All Things in Moderation

Vital Statistics:

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

Minneapolis Fed President Neel Kashkari thinks the current rate regime will last a while. He didn’t rule out further rate hikes, although he doesn’t consider that a base case. “The FOMC targets 12-month headline inflation of 2 percent. While we saw rapid disinflation in the second half of 2023, that progress appears to have stalled in the most recent quarter (see Figure 1). The question we now face is whether the disinflationary process is in fact still underway, merely taking longer than expected, or if inflation is instead settling to around a 3 percent level, suggesting that the FOMC has more work to do to achieve our dual mandate goals.”

He also suggested that policy might not be super-restrictive given the strength of the housing market. He does mention some exogenous factors such as underbuilding post-2008, along with heavy immigration has increased demand for housing. “Policy actions by the FOMC have driven 30-year mortgage rates from around 4.0 percent prior to the pandemic to around 7.5 percent today. Perhaps that level of mortgage rates is not as contractionary for residential investment as it would have been absent these unique factors which are driving housing demand higher. In other words, perhaps a neutral rate for the housing market is higher than before the pandemic.” Since housing is the main driver of inflation these days, inflation (and therefore tight monetary policy) might stick around a while longer.

In an interview, he did say the bar is high to consider additional rate hikes, and also said we may be at current levels a while: “My colleagues and I are of course very happy that the labor market has proven resilient, but, with inflation in the most recent quarter moving sideways, it raises questions about how restrictive policy really is.”

Bottom line: if housing is the driver of inflation, and the neutral rate may be higher, then additional rate hikes might be needed to cool the housing market. Unfortunately, it is a catch-22: The problem for housing is limited supply, and higher rates don’t encourage building. But if they cut rates to stimulate building, they might stimulate speculation instead.

FWIW, I think a lot of the hottest markets (especially in FL) were driven by Air BnB speculators, and the Air BnBust is in full bloom. We are seeing price cutting in a lot of the hottest markets.

If these properties were financed with non-QM mortgages using DSCR programs, we could start seeing DQs pile up there.

Mortgage applications rose 2.5% last week as purchases rose 2% and refis rose 5%. “Treasury rates and mortgage rates fell last week on the news of a slowing job market, with wage growth at the slowest pace since 2021, and the Federal Reserve’s announced plans to ease quantitative tightening in June and to maintain its view that another rate hike is unlikely. The conventional 30-year rate dropped 11 basis points, and the FHA rate fell 17 basis points to 6.92 percent, back below 7% for the first time in three weeks,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “Mortgage applications increased for the first time in three weeks, with refinances up 5 percent. Even with the increase, which included a 29 percent jump in VA refinances, refinance volume remains about 6 percent below last year’s already low levels.”

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Vital Statistics;

Stocks are lower this morning as the May FOMC meeting begins. Bonds and MBS are up.

Fed-whisperer Nick Timaros of the Wall Street Journal says the Fed is planning to signal to the markets that it is comfortable keeping rates higher for longer, while stopping short of introducing the possibility of raising rates further.

“Firmer-than-anticipated inflation in the first three months of the year has likely postponed rate cuts for the foreseeable future. As a result, officials are likely to emphasize that they are prepared to hold rates steady, at a level most of them expect will provide meaningful restraint to economic activity, for longer than they previously anticipated.”

“But a hawkish pivot, suggesting an increase in rates is more likely than a cut, appears unlikely, for now. Any such shift is likely to unfold over a longer period. It would require some combination of a new, nasty supply shock such as a significant increase in commodity prices; signs that wage growth was reaccelerating; and evidence the public was anticipating higher inflation to continue well into the future.”

The article suggests the Fed is close to tapering its balance sheet reduction (quantitative tightening) by reducing the runoff of its Treasury securities. In other words, this won’t affect mortgage backed securities. The runoff for mortgage backed securities continues, albeit at an organic pace driven by relocation and a few cash-out refis.

Compensation costs for civilian workers increased 1.2% in the first quarter, according to the Employment Cost Index. Wages increased 1.1%, as did benefit costs. For the past 12 months, compensation costs rose 4.8%. On a quarter-over-quarter basis, compensation costs rose from 0.9% to 1.2%, driven largely by an increase in benefit costs. Note this kind of contradicts the CPI data which claims that health insurance costs fell 15% in March.

