All Things in Moderation

Vital Statistics:

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

Existing home sales rose 3% in January, according to NAR. They came in at a seasonally-adjusted annual rate of 4.0 million units. This was down about 1.7% on a year-over-year basis. “While home sales remain sizably lower than a couple of years ago, January’s monthly gain is the start of more supply and demand,” said NAR Chief Economist Lawrence Yun. “Listings were modestly higher, and home buyers are taking advantage of lower mortgage rates compared to late last year. The median home price reached an all-time high for the month of January,” Yun added. “Multiple offers are common on mid-priced homes, and many homes were still sold within a month. The elevated share of cash deals – 32% – indicated a market full of multiple offers and propelled by record-high housing wealth.”

Inventory was up marginally to 1.01 million units, while the median home price rose 5.1% YOY to $379,100. The South and the West saw the most activity, while the Northeast and Midwest were flat.

Philly Fed President Patrick Harker warned against betting on early rate cuts. “I would caution anyone from looking for [a rate cut] right now and right away,” Harker said in a speech at the University of Delaware … I will signal my belief that we’re ready for a rate decrease when all the data – both the hard and the soft – give me that signal,” he said.

Separately, Goldman has moved their first cut forecast from May to June.

The economy expanded in February, albeit at a slower pace according to the S&P Flash PMI. While services slowed, manufacturing hit the highest level in 10 months. Manufacturing was weak most of last year. Importantly, cost pressures continued to ease as input prices rose at the slowest pace since October 2020.

Rocket reported fourth quarter earnings. Volume in the fourth quarter fell 9.3% to $17.3 billion, while gain on sale increased from 217 basis points to 268. For the full year 2023, origination volume fell 41% to $78.7 billion.

It has been brutal out there.

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Vital Statistics:

Stocks are lower this morning after we return from a long weekend. Bonds and MBS are up small.

Capital One is buying Discover Financial Services in a $35 billion deal. With the interest rate environment less hospitable than before, we might see more merger activity in the financial sector. This deal seems to be mainly about attracting deposits: “Discover has done a better job of bringing in a lot of deposits and [has] access to a lot of institutions to run the debit card network and provide service. So it gives them a lot of deposit gathering ability, which particularly in the current market is enormously important,” said David Schiff, West Monroe’s head of consumer retail and banking.

The upcoming week won’t have much in the way of market-moving data, however we will get the FOMC minutes on Wednesday. This should give us more insight into when the Fed is going to start cutting rates. The CPI report last week caused traders to pare back their bets on rate cuts this year, although shelter inflation was the big driver.

Shelter accounted for about 2/3 of the increase in the CPI last month, and in my latest Substack, I take a deeper dive into the shelter component and look at how the worst might be over here.

Consumer sentiment in February is mostly unchanged from January, according to the University of Michigan Consumer Sentiment Survey. Consumers are generally getting more constructive about the economy, although there remains a partisan gap.

Year-ahead inflationary expectations ticked up from 2.9% to 3.0% which is still within the pre-pandemic 2.3% – 3.0% range. Longer-term inflationary expectations remained at 2.9%, which is still above the pre-pandemic range of 2.2% – 2.6%.

Some encouraging data for the Spring Selling Season, which is more or less underway. New listings were up 9.5% compared to a year ago, while median prices were more or less flat. Active inventory was up 13.9%.

I am wondering if people are accepting the fact that we aren’t going back to 3% mortgage rates and just dealing with it.

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Vital Statistics:

Stocks are lower after the producer price index came in hotter than expected. Bonds and MBS are down.

The producer price index (a measure of inflation at the wholesale level) rose 0.3% in January, which was above expectations. Services drove the increase. On a year-over-year basis, the PPI rose 0.9%, which is below the Fed’s 2% target. Healthcare was a big driver of the increase in services cost, and services inflation is driven primarily by wages.

Housing starts rose 1.33 million in January, which was way below expectations. This is 14% below December and down around 1% on a year-over-year basis. Building permits fell 1.5% MOM to 1.47 million, which is up 9% on a YOY basis.

The mix of permits is changing pretty dramatically, with single-family houses up 36% YOY while multi-fam is down 27%. Remember, we have a record number of multi-fam units under construction, and rental inflation is leveling out.

Homebuilder sentiment improved in January, according to the NAHB.

“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “And while mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year.”

“With future expectations of Fed rate cuts in the latter half of 2024, NAHB is forecasting that single-family starts will rise about 5% this year,” said NAHB Chief Economist Robert Dietz. “But as builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages. And as a further reminder that the recovery will be bumpy as buyers remain sensitive to interest rate and construction cost changes, the 10-year Treasury rate is up more than 40 basis points since the beginning of the year.”

