All Things in Moderation

Vital Statistics:

Stocks are lower this morning after lackluster earnings from Tesla. Bonds and MBS are flat.

Existing home sales fell 5.4% last month to a seasonally-adjusted annual rate of 3.89 million. “We’re seeing a slow shift from a seller’s market to a buyer’s market,” said NAR Chief Economist Lawrence Yun. “Homes are sitting on the market a bit longer, and sellers are receiving fewer offers. More buyers are insisting on home inspections and appraisals, and inventory is definitively rising on a national basis. Even as the median home price reached a new record high, further large accelerations are unlikely,” Yun added. “Supply and demand dynamics are nearing a balanced market condition. The months supply of inventory reached its highest level in more than four years.”

The median home price rose to 426,900, which was a 4.1% increase from a year ago. The first time homebuyer share fell from 31% to 29%, while investor purchases fell from 18% to 16%. The 3.9 million pace of existing home sales is pretty consistent for a housing recession. To put that number into perspective, we did something like 5.3 million in 2019.

Fannie Mae’s latest housing forecast is out. They see the 30 year fixed rate mortgage ending the year at 6.7%, and gradually falling to 6.2% by the end of 2025. Home price appreciation is expected to remain in the 6% range before falling into the 3% range in 2025. They expect to see 25 basis points in rate cuts this year and another 75 bp in 2025. The core PCE inflation rate is expected to fall to 2.7% this year and 2.3% next year.

PennyMac reported earnings that disappointed the Street. The company acquired $22.5 billion in loans in Q2, which was up 6% on a year-over-year basis. On the earnings conference call, CEO David Spector was asked about when we will start seeing more refi activity:

“Look, I think it’s a gradual decline down. I think if you look at originations post COVID, we kind of jumped and kind of ran through loans with 5% handle. And I think it’s really in the 6% to 7% range where you see a lot — and even north of 7%, where you see a lot of opportunity. It’s going to be — the way I think about it is it’s going to be the slow grind down. I think when rates get to 6.5%, that’s where it really picks up steam.

And I think at 6%, you’re in what I would deem a really robust refi market because it’s not just the existing first that are in the money. You could have loans that are 4% and 5%, taking out debt consolidation, cash refinance to either pay off existing HELOCs or closed-end seconds or other forms of debt. And so it’s really a function of what’s behind the first lien that helps drive the refinanceability. But I continue to believe that it’s 10-year around 3.75%, mortgage is down 50 basis points, that it really is to me, that’s the signal of a true new market or new phase of the refinanceability.”

Mortgage applications fell 2.2% last week as purchases fell 4% and refis rose 0.3%. “Mortgage rates continued to ease, with the 30-year fixed rate dipping to 6.82 percent, the lowest level since February 2024,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Refinance applications were up, driven by conventional and FHA application activity, as some borrowers took the opportunity to act. Furthermore, the conventional refi index was at its highest level since September 2022. Purchase applications decreased as ongoing affordability challenges persist with rates at their current levels and with home-price appreciation still strong in many markets.”

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Vital Statistics:

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

Jerome Powell spoke yesterday, and said that the Fed isn’t going to wait until inflation hits its 2% target before easing. “The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%,” Powell said.

He also acknowledged the recent good inflation reports: “What increases that confidence in that is more good inflation data, and lately here we have been getting some of that,” he said.

The September Fed Funds futures now see a rate cut as a certainty.

Retail Sales were flat month-over-month in June, according to the Census Bureau. They rose 2.3% on a year-over-year basis. Since these numbers are not adjusted for inflation, real retail sales fell.

Non-store retailers (i.e. online shopping) and restaurants saw big increases. If you strip out motor vehicles, sales rose 0.4% MOM and if you exclude vehicles and gasoline, they rose 0.8%.

May’s retail sales numbers were revised upward.

When inflation rises, politicians invariably return to one of the dumbest ideas ever put forward – price caps. The idea is that we beat inflation by simply putting a ceiling on prices. Of course this has unintended consequences – the most common is that price controls create shortages – but those effects take time to play out, so it can often give a politician the veneer of “doing something” long enough to get through the election cycle before the unintended effects are visible.

I mention this because the Biden Administration wants to impose rent control nationwide, capping annual price increases at 5%. Of course since this doesn’t affect the costs that landlords bear, it will act to lower cap rates for multi-family developments, which will discourage investment.

Needless to say, industry groups oppose this. The MBA said “There are endless examples in localities in America and around the world that prove that rent control is a counter-productive policy idea that ultimately harms renters by distorting market pricing, discouraging new construction, and degrading the quality of rental housing. While the odds are stacked against this proposal ever passing Congress, a federal rent control law would be catastrophic to renters and our nation’s rental housing market. 

