All Things in Moderation

Vital Statistics:

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

We have a decent amount of data this week with construction spending, the jobs report and ISM. We will also get some real estate index data with Case-Shiller and the FHFA Home Price Index. Investors will be focusing on wage growth in Friday’s report, although there will be a lot of COVID-related noise in the number.

The CDC has extended the eviction moratorium for another 30 days. The foreclosure moratorium was extended as well. Not sure there is a game plan here.

It looks like we might have a deal on a bipartisan infrastructure package in DC. Biden was threatening to veto the bill unless a separate spending plan also passed. He subsequently withdrew that threat.

HUD is bringing back the “disparate impact” theory to inform policy going forward. Essentially it means that you (a landlord, lender etc) are guilty of discrimination if your numbers don’t add up, even if you have no intent of discriminating. Bad luck, no dice.

iBuyers are coming back to reach pre-pandemic levels. These buyers often buy sight unseen, using algorithms to estimate the property value. Home sellers often like iBuyers because it allows them to submit a non-contingent bid on a move-up property. “Business really started ramping up in January and February. Since then, we’ve just had a constant barrage of deals,” said Allister Booth, an acquisitions specialist at RedfinNow in Los Angeles. “We’re back to full speed and are buying more homes than we were last year. After we buy and renovate those homes, we know we’ll be able to sell them because there are so many more buyers in the market right now than there are homes available.”

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Vital Statistics:

Stocks are higher this morning after we get a deal for an infrastructure package. Bonds and MBS are down small.

Personal incomes fell 2% in May, according to the Bureaus of Economic Analysis. Incomes have been volatile over the past year due to stimulus payments, and this month is no different. Personal consumption was flat after a series of big increases over the past few months. The headline Personal Consumption Expenditures Index, which is the Fed’s preferred inflation measure rose 3.9%, while the index ex-food and energy rose 3.4%. Commodity push inflation is driving the inflation indices higher, although that is expected to moderate after COVID-driven supply shortages are satisfied.

The White House has named Sandra Thompson to fill the role of interim FHFA Chair. She has been with FHFA since 2013, and prior to that worked at the FDIC. As far as priorities, she is going to be big in community lending and increasing homeownership. “As a longtime regulator, I am committed to making sure our nation’s housing finance systems and our regulated entities operate in a safe and sound manner,” Thompson said. “We can accomplish this, and at the same time have a laser focus on mission and community investment. There is a widespread lack of affordable housing and access to credit, especially in communities of color. It is FHFA’s duty through our regulated entities to ensure that all Americans have equal access to safe, decent, and affordable housing.”

What that means is that the restrictions on high LTV / low FICO loans are as good as gone. Investment and second homes might fall under the “operate in a safe and sound manner” comment. As noted before, NOO loans are highly profitable for the GSEs, so that could fall under the rubric of GSE financial stability.

Yet another private equity firm is getting into the single-family rental business. KKR is launching a new venture called My Community Homes, which will focus on suburban homes. KKR recently backed Home Partners of America, which it sold to Blackstone for $6 billion. It made a 20% IRR on that investment. Those sorts of returns are still looking possible given that cap rates are in the mid single-digits and real estate is appreciating at double-digit rates. It looks like the first time homebuyer is going to find it even harder to find properties and win bidding wars.

Consumer sentiment slipped in June, according to the University of Michigan Consumer Sentiment survey. You can see we are back to more or less historical averages.

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Vital Statistics:

Stocks are higher this morning on overseas strength. Bonds and MBS are up.

The Supreme Court ruled yesterday that the President could fire the Director of the FHFA without cause, and Joe Biden immediately let Mark Calabria go. He has named Sandra Thompson as interim director.

The immediate question revolves around the limits put in place during the waning days of the Trump Administration, especially the limits on investment properties and high LTV / low FICO products. The politics of removing the high LTV / low FICO limits are a no-brainer, however the optics of helping landlords are a touch more difficult. We could see some changes rolled back, while others stay.

Rescinding the limits will be relatively straightforward – the only other condition is that Treasury Secretary Janet Yellen agree, which is a formality. Suffice it to say that increasing the size of the credit box to the low income and first-time homebuyers is the biggest priority. Since NOO loans subsidize those products, we could see those go as well.

