All Things in Moderation

Vital Statistics:

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

The FOMC decision will be released at 2:00 pm today. I don’t think there will be anything market-moving in the language, but just be aware.

Mortgage applications fell 4.1% last week as purchases fell 5% and refis fell 4%. “In a sign that borrowers are increasingly more sensitive to higher rates, large declines in government purchase applications and refinance applications pulled overall activity lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The refinance index has now declined for two straight weeks, but is still 83 percent higher than last year. Purchase applications also decreased last week, but the impressive trend of year-over-year growth since the second half of 2020 has continued in early 2021. Activity was up 16 percent from a year ago, and the average purchase loan amount hit another record high of $395,200.”

The 10 year bond sold off after the results of the Georgia Senate runoff. I suspect it might have been overdone, and given Schumer’s talk of a stimulus not happening until March (Congress has bigger fish to fry, apparently), bond yields will probably work their way lower.

Durable Goods orders rose 0.2% in December, well below expectations. However, if you strip out transportation, it rose 0.7%. Core capital goods (a proxy for business capital expenditures) rose 0.6%

The FHA extended its foreclosure moratorium until March 31.

Homebuilder D.R. Horton reported fourth quarter earnings which rose 84% on a year-over-year basis. Sales were up 56% in units and 62% in dollar value to $6.4 billion. COVID-19 has increased demand for single family residences, and the work-from-home option has increased the viability of distant exurbs. The US economy should be buoyed by housing construction, although the big question is whether it will be enough to offset the devastation of small business from government-imposed COVID lockdowns.

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Vital Statistics:

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

The FOMC begins its two-day meeting today. The announcement is scheduled for 2:00 pm tomorrow.

Chuck Schumer said that negotiations for the stimulus may take a while. He is aiming for mid-March, when extended unemployment begins to run out. Meanwhile, the priority seems to be impeaching a guy who is no longer in office.

With stimulus looking further away, and Schumer signaling that negotiations should be tough, I wouldn’t be surprised to see bond yields drift lower. Bond markets are a global phenomenon, and while the US bond yield has been drifting upward, the German Bund (which is a proxy for Europe) has been stuck in a very narrow band around -0.54%.

Home prices rose 11% in November, according to the FHFA House Price Index. “House prices have risen by at least one percent for six consecutive months,” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “The acceleration has been slowing but annual gains now outpace the prior housing boom. Current conditions can be explained by fundamentals, including low rates and tight housing supply, which have been intensified by the pandemic.”

The Case-Shiller Home price index reported a smaller nationwide gain of about 9%. The difference is explained by the indices. FHFA only looks at loans which are guaranteed by the US government, so it excludes jumbos and distressed. Affordable homes are in the most demand, and that is where we are seeing the biggest price increases.

The FHFA announced that it will limit cash window purchases for mortgage banks to $1.5 billion per year in order to ensure that smaller banks continue to get access.

The letter agreements codify FHFA conservatorship directives that require the GSEs to purchase loans for cash consideration, and to operate this cash window with non-discriminatory pricing. Additionally, to ensure that the cash window is for the benefit of community lenders, each GSE will limit volume purchased through the cash window to $1.5 billion per lender during any period comprising four calendar quarters.

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Vital Statistics:

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

We have a big week of data coming up, along with the FOMC meeting. In terms of data, we will get home prices tomorrow, the FOMC decision on Wednesday, fourth quarter GDP on Thursday, and personal incomes / spending on Friday. The Fed meeting should be uneventful given Jerome Powell’s “now is not the time” language, referring to scaling back bond purchases.

Existing Home Sales rose 0.7% in December to a seasonally-adjusted annual rate of 5.64 million, according to the National Association of Realtors. This is the fastest pace since 2006. “Home sales rose in December, and for 2020 as a whole, we saw sales perform at their highest levels since 2006, despite the pandemic,” said Lawrence Yun, NAR’s chief economist. “What’s even better is that this momentum is likely to carry into the new year, with more buyers expected to enter the market.” I think Yun is right there – all signs point to an exceptionally strong Spring Selling Season, which is right around the corner. FWIW, NAR sees mortgage rates hovering around 3% in 2021, which is low enough for the refinance party to continue.

Total inventory fell to 1.07 million units, which is a 23% drop from a year ago, and represents under a two month supply of homes. This is the lowest amount since 1982, when NAR first started compiling these statistics. Tight inventory means higher prices, and the median home price was up 13% YOY to $309,800. With home prices rising affordability remains a concern, and I think the Fed is going to take that into account and hold down rates as long as it can.