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Vital Statistics:

Stocks are higher as investors like Tesla’s numbers. Bonds and MBS are down.

New Home Sales rose 8.8% MOM in March to a seasonally adjusted annual rate of 693,000. This is up 8.3% on a year-over-year basis. The median new home price fell 2% on a YOY basis to $430,700. There is an 8.3 month supply of homes for sale.

Pulte reported earnings per share that rose 32% compared to a year ago. Revenues rose 10% to $3.8 billion. Gross margins expanded 50 basis points YOY to 30%. CEO Ryan Marshall said this on the earnings conference call:

Against generally favorable demand conditions, the supply of available housing remains tight. We have a long-term structural issue resulting from a decade of under-building that has the country short approximately 4 million housing units. At the same time, the available inventory of existing homes for sale continues to be low as homeowners remain locked into their low mortgage rates. Life happens, so we are seeing some additional existing homes come to market, but the numbers remain well below historic rates.

As a homebuilder, this is a great operating environment as we are supplying a product that a lot of people need and want. I appreciate, however, that our country’s housing shortage can create hardships for today’s consumers as the lack of supply keeps housing prices high. In fact, some of our recent buyers said that they made the decision to buy now because they couldn’t wait any longer for rates to roll back.

In a market where home prices are high and because of limited inventory, they will likely continue moving higher. Our company’s ability to offer targeted incentives, particularly mortgage rate buy-downs, is a powerful tool that can help bridge the affordability gap. For example, in the first quarter, approximately 25% of our home buyers used our national rate program. In a world where the consensus is that interest rates will be higher for longer, our interest rate incentives likely become an even greater competitive advantage, especially relative to the existing home seller.

The environment for homebuilders couldn’t be better. The chart below looks at new home sales divided by the number of households in the US: Look how much we have underbuilt since the bubble years:

Like D.R. Horton, Pulte spent capital buying back stock instead of plowing every cent back into the business. I understand housing is cyclical, but when your ROE is 27%, buying back stock doesn’t make sense.

Mortgage applications fell 2.7% last week as purchases rose 0.2% and refis fell 6%. “Mortgage rates continued to move higher last week, reaching their highest levels since late 2023 and putting a damper on applications activity. The 30-year fixed rate increased for the third consecutive week to 7.24 percent, the highest since November 2023,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications declined, as home buyers delayed their purchase decisions due to strained affordability and low supply. The ARM share of applications increased to 7.6 percent, consistent with the upward trend in rates, as buyers look to reduce their potential monthly payments.”

Jamie Dimon is worried that stagflation might be returning to the US. “Yes, I think there’s a chance that can happen again,” he said during an appearance Tuesday at the Economic Club of New York. He is referring to stickier-than-normal inflation along with mediocre growth. Of course the difference the economy in the 1970s bears little resemblance to the economy of today, but it is a risk.

Filed under: Economy | 26 Comments »

Vital Statistics:

Stocks are flattish this morning after yesterday’s bloodbath. Bonds and MBS are down again.

Housing starts came in at 1.32 million in March, which was way below expectations. The number was down 14% month-over-month and 4% year-over-year. Building permits fell 4% MOM and rose 1% YOY to 1.46 million. This will not help alleviate the affordability issue, which is as bad as it was in the 1980s.

I discussed home affordability and compared the last bouts of expensive housing in my latest Substack article. Check it out and please consider subscribing.

Builder sentiment was flat in March, according to the NAHB / Wells Fargo Housing Market Index. High mortgage rates continue to be a headwind for the builders as it is keeping buyers on the sideline, hoping for a decline in borrowing costs.

Note the big builders are helping to alleviate that issue by offering buydowns via their captive mortgage originators. Builders generally pencil in about $40,000 in upgrades for their properties – i.e. things like granite countertops, better appliances etc. For a typical loan, $40k is about 10 points, so you can buy down the rate a lot. Plus it keeps the sales price unchanged which means the comps remain high.

