All Things in Moderation

Vital Statistics:

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

The global rally in bonds seems to be emanating from growth fears out of Asia. “Asia was seen as the poster child in pandemic response last year, but this year the slow vaccination rollout in most countries combined with the arrival of the delta variant means another lost year,” said Mark Matthews, head of Asia research with Bank Julius Baer & Co. in Singapore. “I suspect Asia will continue to lag as long as vaccination rollouts remain at their relatively sluggish levels and high daily new Covid counts prevent them from lifting mobility restrictions.”

Given that COVID issues are behind the lagging growth in Asia, I suspect this temporary respite in bond yields will be short-lived.

The number of homeowners in active forbearance plans continues to drop, according to Black Knight. Over the past month, loans in active forbearance have fallen 12% to 1.9 million.

No money down mortgages are back, under the rubric of 80/20 piggybacks. They aren’t cheap, with a 4.5% floor rate on the primary and 10% on the second, but I guess rising home prices cure all sorts of underwriting sins.

The National Multifamily Housing Council reported that 76.5% of renters made a full or partial rent payment by July 6 this year. This compares unfavorably to the 77.4% which paid by July 6 2020 and 79.7% that were collected by July 6 2019. Separately, momentum seems to be flagging in commercial real estate.

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Vital Statistics:

Stocks are lower as investors lose their confidence in the reflation trade. Bonds and MBS are up.

Mortgage backed securities are lagging the move in bond yields, as usual. This means that mortgage rates are not going to correlate perfectly with the decline in the 10-year. It may take a day or two for MBS to catch up.

Initial Jobless Claims were more or less unchanged last week at 373,000. The number came in above expectations.

The FOMC minutes from June didn’t really say much, although the Fed is at least greasing the skids for tapering:

“Participants discussed the Federal Reserve’s asset purchases and progress toward the Committee’s goals since last December when the Committee adopted its guidance for asset purchases. The Committee’s standard of
“substantial further progress” was generally seen as not having yet been met, though participants expected progress to continue. Various participants mentioned that they expected the conditions for beginning to reduce the
pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data. Some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation. As a result, several of these participants emphasized that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases. Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals.”

The FOMC also discussed reducing the purchases of mortgage backed securities earlier than expected “in light of valuation pressures in the housing market.” While lower mortgage rates probably are helping support asset prices the fundamental issue is a supply shortage, not mortgage rates.

The stance of the FOMC on reducing MBS purchases will make mortgage rates move down more slowly than otherwise. Ultimately, the reduction will depend on inflation and the labor market. The Fed will be comfortable with inflation above the 2% target, and the commodity-push inflation is probably going to ease. The labor market is the bigger question, and so far it is providing such mixed signals that I don’t see the Fed adjusting policy in response to it. That said, expect disappointment when you run a scenario after hearing on CNBC that Treasury yields are down another handful of basis points.

On the labor market, the Fed expects the current labor supply constraints to ease. It believes that the current issue of unfilled jobs is a due to a combination of “early retirements, concerns about the virus, childcare responsibilities, and expanded unemployment insurance benefits.”

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Vital Statistics:

Stocks are higher this morning as we await the FOMC minutes at 2:00 pm this afternoon. Bonds and MBS are up.

It looks like the big decrease in yields is an across-the-board phenomenon in global sovereign debt markets which started on Monday when US markets were closed. The German Bund has dropped 10 basis points in yield to -30 bp, and Gilts / JGBs are up as well. The drop in yields doesn’t appear to be driven by, say the jobs report.

One possibility is that investors are thinking that the post-COVID recovery has peaked, and that inventory re-stocking is wrapping up which means that any commodity-driven inflation has peaked. Commodity-driven inflation is almost always transitory (the exception being the oil shocks of the 1970s), and a durable increase in inflation requires higher wages combined with low productivity.

MBS are lagging the move in Treasuries as usual.

The number of mortgages in forbearance fell to 2 million, which is the lowest since March 2020 at the onset of COVID. The percentage fell to 3.87%. “For the first time since last March, the share of Fannie Mae and Freddie Mac loans in forbearance dropped below 2 percent. The share in every investor type and almost every loan category dropped as well, bringing the number of homeowners in forbearance below 2 million,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The rate of forbearance exits and new forbearance requests remained at low levels, but we expect the pace of exits to increase with reporting next week for the beginning of July.”

Mortgage applications fell 1.8% last week as purchases fell 1% and refis fell 2%. “Even as mortgage rates declined, with the 30-year fixed rate dropping 5 basis points to 3.15 percent, both purchase and refinance applications decreased,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Treasury yields have been volatile despite mostly positive economic news, including last week’s June jobs report, which showed ongoing improvements in the labor market. However, rates continued to move lower – especially late in the week. The 30-year fixed rate was 11 basis points lower than the same week a year ago, but many borrowers previously refinanced at even lower rates. Refinance applications have trended lower than 2020 levels for the past four months.”

