All Things in Moderation

Vital Statistics:

Stocks are lower this morning as hopes for a stimulus package fade. Bonds and MBS are up.

Small business optimism declined in November according to the NFIB. “Small business owners are still facing major uncertainties, including the COVID-19 crisis and the upcoming Georgia runoff election, which is shaping how they’re viewing future business conditions,” said NFIB Chief Economist Bill Dunkelberg. “The recovery will remain uneven as long as we see state and local mandates that target business conditions and disproportionately affect small businesses.” The bright spot remains labor markets with a net 20% of firms raising compensation. 89% of employers said that finding qualified employees was difficult.

Productivity in the third quarter was revised downward to 4.6%. COVID is introducing a lot of noise to these numbers. Unit Labor Costs fell by 6.6%.

Mortgage delinquencies rose in September to 6.3% compared to 3.8% a year ago. “Although delinquencies remain high, it’s clear the economy has passed an initial stress test. High home equity balances and structural protections put in place as a result of the Great Recession contributed to surviving this test. Housing demand remains strong, and rates low, which provides optimism that the housing market will continue to be a bright spot in this COVID-ravaged economy.” The hardest-hit states for delinquencies are Louisiana, Mississippi, New York, New Jersey, and Florida.

Redfin sees the housing economy absorbing any COVID-19 related foreclosures with relative ease. “In my experience selling foreclosed properties, some people don’t take advantage of forbearance because they aren’t educated on what it entails,” said Redfin agent Gina Sapnar. “There are people who are in forbearance who don’t understand how repayment works. For some people payments are tacked on to the end of the loan, but for others it may be a large payment due immediately at the end of forbearance as a lump sum, which could be very tough for people to repay. Some homeowners are underwater because they took on more debt than they could handle. I know of a restaurant owner who took equity out of his home to pay his workers during the pandemic. There are people suffering who have depleted their entire life savings, are drowning in debt and they aren’t paying their mortgages. But even those people have options. The lenders are really trying to work with occupants and educate them on how to avoid the scarlet letter of a foreclosure.”

The demand for homes is so insatiable that the excess supply will be taken up quickly.

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Vital Statistics:

Stocks are lower this morning as California institutes a strict lockdown amidst a rise in COVID-19 cases. Bonds and MBS are down.

The upcoming week should be relatively quiet with the Fed in the quiet period ahead of next week’s FOMC meeting and limited economic data. We will get inflation and productivity data this week and that is about it.

CoreLogic released its three-year economic outlook, and it predicts low mortgage rates through 2023 as well as rising home prices. They forecast that mortgage rates will average around 3.2% for 2021 through 2023. This means that the refi boom will continue.

They anticipate rates will remain below 3% for early 2021.

Second, they see the Millennial generation will be a huge tailwind for housing demand. The largest age cohort of the Millennial generation is in their late 20s and, and the median age for the first time homebuyer is age 33. The first time homebuyer has been underrepresented in the homebuying population, averaging about 30% of home purchases. Historically that number has been closer to 40%. So, as homebuilders ramp up to satisfy this demand, the purchase side of the business should remain robust for the next several years.

Finally, CoreLogic expects home price appreciation to slow as builders ramp up production and the supply / demand imbalance gets fixed. As the first time buyers become a bigger percentage of the mix, lower-priced starter homes will be act to pull the average prices down.

Overall, the report is bullish for housing and the mortgage origination industry. The Fed seems to be in no hurry to increase rates, and the global vortex of low and negative sovereign yields should keep a lid on the 10 year. Plus the Fed is thinking of increasing MBS purchases, which will keep mortgage rates low. Overall, this should be a great environment for the origination business going forward.

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Vital Statistics:

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

Initial Jobless Claims fell to 712k last week, while the Challenger and Gray job cut report showed companies announced 64,700 job cuts last month.

Independent mortgage banks earned $5,535 on each loan in the third quarter, an increase from $4,458 in the second quarter, according to the MBA. This works out to be 203 basis points compared to 167 basis points in the second quarter. Average production volume increased from $1.02 billion to $1.34 billion.

“With the surge in mortgage production volume in the third quarter, net production profits among independent mortgage bankers increased, surpassing 200 basis points for the first time since the inception of MBA’s report in 2008,” said MBA Vice President of Industry Analysis Marina Walsh, CMB. “Soaring production revenues – led by strong secondary marketing gains – drove these results and more than offset an increase in production expenses.” 