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Vital Statistics:

Stocks are rebounding after yesterday’s allergic reaction to the hotter-than-expected CPI report. Bonds and MBS are flat.

The Consumer Price Index rose 0.3 MOM in January and 3.1% on a year-over-year basis. Shelter accounted for two thirds of the increase. The core rate of inflation rose 0.4% MOM and 3.9% on a YOY basis. The core rate has been steadily rising on a month-over-month basis since the summer:

The stock and bond markets tanked on the news, with the S&P 500 falling 1.37% and the yield on the 10 year rising to 4.32%. The Fed Funds futures didn’t change that dramatically for March, however the December futures are now pricing in 4 cuts this year, with 3 cuts as the next likeliest scenario.

Guild Mortgage is acquiring Academy to become the 8th largest non-bank mortgage lender in the US. “Guild and Academy share a commitment to the purchase mortgage market and believe in local sales and fulfillment that builds on our customers for life strategy. Our aligned core values attract employees dedicated to serving their communities and delivering on the promise of homeownership,” said Guild Chief Executive Terry Schmidt. “This transaction represents two like-minded organizations joining forces to continue to grow stronger together. Each acquisition we’ve completed has brought new talent to Guild, making us a better company. We’re excited to extend a warm welcome to our new Academy teammates and build on their talent with the support of Guild behind them.”

Mortgage applications fell 2.3% last week as purchases fell 3% and refis fell 2%. “Application activity was weaker last week, as mortgage rates moved higher across the board. The 30-year fixed mortgage rate was up to 6.87 percent – the highest rate since early December 2023,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications remained subdued as elevated rates continue to add to affordability challenges along with still-low existing housing inventory. Refinance applications declined and remained depressed, with rates still higher than a year ago.” 

This graph gives a vivid illustration of how much the US has under-built housing since the real estate bubble. The average age of the median home is 40 years, up from 31 during the bubble years. Over a third of the US housing stock was built before 1969, and 60% were built before 1980.

Given the paltry inventory of for-sale homes, renovation loans should be a potential opportunity.

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Vital Statistics:

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

The Consumer Price Index was revised downward slightly in December and the fourth quarter was unchanged.

Mr. Cooper reported fourth quarter earnings this morning. Funded volume fell 16% YOY and gain on sale margin fell slightly to 197 basis points. The servicing book is being valued at 155 basis points.

Richmond Fed President Tom Barkin is in no hurry to cut rates. The Fed is committed to returning inflation all the way to 2 percent. “As I think about that commitment, I can’t help but look to lessons from the past. History tells many stories of inflation head-fakes. For example, at the end of the Volcker era, inflation seemed to settle in mid-1986. The Fed reduced rates. But inflation then escalated again the following year, causing the Fed to reverse course. I would love to avoid that roller coaster if we can.”

Mortgage delinquencies increased to a seasonally adjusted rate of 3.88% in the fourth quarter, according to the MBA. This was up 26 basis points compared to the third quarter, but down 8 basis points year-over-year. “Mortgage delinquencies increased across all product types for the second consecutive quarter,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “While the overall delinquency rate is still very low compared to the historical average, the pace of new loans entering delinquency picked up and some loans moved into later stages of delinquency. The resumption of student loan payments, robust personal spending, and rising balances on credit cards and other forms of consumer debt, paired with declining savings rates, are likely behind some borrowers falling behind at the end of 2023.”

Mortgage rates moved little last week, according to the Freddie Mac Primary Mortgage Market Survey

“Mortgage rates remain stagnant, hovering in the mid-six percent range over the past several weeks,” said Sam Khater, Freddie Mac’s Chief Economist. “The economy and labor market remain strong with wage growth outpacing inflation, which is keeping consumer spending robust. Meanwhile, affordability in the housing market is an ongoing issue due to continued high home prices, elevated mortgage rates and low supply of homes on the market, particularly for first-time and low-income homebuyers.”

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Vital Statistics:

Stocks are higher this morning as global equities rally. Bonds and MBS are up small.

Minneapolis Fed President Neel Kashkari wrote an essay on monetary policy. In it, he discusses how tight monetary policy currently is and how to measure that tightness. He addresses the argument that monetary policy is getting tighter because the Fed Funds rate is stable in the context of falling inflation. If inflation has fallen by 3% over the past year, that implies the real Fed Funds rate has increased by about 3.6%.

He believes that is one way to look at the issue, however he prefers to look at the yield on the 10 year TIPS – or inflation-protected securities. Under this model, real rates have risen about only 60 basis points. Since the economy has remained so resilient, he considers whether monetary policy is as tight as the first model suggests. “The implication of this is that, I believe, it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.”

This is one vote for the higher-for-longer outlook.

