Morning Report: Homebuilder confidence falls

Vital Statistics:

S&P futures4,251-29.50
Oil (WTI)87.46-4.67
10 year government bond yield 2.79
30 year fixed rate mortgage 5.42%

Stocks are lower this morning on weak Chinese data. Bonds and MBS are up small.

The upcoming week won’t have much in the way of market-moving data, however we will get some housing data with the NAHB Housing Market Index today, housing starts on Tuesday, and existing home sales on Thursday. We will also get the FOMC minutes on Wednesday.

Mortgage delinquency rates were 3.64% in the second quarter, which is a series low dating back to 1979. The delinquency rate and the unemployment rate track super-closely, as you can see from the chart below.

Wells Fargo is looking to shrink its mortgage footprint and cut costs. It looks like correspondent lending will take a hit and the bank will probably focus on its own retail origination. The other area is Ginnie Mae servicing. Wells has pulled back from FHA lending and is looking to get out of FHA servicing as well. Ginnie Mae servicing requirements are much harsher than Fannie Mae or Freddie Mac servicing requirements.

“We’re not interested in being extraordinarily large in the mortgage business just for the sake of being in the mortgage business,” Scharf, 57, told analysts on a conference call last month. “We are in the home-lending business because we think home lending is an important product for us to talk to our customers about, and that will ultimately dictate the appropriate size of it.”

Theoretically all of these players exiting / downsizing their presence in the mortgage market should be good news for margins going forward, however both Rocket and United Wholesale guided for compressed margins in Q3. UWM said that margins would fall from 99 bps in Q2 to 30 – 60 in Q3.

Homebuilder confidence fell for the 8th straight month, according to the NAHB Housing Market Index. Sentiment is overall negative for the first time in a while. “Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “And in a troubling sign that consumers are now sitting on the sidelines due to higher housing costs, the August buyer traffic number in our builder survey was 32, the lowest level since April 2014 with the exception of the spring of 2020 when the pandemic first hit.”

Morning Report: Inflationary expectations decline

Vital Statistics:

S&P futures4,23424.50
Oil (WTI)92.41-1.53
10 year government bond yield 2.84
30 year fixed rate mortgage 5.39%

Stocks are higher as we finish up a good week of earnings. Bonds and MBS are up.

At least some good news on the home purchase front: Record numbers of homeowners are looking to relocate to cheaper locations, according to a study from Redfin. 33.7% of homeowners want to move somewhere new, compared to 26% pre-pandemic.

The places people are leaving are unsurprising: typically the expensive coastal cities, especially in California, where costs of living are sky-high. IMO, this is something that will remain given that work-from-home is now a permanent part of the landscape.

I suspect that this will actually be a huge boon to the economy, given that a historical source of friction (workers having to be near their place of employment) is no longer an issue. Think about how much productive time is wasted in commuting. This will be good for lower-cost areas, but probably not good for expensive coastal real estate.

Consumer sentiment improved in August, according to the University of Michigan Consumer Sentiment Index. Again, these indices are generally an inverse index of gasoline prices. Inflation expectations dropped, which is welcome and something the Fed pays close attention to.

Consumer sentiment moved up very slightly this month to about 5 index points above the all-time low reached in June. All components of the expectations index improved this month, particularly among low and middle income consumers for whom inflation is particularly salient. The year-ahead economic outlook rose substantially to just above its average reading from the second quarter 2022, while the two other expectations index components remain at or below their second quarter averages. At the same time, high income consumers, who generate a disproportionate share of spending, registered large declines in both their current personal finances as well as buying conditions for durables. With continued declines in energy prices, the median expected year-ahead inflation rate fell to 5.0%, its lowest reading since February but still well above the 4.6% reading from a year ago. At 3.0%, median long run inflation expectations remained within the 2.9-3.1% range seen over the past year. Uncertainty over long run inflation receded a bit, with the interquartile range in expectations falling from 4.7 last month to 3.8 this month, remaining above the 3.3 range seen last August. Still, the share of consumers blaming inflation for eroding their living standards remained near 48%.