The Supreme Court also rejected the shareholder lawsuit regarding the net profit sweep. Fannie and Freddie stocks were down something like 40% on the news. It is critical to understand that the only reason why these stocks trade is because the government doesn’t want to consolidate Fannie and Freddie debt on its balance sheet. If that wasn’t an issue, then they would have been wiped out when Fannie and Freddie failed in 2008. These stocks always were a litigation lottery ticket, and it looks like it didn’t pay off.

New Home Sales fell 6% MOM to a seasonally-adjusted annual pace of 769,000. This was a YOY increase, however last year’s numbers were depressed by COVID. There were 330k homes for sale, which represents a 5.1 month supply at the current sales pace.

Durable Goods orders rose 2.3% last month, while core capital goods orders (kind of a proxy for business capital investment) fell 0.1%.

Initial Jobless Claims fell slightly to 411,000 last week, which was above expectations. It remains a mystery why we have elevated claims in the context of record job openings.

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Vital Statistics:

Stocks are flattish this morning on no major news. Bonds and MBS are up small.

As the economy recovers, the number of loans in forbearance continues to fall. According to the MBA, the share of loans in forbearance fell below 4% last week. Fannie and Freddie loans are now 2.05%, while private label and portfolio loans are 7.98%. Ginnie Mae loans fell to 5.15%.

Mortgage Applications increased by 2.1% last week as purchases rose 1% and refis rose 3%. “Despite the jump in rates, refinances increased for the second consecutive week, pushed higher by a 4 percent bump in conventional refinance applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications have regained an upward trend over the past few weeks. Activity was slightly higher for the third straight week, but remained lower than the same week a year ago. Government purchase applications drove most of last week’s increase, which also contributed to a slightly lower overall average purchase loan size.”

Existing home sales fell 0.9% in May, according to NAR. They came in at a seasonally-adjusted annual rate of 5.8 million. Lack of supply remains the biggest issue, however first-time homebuyers are bumping up against affordability constraints. The median home price rose 23.6% (!) to $353,300. While that growth rate is exaggerated by the COVID-19 lockdowns of a year ago, home prices are rising at a rapid clip.

There were 1.23 million units for sale at the end of May, which represents a 2.4 month supply at the current run rate. This is barely above the record low established in April. Homes sold in 17 days. First time homebuyers were 31% of total purchases, down from 34% in April.

Historically, home prices have tracked incomes pretty closely. If you look at the median home price divided by median income, it tends to stay in a range of 3.5 – 5 times or so. Note that Census data ends in 2019, so the graph is somewhat dated.

With the current median home price at 353k and the latest estimate of median income at $66.8k, that puts the ratio at 5.3 times, which according to the graph above is a record. Now to be fair, median incomes and home prices don’t tell the whole story because interest rates matter. The better calculation would be to look at the the percentage of median income the 30 year fixed rate mortgage payment would be. That said, we have pretty strong evidence here that home prices are stretched vis a vis incomes.

JP Morgan is making an investment in Maxex, which is trading $1 billion in mortgages a month. It is focusing on private label securitizations, which have been coming back as Fannie and Freddie restrict their purchases of investment loans.

I find it surprising that Intercontinental Exchange, which owns the New York Stock Exchange, Ellie Mae and MERS doesn’t have a mortgage exchange. It seems like a natural fit.

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Vital Statistics:

Stocks are up as we await Jerome Powell’s testimony in front of Congress. Bonds and MBS are down.

Fed Chairman Jerome Powell heads to the Hill today for testimony about the economy. Here are his prepared remarks. He discusses the uptick in inflation and why it is temporary:

Inflation has increased notably in recent months. This reflects, in part, the very low readings from early in the pandemic falling out of the calculation; the pass-through of past increases in oil prices to consumer energy prices; the rebound in spending as the economy continues to reopen; and the exacerbating factor of supply bottlenecks, which have limited how quickly production in some sectors can respond in the near term. As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.

He sees the labor market recovery as “uneven,” as the labor force participation rate remains low.

As with overall economic activity, conditions in the labor market have continued to improve, although the pace has been uneven. The unemployment rate remained elevated in May at 5.8 percent, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year. Job gains should pick up in coming months as vaccinations rise, easing some of the pandemic-related factors currently weighing them down.

The big question regarding inflation will revolve around wage growth. The latest JOLTS job openings report showed a marked uptick in the quits rate, which generally precedes wage growth. Presumably people are quitting their jobs to take ones that pay better.