The ICE Mortgage Monitor sees improvement in the housing market from late 2023: “Prospective homebuyers may feel an all-too-familiar sense of dread upon hearing that prices – already at record highs – rose another 5.6% in 2023 according to our ICE Home Price Index,” Walden said. “As always, the truth of the situation is more nuanced than one simple, backward-looking metric might suggest, and the data holds some encouraging signals for these folks. In recent months, we’ve seen improvement in rates, affordability, and for sale inventory, with monthly home price growth moderating on a seasonally adjusted basis. While we are still out of sync with historical norms on multiple fronts, each of those metrics have at least been moving in the right direction.”

New York Community Bank continues to get pummeled in the wake of its fourth quarter miss and dividend cut. The Financial Times reported that the bank’s head of risk left the company earlier this year and it wasn’t disclosed to the market. Apparently the acquisition of Flagstar gave the OCC veto power over dividend payouts and after tense discussions, NYCB cut the dividend.

NYCB is taking some losses on an office property and is also exposed to a lot of multi-family risk that is a feature of rent-controlled New York City landscape. Apparently a lot of developers bought fixer-upper rent controlled apartments with the intention of raising the rent after the renovations. The city changed the rules during COVID and the aftermath, which means a lot of these multi-family properties are struggling with the developer (and the bank) left holding the bag. NYCB was highly active in Brooklyn multi-fam and it looks like losses are coming down the pike on some of these loans.

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Vital Statistics:

Stocks are higher this morning after the Fed maintained interest rates at current levels. Bonds and MBS are up.

As expected, the Fed maintained the Fed Funds rate at its current level of 5.25% – 5.5%. They didn’t really indicate that rate cuts are imminent at the March meeting:  “In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

The big driver of inflation remains shelter:

If the Fed cuts rates, it risks a re-ignition of inflation as mortgage rates fall and home prices rise. We do have a record number of apartments under construction, and that should put downward pressure on the rental component of shelter inflation.

New York Community Bank (the parent of Flagstar) fell 38% yesterday on a loss and dividend cut. The company also acquired Signature Bank last year during the regional banking crisis. It boosted its provision for loan losses, and the Street is taking this quarter as sort of a “kitchen sink” earnings release – which is when a company that is reporting bad news decides to release everything negative all at once. This often supports better earnings going forward. That said, the dividend cut was bad news.

In other economic news, nonfarm productivity rose 3.2% in the fourth quarter and unit labor costs rose 0.5%. This is good news for inflation. Initial Jobless claims rose to 224k, indicating that the labor market is cooling.

Announced job cuts surged in January, according to outplacement firm Challenger, Gray and Christmas. “Waves of layoff announcements hit US-based companies in January after a quiet fourth quarter. As we step into 2024, the landscape is shaped by stabilizing prices and the anticipation of falling interest rates. It is also an election year, and companies begin to plan for potential policy changes that may impact their industries. However, these layoffs are also driven by broader economic trends and a strategic shift towards increased automation and AI adoption in various sectors, though in most cases, companies point to cost-cutting as the main driver for layoffs,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

The financial sector was a big contributor to the increase:

The manufacturing economy improved in January, although we are still in contractionary territory. “Demand remains soft but shows signs of improvement, and production execution is stable compared to December, as panelists’ companies continue to manage outputs, material inputs and labor costs.”

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Vital Statistics:

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

Personal Incomes rose 0.3% MOM in December, according to the Bureau of Economic Analysis. Personal outlays (spending) rose 0.7%. The income number was in line with expectations, while spending was hotter than expected. The unexpected jump in spending makes sense given the better than expected GDP print yesterday.

The important number was the PCE Price Index, which is the inflation number that matters most to the Fed. The headline PCE Index rose 0.2% MOM as did the core rate, which excludes food and energy. Both of these were in line with expectations. On an annualized basis, the headline rate rose 2.6% YOY and the core rate rose 2.9% YOY. These were a touch below expectations, however the trends in annual inflation numbers continue to move lower.

The tame inflation numbers didn’t impact the Fed Funds futures all that much. We still see no change at the FOMC meeting next week, and March is still a toss-up.

Western Alliance reported earnings in line with estimates, however revenues were a bit light. Charge offs and provisions for loan losses increased, however it doesn’t appear that the carnage we are seeing in the commercial real estate space is hitting the bank balance sheets. Deposits grew, and WAL took advantage of it to pay down debt. The stock is down about a percent pre-open.

Mortgage origination volume was up 22% on a year-over-year basis to $10.1 billion. 90% of its origination business was purchase. Gain on sale margin expanded on a YOY basis to 30 bps. Don’t forget that mortgage rates were atrocious in October and early November, so the overall YOY growth in mortgage origination is encouraging for the mortgage business this year.

