All Things in Moderation

Vital Statistics:

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

The increase in US bond yields yesterday was driven by a few strategists saying that inflation could return in the back half of 2021, and we should see a rapid rebound due to stimulus payments. There is a global story being told as well, with expectations of a recovery as people get vaccinated. We have seen the German Bund (which is the German 10 year bond) increase in yield from -55 basis points to -35 basis points. The Japanese 10 year is also around 10 basis points. In other words, the bond sell-off in the US is being driven by global forces as well as US ones. Regardless, we are seeing mortgage rates push up, with the average 30 year mortgage rate rising 5 basis points yesterday.

The Fed has stressed that it wants to maintain an average of 2% on inflation. This means that it is prepared to let inflation run above 2% for a while in order to bring up the average. The Fed will almost certainly maintain the current policy through this year and probably well into next year. The Fed Funds futures contracts did begin to start handicapping a rate increase in late 2023, but the overall policy stance should be set for the foreseeable future.

Mortgage Applications fell by 5.1% last week as purchases fell 6% and refis fell 5%. “Expectations of faster economic growth and inflation continue to push Treasury yields and mortgage rates higher. Since hitting a survey low in December, the 30-year fixed rate has slowly risen, and last week climbed to its highest level since November,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The uptick in rates has slightly dampened refinance activity, with MBA’s index falling for the second week in a row, and the overall share dipping below 70 percent for the first time since last October.”

The Producer Price Index (a measure of wholesale inflation) came in hotter than expectations. The index rose 1.3% MOM and 1.7% YOY. Ex- food and energy and trade services it rose 1.2% MOM and 2% YOY.

Retail sales were strong in January, with the headline number rising 5.3% overall. The control group which excludes autos, gas and building supplies rose 6.1%.

Industrial Production rose 0.9% in January, while manufacturing production rose 1%. Capacity Utilization rose to 75.6%.

Western Alliance Bank just agreed to buy Amerihome for $1 billion in cash. This price is about 1.4 times book value. Western Alliance recently bought Galton Funding as well, and has always been a big name in warehouse lending. The deal is expected to be 30% accretive to EPS and add 500 basis points to ROE.

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Vital Statistics:

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

Not sure what is going on in the bond market, but rates are up big this morning. Bitcoin is above 50k, and we are seeing commodity prices rise. The ice storm hit Texas and Oklahoma pretty hard, and that should impact oil supply and pricing. Lumber is also up big.

The upcoming week has some important data, with the producer price index, industrial production, housing starts, and existing home sales. The increase in lumber prices is an indication that this year will be big for housing starts.

We will also get the FOMC minutes on Wednesday.

Delinquencies fell from 7.65% at the end of the third quarter to 6.73% at the end of the fourth, according to the MBA. This is the biggest drop in delinquencies since the MBA started keeping records. DQs for government are about three times the rate of Fan / Fred.

Business activity grew “modestly” in New York State according to the Empire State Manufacturing Survey. The Fed tends to use terms like “modest” or “moderate” to characterize activity. Generally speaking, on a scale of 1 – 10, “modest” means about a 3. That said, the report did note some inflationary pressures: The prices paid index rose twelve points to 57.8, a level last reached
in 2011, pointing to sharp input price increases. The big question about all of this is whether the commodity price increases we are seeing are due to COVID-19 related supply chain issues (which are temporary) or due to fundamental changes in inflationary expectations and therefore permanent. This inflationary pressure will put bond yields on the defensive though.

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Vital Statistics:

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

Loan Depot is now public, trading under the ticker LDI. They will announce fourth quarter earnings next week. The past year has been a bonanza for mortgage IPOs.

Democrats are still working on a stimulus bill. They plan on inserting a $15 minimum wage increase which guarantees there will be almost no Republican support. They will push it through the Senate via reconciliation which sidesteps the filibuster. Note that the CBO says the 2021 deficit will hit $2.3 trillion, before the new $1.9 trillion stimulus is taken into account.

