Stocks are higher this morning as commodity prices fall. Bonds and MBS are flat.
China has vowed to crack down on commodity speculation and this is having reverberations throughout global commodity markets, especially the metals. Since commodities generally correlate, we could see some pressure on lumber, which would be welcome in the US.
We have a big week of economic data, with real estate prices, new home sales, GDP and personal income / spending. We will also have a lot of Fed-speak.
Economic activity moderated in April, according to the Chicago Fed National Activity Index. Production-related indicators added to the index while consumption and housing deducted from it. This is consistent with some of the weaker data we saw in April, especially retail sales and employment.
Shortages – of land, lumber, gypsum and labor – are restricting development of new homes. The number of actively selling subdivisions is off 30% compared to 2019. As one developer noted: The “L’s: location, location, location” now mean “lumber, lumber, lumber.” Builders are now paying about $48,000 in softwood lumber for the average priced home.
The MBA updated its origination forecast. The advocacy group now predicts that 2021 origination will come in at $3.4 trillion before dropping to $2.3 trillion in 2022. Purchase originations will continue to increase while refis will fall off a cliff. They forecast that the 30 year fixed rate mortgage rate will average 3.5% in 2021 and 4.2% in 2022. Interestingly, the mortgage rate will increase faster than the 10-year bond yield. I am not sure what would drive that, given that the big mortgage originators (Rocket, United Wholesale, etc) are girding for a price war.
Stocks are higher this morning on overseas strength. Bonds and MBS are up.
Existing home sales fell 2.7% in April, according to NAR. The median home price rose 19.1% (!) to $341,600. Not sure what to make of that number. I am guessing that the lower price tier is completely picked over, and people are reaching for luxury properties, but who knows? The median price a year ago was $286,600 so perhaps that number was depressed a little? Year-over-year comparisons are going to be a bit wonky across the board for the next few months.
The seasonally-adjusted annual pace of sales hit 5.85 million, which was up big compared to lockdown-depressed numbers a year ago. There were only 1.2 million units in inventory, which represents a 2.4 month supply. These are record lows going to back to the early 80s. Days on market fell to 17.
First time homebuyers represented 31% of sales, and they are struggling to compete with cash buyers and investors who are snapping up properties. All-cash transactions were 25% of sales compared to 15% a year ago.
Delinquencies fell below 5% in April, according to Black Knight’s First Look. Total delinquencies fell to 4.66%, which is down 7% from March and 28% from a year ago. 30 day DQs did tick up compared to March however. Foreclosure starts were only 3,700, however that is being affected by the foreclosure moratorium. Once that is lifted, we should see a wave of foreclosures as there are 1.8 million loans in the seriously delinquent status. This is an increase of 1.3 million from a year ago.
If we do see an uptick in foreclosures, the big difference from 2010 would be the home equity. Anyone who bought a home 2 or 3 years ago should have enough equity to sell the home, close out the existing mortgage, and move somewhere cheaper.
Despite a tight inventory picture, RE/MAX reported that April was the strongest in 13 years. RE/MAX reported that there was only 1.1 month’s worth of inventory, and home prices increased 5.9%. Days on market hit a low at 32. “Even with rising home prices, super-quick turnarounds, and fierce competition for available listings, April 2021 saw more home sales than any April in at least 13 years. That’s a clear reflection of overwhelming demand and the resilience of today’s buyers,” said Adam Contos, CEO of RE/MAX Holdings, Inc. “The 32 Days on Market average – a report record – is noteworthy, too. Many listings are being snapped up the day they go on sale – or within just a few days. That pace underscores the importance of an experienced professional who can guide you to smart decisions and quick action – on either side of the transaction.”
Note how much the RE/MAX numbers differ from NAR. 19% home price appreciation versus 6%, 32 days on market versus 17.
Stocks are weaker this morning as the global sell-off continues. Bonds and MBS are flat.
The FOMC minutes didn’t have anything too earth-shattering. The economic projections prepared for the April meeting were slightly better than the ones for the March meeting. Inflation was expected to increase to above 2% for the rest of the year as COVID depressed prices in 2020, which makes the year-over-year growth exaggerated. Inflation is expected to fall below 2% next year as these YOY comparisons fall away.
The FOMC expects consumption to accelerate this year, driven by pent-up demand. So far, we are not really seeing that in the data – the personal incomes and personal spending numbers show an increase in the savings rate. They believe that the elevated savings rate will translate into higher spending in the future.
