All Things in Moderation

Vital Statistics:

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

The upcoming week will be date-light, however we will have a lot of Fed-speak. Jerome Powell will be delivering his semi-annual Humphrey-Hawkins testimony on Capitol Hill on Tuesday and Wednesday. In terms of economic data, we will get CPI, retail sales and industrial production this week. None of these should be market-movers. The 10 year will be driven mainly by the global risk on / risk off trade which will be led by China.

The Fed said that downside risks to the US economy have diminished over the past few months, although Coronavirus remains a threat. Remember, recoveries don’t die of old age – they are either murdered by the Fed or are ended by some external event. “Downside risks to the U.S. outlook seem to have receded in the latter part of the year, as the conflicts over trade policy diminished somewhat, economic growth abroad showed signs of stabilizing, and financial conditions eased. The likelihood of a recession occurring over the next year has fallen noticeably in recent months.”

The Atlanta Fed has Q1 growth coming in at 2.7%.

Mortgage credit availability dipped in January, according to the MBA. “Mortgage credit availability was mostly unchanged to start 2020, decreasing 0.2 percent in January,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Similar to December of 2019, the decline came from the reduction of low credit score, high-LTV programs. Furthermore, there continues to be movement with both adds and drops in the government program space, with the net result last month showing small growth in the government index. Although credit supply has flattened these last two years, the meaningful increase seen overall since the Great Recession has been helpful to the growing share of first-time homebuyers, as well as refinance borrowers looking to act on lower mortgage rates. Ongoing housing supply constraints in the lower-price range continues to hold prospective buyers back the most.”

Interesting article in American Banker: Big banks lost money on mortgages in 2018. “Large banks withstood an average loss of $4,803 for every retail mortgage originated in 2018 (compared with a net profit of $376 per loan for independent mortgage bankers). Appetite for these kinds of losses is increasing.” Why were they doing this business? It is all about the MSR. And unfortunately for holders of servicing, rates have been going down, not up which is a negative for servicing assets. As rates have fallen, banks have had to reach for yield, which generally means taking more risk. I know that 2018 data is far in the rear view mirror,  but that is an incredible number.

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Vital Statistics:

Stocks are lower this morning as investors sell winners. Bonds and MBS are up.

Jobs report data dump:

• Nonfarm payrolls up 225,000
• Unemployment rate 3.6%
• Average hourly earnings up 3.1% annually
• Labor force participation rate 63.4%
• Employment-population ratio 61.2%

Overall, a strong report. Certainly payrolls were way above the 158,000 expectation. Construction gained workers, which comports with what we have been hearing from the builders – that they are ramping up for 2020. Wage growth and payroll growth remain strong, and more people are entering the workforce, with the participation rate up and a rise in the employment-population ratio.

The NAHB notes that 63 million households are unable to afford a $250,000 home. Interesting stat from the piece: “A previous post discussed the often-cited estimate that a $1,000 increase in the price of a median-priced new home will price 158,857 U.S. households out of the market for the home.  A second post discussed the related estimate that a quarter point increase in the mortgage rate will price out 1.3 million.”

On the other side of the spectrum, Redfin notes that luxury home prices are rising again as interest rates fall. “Demand for luxury is improving. That’s showing up primarily in an increase in sales right now, but it’s also putting some slight upward pressure on prices,” said Redfin chief economist Daryl Fairweather. “We’re ending the year in a much better position than we started, which is a good sign for 2020. I expect price growth to return to at least 3% to 5% by spring.”

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Vital Statistics:

Stocks are up after China announced they will cut tariffs on about $75 billion in goods by mid-month. Bonds and MBS are flat.

Announced job cuts doubled in January, according to outplacement firm Challenger, Gray and Christmas. Note that this is generally a weak employment indicator, as it focuses only on announced job cuts in press releases, which may or may not happen. Separately, initial jobless claims fell to 202k.

Productivity rose 1.4% in the fourth quarter, while unit labor costs rose by the same amount. The Street was looking for a 1.5% increase in both. Manufacturing productivity fell by 1.2%, which probably was Boeing-related.