Morning Report: More good news on inflation

Vital Statistics:

S&P futures4,24030.50
Oil (WTI)93.491.53
10 year government bond yield 2.76%
30 year fixed rate mortgage 5.35%

Stocks are higher this morning after some more good news on inflation. Bonds and MBS are up.

The producer price index declined 0.5% in July. Yes, declined. The decrease was driven by lower energy prices. Final demand (or in other words, what producers get for their goods / services) fell 1.8%. 80% of this decline was attributable to falling gasoline prices. On a year-over-year basis, final demand rose 9.8%. Both numbers were below expectations.

Final demand ex-food and energy rose 0.2% MOM and 7.6% YOY. Again, both numbers were below Street expectations. While we are seeing relief from energy prices, food is still elevated, rising 1% in July.

Between the CPI yesterday and the PPI today, we have finally had some good news on inflation. This has mainly been driven by falling energy prices. Wages are still rising, and that will ultimately put a floor under how much lower inflation can go.

We had some Fed-Speak yesterday with Neel Kashkari and Charles Evans, both of whom reiterated the Fed’s commitment to decreasing inflation. And don’t forget, real (inflation-adjusted) interest rates are still highly negative. That said, stocks like the news and the front end of the yield curve continues to fall.

The labor market remains strong, with initial jobless claims coming in at 262k. This is a bit more than the prior week, however claims in the mid 200s is considered historically very low.

The latest reading from the Atlanta Fed’s GDP Now Index is 2.2% in Q3. This is being driven by a big increase in the expected pace of consumption from 1.8% to 2.7%. We will get a read on consumption when we get the back-to-school shopping numbers in September. BTS is generally a good read on the holiday shopping season.

Morning Report: Some good news on the inflation front

Vital Statistics:

S&P futures4,18965.50
Oil (WTI)90.19-0.53
10 year government bond yield 2.74%
30 year fixed rate mortgage 5.45%

Stocks are higher this morning after the Consumer Price Index came in lower than expected. Bonds and MBS are up.

The consumer price index was flat month-over-month in July, according to BLS. On a year-over-year basis, prices were up 8.5%. Ex-food and energy, prices rose 0.3% MOM and 5.9% YOY. These numbers were below Street expectations, which triggered a rally in the stock and bond markets.

We saw decreases in energy, used cars and apparel. Overall, this is good news for the Fed, especially the decrease in the month-over-month rate. One data point does not mean the risk of inflation is over, however it does give the Fed comfort that inflation is moving in the right direction.

The immediate reaction in the bond market was a drop in the 2 year bond yield by 16 basis points to 3.11%. The 10-year bond yield dropped 6 basis points. This means the inversion of the yield curve has eased. Finally, the Fed Funds futures have gone to a 60% chance of a 50 basis hike from a 32% chance yesterday.

More good news on the inflation front: The Atlanta Fed’s Business Inflation Expectations index fell to 3.5% from 3.7%. This index peaked in March at 3.8% and has been moving down ever since.

Mortgage applications rose by 0.2% as purchases decreased 1% and refis rose 4%. “Mortgage rates remained volatile last week – after drops in the previous two weeks, mortgage rates ended up rising four basis points,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting.

“Mortgage applications were relatively flat, with a decline in purchase activity offset by an increase in refinance applications. Kan noted the purchase market continues to experience a slowdown, despite the strong job market. “Activity has now fallen in five of the last six weeks, as buyers remain on the sidelines due to still-challenging affordability conditions and doubts about the strength of the economy,” he said. “Refinance applications increased over three percent but remained more than 80 percent lower than a year ago in this higher rate environment.”

Loan Depot is getting out of the wholesale business. Volumes were down 26% QOQ and 54% YOY. “We have already made significant progress by consolidating management spans to create operating efficiencies and reducing headcount from approximately 11,300 at year-end 2021 to approximately 8,500 at the end of June, 2022, to approximately 7,400 at the beginning of August 2022. We are accelerating our execution of the plan and expect to end the third quarter of 2022 with headcount below our previously stated year-end goal of 6,500. In addition we are exiting our wholesale channel consistent with our strategy of becoming a more purpose-driven organization with direct customer engagement throughout the entire lending process. Our exit from wholesale will also enable us to direct resources to other origination channels, reduce operational complexities and increase margins.”