Industrial production rose 0.4% in March, according to the Fed. The latest numbers indicate the manufacturing sector is rebounding after slowing from December through February. On a year-over-year basis production was flat, and generally corresponds to the ISM data along with the Fed surveys.

Bank of America reported first quarter earnings that dropped 8.4% if you strip out a special FDIC charge that most banks took in Q1. Higher deposit costs negatively impacted net interest income. Provisions for credit losses increased 14% QOQ and 40% YOY.

Mortgage origination volume fell 13% compared to the fourth quarter and a year ago. HELOC origination fell as well.

Filed under: Economy | 38 Comments »

Vital Statistics:

Stocks are flattish after another inflation gauge came in hot. Bonds and MBS are down.

Inflation at the wholesale level rose 0.2% in March and 2.1% YOY, according to the Producer Price Index. If you strip out food and energy, the index rose 0.2% month-over-month and 2.4% year-over-year. While not a disaster like the CPI report yesterday, it isn’t helping the cause, and the 10 year is getting smoked again.

The FOMC minutes from the March meeting did indicate rate cuts were in the near future. While they did note that there might be some seasonality involved with the inflation numbers, the message was steady as she goes.

In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle, and almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected. In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven. They also pointed to the Committee’s policy actions together with the ongoing improvements in supply conditions as factors working to move supply and demand into better balance. Participants noted indicators pointing to strong economic momentum and disappointing readings on inflation in recent months and commented that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent.

In addition to the hotter-than-expected CPI print, we also had a pretty lousy 10 year bond auction. The bid-to-cover ratio was an anemic 2.34x, and dealers were forced to buy 25% of the $39 billion issue, which pushed 10 year yields to 4.56%.

Needless to say, the mortgage banks got roughed up yesterday, with Rocket down 13%, UWM down 7%, and Loan Depot down 5%. Mr. Cooper held up reasonably well due to is heavy MSR exposure.

Between all three hawkish events, the Fed Funds futures moved decisively towards higher rates, with the June futures pricing in only a 17% chance of a rate cut, and the December futures pricing in only 1 cut this year. Check out the probabilities from a month ago – markets saw 100 basis points in cuts.

Asking rents rose 1% in March compared to a year ago, according to data from Redfin. They were little changed compared to February at $1,987. The Midwest and the Northeast saw the biggest increases.

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Vital Statistics:

Stocks are lower this morning as we await comments from Jerome Powell. Bonds and MBS are flat.

Employers added 184,000 jobs in March, according to the ADP Employment Survey. This was 150k higher than the estimate, and a touch lower than Friday’s 200k forecast. Pay increases were flat at 5.1% for job stayers, but rose 10% for job changers.

“March was surprising not just for the pay gains, but the sectors that recorded them. The three biggest increases for job-changers were in construction, financial services, and manufacturing,” said Nela Richardson, chief economist, ADP. “Inflation has been cooling, but our data shows pay is heating up in both goods and services.”

Mortgage Applications fell 0.6% last week, according to the MBA. Purchases rose 1% while refis fell 2%. “Mortgage rates moved lower last week, but that did little to ignite overall mortgage application activity. The 30-year fixed mortgage rate declined slightly to 6.91 percent, while the 15-year fixed rate decreased to its lowest level in two months at 6.35 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Elevated mortgage rates continued to weigh down on home buying. Purchase applications were unchanged overall, although FHA purchases did pick up slightly over the week. Refinance applications decreased to fall 5 percent below last year’s pace.”

Job openings were more or less unchanged in February, according to the JOLTS jobs report. Job openings were down about 11% on a year-over-year basis. The quits rate, which tends to lead wage increases, was flat month-over-month at 2.2% and down significantly from a year ago.

Home prices rose 5.5% in February, according to CoreLogic. The Northeast saw the biggest increases.

“Home price growth pivoted in February, as the impact of the January 2023 Home Price Index bottom finally faded,” said Dr. Selma Hepp, chief economist for CoreLogic. “As a result, the U.S. should begin to see slowing annual home price gains moving forward.”