I think the punch line for the economy is that visibility is super-low right now. We have elevated unemployment along with record job openings. We also have a global sovereign debt bubble at the same time that governments have a voracious appetite for spending. It remains an open question how long investors will purchase government debt at negative inflation-adjusted interest rates. Global central banks may have painted themselves into a corner with such broad-based asset support.

Cryptocurrencies are getting whacked as China cracks down on non-governmental stores of value. It wants to shut down all Bitcoin mining operations and has warned financial institutions against converting crypto to cash. I am not sure that governments can put the genie back into the bottle, though most will try, arguing that the only people who care about crypto are criminals, speculators, and conspiracy theorists. Perhaps, but we have seen a flood of new governmental money-printing combined with a sovereign debt bubble.

Blackstone looks to get back into the single-family rental business. After launching Invitation Homes in the aftermath of the real estate bubble, it floated Invitation and exited in 2019. With real estate prices soaring, it has inked a deal to buy Home Partners of America for $6 billion. HPA’s model is different than Invitation or American Homes 4 Rent as Blackstone explains: “The fundamental premise of the HPA platform is to provide residents with the opportunity to live in their chosen home with the option to purchase it—we intend to build on that goal and expand access to homes across the U.S. We look forward to working with HPA’s leadership team to further invest in the properties and continue its role as a valuable resource for people considering home purchases.”

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Vital Statistics:

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

The 10-year traded as low as 1.36% in the overnight session. Not sure what was driving that, but after the FOMC increase in rates last week based on the updated dot plot, the 10 year has done nothing but fall in yield. Like usual, mortgage backed securities (which determine mortgage rates) have been lagging the move.

We will have a decent amount of economic data this week with existing home sales, new home sales, personal incomes and spending, and GDP. The GDP number is the third estimate for the first quarter. We will also have a lot of Fed-Speak.

The economy picked up in May, according to the Chicago Fed National Activity Index. That said, the number came in way below expectations. The CFNAI is sort of a meta-index of 85 different economic indictors. The COVID lockdowns of a year ago are introducing all sorts of noise into just about every economic statistic. The punch line is that economic growth has probably peaked for the year.

Invitation Homes CEO Dallas Tanner is sanguine about the housing market: “I would expect that home prices stay relatively stable, if not continue to grow in value for the homeowners in the country, but we’ll find our ways to pick our spots whether through our partnerships with builders or our ability to buy one-off,” Tanner said. “We view the housing environment overall as extremely healthy.”

With the big increases in housing prices this year, the media types are asking questions about whether we have another housing bubble, similar to 2006. The United States does not. Other countries do. Housing bubbles are quite rare, and only come around once or twice a century. A lot of pieces need to be in place to create one, and the biggest one is a belief amongst buyers, sellers, lenders, and regulators that an asset is “special” and cannot fall in price. Anyone who is old enough to sign a mortgage doc knows that isn’t the case.

Buyers are beginning to balk at higher home prices, according to a report from Redfin. Its Homebuyer demand index peaked about 9 weeks ago, and is down 14% since. “Offers no longer pour in the day a home hits the market,” said Phoenix Redfin real estate agent John Biddle. “It has become more common for offers to come in at least a few days after a home is listed for sale. If this were three years ago, we’d marvel at how fast the market was, but it’s a clear slowdown from a few weeks ago. Now that things are opening up again and the summer is almost here, people have other priorities, like going on vacation. Plus, many homebuyers are frustrated and tired of competing, so they’ve stepped back—for now at least.”

With inflation rising, it is helpful to put the numbers in perspective. Inflation is going to be high for the rest of the year as shortages and COVID noise drive up the numbers. The Fed predicts that the Personal Consumption Index will rise 3.5% this year. Take a look at the chart below and see what that looks like historically.

Not too dramatic, is it? Certainly not like the 1970s, which were driven mainly by oil prices. If anything we are headed back to historical norms after a bout of exceptionally low inflation. The question the Fed is grappling with is how much of the current inflation is due to COVID and how much is not. That will depend largely on wage growth, and given the seemingly ubiquitous “help wanted” signs these days these price increases may turn out to be more permanent.

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Vital Statistics:

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

The Federal Government made Juneteenth a Federal holiday. Government offices are shut. The Federal Reserve will remain open today, and the implications of a surprise holiday will mean all sorts of things with respect to TRID and recission periods etc.