Western Asset Management – a small mortgage REIT – is stuck with a bunch of non-QM loans that it wasn’t able to move before NQM rates moved up violently a couple of months ago. Some 60% of the loans on its balance sheet are at rates of 5% or lower, with par rates now around 6% – 7%. It will probably have to sell them in the 90s in order to get rid of them.

Morning Report: Productivity collapses

Vital Statistics:

S&P futures4,133-9.00
Oil (WTI)92.421.73
10 year government bond yield 2.79%
30 year fixed rate mortgage 5.44%

Stocks are lower this morning as we await tomorrow’s Consumer Price Index reading. Bonds and MBS are flat.

Some good news for the Fed: inflationary expectations fell in July as declining gas prices improved sentiment. Longer-term expectations fell from 6.8% to 6.2%. The 3 year expected inflation index fell from 3.6% to 3.2%.

Some bad news for the Fed: productivity declined 4.6% in the second quarter. Output fell 2.1% and hours worked increased 2.6%. Unit labor costs rose a whopping 10.8%, which was driven by a 5.7% increase in compensation and a 4.6% decline in productivity. This is the largest increase in unit labor costs in 40 years.

Rising productivity is a major factor in controlling inflation. Productivity was lousy in the 1970s, and usually corresponds with a recession. You can see in the chart below, we are at exceptionally low levels.

Small Business Optimism rose in July according to the NFIB. This is the sixth consecutive month below the historical average of the index. 37% of respondents said that inflation was their biggest concern, which was the highest since 1979. That said, it looks like pricing pressures are beginning to ease a touch, although we are still quite elevated.

The yield curve continues to invert, with the spread between the 10 year and the 2 year now 47 basis points. This is another recessionary signal. The market is waiting for some indication that inflation is moderating which will mean the Fed can pivot from hawkishness to neutrality.

The decrease in the 10 year is perplexing given inflationary expectations. I mean, why would you want to tie up your money for 10 years at 2.8% when inflation is running in the high single digits? That said, I suspect that sovereign debt is being supported by Chinese investors who are worried about the bursting of their real estate bubble. It isn’t just Treasuries that are seeing lower rates – German Bunds and Japanese government bonds are as well.

As the Chinese real estate bubble bursts, the government is going to protect homeowners first and investors second. For example remember troubled developer Evergrande? Its bonds are trading at 7 cents to the dollar. As China’s real estate bubble bursts, domestic demand is going to plummet, which means the trade deficit with China is about to blow out. And if the Chinese aren’t going to be buying US goods and services in exchange for their goods and services, they will be buying Treasuries instead.

Mortgage credit availability fell to the lowest level in 9 years, according to the MBA. “Credit availability fell last month to the lowest level since May 2013, as lenders streamlined their loan offerings in this declining volume environment,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The 9 percent decline in the July index was the largest monthly decrease since April 2020. Lenders have responded accordingly to the decrease in demand for refinance and purchase loans by reducing loan offerings, including for ARMs, cash-out refinances and investment properties.”

Morning Report: Larry Summers sounds hawkish on inflation.

Vital Statistics:

S&P futures4,16922.25
Oil (WTI)87.64-1.36
10 year government bond yield 2.79%
30 year fixed rate mortgage 5.45%

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

Ordinarily the week after the jobs report is often a snoozer economically, but that has changed as inflation now takes center stage. We will get some big numbers this week with the Consumer Price Index on Tuesday, Productivity and Costs on Wednesday and the Producer Price Index on Thursday.

Friday’s strong jobs report caused a hawkish shift in the Fed Funds futures contracts. The September meeting now has a 2/3 probability of a 75 basis point hike and a 1/3 probability of a 50 basis point hike. The December futures are centering around a Fed Funds range of 3.5% to 3.75%, which is up 25 basis points from before the report.

Former Treasury Secretary Larry Summers made some hawkish comments about inflation over the weekend. On the jobs report, he said: “Everything in this number says to me overheating, not yet under control, not yet on a path to being under control,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV. “My concern was actually magnified,” he said.

He also pointed out that core inflation is running at about 5%, which is higher than it was when Nixon put on wage and price controls in the 1970s.