“Nevertheless,” Hepp continued, “with a 0.7% increase from January to February 2024, which is almost double the monthly increase recorded before the pandemic, spring home price gains are already off to a strong start despite continued mortgage rate volatility. That said, more inventory finally coming to market will likely translate to more options for buyers and fewer bidding wars, which typically keeps outsized price growth in check. Still, despite affordability challenges, homebuyer demand appears to favor already expensive, coastal markets with a limited availability of properties for sale.”

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Markets are closed for the Good Friday Holiday.

Personal Incomes rose 0.3% in February, while spending rose 0.8%. The all-important PCE Price Index rose 0.3% MOM, which was a deceleration from the 0.4% increase in January, but higher than the numbers were were seeing in the fourth quarter of 2023. Excluding food and energy, the index rose 0.3%. The annual rates continued their general downward trend, with the annual headline number falling to 2.5% and the core rate falling to 2.8%.

Pending Home Sales grew 1.6 month-over-month in February, according to NAR. Pending Home Sales fell 7% on a year-over-year basis however. NAR expects to see more inventory hit the market, however which should boost sales. “While modest sales growth might not stir excitement, it shows slow and steady progress from the lows of late last year,” said NAR Chief Economist Lawrence Yun. “Ongoing job gains are clearly increasing demand along with more inventory. The high-cost regions in the Northeast and West experienced pullbacks due to affordability challenges,” added Yun. “Home prices rising faster than income growth is not healthy and adds challenges for first-time buyers.”

Yun further noted, “There will be a steady rise in inventory from recent growth in home building. Additionally, many sellers, who delayed listing in the past two years, will begin to put their homes on the market to move to a different home that better fits their new life circumstances – such as changes in family composition, jobs, commuting patterns and retirees wanting to be closer to their grandkids.”   

Consumer sentiment improved in March, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment recorded an incremental increase of less than three index points from February, well within the margin of error and stable since January. Critically, consumers exhibited confidence that inflation will continue to soften. Assessments and expectations of personal finances improved modestly from last month, as the perceived negative effects of high prices and expenses on living standards eased. Strong stock market performance this month supported sentiment gains only for those with the largest holdings, with little impact on the index. Overall, sentiment is essentially unchanged throughout the first quarter of 2024, remaining just shy of the midpoint between the pre-pandemic level of sentiment and the historic trough from June 2022.”

Importantly, consumers’ forecasts for inflation continued to improve. Year-ahead expectations fell from 3.0% to 2.9%, while long-term expectations fell from 2.9% to 2.8%. The Fed pays attention to UMich and has mentioned it in its minutes.

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Vital Statistics:

Stocks are higher this morning after the Fed’s statement kicked off another rally. Bonds and MBS are up.

The Fed maintained the Fed Funds rate at current levels as expected and signaled that it would begin cutting this year. The dot plot was pretty similar to December, which signaled three rate cuts this year. The fear going into the meeting was that the majority of voters might move from 3 cuts to 2, but that didn’t happen. That said, there were more votes for 2 cuts than there were in December.

In the economic projections, the Fed raised their estimate for this year’s GDP growth from 1.4% to 2%, pushed down their estimate for unemployment from 4.1% to 4% and increased their estimate for core inflation growth from 2.4% to 2.6%.

During the press conference, Jerome Powell said that the recent disappointing inflation numbers might be due to seasonality, and he also said that the Fed might begin to taper its balance sheet runoff. I think the comments on tapering QT were a surprise to the market. Theoretically this should be a positive for MBS spreads, although the Fed’s MBS portfolio is way out of the money, and the only runoff will be from people who are moving.

When asked about shelter inflation, he mentioned that rents seem to be cooling off and he was convinced that overall inflation would move lower.

Overall, the stock market liked the decision and the bond market seemed to take comfort in the fact that quantitative tightening might decrease going forward. The yield curve became slightly less inverted, with the 2s-10s spread going from -36 basis points to -32 basis points. Given the strength of the overall economy, it is surprising to see an inverted yield curve.

The Fed Funds futures didn’t make any dramatic changes, although the June chances of a rate cut increased from about 60% to 75%, while the December futures remained at three cuts. The December futures are handicapping a bigger chance of 100 basis points than 50 this year.

Overall, the Fed statement and press conference was mildly bullish, and the big takeaways are that (a) the Fed seems unconcerned about the recent hot inflation prints and (b) the Fed wants to slow its balance sheet reduction which should be supportive to the 10 year bond and MBS spreads.