The FOMC also mentioned the tight labor market, along with the elevated unemployment rate, but made no effort to try and square the two. Businesses are struggling to find qualified workers (#1 concern of the NFIB Small Business Survey), yet the number of job losses during the pandemic was 10 million and the FOMC considers itself far from achieving its goal of full employment. To me, that is one of the big mysteries right now. It is almost as if these 10 million people exited the labor force and have no intentions of returning. I suspect the answer is a skills mismatch. Skilled labor was hard to find before the pandemic, and that is still the case. That would explain the NFIB data. Unskilled labor should be in a surplus, however it seems like every fast food place and supermarket has a “help wanted” sign on it. Definitely strange.
Regarding real estate, they did note that house prices have accelerated this year, and mortgage credit is bifurcated by credit score. Above 700, one can get a loan easily. Below that level it gets difficult. No mystery there: forbearances explain that.
The conclusion is that the Fed still has a way to go in order to achieve their goal of full employment, but the economy has improved enough that they felt comfortable removing the term “considerable” from its characterization of the downside risks to the economy.
Initial jobless claims are still elevated, with 444k filings last week. Pre-COVID, that number was closer to 200k.
On the subject of inflation, rising housing prices might be a big contributor here going forward. Owner’s Equivalent Rent (which is admittedly an “inside baseball” stat) basically tries to estimate what a homeowner would get for their house if they rented it out. If house prices rise, so does owners equivalent rent. This may sound like a theoretical exercise, and it is, but it is almost a quarter of the Consumer Price Index and 15% of the Personal Consumption Index. It is also a lagging indicator, so this will accelerate the inflation numbers going forward.
Supposedly the Reddit crowd that pushed Gamestop is now chattering about the mortgage bankers, and according to the Detroit Free Press is looking to squeeze the shorts in United Wholesale. This happened to Rocket a month or so ago and pushed it to $40 per share. Note that Loan Depot was up big intraday yesterday as it introduced a quarterly dividend.
Stocks are lower this morning on COVID and inflation fears. Bonds and MBS are down.
The FOMC minutes from the April meeting are scheduled to be released at 2:00 pm. I doubt we will get anything market-moving out of the release, but you should be aware.
Mortgage Applications rose by 1.2% last week as refinances rose by 4% and purchases fell by 4%. “Mortgage rates increased last week, with all loan types hitting their highest levels in two weeks. Rates were still lower than levels reported in late March and early April, providing additional opportunity for borrowers to refinance,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite the 30-year fixed rate rising to 3.15 percent, applications for conventional and VA refinances increased. Ongoing volatility in refinance applications is likely if rates continue to oscillate around current levels.”
Rising lumber prices drove the disappointing housing starts number yesterday. It looks like lumber is starting to head back down again.
Single-family rents increased 4.3% in March, according to CoreLogic. The increase was the biggest in 14 years and was driven by the growth at the high end. There was a marked divergence between growth for SFR and attached units.
There was a wide divergence in metro areas as well, with Boston reporting a 11% decline in rents versus Phoenix which grew 11%. I wonder if the eviction moratorium is introducing noise into the data however.
The anticipated increase in housing inventory failed to materialize in April, according to the latest research by Zillow. Inventory fell 1.4% compared to March and is down 30% from a year ago. This drove prices to increase 11.6% on a YOY basis, which was the fastest increase in the history of the Zillow Home Price Index, which goes back 25 years. The typical home was on the market for only 7 days before accepting an offer. Zillow economists are forecasting another big year for home price growth, expecting to see 11.6% growth through April 2022.
Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.
Housing starts came in at 1.57 million in April, which was way below the 1.7 million Street expectation. This is 10% below the March level of 1.73 million. Building Permits came in flat at 1.7 million. Not sure what drove the decline in starts, but it is a surprise. We might see this get revised away in later releases.
The NAHB Housing Market index was flat at 83 in May as well. “Builder confidence in the market remains strong due to a lack of resale inventory, low mortgage interest rates and a growing demographic of prospective home buyers,” said NAHB Chairman Chuck Fowke, a custom home builder from Tampa, Fla. “However, first-time and first-generation home buyers are particularly at risk for losing a purchase due to cost hikes associated with increasingly scarce material availability. Policymakers must take note and find ways to increase production of domestic building materials, including lumber and steel, and suspend tariffs on imports of construction materials.” It may turn out that lack of materials was the reason for the miss in the housing starts number.
Loans in forbearance fell to 4.22% of all mortgages last week according to the MBA. “The rate of new requests dropped to 4 basis points, which is the lowest level since last March,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Of those in forbearance extensions, more than half have been in forbearance for more than 12 months.”
The Home Despot beat earnings estimates as revenues rose 33%. I am sure higher lumber prices are playing into that number. It does speak to the shortage of single family homes – if you cannot find a suitable move-up property, the next best option may be a home renovation. I would be interested to see if HomeStyle and 203k loan volume is up on this. That said, with labor shortages etc, I would imagine managing the construction process would be much more difficult these days.