On the assessment that the Fed is close to a neutral policy, he said: “I don’t think the Fed has the thread right now,” Summers said. Without significantly boosting real interest rates — which are adjusted for some gauge of inflation — “then we’re just setting the stage for stagflation”

His point about real interest rates is important, since the real interest rate is a moving target. The Fed Funds rate is a nominal interest rate which doesn’t take into account inflation. By any measurement, with core inflation running around 5% and the Fed Funds rate at 2.25%, real interest rates are still negative.

Even Paul (Dr. Cowbell) Krugman had to admit that the Fed needs to do more to get inflation under control.

Meanwhile, the Atlanta Fed’s GDP Now index predicts Q3 GDP will come in 1.4%, though this was before the jobs report. While 1.4% is still positive, it is by no means strong. The Fed would characterize 1.4% GDP growth as “modest.” And this is before all of the tightening we have just experienced gets felt by the market. We won’t see the economic effects of this tightening begin until after Labor Day at the earliest.

Rithm Capital aka New Residential reported that origination volume was down 29% QOQ to $19.1 billion. This is down 19% from a year ago, but I suspect last year’s numbers don’t include Caliber. Gain on sale margins increased to 1.95%, however the company said on the earnings call that it was de-emphasizing origination going forward because the gain on sale margins weren’t there. 1.95% was the highest number over the past year, so I found that interesting.

Like every originator out there, MSR valuations saved the day, and the strategy is all about cost cutting. Rithm sees the mortgage company operating at roughly breakeven for the foreseeable future.

Morning Report: Strong jobs report

Vital Statistics:

S&P futures4,112-40.25
Oil (WTI)88.93-0.36
10 year government bond yield 2.82%
30 year fixed rate mortgage 5.33%

Stocks are lower this morning after the hot employment situation report. Bonds and MBS are down.

The July employment situation report was exceptionally strong. The economy added 528,000 jobs and the unemployment rate ticked down to 3.5%. Job gains were most pronounced in leisure / hospitality and business / professional services. The unemployment rate is back to pre-pandemic levels. The interesting thing is that the labor force participation rate and the employment-population ratios remain well below their pre-pandemic peaks.

Average hourly earnings seem to be accelerating again. Month over month, average hourly earnings rose 0.5%, which was a pickup from the 0.3% reported in June. On an annual basis, they rose 5.2%.

Bottom line: the labor market is strengthening, not weakening. This makes the Fed’s job harder, but it also means that any recession we get will fell milder than normal.

Rocket reported second quarter numbers yesterday. Volume was down a whopping 58% on a YOY basis, although gain on sale margins improved. Earnings per share came in at $0.02. Like most originators, servicing income has offset declining origination income. The company continues to build out its ancillary businesses such as Rocket Homes and Rocket Money.

Rocket has been hit by the disappearance of the rate / term refinance, but purchases are suffering too as a combination of higher home prices and higher rates dampen buyer sentiment. The company has been cutting costs, but it will also maintain some excess capacity so it can grow in the future.

Morning Report: Job cuts tick up

Vital Statistics:

S&P futures4,1615.25
Oil (WTI)90.93-0.20
10 year government bond yield 2.69%
30 year fixed rate mortgage 5.45%

Stocks are higher this morning after yesterday’s rally. Bonds and MBS are up.

US employers announced 25,810 job cuts in July, according to outplacement firm Challenger, Gray and Christmas. This is down 21% from June but up about 36% compared to a year ago. For the first 7 months of the year, companies announced about 159,000 job cut which is a series low going back to 1993.

Automakers, retailers and financial firms were the biggest sectors announcing layoffs. “The job market remains tight, and large-scale layoffs have not begun. There are some indicators that hiring is slowing after months of growth, however,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc. “Job cut levels are nowhere near where they were in the 2001 and 2008 recessions right now, though they may be ticking up. If we’re in a recession, we have yet to feel it in the labor market,” said Challenger.

Separately, initial jobless claims continue to tick up. There were 260k initial claims last week, an increase from 254k the week before.

PennyMac Financial services reported that volumes fell 20% QOQ and 56% YOY to $26.7 billion. Like most originators out there, servicing income is making up for lost origination income. This shows the benefit of retaining servicing as a hedge for the origination business.