The Fannie Mae Home Purchase Sentiment Index was largely unchanged last month, however the some of the components are beginning to reflect the current housing market. The percentage of people who think it is a bad time to buy increased by 8 ppts to 64%, while the number of people who think it is a good time to sell increased by 10 ppts to 77%.

There were 9.2 million job openings at the end of May, according to the JOLTS jobs report. Interestingly, the quits rate fell from 2.8% in April to 2.5% in May. Since the quits rate tends to lead wage inflation, the drop in that statistic could be considered bond-bullish. The labor market continues to be a mess of conflicting signals.

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Vital Statistics:

Stocks are higher as we head into a 3 day weekend. Bonds and MBS are up small. Note the bond market has an early close today.

The jobs report was a mixed bag this morning. Payrolls came in at 850,000, which was higher than the Street estimate. The 2 month revision was also modestly positive. The unemployment rate ticked up from 5.8% to 5.9%, and the labor force participation rate was flat at 61.6%. Average weekly earnings came in at 3.6% versus expectations of 3.4%.

Overall, the report was more or less a push for the bond markets, and bonds are down modestly on the report.

The CFPB is warning landlords to not report inaccurate information on credit reports. “Errors in your tenant screening report shouldn’t hold you back from having a place to call home,” said CFPB Acting Director Dave Uejio. “For families already struggling to make ends meet, an inaccurate report can be the difference between homelessness or settling into a safe and affordable home. Landlords and consumer reporting agencies have clear obligations under federal law, regarding the accuracy of information reported about tenants, and to conduct timely investigations when consumers dispute information. They need to get this right. The CFPB will closely monitor their compliance, and we will use all the tools at our disposal including enforcement, to protect consumers during this critical time.”

The title of the memo from the CFPB is “As Federal Eviction Protections Come to an End, CFPB Warns Landlords and Consumer Reporting Agencies to Report Rental Information Accurately.” Presumably this means that the government plans to end the eviction and foreclosure moratorium soon.

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Vital Statistics:

Stocks are higher as we start the second half of 2021. Bonds and MBS are down small.

Announced job cuts fell to a 21 year low last month, according to outplacement firm Challenger, Gray and Christmas. Job cuts fell 88% YOY to 20,476. Note that this statistic measures announced cuts (as in via a press release). “We’re seeing the rubber band snap back,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc. “Companies are holding on tight to their workers during a time of record job openings and very high job seeker confidence. We haven’t seen job cuts this low since the Dot-Com boom.” Energy and defense lead the sectors in job cuts.

Initial Jobless Claims fell to 364k, which is still elevated compared to pre-COVID where 225k was the norm. If you compare the last year to the Great Recession, the 2009 bust looks like a molehill compared to a mountain:

The Challenger and initial jobless numbers illustrate the conundrum of analyzing the labor market. Job openings are at record highs, yet initial claims are stubbornly high. Unemployment is elevated, but it seems like every fast food place and retail establishment has a “help wanted” sign. The Fed minutes don’t really shed any light on the situation; they just lay out the same contradictions I just did. I don’t think anyone really has a handle on it, and think tanks are interpreting it via their own ideological lenses. And with global bond markets under the firm control of central banks’ activist policies interest rates are a pretty useless indicator as well.

Lumber prices are finally falling back to earth. Lumber has done quite the round trip over the past year, rising from $438 to $1,670 and then falling back $783. Falling lumber costs will hopefully re-ignite the homebuilding sector which should help alleviate the acute housing shortage.

The manufacturing sector grew in June, according to the ISM Report. Shortages of all types continue to hamper manufacturing growth: ” “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to parts shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.” I found the worker absenteeism issue to be interesting. I wonder if it is simply COVID-19 driven, or is something else going on.

Construction spending fell 0.2% MOM but is up 7.5% YOY. Resi construction is up 28% YOY, but the lockdowns of a year ago are probably affecting the numbers.

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Vital Statistics:

Stocks are lower this morning on fears of the Delta variant of COVID. Bonds and MBS are up.

Mortgage applications fell 6.9% last week as purchases fell 5% and refis fell 8%. “Mortgage rates were volatile last week, as investors tried to gauge upcoming moves by the Federal Reserve amidst several divergent signals, including rising inflation, mixed job market data, strong consumer spending and a supply-constrained housing market that has led to rapid home-price growth,” said MBA Chief Economist Mike Fratantoni. “Purchase applications for conventional loans declined last week to the lowest level since last May. The average loan size for total purchase applications increased, indicating that first-time homebuyers, who typically get smaller loans, are likely getting squeezed out of the market due to the lack of entry-level homes for sale.”

