All Things in Moderation

Vital Statistics:

Stocks are higher this morning on optimism about the economy re-opening. Bonds and MBS are flat.

The upcoming week is somewhat data-light. The big numbers will be the second revision to GDP and construction spending.

Home prices rose 1.7% in the first quarter and were up 5.7% on a YOY basis, according to the FHFA House Price Index.  That said, the report noted that the data in the report probably doesn’t take into account the effects of COVID. The Mountain states led the charge, with Idaho, Montana, and Wyoming posting double-digit gains.

The Case-Shiller index reported a 4.4% annual gain. The difference between the FHFA and Case-Shiller indices? FHFA is limited to transactions with a conforming mortgage, while Case-Shiller includes all sales.

New Home Sales came in at 623,000 which was up from March, but down 6.7% on a YOY basis. Since April was the worst of the crisis, this is an encouraging number. Note that these are estimates with wide confidence intervals. So there is a chance these could get revised lower. I listened to pretty much every homebuilder earnings call and pretty much every one said that the second half of April was unexpectedly strong.

I went to a restaurant in Connecticut last night. Outdoor seating, long line out the door to get a table. Sample size of 1, but it looks like people are antsy to get out of the house and put COVID behind them. Barring any sort of second wave of infections, I think the economy rebound by the 4th of July and will have shaken off most of the economic damage by Labor Day.

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Vital Statistics:

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

Initial Jobless Claims came in at 2.4 million. which was a touch higher than expectations.

3.6 million Americans were past due on their April mortgage payment according to Black Knight Financial Services. This is the largest number since January 2015. Foreclosure starts and completions were at record lows due to government-imposed moratoriums. Miami, NYC and Las Vegas were the hardest hit cities. Note that sales in NYC are down 61%. I suspect we are going to see a mass exodus to the suburbs after this is over.

The Census Bureau estimates that almost half of all households has lost employment income during the pandemic. States that rely heaviest on tourism like Nevada and Hawaii saw close to 60%.

Existing home sales fell 18% in April, according to NAR. The median home price rose 7.4% YOY. Inventory was down 1.3% from March and down 19.7% from a year ago. “The economic lockdowns – occurring from mid-March through April in most states – have temporarily disrupted home sales,” said Lawrence Yun, NAR’s chief economist. “But the listings that are on the market are still attracting buyers and boosting home prices.”

The index of leading economic indicators came in at -4.4, better than expected, and an improvement from the March number.

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Vital Statistics:

Stocks are higher this morning as retailer earnings are coming in better than expected. Bonds and MBS are flat.

The FHFA put out new guidance yesterday on forbearance and refinances. Essentially, you will will be eligible to refinance your property provided you are current with whatever repayment plan you negotiated for 3 months after exiting forbearance. “Homeowners who are in COVID-19 forbearance but continue to make their mortgage payment will not be penalized,” said Director Mark Calabria. “Today’s action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.” According to the MBA, 4.1 million borrowers are in forbearance right now and over 70% don’t need the help. That is a huge number, but i guess it is to be expected since there is no requirement to demonstrate hardship.

Mortgage Applications fell 2.6% last week as purchases increased 6% and refis fell 6%. “Applications for home purchases continue to recover from April’s sizable drop and have now increased for five consecutive weeks,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity – which was 35 percent below year-ago levels six weeks ago – increased across all loan types and was only 1.5 percent lower than last year. Government purchase applications, which include FHA, VA and USDA loans, are now 5 percent higher than a year ago, which is an encouraging turnaround after the weakness seen over the past two months. As states gradually reopen and both home buyer and seller activity increases, we will be closely watching to see if these positive trends continue, or if they reflect shorter-term, pent-up demand.”

41% of home sales had bidding wars, according to Redfin. “Demand for homes has picked back up after hitting rock bottom in April, and that uptick paired with a lack of supply is a recipe for bidding wars,” said Redfin lead economist Taylor Marr. “Homebuyers are getting back out there, searching for more space as they realize using their home as an office and school may become the norm. But sellers are still holding off on listing their homes, partially due to economic uncertainty and concerns of health risks. In some hot neighborhoods, there may only be one or two homes for sale, with multiple homebuyers vying for them.”

22% of builders reduced home prices to move inventory, according to the NAHB. This is much less than the housing recession of 2008, which was about 50%.

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Vital Statistics:

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

Fed Chairman Jerome Powell and Treasury Secretary Steve Mnuchin head to Capitol Hill to testify in front of the Senate today.  In his prepared remarks, Jerome Powell basically laid out everything the Fed has done so far, so it doesn’t look like anything new is going to come out of this.

Social distancing took a bite out of housing starts in April, falling 30% to 891 thousand. Building Permits also fell 19% from March. Separately, the NAHB Housing Market index increased in May to 37 from 30.

CNBC explains why this isn’t the Great Depression, even though the unemployment numbers are up there. The simplest explanation – there was no economic rot that caused the drop in the economy. No asset bubbles, no bad investments, no bank failures – it isn’t comparable. This was a healthy economy that was put in a deep freeze in response to a pandemic. Recessions generally exist because bad debt needs to be written off, excess inventory needs to be sold, and bad businesses liquidated. There isn’t any of that this time around. Just like the predictions of millions of deaths in the US from COVID turned out to be overly pessimistic, I think many of the predictions of a long, drawn out recovery will be too.