Dallas Fed Chairman Robert Kaplan thinks we could possibly see a rate hike by the end of 2022. “I haven’t seen anything from that point to today that’s changed my view,” Kaplan said during a virtual town hall conversation organized by the bank. The U.S. labor market has a “good chance” of being at full employment by then and of having inflation at the central bank’s 2% target, Kaplan said.
The Fed Funds futures are still handicapping an 11% chance of a rate hike by the end of 2021.
Stocks are lower this morning as COVID cases increase in Asia. Bonds and MBS are down small.
The upcoming week won’t have much in the way of market-moving data, however we will get housing info with housing starts and existing home sales. We will also have a lot of Fed-speak and will get the minutes from the April FOMC meeting on Wednesday.
Manufacturing activity was flat in New York State, according to the NY Fed’s Empire Manufacturing Survey. New Orders and shipments improved strongly, although we did see shipment times expand. Prices are also increasing as raw materials get more expensive.
The Atlanta Fed’s GDP Now indicator is forecasting 10.5% GDP for the second quarter.
Three quarters of home offers were competitive situation, according to Redfin. The hottest markets are Spokane, San Diego, Boise, Salt Lake City, and Phoenix. We are seeing all-cash offers win out over offers with a financing contingency. “The homes for sale today are high-quality, desirable homes—a dynamic that’s fueling more competition. This is a contrast from the winter, when most properties coming on the market were bottom-of-the-barrel homes. The difference is that today’s sellers are folks who want to sell, whereas many sellers back in the winter had to sell and didn’t have time to do any upgrades.”
Stocks are higher this morning on no real news. Bonds and MBS are flat.
Retail Sales were flat in April after a big rise in March. Ex-autos they fell 0.8%. The control group, which excludes autos, gas and building products fell 1.5%.
In other economic data, industrial production fell 0.4% in April, while manufacturing production rose 0.4%. Capacity Utilization rose to 74.9%.
Consumer confidence fell in May, according to the University of Michigan Consumer Confidence survey. Consumer sentiment came in well below expectations. Both current and expectations indices fell.
Home purchase applications decreased 9% MOM, but were up 31% YOY, according to the MBA. “Purchase applications for new homes, unadjusted for typical seasonal patterns, declined in April, but the average loan size increased to its highest level in MBA’s survey,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The purchase market remains strong overall, but low housing inventory and accelerating home prices have started to adversely impact purchase activity. Additionally, homebuilders have reported significantly higher input prices, which is contributing to the ongoing rise in sales prices and average loan sizes.”
There are 17.8 million homes that have more than 50% equity, according to the latest ATTOM data. This is about a third of the 55.8 million mortgaged properties in the US. On the other side of the coin, about 2.6 million are seriously underwater which they take to mean a LTV of 125% or more.
Stocks are higher this morning after a two-day sell-off. Bonds and MBS are up small.
The producer price index rose 0.6% MOM and 6.2% YOY in April. Again, year-over-year comparisons are going to be distorted by the lockdowns of a year ago, so take those numbers with a grain of salt. Unlike the hot CPI reading of yesterday, the bond market took these numbers in stride.
Initial Jobless Claims fell to 473,000 last week. So despite the lousy jobs report, at least unemployment claims are going in the right direction.
Federal Reserve Vice Chairman Richard Clarida said that the jobs report and the hot CPI reading does not change the Fed’s outlook or plans for the economy. “We would not hesitate to act to bring inflation down,” if needed, Clarida said. But “this is one data point, as was the labor report … We have been saying for some time that reopening the economy would put some upward pressure on prices.” Note that Clarida characterized last Friday’s jobs report as the “biggest miss in history.”
Stocks are lower this morning as the global stock sell-off continues. Bonds and MBS are down.
Inflation at the consumer level rose 0.8% month-over-month and 4.2% on a year-over-year basis. The index for used autos and trucks supposedly drove the increase. The index for food at home (in other words groceries) rose 0.4% MOM and 1.2% YOY. Energy fell 0.1% MOM but is up 25% on a YOY basis. It is unfortunate that COVID shutdowns are messing with the YOY numbers just when inflation data matters more than ever. Bond prices sold off on the report, with the 10 year bond yield rising to 1.65%.
Mortgage Applications rose 2.1% last week as purchases rose 1% and refis rose 3%. “Mortgage rates fell last week to the lowest levels since February, tracking the dip in Treasury yields,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The decline in rates helped the refinance index reach its highest level in eight weeks, driven by a 4 percent increase in conventional refinances. Additionally, refinance loan balances increased for the fourth straight week, an indication that higher-balance borrowers acted to take quick advantage of lower rates.”