The Index of Leading Indicators hit a record in May, according to the Conference Board. “After another large improvement in May, the U.S. LEI now stands above its previous peak reached in January 2020 (112.0), suggesting that strong economic growth will continue in the near term,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Strengths among the leading indicators were widespread, with initial claims for unemployment insurance making the largest positive contribution to the index; housing permits made this month’s only negative contribution. The   Conference Board now forecasts real GDP growth in Q2 could reach 9 percent (annualized), with year-over-year economic growth reaching 6.6 percent for 2021.”

More than half of all home sales occurred above the listing price, according to Redfin. We are seeing record price appreciation, where Phoenix (33%), Austin (42%), and Detroit (32%) had the biggest increases, while San Francisco was flattish. “Homes in the Inland Empire are still affordable compared to nearby coastal areas like Santa Monica, OC, or San Diego, but they’re nearly double what they used to be just a few years ago,” said Inland Empire, CA Redfin real estate agent Keith Thomas. “Locals are scratching their heads and wondering how they can afford a home as people move into Riverside County and the high desert from LA, Burbank, and other more expensive areas. Many are remote workers looking for something more affordable.”

With lumber prices coming back to Earth, I think we will see an acceleration in homebuilding going forward. Places like Austin, Phoenix aren’t restricted by geography the way many West Coast areas are. Those places can build out and create exurbs, which should alleviate upward price appreciation. Still, that will take some time to come on line. Interestingly, the only places where we saw increases in supply were areas people are fleeing: San Francisco, New York, and Philly.

The Fed is likely to go slower this time getting off the zero bound. The consensus of the FOMC seems to be two rate hikes in 2023. One area of concern will be the pace of reduction in purchases of Treasuries and MBS. The Fed wants to avoid another “taper tantrum” like it had in 2013. Note that the 10-year has shrugged off Wednesday’s hawkish FOMC statement already.

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Vital Statistics:

Stocks are lower this morning after the FOMC decision. Bonds and MBS are up small.

The Fed made no changes to policy, however the dot plot showed a faster path of interest rate hikes than previously forecast. You can see the comparison of March versus June below:

The big takeaway is that in March, it was looking like we wouldn’t see any hikes until 2024. Now it looks like we will see rates begin to rise in 2023.

Bonds initially reacted pretty negatively to the release, with the 10 year moving up to 1.59% and MBS trading down a point or so.

The Fed took up their projections for GDP growth this year from 6.5% to 7%, but the number that got everyone’s attention was the inflation forecast, which was taken up from 2.4% to 3.4%. Supply bottlenecks are believed to be driving the increase in inflation this year, which means that it will be a temporary phenomenon as inventories catch up to demand. In his press conference, Jerome Powell noted that longer-run inflationary expectations seem to be unchanged, which gives the bank comfort that price increases this year will revert back to normal. If longer-run inflationary expectations start to creep up, then the Fed will get more concerned.

Jerome Powell also addressed the labor market, and the fact that we have high unemployment while companies have lots of unfilled positions. He attributed it to workers having a fear of getting COVID, expanded unemployment insurance, and workers having to take care of sick family members. The labor market remains a mystery, but I think the punch line is that wages are going up, and that means inflation may more persistent than the Fed is thinking. As Keynes noted, wages are sticky – commodity prices are not.

Speaking of the labor market, initial jobless claims increased last week to 412,000. It seems like every business has a “help wanted” sign, but unemployment claims remain stubbornly high.

New home mortgage applications fell for the second straight month due to inventory constraints. They fell 9% compared to April, but also 6% from a year ago. Given that we were under lockdown a year ago, that is a surprising number. “Mortgage applications to purchase a new home decreased in May for the second straight month, while the average loan size, at $384,000, increased for the fourth consecutive month,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Loan balances continue to rise because of a larger share of sales in the higher end of the market, as well as increased sales prices from strong demand and elevated building material costs.” 

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Vital Statistics:

Stocks are flat as we await the FOMC decision. Bonds and MBS are flat.

The FOMC decision will be released at noon today. The markets will be listening for language pointing towards an end of MBS and Treasury purchases as well as the dot plot. I also think markets will be sensitive to how the Fed describes the state of the economy. Finally, I hope they discuss what is driving the current labor shortage and offer up a reasonable explanation for it.