JP Morgan Chase is entertaining getting back into the FHA business. JP Morgan had scaled back their FHA lending because of “aggressive use” of the False Claims Act, which resulted in large fines, and basically made the business too risky. Talks are still at the initial stage, but appeared to have been driven by a Trump Administration policy that will not penalize lenders for immaterial errors. JPM CEO Jamie Dimon said that the Obama Administration’s use of the False Claims Act to extract massive penalties for underwriting mistakes wiped out a decade’s worth of profit for the business.

Punchy bet: There is a 70% chance of a recession in the next 6 months, according to a study by State Street and MIT. They fit a model based on industrial production, nonfarm payroll growth, the slope of the yield curve, and stock market returns. They looked at over 100 years of data and concluded that the current set of circumstances would see a recession within 6 months about 76% of the time. FWIW, this sounds more like a “gee-whiz, look at what our model predicts!” sort of scenario than a real forecast. For starters, the economy is much less sensitive to industrial production than it was a century ago. Second, the yield curve’s behavior is being manipulated by unprecedented action out of central banks. Financial repression (the name for the central bank’s mission to push rates lower) also is pushing money into the stock market. This sort of activity was unthinkable even 15 years ago, so historical comparisons should be treated with caution. In other words, take this survey with a boulder of salt.

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Vital Statistics:

Stocks are higher after Chinese markets held up overnight. Bonds and MBS are down.

Construction spending fell 0.2% in November, but was up 5% on a YOY basis. Residential construction was up 1.4% MOM and up 5.8% YOY. Public residential construction was up almost 30% YOY.

Manufacturing performed better than expected in January, with the ISM Manufacturing Index rising to 50.9. This is a sharp rebound from December, which indicates that trade issues are in the rear view mirror.

The government is considering an expansion of the Federal Home Loan Bank’s customer base to include non-bank lenders and mortgage REITs. Federal Home Loan Bank borrowers generally get a sweetheart deal on financing, usually much better than even overnight repo lines. The reason? government subsidies. Note that some mortgage REITs currently do have FHLB lines, but I guess they want more mortgage REITs in the business. The Feds have been frustrated by the large banks, who have shied away from all but the most credit-worthy borrowers.

FHFA has hired an advisor to help recapitalize Fannie Mae and Freddie Mac. Houlihan Lokey won the deal. This will allow Fan and Fred to hire their own advisors for the equity sale. This is part of the government’s plan to decrease its footprint in the mortgage market. The share sale could top $125 billion, which would dwarf the largest IPO ever (Saudi Aramco in December) by a factor of 5. Lots of details remain, but progress is being made.

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Vital Statistics:

Stocks are higher despite Chinese markets getting hammered on Coronavirus. Bonds and MBS are down small.

We saw a big jump downward in rates last week, both here and in Europe. The Coronavirus is triggering the “flight to safety” trade, which means investors sell risky assets like stocks to buy less risky assets like Treasuries. So far, we aren’t seeing major moves in the Fed funds futures, but this situation is still developing.

Stocks this week will probably be driven by developments in China more than the usual catalysts (earnings and economic data). We are in the heart of earnings season right now, with heavyweights like Google reporting tonight. Not much in terms of Fed speak this week, however we do have some important economic data with the jobs report on Friday.

Black Knight Financial estimates there are 9 million refinanceable mortgages in the market right now. By their numbers, 9.4 million borrowers could save an average lf $272 a month if they were to refinance, assuming 30 year mortgage, 20% equity and a 720 FICO. That adds up to $2.6 billion per month, the highest potential savings in 20 years.

Wells estimates that if Coronavirus takes a big bite out of global growth, we could be looking at low 1%s in the 10 year. They also think each 1% sell-off in the S&P 500 translates into about 4 basis points lower in the 10 year yield.

The homeownership rate ticked up in the fourth quarter to 64.8%, the highest level in the second quarter of 2014. I don’t know if we will get back to the peak levels we saw in 2005-2006 given that the financial conditions that spawned it aren’t present any more.