Housing starts are rising, which should help alleviate the shortage, however it will take a couple years at least to get back to some semblance of balance. Housing construction should be great for the economy, and we could be looking at some strong performance between the stimulus and housing once the COVID crisis is out of the way. That said, one in three small businesses have shut over the past year, and that will be a drag.

The mortgage IPOs keep coming. United Wholesale completed its merger with a SPAC, and now Home Point is filing to go public. Loan Depot is another candidate.

The regulatory state is mulling whether to extend the Community Reinvestment Act to non-banks.

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Vital Statistics:

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

Delinquencies fell in December to 6.08%, the lowest level since April, according to Black Knight Financial Services. This is down 3.9% compared to November, but is up 78% on a YOY basis.

The MBA is requesting a $25 billion housing assistance fund. “We are requesting that you include a $25 billion Housing Assistance Fund, modeled on the Hardest Hit Fund, to provide funds to state housing finance agencies to help homeowners with COVID-19 hardships bring their mortgage loans current through targeted assistance,” the letter said. “The funds would be used for mortgage payment assistance, utility payments, property tax assessments and other support to prevent eviction, mortgage delinquency, default, foreclosure or loss of utility services.”

Flagstar reported fourth quarter earnings numbers that revealed that gain on sale margins are beginning to compress. “Our mortgage team continues to deliver, achieving revenues of $232 million for the quarter. While gain on sale margins did compress, we were pleased with how well they held up, finishing at 1.93 percent for the quarter. The team’s all-out efforts—coupled with our diverse, multi-channel mortgage platform—made it possible for us to deliver a quality experience to customers all year long in the face of unprecedented volumes. It will be interesting to see if this margin compression continues through 2021.

United Wholesale completed its merger with the Gores SPAC and should begin trading today under the new ticker UWMC. Third quarter originations were $54 billion for the company.

The three hottest real estate markets are Austin TX, Phoenix, and Nashville. The coldest are New York, San Francisco, and Los Angeles. “The pandemic has not upended the housing market so much as accelerated trends we saw coming into 2020,” said Zillow senior economist Jeff Tucker. “These Sun Belt destinations are migration magnets thanks to relatively affordable, family-sized homes, booming economies and sunny weather. Record-low mortgage rates and the increased demand for living space, coupled with a surge of millennials buying their first homes, will keep the pressure on home prices there for the foreseeable future.”

The PMI Flash index shows manufacturing and services perking up. Growth is the fastest since the start of 2015, however keep in mind that it is exaggerated given the drop in activity last year. The index did note that supply chain constraints are creating a backdrop for inflation.

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Vital Statistics:

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

Housing starts came in at 1.67 million, while building permits rose to 1.7 million. This is the fastest pace since the peak of the bubble years in 2006. For the full year of 2020, housing starts rose 1.38 million, which was 9% above the 2019 number.

You can see in the chart above that we are still kind of around historical averages, although they should trend upward with population growth. That chart goes back to 1960, when the US population was 181 million. We are at 331 million now. We will get existing home sales tomorrow, and the NAR has been reporting for-sale inventory is at record lows. The homebuilders have a lot of wood to chop in order to get inventory back to normal levels.

Initial Jobless Claims came in at 900k last week, which was a decline from the previous week.

The FHA said it will approve mortgages for DACA applicants. (or kids who’s parents are in the US illegally). It will be interesting to see how the government can push FHA lending going forward. They want the banks to do more of it, but the banks are understandably gun-shy after the Obama Admin used the False Claims Act to extract billions in settlements. I suspect we will be back to the Obama-era policy of cognitive dissonance: How hard can we kick the banks while simultaneously encouraging them to make more mortgages?

Homebuilder sentiment slipped on rising materials prices. “Despite robust housing demand and low mortgage rates, buyers are facing a dearth of new homes on the market, which is exacerbating affordability problems,” said NAHB Chairman Chuck Fowke. “Builders are grappling with supply-side constraints related to lumber and other material costs, a lack of affordable lots and labor shortages that delay delivery times and put upward pressure on home prices. They are also concerned about a changing regulatory environment.”

The Biden Administration is going to have to walk a fine line with respect to building more homes. Housing shortages are most acute in deep-blue urban areas where environmentalism and NIMBY-ism conspire to keep supply low. In other words, he is going to have to buck his own party’s base on this.

