goods and services.”

Mortgage Applications fell 0.6% last week, according to the MBA. Purchases rose 1% while refis fell 2%. “Mortgage rates moved lower last week, but that did little to ignite overall mortgage application activity. The 30-year fixed mortgage rate declined slightly to 6.91 percent, while the 15-year fixed rate decreased to its lowest level in two months at 6.35 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Elevated mortgage rates continued to weigh down on home buying. Purchase applications were unchanged overall, although FHA purchases did pick up slightly over the week. Refinance applications decreased to fall 5 percent below last year’s pace.”

Job openings were more or less unchanged in February, according to the JOLTS jobs report. Job openings were down about 11% on a year-over-year basis. The quits rate, which tends to lead wage increases, was flat month-over-month at 2.2% and down significantly from a year ago.

Home prices rose 5.5% in February, according to CoreLogic. The Northeast saw the biggest increases.

“Home price growth pivoted in February, as the impact of the January 2023 Home Price Index bottom finally faded,” said Dr. Selma Hepp, chief economist for CoreLogic. “As a result, the U.S. should begin to see slowing annual home price gains moving forward.”

“Nevertheless,” Hepp continued, “with a 0.7% increase from January to February 2024, which is almost double the monthly increase recorded before the pandemic, spring home price gains are already off to a strong start despite continued mortgage rate volatility. That said, more inventory finally coming to market will likely translate to more options for buyers and fewer bidding wars, which typically keeps outsized price growth in check. Still, despite affordability challenges, homebuyer demand appears to favor already expensive, coastal markets with a limited availability of properties for sale.”

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