The FHFA extended the moratorium on foreclosures and evictions through January 31, 2021.

The Fed’s Beige Book reported modest growth for most of the country. Employment growth remains slow, and inflation is under control. Overall, the economy has a lot of work to do in order to recover to pre-COVID levels.

The CDC has lowered its quarantine time recommendations. The 14 day period has dropped to 7 or 10 days, depending on test results and symptoms.

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Vital Statistics:

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

Jerome Powell speaks at 10:00 am today. Bonds and MBS have been a touch volatile based on clues for added Fed purchases.

The share of loans in forbearance increased last week to 5.54%, up from 5.48% the week before. “For the second week in a row, the share of loans in forbearance has increased, driven by a rise in new forbearance requests and another slowdown in the pace of forbearance exits,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The increase was across all loan and servicer types. Even GSE loans, which had previously declined for 24 straight weeks, saw an increase last week.”

Mortgage applications fell 0.6% last week (which included the Thanksgiving holiday) as purchases increased 9% and refis fell 5%. Refi activity is up 100% on a YOY basis, while purchase activity is up 28% YOY.

The ADP jobs report showed the economy adding 307,000 jobs last month. Big gains were reported in leisure / hospitality, professional and business services, and social services. FWIW, the Street is looking for 500k payrolls in Friday’s jobs report, so this is a bit of a miss.

Given the ADP report, it looks like the rebound is beginning to lose some steam. This should be positive for bonds, as it will encourage the Fed to increase purchases. Note that mortgage rates continue to move lower despite the uptick in interest rates.

I think the breakdown in correlation is largely due to mortgage banks beginning to decrease margins, as well as the Fed’s purchases of MBS in the market anchoring rates. With rates in the rest of the world stuck at 0% (or even negative), I don’t think the 10 year yield will be able to generate that much momentum.

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Vital Statistics:

Stocks are higher on positive vaccine news. Bonds and MBS are down.

Home prices rose 1.1% MOM and 7.3% YOY in October, according to CoreLogic. Detached home prices rose 7.9% while attached rose only 4.5%. This is almost certainly due to COVID and buyer preference for isolation from neighbors. Phoenix experienced the biggest gains, rising 12%, while the New York City area MSA only grew by 2%.

Jerome Powell will head to the Hill today for testimony. Here are his prepared remarks. He mainly discussed the various lending programs for small businesses and municipalities. He didn’t really talk about MBS purchases.

A bipartisan group of lawmakers are preparing a $908 billion stimulus plan. It will provide an additional $300 a week in unemployment benefits, which is lower than the $600 a week Democrats want. It will provide $240 billion in aid to state and local governments, which Republicans oppose, and another 6 month moratorium on COVID-related lawsuits which Democrats oppose. We will see if this plan has any White House support.

New home inventory is at a 3 year low. A picture is worth a thousand words:

Construction spending rose 1.3% MOM and 3.7% YOY, according to the Census Bureau. Residential construction spending rose 2.9% MOM and 14.6% YOY.

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Vital Statistics:

Stocks are flattish this morning despite positive COVID-19 vaccine news. Bonds and MBS are flat.

Today is Cyber Monday and investors are hoping that it will offset the weakness we saw on Black Friday, where traffic was down 50% due to the pandemic. That said, retailers are expecting a robust holiday, with spending expected to rise 3.6% according to the National Retail Foundation.

We will have a lot of data and Fed-speak this week as we enter the final month of 2020. Data-wise, we have construction spending, the jobs report, and PMI data. Jerome Powell will be speaking Tuesday and Wednesday.

New home sales rose 23% YOY to 999,000 in October, which was more or less flat with September’s million unit print. As a general rule, new home sales can be a volatile number and I kind of thought September’s big print would be revised away. Turns out, it wasn’t. This will be an under-appreciated economic boost to the country going forward. Housing is back.

Janet Yellen is Biden’s nominee for Treasury Secretary. She will be confirmed easily, as she is liked by the banks and is a known quantity. She is considered a bipartisan pick, and will advocate for additional federal spending to combat the economic weakness caused by COVID.