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Vital Statistics:

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

The MBA reported that mortgage loans in forbearance fell 5.37% compared to 5.46% a week ago. Fannie and Fred loans in forbearance fell to 3.13%, an improvement of 6 basis points. “The week of January 10 saw the largest – and only the second – decrease in the share of loans in forbearance in nine weeks, with declines across almost every tracked loan category,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The rate of exits from forbearance has picked up a bit over the past two weeks but remains much lower than what was seen in October and early November.”

The FHFA has extended its foreclosure moratorium until Feb 28. The FHFA projects the COVID-19 foreclosure moratorium and its extension will create an additional $1.4 to $2 billion in expenses for the government-sponsored enterprises.

Mortgage Applications decreased 1.9% last week according to the MBA. Purchases increased 3%, while refinances fell 5%. “Market expectations of a larger than anticipated fiscal relief package, which is expected to further boost economic growth and lower unemployment, have driven Treasury yields higher the last two weeks,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “After a post-holiday surge of refinances, higher rates chipped away at demand. There was a 5 percent drop in refinance activity, driven by a 13.5 percent pullback in government refinances.”

Janet Yellen testified yesterday in front of the Senate Finance Committee. Here were the big takeaways:

• Higher taxes are coming, but not now.
• The government needs to get spending under control, but not now.
• The dollar should be strong
• Fiscal stimulus needs to be big.

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Vital Statistics:

Stocks are higher this morning as more financial stocks report earnings. Bonds and MBS are down.

The upcoming week is pretty data-light, although we will get some housing data with housing starts, the NAHB Housing Market Index and Existing Home Sales. The Spring Selling Season will be starting in about a month or so, and we should see plenty of pent-up demand from last year. Existing home inventory is at record lows, and prices are rising.

Bank of America reported better than expected earnings, however revenues fell 10%. The Fed has loosened the reins on stock buybacks, and the company announced it intended to repurchase $2.9 billion shares. Separately, Goldman Sachs reported strong earnings.

Janet Yellen is scheduled to return to the Hill today for testimony about her new role as Treasury Secretary. Unsurprisingly, she is going to advocate for a lot of additional fiscal stimulus. Note that with the change of the administration, many Democratic lawmakers are suddenly interested in re-opening the economy.

Joe Biden nominated Rohit Chopra to lead the CFPB. It sounds like the Administration is going to focus on student loan servicing practices. I am sure that the Agency will also focus on mortgage servicing as well. Chopra is a well-known name in DC and was most recently at the FTC where he focused on market domination in the tech space.

Merrill Lynch is out with a bullish take on the 2021 economy, predicting that the most vulnerable parts of our population will be vaccinated by April and May, and earlier and larger stimulus package will help things as well. They are taking up their GDP forecast from 4.6% to 5%. Note the Fed is predicting 4.2% for next year. If historical patterns hold, we can expect the Fed to overshoot growth estimates for the next four years.

Freddie Mac is forecasting that originations will decline 20% from their all-time high of $4 trillion in 2021. $3.2 trillion is still a hefty number, and should allow for great times for the industry. They see mortgage rates averaging about 2.9% this year before rising to 3.2% in 2022. Freddie also sees home price appreciation leveling out to about 0.7% in 2021. With the current supply-demand imbalance, that seems unlikely.

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Vital Statistics:

Stocks are lower this morning as we kick off earnings season. Bonds and MBS are up.

Retail Sales dropped 0.7% in December. This was well below expectations. Ex-gasoline and autos, sales fell 2.1%. This shows the economy is moving in the wrong direction, and I suspect we will see economists take down their estimates for fourth quarter US GDP growth. Separately, the University of Michigan Consumer Sentiment Index fell in January.

Industrial Production rose 1.6% while manufacturing production rose 0.9%. Capacity Utilization rose to 74.5%. We still have a lot of wood to chop to get back to pre-COVID levels here as well.

Fed Chairman Jerome Powell said that “now is not the time” to discuss tapering bond purchases. “Now is not the time to be talking about exit,” from the $120 billion in government securities the Fed is buying each month, Powell said in a web symposium with Princeton University. “A lesson of the Global Financial Crisis is be careful not to exit too early, and by the way try not to talk about exit all the time…because the markets are listening.” ”The economy is far from our goals…and we are strongly committed…to using our monetary policy tools until the job is well and truly done.” He went on further to say that the goal is to get the labor economy back to where it was pre-pandemic. The focus for that will be on lower-wage employment and wage growth.