A good sign for the Spring Selling season: Pending home sales rose 8.3% in December, according to NAR. “The housing market is off to a good start this year, as consumers benefit from falling mortgage rates and stable home prices,” said Lawrence Yun, NAR chief economist. “Job additions and income growth will further help with housing affordability, but increased supply will be essential to satisfying all potential demand.”

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Vital Statistics:

Stocks are higher this morning on good earnings numbers out of market darling Netflix. Bonds and MBS are up.

Mortgage applications rose 3.7% last week as purchases increased 8% and refinances fell 7%. There was an adjustment for the Martin Luther King holiday. “Mortgage rates increased slightly last week, but there continues to be an upward trend in purchase activity. Conventional and FHA purchase applications drove most of the increase last week as some buyers moved to act early this season,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Refinance applications declined over the week and remained at low levels. There is still little incentive for homeowners to refinance with rates at these levels.”

Homebuilder D.R Horton released Q1 earnings last night that missed Street expectations. Earnings per share rose 2% YOY, while revenues rose 7%, indicating that margins are contracting. Part of the issue was a decline in gross margins, which was due to hedging costs related to the company’s use of buy-downs to incentivize homebuyers. By using buy-downs, homebuilders can “cut” the price of the home to the buyer without disturbing the comps. Headline price stays the same, but the borrower gets the price cut via a subsidized mortgage.

Orders rose 35%, but average prices are decreasing as consumers prefer lower price points. The stock was down 9.2% on the day. The homebuilders have been on a tear for the past year, so any disappointment was likely to have an outsized reaction.

The S&P Homebuilder ETF XHB was on a tear last year, rising almost 60%.

The builders are still being somewhat cautious, which is surprising given the demand out there. D.R. Horton’s single family homes under construction fell to 900 units or so at the end of the year.

Meanwhile, apartments are flooding the market, especially in the hot MSAs like Nashville, where developers are having to get quite promotional to get occupancy – i.e. 4 months of free rent. Supposedly Nashville will see 37,000 new units hit the market this year. Suffice it to say, over the past several years the US has overbuilt multi-fam and under-built SFR.

The US economy started 2024 on a strong note, according to the flash PMI. “An encouraging start to the year is indicated for the US economy by the flash PMI data, with companies reporting a marked acceleration of growth alongside a sharp cooling of inflation pressures. Output measured across both goods and services rose in January at the fastest rate since last June, growth momentum having stepped up a gear on the back of improved demand conditions. New orders inflows have now picked up for three months, buoyed in particular by improving sales to domestic customers, helping lift business confidence about the year ahead to the most optimistic since May 2022.”

Importantly, inflation was the lowest since October 2020, indicating the Fed’s tightening policy has worked. We get the all-important PCE data on Friday before the Fed meets next week.

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Vital Statistics:

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

The week ahead will have a couple of important economic prints – GDP on Thursday, and Personal Incomes / Outlays on Friday. The Personal Income / Outlay report contains the PCE Price Index, which is the Fed’s favored 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 now pricing in a better-than-50% chance that the Fed will keep rates at current levels and not cut. A month ago, it was a 80% chance of a rate cut. The December 2024 futures still envision 150 basis points in rate cuts as the most likely scenario. As inflation continues to fall, a static Fed Funds rate means that real (inflation-adjusted) rates are rising. This could be an impetus for the Fed to cut rates anyway, just to maintain the current level of monetary tightness.

Loan Depot issued an update regarding its cyber security incident from earlier this month. Approximately 16.6 million customers were impacted, and the company is working to restore normal operations. “Unfortunately, we live in a world where these types of attacks are increasingly frequent and sophisticated, and our industry has not been spared. We sincerely regret any impact to our customers,” said loanDepot CEO Frank Martell. “The entire loanDepot team has worked tirelessly throughout this incident to support our customers, our partners and each other. I am pleased by our progress in quickly bringing our systems back online and restoring normal business operations.” The stock is up pre-market, however it lost about 20% on the announcement a couple weeks ago.

The Conference Board’s Index of Leading Economic Indicators fell in December, which signals a weaker economy going forward.

“The US LEI fell slightly in December, continuing to signal underlying weakness in the US economy,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Despite the overall decline, six out of ten leading indicators made positive contributions to the LEI in December. Nonetheless, these improvements were more than offset by weak conditions in manufacturing, the high interest-rate environment, and low consumer confidence. As the magnitude of monthly declines has lessened, the LEI’s six-month and twelve-month growth rates have turned upward but remain negative, continuing to signal the risk of recession ahead. Overall, we expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.”

The big drivers of the the decline include the inverted yield curve, dour consumer sentiment, and the ISM indices for new orders. The positive indicators include the stock market and initial jobless claims.

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