The measure requires Congressional approval, so has little-to-no chance of getting passed, let alone in an election year, but it does demonstrate yet again that bad ideas are like Freddy Kreuger – they keep coming back

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Vital Statistics:

Stocks are lower despite a good CPI print. Bonds and MBS are up.

Inflation fell 0.1% MOM and 3.0% year-over-year. The Street was expecting an increase of 0.1%, so this was a good surprise for the bond market. Energy prices fell overall, which was offset by increases in shelter. Used Car prices were down 10% on a year-over-year basis.

If you strip out food and energy, prices rose 0.1% month-over-month and 3.1% year-over-year. This was again below expectations. The bond market reacted positively to the report, with the 10 year yield falling over 10 basis points to below 4.2%.

The September Fed Funds futures now see a 80% chance of a rate cut at the September meeting.

Over the past year, we have seen a lot of eye-popping payroll gains, which get revised downward in later months. The average downward revision this year has been 50,000 per month. The typical headline number has been around 275k, so this is a pretty big downward revision. What is going on?

The explanation may be that the numbers are less reliable due to lower response rates. The government estimates payroll growth by sending out questionnaires to businesses who report how many people they hired during the month. It goes out to some 600,000 businesses nationwide.

The response rate fell to a 21 year low in 2023, and has fallen even more this year. If less businesses respond to the survey, the less accurate it is. And with the big downward revisions, the labor market might be worse off than it initially appears.

One recent phenomenon has been the posting of “ghost jobs” which are job listings where the company really doesn’t intend to hire any one. They are there for HR window dressing and resume collection, but they don’t represent real hiring needs. If this behavior is affecting the JOLTs job openings number, then that is another employment statistic that is hiding a broader deterioration in the labor market.

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Vital Statistics:

Stocks are flattish as we head into earnings season. Bonds and MBS are up small.

The week ahead will have some important events, with Jerome Powell heading to the Hill on Tuesday and Wednesday for his semi-annual Humphrey-Hawkins testimony. We will get the consumer price index on Thursday, and earnings season kicks off with the big banks reporting on Friday.

We are seeing for-sale inventory build, however we are still below pre-pandemic levels, according to research from Realtor.com. For-sale inventory rose 35% on a year-over-year basis, however median prices were flat. This might represent a mix shift, as prices rose on price per square foot basis.

While inventory is up 35% YOY, it is still about 35% below 2019 levels. Inventory is getting closer to balance in the South and West, where we saw a building boom over the past few years. Regions which saw muted growth post-2008 (lots of the Northeast and Midwest) are now catching up to the rest of the country.

Mark Zandi has come out in favor of rate cuts.

While the Fed Funds futures are seeing no move at the July 31 meeting, they are handicapping a 74% chance of a rate cut

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Vital Statistics:

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

Jerome Powell is speaking at 9:30 this morning.

The manufacturing economy contracted again in June, according to the ISM Manufacturing Report. “Demand remains subdued, as companies demonstrate an unwillingness to invest in capital and inventory due to current monetary policy and other conditions. Production execution was down compared to the previous month, likely causing revenue declines, putting pressure on profitability. Suppliers continue to have capacity, with lead times improving and shortages not as severe. Sixty-two percent of manufacturing gross domestic product (GDP) contracted in June, up from 55 percent in May. More concerning is the share of sector GDP registering a composite PMI^® calculation at or below 45 percent — a good barometer of overall manufacturing weakness — was 14 percent in June, 10 percentage points higher than the 4 percent reported in May.”

Importantly, the prices index fell pretty dramatically, which helps support falling inflation.

The manufacturing economy expanded slightly in June, according to the S&P US Manufacturing PMI. New orders appear to be increasing, and input costs remain an issue. That said, business confidence hit a 19 month low. “Factories have been hit over the past two years by demand switching post-pandemic from goods to services, while at the same time household and business spending power has been diminished by higher prices and concerns over higher-for-longer interest rates. These headwinds persisted into June, accompanied by heightened uncertainty about the economic outlook as the presidential election draws closer. Business confidence has consequently fallen to the lowest for 19 months, suggesting the manufacturing sector is bracing
itself for further tough times in the coming months.”

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Vital Statistics:

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

The week ahead will have a lot of real estate data, with home prices and pending home sales. We will get the third revision to Q1 GDP and get personal incomes / outlays on Friday which will give us the all-important PCE Price Index.

Existing home sales fell 0.7% MOM in May, according to NAR. This is a decline of 2.8% compared to a year ago. The median home price rose 5.8% on a YOY basis to $419,300. There are about 1.28 million units for sale, which represents a 3.7 month supply at the current sales pace. A balanced market is 6 – 7 months’ worth of supply.

“Eventually, more inventory will help boost home sales and tame home price gains in the upcoming months,” said NAR Chief Economist Lawrence Yun. “Increased housing supply spells good news for consumers who want to see more properties before making purchasing decisions.” “Home prices reaching new highs are creating a wider divide between those owning properties and those who wish to be first-time buyers,” Yun added. “The mortgage payment for a typical home today is more than double that of homes purchased before 2020. Still, first-time buyers in the market understand the long-term benefits of owning.”