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Vital Statistics:

Stocks are lower on mixed earnings reports. Bonds and MBS are up.

The Fed made no changes to monetary policy, however they did tweak some overnight lending rates. The interest on overnight excess reserves and reverse repo transactions were hiked by 5 basis points to 1.6% and 1.55% respectively. The vote was unanimous. The Fed Funds futures became more dovish, with the Dec futures predicting an 85% chance for a cut of some sort, and a 15% chance of no change. Interesting to see the move in the Fed Funds futures given that the Fed actually tightened slightly by increasing the reverse repo and interest on overnight reserve rates.

GDP rose at 2.1% in the fourth quarter of 2019, a little bit higher than expectations. Consumption growth slipped to 1.8%, while inflation remained broadly in check. The PCE index rose 1.5%, while the core PCE, excluding food and energy rose only 1.3%. Residential construction rose 5.8%. The trade balance moved in the US’s favor, which also helped growth.

Initial Jobless Claims came in at 216,000.

Pending Home Sales decreased 4.8% in December according to NAR. “Mortgage rates are expected to hold under 4% for most of 2020, while net job creation will likely exceed two million,” said Lawrence Yun, NAR’s chief economist. “Due to the shortage of affordable homes, home sales growth will only rise by around 3%,” Yun predicted. “Still, national median home price growth is in no danger of falling due to inventory shortages and will rise by 4%. The new home construction market also looks brighter, with housing starts and new home sales set to rise 6% and 10%, respectively.”

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Vital Statistics:

Stocks are higher as earnings continue to come in. Bonds and MBS are flat.

The Fed is set to announce its decision at 2:00 pm this afternoon. No changes in rate policy are expected, however there might be some news regarding the balance sheet and overnight rates. It probably won’t be market-moving, but just be aware.

Mortgage applications rose 7.2% last week as purchases rose 5% and refis rose 8%. “Mortgage applications continued their strong start to the year, as borrowers acted on the drop in mortgage rates last week. Rates were driven lower by investors’ increased concern about the economic impact from China’s coronavirus outbreak, in addition to existing concerns over trade and other geopolitical risks,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “With the 30-year fixed rate at its lowest level since November 2016, refinances jumped 7.5 percent. Purchase applications grew 2 percent and were 17 percent higher than the same week last year. Thanks to low rates and the healthy job market, purchase activity continues to run stronger than in 2019.” Note that there was an adjustment due to the Martin Luther King holiday.

Pulte reported better than expected earnings yesterday. Revenues were flat, but the 33% increase in new order stood out.  “As demonstrated by our 33% increase in orders, the recovery in housing demand that began earlier this year gained momentum through the fourth quarter as we realized strong sales across all buyer groups,” said Company President and CEO Ryan Marshall. “Strong demand for new homes is benefiting from favorable market dynamics including improved affordability in part due to low mortgage rates, high employment and consumer confidence, and a generally balanced inventory of new homes,” added Marshall. The stock was up about 5% yesterday.

Consumer confidence perked up in January, according to the Conference Board. “Consumer confidence increased in January, following a moderate advance in December, driven primarily by a more positive assessment of the current job market and increased optimism about future job prospects,” said Lynn Franco, Senior Director, Economic Indicators, at The Conference Board. “Optimism about the labor market should continue to support confidence in the short-term and, as a result, consumers will continue driving growth and prevent the economy from slowing in early 2020.”

Strong consumer confidence, better homebuilding numbers and low rates mean that 2020 could be better than people are thinking for the mortgage industry. CNBC polls show that growth is expected to be 2% next year. Seems low if December’s housing starts weren’t a fluke, and judging by what we are hearing from the builders, it might not be. Those hoping for a recession will be encouraged by the inverting yield curve, but in this age of central bank intervention the signal doesn’t carry the weight it used to.

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Vital Statistics:

Stocks are up this morning as the tape exhibits a risk-on feel. Bonds and MBS are down small.

The FOMC meeting begins today. No changes in rates are expected, but market participants will be watching for changes in the interest on overnight reserves and changes in the Fed’s balance sheet.