The private sector added 692,000 jobs in June according to the ADP Employment Survey. Leisure and hospitality added almost half the jobs created last month, and manufacturing comprised about 10%. “The labor market recovery remains robust, with June closing out a strong second quarter of jobs growth,” said Nela Richardson, chief economist, ADP. “While payrolls are still nearly 7 million short of pre-COVID19 levels, job gains have totaled about 3 million since the beginning of 2021. Service providers, the hardest hit sector, continue to do the heavy lifting, with leisure and hospitality posting the strongest gain as businesses begin to reopen to full capacity across the country.”

The ADP numbers were above consensus, however May was revised downward. The Street is looking for 675,000 jobs in Friday’s report.

Ginnie Mae is announcing a new security which can contain loans with terms up to 40 years. This will add a new tool for servicers to modify loans for struggling homeowners. “It’s important that Ginnie Mae issuers have secondary market liquidity for options that our agency partners determine are appropriate for supporting homeowners in distress,” said Michael Drayne, Ginnie Mae’s Acting Executive Vice President. “Because an extended term up to 40 years can be a powerful tool in reducing monthly payment obligations with the goal of home retention, we have begun work to make this security product available.“

Pending home sales rose 8% in May, according to NAR. The Pending Homes Sales Index reached its highest level since 2005. “May’s strong increase in transactions – following April’s decline, as well as a sudden erosion in home affordability – was indeed a surprise,” said Lawrence Yun, NAR’s chief economist. “The housing market is attracting buyers due to the decline in mortgage rates, which fell below 3%, and from an uptick in listings.” The Northeast was the leader, with transactions increasing 15.5%.

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Vital Statistics:

Stocks are taking a breather this morning after hitting record levels. Bonds and MBS are flat.

Home prices rose 15.7% in April, according to the FHFA House Price Index. On a month-over-month basis, prices rose 1.8%. In some MSAs like Boise, prices are up 28%. Austin is up 23%. Note that in April of 2020, the entire US was in lockdown, and there were very few transactions. This will exaggerate the year-over-year price increases. The supply / demand imbalance will hopefully get some relief as lumber prices fall, and the foreclosure / eviction moratoriums expire. Until then, it is slim pickings if you are a buyer.

The Case-Shiller Home Price Index reported similar gains to FHFA, rising 2.1% MOM and 14% YOY. Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P had this to say about the pace of home price growth:

“We have previously suggested that the strength in the U.S. housing market is being driven in part by reaction to the COVID pandemic, as potential buyers move from urban apartments to suburban homes. April’s data continue to be consistent with this hypothesis. This demand surge may simply represent an acceleration of purchases that would have occurred anyway over the next several years. Alternatively, there may have been a secular change in locational preferences, leading to a permanent shift in the demand curve for housing. More time and data will be required to analyze this question.”

The change in housing preferences is an interesting idea, however Occam’s Razor says that we have underbuilt for years, and have not kept pace with population growth and obsolescence. That said, COVID probably did affect preferences at the margin, but even before the pandemic we had a supply problem. If anything, COVID just exacerbated it.

The number of loans in forbearance fell another 2 basis points last week to 3.91%, according to the MBA. Re-entries accounted for 6.2% of those in forbearance, so it looks like some borrowers are not really launching yet.

Despite the seemingly never-ending foreclosure moratoriums, the government did make a few tweaks to its policy. Foreclosure proceedings are permitted to begin if (a) the home is abandoned, (b) the borrower has not responded to any messages for 90 days, (c) the borrower has been evaluated for a modification and none are viable or (d) the borrower was 120 days down before March 2020.

Consumer confidence increased in June, according to the Conference Board. “Consumer confidence increased in June and is currently at its highest level since the onset of the pandemic’s first surge in March 2020,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions improved again, suggesting economic growth has strengthened further in Q2. Consumers’ short-term optimism rebounded, buoyed by expectations that business conditions and their own financial prospects will continue improving in the months ahead. While short-term inflation expectations increased, this had little impact on consumers’ confidence or purchasing intentions. In fact, the proportion of consumers planning to purchase homes, automobiles, and major appliances all rose—a sign that consumer spending will continue to support economic growth in the short-term. Vacation intentions also rose, reflecting a continued increase in spending on services.”

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Vital Statistics:

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

We have a decent amount of data this week with construction spending, the jobs report and ISM. We will also get some real estate index data with Case-Shiller and the FHFA Home Price Index. Investors will be focusing on wage growth in Friday’s report, although there will be a lot of COVID-related noise in the number.

The CDC has extended the eviction moratorium for another 30 days. The foreclosure moratorium was extended as well. Not sure there is a game plan here.