Q2 GDP is tracking around 3%, according to the Atlanta Fed GDP Now model.

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Vital Statistics:

Stocks are higher as markets digest the Fed decision. Bonds and MBS are down small.

As expected, the Fed maintained the Fed Funds rate at current levels. “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.” In the May statement, the Fed said that “In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.” So there is a bit of an improvement in the language.

The dot plot showed the Committee expects to cut rates once this year. The economic forecasts didn’t move much, however they did bump up their inflation forecasts a tad, with the headline PCE forecast increasing from 2.4% to 2.6% and the core rate increasing from 2.6% to 2.8%.

We have another benign inflation report, with the producer price index actually falling 0.2% on a month-over-month basis and 2.2% on a year-over-year basis. About 60% of the decline was due to falling gas prices. Ex-food and energy, the index was flat and rose 2.3% on a YOY basis. Both numbers were below expectations.

More evidence of a weakening job market: Initial Jobless Claims rose to 242k last week. This is the highest level since August of last year.

The median home sale price in the US hit a record last week, according to Redfin. The median sale price hit $394,000 which is up 4.4% on a year-over-year basis. Asking prices appear to be leveling off however. The median mortgage payment fell to $2,829 due to falling mortgage rates. “The latest inflation report is good for homebuyers because it has already sent mortgage rates down, though this week’s Fed meeting will temper mortgage-rate declines,” said Chen Zhao, Redfin’s economic research lead. “But on the other side of the coin, if lower mortgage rates bring back more demand than supply, that could erase the possibility that home-price growth softens, and push prices up even further. Lower rates and higher prices may ultimately cancel each other out when it comes to homebuyers’ monthly paym

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Vital Statisics:

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

Bond yields got pushed down on the softer-than-expected ISM survey yesterday. The market narrative seems to be shifting from persistent inflation to a slowdown.

The manufacturing economy deteriorated in May, according to the ISM report.  “U.S. manufacturing activity continued in contraction after growing in March, the first expansion for the sector since September 2022. Demand was soft again, output was stable, and inputs stayed accommodative. Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions. These investments include supplier order commitments, inventory building and capital expenditures. Production execution continued to expand but was essentially flat compared to the previous month. Suppliers continue to have capacity, with lead times improving and shortages not as severe. Fifty-five percent of manufacturing gross domestic product (GDP) contracted in May, up from 34 percent in April.

The prices measure improved from April, but is still above February and March.

Construction spending fell 0.1% MOM and rose 10% YOY. Residential construction rose 8.1% on a year over year basis. There is a massive bifurcation in the resi market, with single-family construction up 20.4% YOY and multi-family up 2.3%.

We are seeing signs that multi-family has reached saturation and projects that penciled out in the 0% free-money era of COVID no longer make sense. “We certainly are seeing a decline in construction,” said Robert Dietz, chief economist at the National Association of Home Builders. “Deals and financing have dried up.”

The boom in multi-family building was the biggest since the early 1970s.

The inventory issue is most acute in the markets which boomed during the pandemic years – Boise, Phoenix, Austin, etc.

For-sale inventory is becoming more aligned with demand, according to the ICE Mortgage Monitor. “With 30-year rates easing and affordability improving entering the year, unadjusted monthly price gains had been running above their same-month 25-year average since the start of 2024,” said Walden. “However, softening price growth in April has dropped us below that long-run average. We’ve seen the rate of appreciation slow on an adjusted level as well, with April’s +0.28% increase in home prices a marked downshift from +0.45% in March.

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Vital Statistics:

Stocks are lower this morning on global weakness and weaker bonds. Bonds got hammered yesterday after a lousy bond auction of 5-year notes, which sent the 10 year yield back above 4.5% to end at 4.55%. Bonds and MBS are weaker again today.

Minneapolis Fed President Neel Kashkari isn’t ready to start thinking about rate cuts yet, and warned about the possibility of another rate hike in an interview with CNBC yesterday. “Many more months of positive inflation data, I think, to give me confidence that it’s appropriate to dial back….I’m not seeing the need to hurry and do rate cuts. I think we should take our time and get it right.” On the subject of rate hikes, he said: “I don’t think we should rule anything out at this point”

Home prices rose 6.6% in the first quarter of 2024 compared to the first quarter of 2023. “U.S. house prices continued to grow at a steady pace in the first quarter,” said Dr. Anju Vajja, Deputy Director for FHFA’s Division of Research and Statistics. “Over the last six consecutive quarters, the low inventory of homes for sale continued to contribute to house price appreciation despite mortgage rates that hovered around 7 percent.”