Durable goods orders rose 2.4%, which was better than expected although the volatile transportation sector accounted for the growth. Ex-transportation they fell 0.1%. Capital expenditures continue to disappoint, falling 0.9%.

Home prices rose 0.5% MOM and 2.6% YOY according to the Case-Shiller home price index.

New home sales were roughly flat with November, but are up 23% on a year-over-year basis. For the year, new home sales came in at 681,000, up 10% from 2018. As you can see from the chart below, we are back towards historical norms, but given the increase in population, that isn’t enough.

Homebuilder D.R. Horton reported Q1 earnings that impressed the Street, with earnings up 53% and revenues up 14%. Orders were up 19% in units and 22% in dollar volume. The cancellation rate fell to 20% from 24%. The stock was up 2% in what was otherwise a putrid tape.

Black Rock’s bond strategist sees bond yields falling another 10 – 15 basis points, as uncertainty over coronavirus and the election seeps into the market. If the virus gets materially worse, and travel and business becomes curtailed, then we could be looking at 1.3% on the 10 year.

The CFPB has issued a statement on how it intends to police abusive behavior by lenders. The Bureau has decided that the definition of abusive behavior is too vague, and that uncertainty is having a negative effect on consumers by driving overly-cautious behavior in lenders. The money quote:

First, consistent with the priority it accords to the prevention of harm, the Bureau intends to focus on citing conduct as abusive in supervision or challenging conduct as abusive in enforcement if the Bureau concludes that the harms to consumers from the conduct outweigh its benefits to consumers. Second, the Bureau will generally avoid challenging conduct as abusive that relies on all or nearly all of the same facts that the Bureau alleges are unfair or deceptive. Where the Bureau nevertheless decides to include an alleged abusiveness violation, the Bureau intends to plead such claims in a manner designed to clearly demonstrate the nexus between the cited facts and the Bureau’s legal analysis of the claim. In its supervision activity, the Bureau similarly intends to provide more clarity as to the specific factual basis for determining that a covered person has violated the abusiveness standard. Third, the Bureau generally does not intend to seek certain types of monetary relief for abusiveness violations where the covered person was making a good-faith effort to comply with the abusiveness standard.

The MBA has more analysis of the change here.

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Vital Statistics:

Stocks are lower this morning as the Asian Coronavirus spreads. Bonds and MBS are up.

The upcoming week will have quite a bit of data – new home sales, the first pass at Q4 GDP, and personal incomes / spending. We will also have the FOMC meeting on Tuesday and Wednesday. The current consensus is that the Fed won’t make any changes in policy.

As a general rule, when you get big moves in the 10 year bond yield, it takes a while for the MBS market to catch up. This means that you can see the CNBC talking heads discussing how much lower rates are, then run a scenario and come away disappointed. We are seeing something similar this morning, where the 10 year bond is up over half a point, while the Fannie Mae 3.5s are flat. Even the Fannie 2.5s are only up 3/16. That said, this is a good opportunity to wake up your borrowers who might have missed an opportunity to refinance.

Fair Issac (the company behind the FICO score) is making changes to its credit scoring model. The change will focus more on payment history and consumer debt changes and less on overall debt such as student loans or a large mortgage. As a general rule, installment debt is less of a factor than revolving debt (i.e. credit cards).

Global real estate markets are cooling down. “Across 23 countries, an index of inflation-adjusted home prices compiled by the Federal Reserve Bank of Dallas grew 1.8% in the third quarter of 2019 from a year earlier, down from a recent peak of 4.3% in 2016, according to an Oxford Economics analysis. In 18 large economies, world-wide residential investment dropped on a year-over-year basis for four consecutive quarters through September, the longest stretch of declines since the 2008-09 crisis, according to Oxford Economics’ analysis of national accounts.” Foreign asset demand seems to be the driver, and it has become more correlated with other asset classes, particularly stocks. For the US, the effects will probably be concentrated primarily in markets like New York City and the pricey West Coast markets.

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