Bottom line: mortgage rates are probably not going to get away from us for a while. A easy non-legislative way to put money in people’s pockets is to allow them to refinance their mortgage at a lower rate. With 32 million borrowers out there able to save 75 basis points on their rate, it will take years to do all of those loans, given industry capacity constraints. Powell knows this, and unless inflation magically appears from out of the blue, rates are staying low.

The FHFA will not leave conservatorship in the near term. There was talk of the Trump Administration letting them go, but that was always a long shot. FWIW, I do not see the Biden Administration releasing them either – if anything I could see them reinstituting the profit sweep and getting a whole slew of new affordable housing mandates.

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Vital Statistics:

Stocks are higher this morning on hopes of a stimulus package. Bonds and MBS are flattish.

Joe Biden revealed a $2 trillion stimulus package. It will include $2,000 payments, aid for state and local governments and extended unemployment benefits. Separately, Mitch McConnell moved the impeachment trial for Trump until after Joe Biden takes office.

New York City renters owe $1 billion in back rent, according to one survey. It probably is closer to $2 billion. According to one housing advocate, the government could wipe that amount out with aid to the New York City. “It’s not an insurmountable amount,” Mr. Martin said. “The numbers tell us that, probably, if we could get an additional billion or two dollars in the city, we could probably pay off every single renter’s arrears in the entire city of New York over the last year of the crisis.” This may be where the government is headed, with the government making rent payments until the crisis is over. This is a risky course of action, as it will encourage a stampede of rent defaults with the government writing checks and asking questions later. Also, it has to be bearish for apartment pricing in the City as well. I don’t know how you account for potentially unenforceable rent contracts in your cap rate assumptions.

The National Federation of Independent Businesses reported that sentiment fell dramatically in December. “This month’s drop in small business optimism is historically very large and most of the decline was due to the outlook of sales and business conditions in 2021,” said NFIB Chief Economist Bill Dunkelberg. “Small businesses are concerned about potential new economic policy in the new administration and the increased spread of COVID-19 that is causing renewed government-mandated business closures across the nation.”

The plus side for the economy going forward is more government aid, and a robust housing market. The downside is more government regulation and general anti-business sentiment.

Mortgage Applications rose 16.7% in the first week of January as purchases rose 8% and refis rose 20%.

Initial Jobless Claims are headed in the wrong direction, with the number of newly unemployed increasing to almost 1 million.

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Vital Statistics:

Stocks are higher this morning despite a pretty lousy jobs report. Bonds and MBS are down.

The jobs report showed a loss of 140,000 jobs in December, which was well below the expected 50,000 gain. The unemployment rate slipped to 6.7% and hourly earnings rose by 5.1% YOY. The labor force participation rate was flat at 61.5%.

Given the riot that happened yesterday in DC, I am surprised to see bonds continuing to sell off. My gut tells me that part of the reason is that the bond market is still adjusting to the surprise result in the GA Senate runoff. Yes, we will get more stimulus which is theoretically inflationary. That said, all of the chaos in DC should be considered bond bullish, and I do think the stock market is in a state of denial. This is setting up for an unfriendly business environment.

As things settle down, I suspect the watchword for the business community will become uncertainty. Uncertainty is the reason for not hiring, not spending, etc. Ultimately, Biden is a bit of a blank screen, and until the business community knows whether we are getting Bill Clinton or Barack Obama’s regulatory state it will choose to sit on its hands. Someone remarked that the DC riot is the left’s 9/11, and they want revenge. An angry left is not conducive to commerce. All you can do is hunker down, play it safe and wait for the storm to pass.

I will be willing to bet that the NFIB Small Business Optimism Index will take a dive the next time it is released. Ultimately, this state of affairs should be considered bond bullish, and I suspect rates will be headed back down. The stock market is still being elevated by the Fed and speculative activity (I read somewhere that 6% of the volume in the market has been in one name: Tesla).

Ultimately, if the economy slows (which seems to be the case), the Fed’s bond purchases will have to stay in place. This means that mortgage rates should have a lid on them for the foreseeable future. While I don’t see a return to the economy of 2009-2010, I do think the pre-COVID economy is probably not in the cards for a long time. This is why I think rates are headed back lower.

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