Home price appreciation is accelerating again:

Home prices hit a new all-time high, according to the Case-Shiller Home Price Index. “This month’s report boasts another all-time high,” says Brian D. Luke, Head of Commodities, Real & Digital Assets at S&P Dow Jones Indices. “We’ve witnessed records repeatedly break in both stock and housing markets over the past year. Our National Index has reached new highs in six of the last 12 months. During that time, we’ve seen record stock market performance, with the S&P 500 hitting fresh all-time highs for 35 trading days in the past year.

“Regionally, the Northeast remains the top performer with an 8.3% annual gain, showcasing robust growth compared to other metro markets. Conversely, cities like Tampa, Phoenix, and Dallas, which saw top-tier performance in 2020 and 2021, are now growing at a slower pace. COVID was a boom for Sunbelt markets, but the bigger gains the last couple of years have been the northern metro cities,” Luke reported. “On a seasonal adjusted basis, national home prices have reached their ninth all-time high within the past year, with all 20 metropolitan markets posting positive annual gains for the fourth consecutive month, indicating widespread and sustained growth in the housing sector.”

It does seem to be a tale of two markets, where the Sunbelt struggles with a lot of new construction, while the two markets that have lagged the post 2012 real estate recovery – the Midwest and the Northeast – are gathering steam. Of course San Diego continues to perform well regardless, because it is, well, San Diego.

Consumer confidence improved in May, according to the Conference Board. “Confidence improved in May after three consecutive months of decline,” said Dana M. Peterson, Chief Economist at The Conference Board. “Consumers’ assessment of current business conditions was slightly less positive than last month. However, the strong labor market continued to bolster consumers’ overall assessment of the present situation. Views of current labor market conditions improved in May, as fewer respondents said jobs were ‘hard to get,’ which outweighed a slight decline in the number who said jobs were ‘plentiful.’ Looking ahead, fewer consumers expected deterioration in future business conditions, job availability, and income, resulting in an increase in the Expectation Index. Nonetheless, the overall confidence gauge remained within the relatively narrow range it has been hovering in for more than two years.”

The present situation index remains well above the expectations index. Fewer people thought jobs were hard to get and expectations improved slightly. That said, the expectations index remains firmly mired in recessionary territory, with inflation expectations increasing from 5.3% to 5.4%.

Note that inflationary expectations are a key input to Fed decision-making since there are all sorts of ancillary behavioral effects that go along with it. Based on inflationary expectations, real interest rates are more or less zero, which could explain why the economy (and inflation) has remained resilient even in the face of 525 basis points of tightening.

Finally, home purchase plans remain the lowest since the bottom of the housing bust in 2012.

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Vital Statistics:

Stocks are higher this morning after good numbers out of Nvidia. Bonds and MBS are flat.

Existing home sales fell 1.9% to a seasonally-adjusted annual rate of 4.14 million. “Home sales changed little overall, but the upper-end market is experiencing a sizable gain due to more supply coming onto the market,” said NAR Chief Economist Lawrence Yun.

Housing inventory is up, which is good news for activity overall. It rose to 1.21 million units which was a 9% bump from last month and 16% from a year ago. This represents a 3.5 month supply at the current sales pace. This is still on the low side – a balanced market is about six month’s worth – but at least we are off the record lows we have seen over the past couple of years.

The median home price rose 5.7% YOY to $407,600. “Home prices reaching a record high for the month of April is very good news for homeowners,” Yun added. “However, the pace of price increases should taper off since more housing inventory is becoming available.”

The FOMC minutes from the May meeting support the “higher for longer” narrative.

Participants noted that they continued to expect that inflation would return to 2 percent over the medium term. However, recent data had not increased their confidence in progress toward 2 percent and, accordingly, had suggested that the disinflation process would likely take longer than previously thought. Participants discussed several factors that, in conjunction with appropriately restrictive monetary policy, could support the return of inflation to the Committee’s goal over time. One was a further reduction in housing services price inflation as lower readings for rent growth on new leases continued to pass through to this category of inflation. However, many participants commented that the pass-through would likely take place only gradually or noted that a reacceleration of market rents could reduce the effect.

Participants discussed the risks and uncertainties around the economic outlook. They generally noted their uncertainty about the persistence of inflation and agreed that recent data had not increased their confidence that inflation was moving sustainably toward 2 percent. A number of participants noted uncertainty regarding the degree of restrictiveness of current financial conditions and the associated risk that such conditions were insufficiently restrictive on aggregate demand and inflation.

Some of the participants raised the possibility that unusually strong seasonal patterns might have been behind the negative surprises in inflation at the beginning of the year. They also noted signs that the consumer is beginning to run out of steam, noting increases in credit use and buy-now-pay-later program usage.

It looks like the economy slowed in April, according to the Chicago Fed National Activity Index (CFNAI). Consumption and Production indicators drove the decrease.

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