Speaking of disappointing economic data, housing starts came in below expectations. Starts came in at 1.57 million, while permits came in at 1.68 million. Starts were more or less flat with April, while permits showed a small uptick. Labor and materials shortages are probably behind the disappointing numbers. That said, homebuilder sentiment remains elevated, despite challenges with input costs and labor.

Mortgage applications rose 4.2% last week as purchases increased 2% and refis rose 6%. Rates have been coming back down, which is increasing refi opportunities. “U.S. Treasury yields have slid because of the uncertainty in the financial markets regarding inflation and how the Federal Reserve may act over the next few months,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity also rebounded, even as supply constraints continue to slow the housing market. An almost 5 percent increase in government purchase applications drove most of last week’s gain while also tempering the recent growth in loan sizes. Purchase applications were still down 17 percent from a year ago, which was when the mortgage market started seeing large post-shutdown increases in activity.”

Note that NAR believes we have a 5.5 million unit gap in housing demand versus supply.

Mortgage credit availability rose in May, according to the MBA. “Mortgage credit availability in May increased to its highest level since near the start of the pandemic, but still remained at 2014 levels. The increase was driven by a 3 percent gain in the conventional segment of the market, with a rise in the supply of ARMs and cash-out refinances. This is consistent with the uptick in mortgage rates and a slowing refinance market, as well as MBA’s Weekly Applications Survey data showing increased interest in ARMs,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The jumbo index jumped 5 percent last month, but even with increases over the past two months, the index is still around half of where it was in February 2020. A rapidly improving economy and job market has freed up jumbo credit, as banks have deposits to utilize. However, there is still plenty of restraint, as many sectors have not fully returned to pre-pandemic capacity, and there are around 2 million borrowers still in forbearance.” 

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Vital Statistics:

Stocks are flattish after a disappointing retail sales number. Bonds and MBS are down small.

The Fed starts its two-day meeting today. The announcement will be tomorrow at 2:00 PM. Bond yields have been slowly declining over the past week or two ahead of the meeting.

Retail Sales fell 1.3% in May. Ex-autos and gas, they fell 0.8%. These numbers were well below Street expectations. On a year-over-year basis, they are up smartly, but this is due to comparisons versus lockdowns. Since consumption is something like 70% of GDP, I find it strange to see the high GDP estimates given this backdrop.

As an aside, regarding retail sales etc, I was at the New England Mortgage Expo which was held at Mohegan Sun, a massive casino complex in Connecticut. The Expo usually has something like 2,000 people attending. If I had to venture a guess, I would say a few hundred attended. The other thing I noticed was the casinos were deserted. The vast majority of the blackjack tables were empty, with no dealers and no gamblers. Very few people playing slots. I heard that the casinos were having a horrible time finding workers as well.

Delinquencies fell to the lowest rate in a year, according to CoreLogic. 4.9% of mortgages were 30 days down. The foreclosure inventory rate was 0.3%, but that number is being held down artificially by the foreclosure moratorium. The eviction moratorium expires at the end of June. The CFPB supposedly plans to extend the foreclosure moratorium until the end of the year.

Inflation at the wholesale level rose 0.8% month-over-month and 6.6% year-over-year. Ex-food, energy, and trade services prices rose 0.7%. Raw material prices are behind the increases. That said, additional supply is coming on line, which should ease the pressure. Note that lumber is down about 40% from its peak a month ago.

The Fannie Mae Mortgage Lender Sentiment Survey shows that lenders expect profit margins to contract. “Despite elevated optimism toward the U.S. economy, lenders show a cautious outlook for their mortgage business,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “This quarter, the largest net percentage of lenders in the survey’s seven-year history are expecting a decrease in their profit margin outlook. This is the third quarterly decline from the lender profitability highs of 2020. Those who expected a lower profit margin continued to cite competition from other lenders and market trend changes as the primary reasons. Lenders reported a significant refinance demand decline over the past three months and expect the decline to continue, with their refinance demand growth expectations reaching the lowest level seen since Q4 2018. With the shift from refinance to purchase business, some lenders commented that purchase transactions are harder to complete and have lower margin.”

Industrial production rose 0.8% in May, while manufacturing production rose 0.9%. Capacity Utilization rose to 75.2%.

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