United Wholesale reported first quarter earnings, however the forward margin guidance is worrisome. In the first quarter of 2021, gain on sale margin came in at 219 basis points. Second quarter margins are expected to fall to a range of 75 – 110 basis points. CEO Matt Ishbia said: “We welcome the shift to more of a purchase market and the pressure on margins as we believe our business model is built to outperform competitors under those conditions.” Rocket forecasted a big decrease in margins as well, although nothing similar to this. It feels like we are in for a rematch of the Great Detroit Price War of 2019.
Job openings hit a record high of 8.1 million in March, according to the JOLTs survey. The quits rate was flat at 2.4 million.
Back to the Consumer Price Index. FWIW, I find the grocery number hard to reconcile with the steep climb in agricultural prices. Commodity prices are up big over the past year.
Front-month corn:
Front-month wheat
Front-month pork
Back in the mid ’00s, we saw many funds begin to treat commodity products as an asset class in of itself and they would buy futures contracts and hold them as a way to fight off the effect of lower interest rates. I wonder if the same thing is happening now.
Stocks are lower this morning as the global tech stock sell-off continues. Bonds and MBS are down.
Small business optimism rose to a level of 99.8 in April, according to the NFIB Small Business Optimism Survey. Interestingly, the biggest problem for companies is finding qualified workers. 44% of companies reported having issues in hiring, which is a record. Companies are offering higher compensation and bonuses. On the inflation front, a net 36% of business owners reported increasing prices, which is the highest level since April 1981 when a net 43% reported raising prices. The big question is whether this is a temporary phenomenon, driven by COVID shortages or something more permanent.
Loans in forbearance fell again last week, declining 11 basis points to 4.36% of servicers’ portfolios. Private label loans were unchanged while government and GSE both fell. “The pace in the declining share of loans in forbearance quickened in the last week of April. This 10th week of decreases reflected a faster rate of exits and a steady, low level of new requests,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Homeowners who have exited forbearance and been able to take up their original payment again are performing at almost the same rate as the overall mortgage servicing portfolio.”
Mortgage credit expanded in April, according to the MBA. “Credit availability rose in April, fueled by a 5 percent increase in conventional mortgage credit, as well as an expansion in agency programs for ARMs and high-balance loans,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The uptick in credit supply comes as the housing market and economy continue to strengthen. One trend that has developed in recent months is the rising demand for ARMs, driven by higher rates for fixed mortgages and faster home-price appreciation.”
Despite the new limits out of Fannie and Fred, demand for second homes is more than double pre-pandemic levels. “The combination of the wealthy becoming wealthier, remote work turning into the new normal and low mortgage rates is creating an ideal environment for affluent Americans to buy vacation homes,” said Redfin Chief Economist Daryl Fairweather. “As long as the economy continues to grow, I don’t foresee demand for second homes slowing down anytime soon.” In seasonal towns, home prices are up a whopping 27%.
Dallas Fed President Robert Kaplan thinks the job market will strengthen this year and we should be ready to discuss tapering bond purchases soon. “Discussion is healthy, again sooner rather than later, because of these, maybe, side effects or even in some cases unintended consequences,” Kaplan said on Bloomberg TV, noting “excesses and imbalances” in financial markets including a sharp rise in house prices with private investors increasingly squeezing out families. “I hope at some point here in the not too distant future we can begin discussing this.”
One of the biggest quandaries for business and economists revolve around the disconnect between what employers say about the availability of labor and the unemployment numbers. Policymakers and the Fed are pulling out all the stops trying to support the labor market, believing that we have a major labor problem. At the same time finding qualified workers is the biggest problem for business. Wages are increasing, but jobs are not getting filled. What is going on?
If you ask the left, they will say that business owners are being greedy and they need to be forced to increase wages via higher minimum wage laws. If you ask the right, they will say that unemployment insurance is acting as a disincentive to work. I suspect that there is still a large number of people who are worried enough about COVID that they would rather stay home and avoid working. As more of the population gets vaccinated that number should fall.
Below is a chart of inflation versus productivity. Productivity determines real wage growth, although wages do correlate with inflation. Take a look at where inflation was in 1981, the last time the NFIB Small Business Survey reported this number of businesses raising prices.
To me, the big takeaway from the chart above is that inflation cycles are long and I don’t think we are headed back to the 1970s. That said, global central banks are working overtime trying to create inflation (and have engineered a sovereign debt bubble in the process). Given that COVID will create all sorts of statistical noise over the next year, I would be reluctant to buy into the inflation story quite yet.
Brent Nyitray
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Let the mutherfuker burn!
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Kevin S. Willis
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ScottC
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All Things in Moderation 