Redfin was out with their take on the meeting and its impact on mortgage rates: “Mortgage rates are still expected to fall gradually this year as the Fed solidifies its plans to cut rates this year. When enough economic data accumulates to set the stage for that, rates will start to drop. However, we don’t expect rates to drop precipitously. We should end the year in the low 6% range. That means the housing market won’t shift dramatically this year, but we do expect more supply and transactions this year amidst weakening price growth.”

Deutsche Bank strategist Jim Reid had this to say: “Last night saw a remarkably relaxed Fed as Powell indicated that January’s higher inflation could have been seasonal, and February’s print had already seen improvements,” said Deutsche Bank’s Jim Reid, adding that Powell’s dovish-leaning press conference drove equities higher and yields lower. “Our economists continue to expect the first rate cut to come in June with 100 bps of cuts in total this year, but with risks skewed to a more hawkish outcome,” Reid added.

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Vital Statistics:

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

Retail sales rose 0.6% in February, which was a touch below expectations. On a year-over-year basis retail sales were up 1.5%. These numbers are not adjusted for inflation, so it is an indication that spending is on the weaker side. January’s numbers were revised downward, which is typical these days.

Inflation at the wholesale level increased 0.6% in February, which was an acceleration from January and December. About 70% of the increase was due to energy prices, particularly gasoline. Excluding food and energy, wholesale prices rose 0.3%.

Initial Jobless Claims fell to 209,000 last week.

Biden is proposing a $10,000 tax credit for first-time homebuyers and people who sell their starter home. The admin is also directing FHFA to waive title insurance fees and telling CFPB to go after fees at closing. Ultimately the problem is supply and interest rates, so the going after closing costs and goosing demand probably isn’t going to do much.

Since the inflation numbers aren’t going to allow the Fed to cut as much as necessary to lower mortgage rates, one way to attack the problem is to target MBS spreads. FHFA can tell Fannie Mae and Freddie Mac buy MBS again which was part of their job prior to the financial crisis.

Homebuilder Lennar reported first quarter earnings yesterday. Revenues rose 13%, which was driven by a 23% increase in units and a 8% decline in average selling prices. Gross margins expanded to 21.8% compared to 21.3% a year ago. The increase in gross margins were driven by decreased construction costs which was offset by a decline in average selling prices and higher land costs. Lennar is holding much less land in inventory than it has in the past.

Earnings were $719 million and the company spent $506 million buying back stock.

Filed under: Economy | 41 Comments »

Vital Statistics:

Stocks are higher this morning after the jobs report. Bonds and MBS are up small.

The economy added 275,000 jobs in February, which was way more than expected. The unemployment rate ticked up from 3.7% to 3.9%, while average hourly earnings rose 0.1%. The headline numbers are indicative of a strong labor market.

January’s payroll number was revised downward substantially, from a gain of 353,000 to a gain of 229,000. The February payroll number was another case of statistical adjustments accounting for the increase, as the number of people with jobs actually fell by 184,000. The number of unemployed people rose by 334k.

The Fed will be happy with the decline in wage growth, and the overall message that the labor market is coming more into balance.

Jerome Powell said yesterday that the Fed is close to cutting rates. “I think we are in the right place,” Powell said of the current stance of monetary policy in a hearing before the Senate Banking Committee. “We are waiting to become more confident that inflation is moving sustainably down to 2%. When we do get that confidence, and we’re not far from it, it will be appropriate to begin to dial back the level of restriction so that we don’t drive the economy into recession.”

When asked about concerns over workers losing their jobs, Powell said: “We’re well aware of that risk, of course, and very conscious of avoiding it,” Powell said. “If what we expect and what we’re seeing – continued strong growth, strong labor market and continuing progress in bringing inflation down – if that happens, if the economy evolves over that path, then we do think that the process of carefully removing the restrictive stance of policy can and will begin over the course of this year.”

These comments helped push the 10 year bond yield to the lowest level in over a month. The Fed Funds futures for March didn’t change, but the June futures are showing a roughly 80% chance of a rate cut.

Filed under: Economy | 34 Comments »