The housing market’s strength has broadened, according to homebuilder Taylor Morrison. “It’s a phenomenal dynamic we’re seeing out in the marketplace,” Palmer said in an interview on “Closing Bell,” one day after the nation’s fifth largest homebuilder reported fourth-quarter revenue of $1.6 billion, up 6% year over year. Net sales orders were up 46% compared with the same period a year earlier. We’re seeing strength across pretty much all geographies as well as all consumer groups. That’s a shift from a few months ago,” said Palmer, who has led Scottsdale, Arizona-based Taylor Morrison since 2007.

Note that lumber prices are up 113% YOY.

Zillow said that average days on market in December was 17 days, which was 25 days faster than December of 2019. “Homes are flying off the shelves. It’s a really high velocity market and that’s what has resulted in the highest home volume sales we’ve seen in 15 years” said Zillow CEO Rich Barton.

While the official unemployment rate is 6.3%, it is really closer to 10%. The reason is the way the US calculates unemployment. The labor force participation rate has collapsed (the decline is the largest since 1948). Actual employment in January was 10 million fewer than it was in February of 2020.

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Vital Statistics:

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

Initial Jobless Claims fell to 739k last week. It looks like the layoffs are starting to ease up, but we are still pretty elevated compared to historical norms.

The FHFA extended its foreclosure moratorium until the end of March. In addition, loans backed by Fan or Fred are eligible for a foreclosure extension for up to three months, and can defer payments for up to 15 months. “To keep families in their home during the pandemic, FHFA is allowing borrowers to be in COVID-19 forbearance for up to 15 months and extending the Enterprises’ foreclosure and eviction extension,” said FHFA Director Mark Calabria.

Fed Chairman Jerome Powell signaled that easy monetary policies will be in place for a while. The Fed is probably not going to “even think about withdrawing policy support” for the foreseeable future. He also said that monetary policy alone will be insufficient to get the economy going again and it will require fiscal stimulus and efforts from the private sector. “It will require a society-wide commitment, with contributions from across government and the private sector” What “contributions from the private sector” means is anyone’s guess. Here are the prepared remarks from his speech.

Mortgage delinquencies fell by 92 basis points in the fourth quarter to 6.73%, according to the MBA. This is an increase of 296 basis points compared to the fourth quarter of 2019. “For the second consecutive quarter, homeowners’ ability to make their mortgage payments improved,” said Marina Walsh, CMB, MBA Vice President of Industry Analysis. “The 92-basis-point drop in the delinquency rate in the fourth quarter was the biggest quarterly decline in the history of MBA’s survey dating back to 1979. Total mortgage delinquencies across the three loan types – conventional, FHA and VA – and across the major stages of delinquency – 30-day, 60-day and 90-day – declined from last year’s third quarter.”

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Vital Statistics:

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

Inflation came in at 0.3% MOM and 1.4% YOY. Ex-food and energy, inflation was flat MOM and rose 1.4% YOY. These numbers were below Street expectations, and are well below the Fed’s inflation target. IMO, inflation certainly doesn’t feel nonexistent. Certainly not at the supermarket.

Mortgage applications decreased 4.1% last week as purchases declined 3% and refis fell 5%. “Mortgage rates have increased in four of the first six weeks of 2021, with jumbo rates being the only loan type that saw a decline last week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite some weekly volatility, Treasury rates have been driven higher by expectations of faster economic growth as the COVID-19 vaccine rollout continues. With the 30-year fixed rate increasing to 2.96 percent – a high not seen since last November – refinances declined, and their share of total applications dipped to the lowest level in three months. Government refinance applications did buck the trend and increase, and overall activity was still 46 percent higher than a year ago. Demand for refinances is still very strong this winter.”