It looks like we might have a deal on a bipartisan infrastructure package in DC. Biden was threatening to veto the bill unless a separate spending plan also passed. He subsequently withdrew that threat.

HUD is bringing back the “disparate impact” theory to inform policy going forward. Essentially it means that you (a landlord, lender etc) are guilty of discrimination if your numbers don’t add up, even if you have no intent of discriminating. Bad luck, no dice.

iBuyers are coming back to reach pre-pandemic levels. These buyers often buy sight unseen, using algorithms to estimate the property value. Home sellers often like iBuyers because it allows them to submit a non-contingent bid on a move-up property. “Business really started ramping up in January and February. Since then, we’ve just had a constant barrage of deals,” said Allister Booth, an acquisitions specialist at RedfinNow in Los Angeles. “We’re back to full speed and are buying more homes than we were last year. After we buy and renovate those homes, we know we’ll be able to sell them because there are so many more buyers in the market right now than there are homes available.”

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Vital Statistics:

Stocks are higher this morning after we get a deal for an infrastructure package. Bonds and MBS are down small.

Personal incomes fell 2% in May, according to the Bureaus of Economic Analysis. Incomes have been volatile over the past year due to stimulus payments, and this month is no different. Personal consumption was flat after a series of big increases over the past few months. The headline Personal Consumption Expenditures Index, which is the Fed’s preferred inflation measure rose 3.9%, while the index ex-food and energy rose 3.4%. Commodity push inflation is driving the inflation indices higher, although that is expected to moderate after COVID-driven supply shortages are satisfied.

The White House has named Sandra Thompson to fill the role of interim FHFA Chair. She has been with FHFA since 2013, and prior to that worked at the FDIC. As far as priorities, she is going to be big in community lending and increasing homeownership. “As a longtime regulator, I am committed to making sure our nation’s housing finance systems and our regulated entities operate in a safe and sound manner,” Thompson said. “We can accomplish this, and at the same time have a laser focus on mission and community investment. There is a widespread lack of affordable housing and access to credit, especially in communities of color. It is FHFA’s duty through our regulated entities to ensure that all Americans have equal access to safe, decent, and affordable housing.”

What that means is that the restrictions on high LTV / low FICO loans are as good as gone. Investment and second homes might fall under the “operate in a safe and sound manner” comment. As noted before, NOO loans are highly profitable for the GSEs, so that could fall under the rubric of GSE financial stability.

Yet another private equity firm is getting into the single-family rental business. KKR is launching a new venture called My Community Homes, which will focus on suburban homes. KKR recently backed Home Partners of America, which it sold to Blackstone for $6 billion. It made a 20% IRR on that investment. Those sorts of returns are still looking possible given that cap rates are in the mid single-digits and real estate is appreciating at double-digit rates. It looks like the first time homebuyer is going to find it even harder to find properties and win bidding wars.

Consumer sentiment slipped in June, according to the University of Michigan Consumer Sentiment survey. You can see we are back to more or less historical averages.

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Vital Statistics:

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

The Supreme Court ruled yesterday that the President could fire the Director of the FHFA without cause, and Joe Biden immediately let Mark Calabria go. He has named Sandra Thompson as interim director.

The immediate question revolves around the limits put in place during the waning days of the Trump Administration, especially the limits on investment properties and high LTV / low FICO products. The politics of removing the high LTV / low FICO limits are a no-brainer, however the optics of helping landlords are a touch more difficult. We could see some changes rolled back, while others stay.

Rescinding the limits will be relatively straightforward – the only other condition is that Treasury Secretary Janet Yellen agree, which is a formality. Suffice it to say that increasing the size of the credit box to the low income and first-time homebuyers is the biggest priority. Since NOO loans subsidize those products, we could see those go as well.

The Supreme Court also rejected the shareholder lawsuit regarding the net profit sweep. Fannie and Freddie stocks were down something like 40% on the news. It is critical to understand that the only reason why these stocks trade is because the government doesn’t want to consolidate Fannie and Freddie debt on its balance sheet. If that wasn’t an issue, then they would have been wiped out when Fannie and Freddie failed in 2008. These stocks always were a litigation lottery ticket, and it looks like it didn’t pay off.

New Home Sales fell 6% MOM to a seasonally-adjusted annual pace of 769,000. This was a YOY increase, however last year’s numbers were depressed by COVID. There were 330k homes for sale, which represents a 5.1 month supply at the current sales pace.

Durable Goods orders rose 2.3% last month, while core capital goods orders (kind of a proxy for business capital investment) fell 0.1%.

Initial Jobless Claims fell slightly to 411,000 last week, which was above expectations. It remains a mystery why we have elevated claims in the context of record job openings.

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