Pending Home Sales fell 1.1% in October, according to NAR. “Pending home transactions saw a small drop off from the prior month but still easily outperformed last year’s numbers for October,” said Lawrence Yun, NAR’s chief economist. “The housing market is still hot, but we may be starting to see rising home prices hurting affordability.”

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Vital Statistics:

Stocks are flattish this morning after a slew of economic data. Bonds and MBS are flat.

Third quarter GDP rose 33.1% and personal consumption expenditures rose 40.6%. This was the second revision and the numbers came in more or less in line with street expectations.

Initial Jobless Claims rose to 778k last week, which was a touch worse than expectations. Meanwhile durable goods orders rose 1.3%, which was better than expected.

Mortgage Applications rose by 4% as purchases rose 4% and refis increased 5%. “Thirty-year fixed mortgage rates dropped seven basis points to 2.92 percent, another record low in MBA’s survey,” said Joel Kan, MBA Associate Vice President of Industry and Economic Forecasting. “Weekly mortgage rate volatility has emerged again, as markets respond to fiscal policy uncertainty and a resurgence in COVID-19 cases around the country. The decline in rates ignited borrower interest, with applications for both home purchases and refinancing increasing on a weekly and annual basis.”

The FHFA increased the one-unit conforming loan limit to $548,250, an increase of 7.42%. All other limits were adjusted upward accordingly.

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Vital Statistics:

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

Joe Biden has nominated Janet Yellen to Treasury. Apparently Elizabeth Warren lobbied hard for the job, but lost out in the end. Yellen gets along with the banks, which is important. Needless to say, Biden wants to see a big stimulus package, and Yellen will be part of agitating for that. The fate of a stimulus package will remain in the hands of Georgia voters.

Home prices are skyrocketing as lower interest rates meet a housing shortage and increased demand. The FHFA House Price Index rose 1.7% MOM and 9.1% on a YOY basis. The Cash-Shiller index rose 1.3% MOM and 6.6% YOY, the highest rate of growth in 6 years.

The FHFA House Price Index only looks at homes with confirming loans, which means it excludes jumbo. Note that with the FHFA index rising so much, we could be looking at a conforming loan limit of around $550k next year.

The number of loans in forbearance ticked up last week, according to the MBA. 5.48% of all mortgages were in forbearance, an uptick of 1 basis point compared to a week prior. “A marked slowdown in forbearance exits, as well as a slight rise in the share of Ginnie Mae, portfolio and PLS loans in forbearance, led to an overall increase for the first time since early June,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The decline in exits in the prior week follows a flurry of them last month, when many borrowers reached the six-month point in their forbearance terms. The share of GSE loans in forbearance continued its downward trend and have now declined every week for six straight months.”

With mortgage rates continuing to fall, Black Knight has updated its count of high quality refinances. According to their latest report, 19.4 million borrowers can save 75 basis points on their rate by refinancing. These are only the high quality refi candidates, which have more than 20% equity and 720 FICOs. Here is an interesting stat: 7.2% of these borrowers are in the New York City area. 1.4 million borrowers * 400k a pop = $700 billion in potential refis right in our backyard.

If you remove the FICO and equity constraints, that number increases to 32 million. As long as the Fed keeps rates low, this refi boom is going to have legs. 32 million potential refis out there at 400k a pop means $12.8 trillion in potential refi activity. The MBA’s estimate of under $1 trillion in refi activity next year seems too low.

As long as mortgage rates keep falling, the number of refis is only going to increase. We are at all-time lows.

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Vital Statistics:

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

The CFPB will get more aggressive under a Biden Administration. Payday lenders will be the focus again, as will servicers. I expect the bureau will also pursue a lot of fair lending cases. Given that there is a time lag to develop cases, the fair lending ones may take a while.

The Index of Leading Economic Indicators rose 0.7% last month, an indication that the economy continues to improve.

Steve Mnuchin has decided to let many emergency Fed lending programs expire at the end of the year. The Fed would like to keep them. I am sure the first order of business in Biden Administration will be to re-institute them.

Chuck Schumer says that he and Mitch McConnell have agreed to resume negotiations over a COVID stimulus bill. “Last night, they’ve agreed to sit down and the staffs are going to sit down today or tomorrow to try to begin to see if we can get a real good Covid relief bill,” the minority leader said during a news conference in New York. “So there’s been a little bit of a breakthrough in that McConnell’s folks are finally sitting down and talking to us.”

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