PennyMac reported full year earnings of $20.92 for 2020. With the stock trading at $62 bucks a share, this works out to be a P/E ratio of three. For the year, the company originated almost $200 billion. PennyMac is expected to earn $16.67 next year, which puts the multiple under 4. One of the knocks on mortgage bankers is that they never seem to obtain a multiple, and we are currently seeing that now.

Speaking of multiples, New Rez mentioned the disappointing mortgage banking multiple issue on its earnings call. The company filed a confidential S-1 with the SEC last year which contemplated doing something with the lending arm. New Rez was asked about the spin on the conference call, and it seemed that they might be having second thoughts:

So we are — without getting too specific, we continue to evaluate what a total separation would mean to the company, meaning NRZ or — and NewRez. So if we think that it will create more value for shareholders by separating the company and bringing it into the public markets. It’s something that’s absolutely on the table. As you’ve seen from some of the recent either attempts or IPOs that have come out with some of our friends and peers on the mortgage company side, some of them have gone OK, others have not gone as well.

Loan Depot is supposed to list this week as well, and they have pulled the IPO before. The market seems to think mortgage bankers are worth single-digit multiples, and it doesn’t matter whether the business model is wholesale, consumer direct, or aggregator. I suspect this won’t be good for potential M&A. I can’t see many founders who worked for years to build a mortgage company being willing to sell out for 3 times earnings.

There were 6.6 million job openings in December according to the JOLTS jobs report. The number of hires fell by 400k to 5.5 million. The losses were mainly in hospitality, entertainment, and transportation. Retail did increase, but that was probably temporary hiring for the holiday season. The quits rate came in at 2.3%, which was unchanged.

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Vital Statistics:

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

The upcoming week is relatively data-light, with inflation data as the only potential market-moving numbers.

Janet Yellen said that if Congress passes the stimulus bill, the economy will return to full employment by 2022. “There’s absolutely no reason why we should suffer through a long slow recovery,” Yellen said during an interview on CNN’s “State of the Union.” “I would expect that if this package is passed that we would get back to full employment next year.” These comments have bond yields rising. The Fed’s December projection has unemployment falling to 4.2%, so I guess you could call that full employment.

FWIW, I guess this is conceivable, but something like one third of small businesses have failed during this pandemic. I don’t know that we have seen anything like that since the Great Depression, and I suspect it will take longer than a year or two to repair that damage. Most of these small business failures were retail, bars and restaurants. Their failures are then transmitted upwards to their commercial real estate landlords. But, remember Yellen is no longer a civilian, she is part of the Biden Administration, so she is talking her political book. It is part of the job description, and you should take her pronouncements with a grain of salt.

The pandemic has hit the hotel sector hard, so hard that many buildings can be bought at deep discounts and then re-purposed into affordable housing. “Apartments around here, you might pay $120,000 a door, and we can purchase these hotels probably $30,000 to $40,000 a door, and maybe put $10,000 a door into the renovations.”

Democrats are mulling a $15,000 tax credit for first time homebuyers in an attempt to mitigate the affordability crisis caused by soaring home values. The fly in the ointment is the left wants to raise the tax rate on long-term capital gains. Since Democrats are going to use the reconciliation process to push through the stimulus bill (thus passing it without Republican votes) it might not matter, but it also does not allow for any D defections.

Ultimately the issue in the housing market is one of supply, not demand. Adding a tax credit will probably just push prices higher. More homebuilding is the need, not housing subsidies. But that is a harder issue since zoning is a local issue, and there are major internecine wars there with the Democrats. Building in the suburbs will be easier, but single family builders are still struggling with high input prices (lumber especially) and a shortage of skilled construction labor.

Merger mania in the mortgage space. Guaranteed Rate just bought Owning Corp, a direct-to-consumer lender in California. Note that Guaranteed Rate just bought Stearns lending as well, so the big players are bulking up for what might be the mother of all price wars down the line.