That said, with rates seeming to level out here, and a plethora of mortgage banks looking to sell servicing portfolios to increase liquidity, I suspect we might be at peak valuations for mortgage servicing rights. Delinquencies are low, but will almost certainly increase if the job market deteriorates.

The US Homeownership rate ticked up from 65.4% in the first quarter to 65.8% in the second quarter, according to the Census Bureau. The rental vacancy rate ticked down from 5.8% to 5.6%.

Morning Report: Pricing pressures appear to be abating

Vital Statistics:

S&P futures4,11621.25
Oil (WTI)94.45-0.20
10 year government bond yield 2.78%
30 year fixed rate mortgage 5.32%

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

Bond yields had been falling over the past few days based on hope that the Fed will pivot to a more normal policy as the economy weakens. So far, we haven’t seen much in the way confirmation from Fed officials, and at least some of it might be wishful thinking. That said, the Fed funds futures still see another 100 basis points in hikes through the end of the year, and then the cycle appears to be over.

Mortgage applications increased 1.2% last week as purchases rose 1% and refis increased 2%. The drop in rates spurred the activity. “Mortgage rates declined last week following another announcement of tighter monetary policy from the Federal Reserve, with the likelihood of more rate hikes to come,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Treasury yields dropped as a result, as investors continue to expect a weaker macroeconomic environment in the coming months.”

The service economy expanded in July, according to the ISM Services Index. It was an improvement from June’s reading which had shown some softening in demand and prices. Most importantly, the prices index fell for the third month in a row. You can see the trend in prices in the table below:

Retailers in particular are noticing that demand is softening as consumers are switching from discretionary goods to essentials. The employment sub-index improved.

One of the respondents discussed the housing market: “Interest rates have significantly impacted the homebuilding market. Cancellation rates have increased, as homebuyers can no longer afford the monthly payment. Traffic to our communities is down. Inflation has sidelined many would-be buyers.” [Construction]

Morning Report: Home prices continue to rise

Vital Statistics:

S&P futures4,103-17.25
Oil (WTI)94.53-4.80
10 year government bond yield 2.59%
30 year fixed rate mortgage 5.26%

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

Job openings fell by 600k in June, according to the JOLTS jobs report. Most of the decrease came in retail, as consumers are beginning to curtail their spending due to rising prices for necessities. The quits rate (which tends to lead wage inflation) remained at 2.8%. Overall, this report shows that the labor market is beginning to cool off.

Home prices continued to appreciate in July, according to the Clear Capital Home Data Index. The usual suspects – Raleigh, Miami, Tampa were the leaders again, but some of the laggards are beginning to heat up. Topping the list with nearly 11% QOQ growth was Rochester, New York. A couple other MSAs – Milwaukee WI and Hartford CT made the list of top 15 MSAs. Interestingly, some of the slowest appreciating MSAs were the ones that led the rally – San Jose, San Francisco, Seattle etc.

I wonder if work-from-home will cause some of these MSAs to equalize. As inflation continues to sap disposable income, perhaps people will relocate to cheaper places

One of the big drivers of home price appreciation has been a lack of homes for sale. Inventories are down some 54% from the average of 2017-2019, according to Black Knight. That said, it looks like inventory is beginning to increase again, as the number of homes for sale rose by 114k over the past two months. It would take a year of similar gains to get back to pre-pandemic normalcy. That said, we are still a long way from a balanced market. The US has underbuilt since the crisis, and is now stymied by shortages of labor and materials.

A balanced market is about 6 to 7 months’ worth of inventory. You can see how this metric has trended since the bubble days.

Inflation is beginning to negatively affect the finances of younger, lower-income Americans, which is causing them to build balances on their credit cards. Delinquencies have yet to take off, but non-mortgage debt is increasing.

For consumers with a mortgage, rising home prices has meant that they are increasing home equity. Debt consolidation cash-out refinances can be an attractive way to lower the monthly payment for people with lots of credit card debt.

Rocket is getting into home equity loans. The company will offer fixed rate home equity loans for a 10 or 20 year terms up to a 90 LTV. Rocket isn’t the only one getting into this line of business: New Residential, Guaranteed Rate and Loan Depot are as well.

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