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Vital Statistics:

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

The January jobs report showed that the economy added 49,000 jobs. The unemployment rate came in at 6.3%, while average hourly earnings increased 5.4% YOY. The increase in wages is certainly good news, however there still might be COVID noise in those numbers. The labor force participation rate slipped 0.1% to 61.4%.

Corelogic agreed to a buyout deal after a long sales process. The company is being bough by Stone Point Capital. Stone Point also owns Home Point.

United Wholesale reported origination of $54.7 billion in the fourth quarter, which was an increase of 71% compared to the fourth quarter of 2019. Gain on sale margin increased to 305 basis points.

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Vital Statistics:

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

Initial Jobless Claims fell to 779,000 last week. While the numbers are going in the right direction, we are still super-elevated, and above the days of the Great Recession.

Announced job cuts rose to 79,552 in January, according to outplacement firm Challenger, Gray and Christmas. “While cuts were higher than average last month, we are seeing a leveling off of announcements, which may bode well for recovery in the coming months. Companies may be reassessing their staffing levels and waiting on the impact of the relief bill before making any additional workforce decisions,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

Productivity fell 4.8% in the fourth quarter as output increased 5.3% and hours worked increased 10.7%. Unit labor costs increased 6.8% driven by a 1.7% increase in compensation and the 4.8% decline in productivity. Unit Labor Costs have been rising steadily for the past year, although I wonder if COVID is introducing some statistical noise here. Note that manufacturing productivity is up, so this is a service sector phenomenon.

Janet Yellen has summoned regulators to discuss stock market volatility and the Gamestop phenomenon. This is similar to the pools that were operating 100 years ago, except the floor traders aren’t in on it any more (since they don’t exist). If you read Reminiscences of a Stock Operator you will read about a similar phenomenon. By the way, IMO Reminiscences is THE treatise on momentum trading (though he didn’t call it that).

I am not sure what regulators can do about this situation. Ultimately, you don’t have big, controllable institutions behind it, and the market-maker adult supervision of the markets disappeared a long time ago. NYSE floor specialists don’t control the flow any more, and NASDAQ market-makers have been eliminated as trading commissions are so low that it doesn’t make sense to take risk any more. The Gamestop situation may simply be nothing more than the unintended consequence of lowering transaction costs to the floor.

Zillow has a report out on suburban versus urban housing markets. The punch line:

• Suburban homes sold faster than urban homes by the end of 2020, but home value growth, sales volume and Zillow web traffic in urban areas has kept pace with or exceeded levels in suburban areas.
• Urban home value growth outperformed the suburbs in much of the Midwest, where homes are typically less expensive near city centers. In some of the most-expensive markets, including New York and San Francisco, urban housing demand softened relative to the surrounding suburbs. 
• Urban rent growth fell behind growth in the suburbs in 2020, but Zillow expects urban rents to quickly recover as the pandemic subsides.

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Vital Statistics:

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

The ADP Employment Report said that 174,000 jobs were created in January, which was above expectations. While the typical categories of professional services and healthcare added jobs, leisure and hospitality added 35,000 positions as well, which are desperately needed. “The labor market continues its slow recovery amid COVID-19 headwinds,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Although job losses were previously concentrated among small and midsized businesses, we are now seeing signs of the prolonged impact of the pandemic on large companies as well.”

Mortgage applications increased by 8.1% last week, according to the MBA. Refis increased by 10% while purchases were more or less flat. “After increasing for three consecutive weeks, the 30-year fixed mortgage rate dropped 3 basis points to 2.92 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The one-week reversal in the recent upswing in rates drove an increase in both conventional and government refinance activity, as borrowers continue to lock in these historically low rates.”

The homeownership rate increased 0.7% year-over-year to 65.8%, however it slipped compared to the third quarter of 2020. Rental vacancy rates were more or less unchanged at 6.4%. The huge jump in the homeownership rate during the second and third quarters is strange, and I am not sure what caused that.

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