The Despot missed earnings expectations this morning, but maintained its dividend. It also withdrew its guidance for the rest of the year. The company took some actions to help its employees including paid time off, bonuses, and healthcare expense help which hit earnings by 60 cents a share. Meanwhile, WalMart reported strong numbers this morning as shoppers stockpile necessities.

It looks like the “forbearance curve” is flattening. “The pace of forbearance requests continued to slow in the second week of May, but the share of loans in forbearance increased,” said Mike Fratantoni, MBA’s chief economist. “There has been a pronounced flattening in loans put into forbearance – despite April’s uniformly negative economic data, remarkably high unemployment, and it now being past May payment due dates.”

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Vital Statistics:

Stocks are higher this morning on positive news for a COVID vaccine. Bonds and MBS are down.

The upcoming week should be relatively quiet, with no major economic news. Jerome Powell speaks tomorrow and we will get the FOMC minutes, but that is about it. Markets will be closing early on Friday for the Memorial Day weekend.

The MBA sent a letter to Congress stressing the need for a liquidity facility for non-bank servicers. In order to work, Ginnie must be given legal authority to approve pledges of an issuer’s future reimbursements on servicing advances. The MBA also points out that allowing everyone to get forbearance regardless of circumstances was not the smartest idea. While FHFA has stated that borrowers who seek forbearance will not be required to repay everything at once, that doesn’t necessarily apply to non-government-backed paper.

About 9% of US mortgages are in forbearance right now. This works out to be $1 trillion in unpaid principal. By the end of June, Black Knight estimates that 10% – 12% of the mortgage market will be in forbearance. 12% would work out to be 6.3 million borrowers. That is a lot of advances. Separately, the National Multifamily Housing Council reported that 88% of renters made their May payment through May 13.

Jerome Powell warned on the economy turning around: “There is a growing sense that the recovery may come more slowly than we would like, but it will come. And that may mean that it’s necessary for us to do more.” He is advocating for Congress to provide more fiscal stimulus, which doesn’t seem like it will be forthcoming. The House has passed a liberal wish-list, but Mitch McConnell doesn’t seem all that eager to take it up. The big trade will be liability protection for business in exchange for vote-by-mail.

The MBA says buyers will return by summer as lockdown ends. “We expect that heading into the summer, more prospective homebuyers will gradually return to the market.” FWIW, “summer” is only a month away, but I think this is already happening. I was listening to the American Homes 4 Rent conference call, and they said that traffic was slower in the second half of March, but by the second half of April, traffic was up 25% year-over-year. They had 9,500 showings is five days which worked out to be six tours per available property. While these are for rentals, it does show that people who are living in crowded urban areas want to escape to the suburbs, where social distancing is easier. The company even mentioned on the call that COVID is driving traffic. I have to imagine the same thing happening for purchase activity. We will get a better idea on April numbers this week when existing home sales comes out on Thursday.

Just like the talking heads overestimated the whole COVID-19 crisis, I think they are also overestimating the economic fallout from it. There just weren’t too many problems with the economy going into the crisis, and this recession wasn’t caused by economic rot or inflation. It was like taking a healthy person and putting him into a medically induced coma. All of the economic models are based on history – in other words, recessions which were caused by asset bubbles or the Fed. It would be like comparing our healthy patient’s coma recovery to someone who was put into a medically-induced coma because of an illness. Without an underlying condition that needs to heal, the recovery should be faster, all things being equal.

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Vital Statistics:

Stocks are lower this morning after a lousy retail sales number. Bonds and MBS are up.

Retail sales fell 16.4% MOM and 21.6% YOY, according to Census. Obviously these are unprecedented numbers, never seen before. Apparel, home furnishings, and electronics were down the most.

Joe Biden would support rent forgiveness if elected.  In other words, if you missed rent payments due to COVID, you’ll never have to pay them back. This is just election pandering – the chance of this getting through Congress is pretty much zero. I guess it is a way to encourage the Bernie Sanders supporters to come out and vote for him on election day.

Meanwhile, the FHFA is extending its foreclosures and eviction moratorium until June 30.

Interesting data point: Home buyer demand is higher than it was pre-COVID 19. Meanwhile supply is down 25%.  Big open floor plans are out, home offices are in. “Pre-COVID people wanted a beautiful open floor plan. After a few months in quarantine, buyers want quiet spaces where they can actually get away from everyone else and dedicated space for school and work.”

JP Morgan and American Homes 4 Rent are joining together to build suburban homes. FWIW, COVID-19 might be what makes the white picket fence cool again.

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Vital Statistics:

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

Initial Jobless Claims came in at 3 million last week. This puts the number of jobs lost to COVID at 36.4 million, or about 430 jobs per death.

The FHFA made an announcement yesterday which permits servicers to allow borrowers who enter forbearance to wait to pay back the skipped payments until they either refinance the loan or at maturity.

“For homeowners in forbearance due to COVID-19, payment deferral allows them to make up missed forbearance payments when they sell their home or refinance,” said FHFA Director Mark Calabria. “This new forbearance repayment solution responsibly simplifies options for homeowners while providing an additional tool for mortgage servicers. Borrowers who can pay their mortgage should, because missed payments remain an obligation that will ultimately have to be repaid.”

Servicers are required to evaluate borrowers for one of several repayment options, generally referred to as a “hierarchy” of repayment and loan modification options. The big question is whether the borrower can demand the servicer provide the option they want. Who has the final say on the repayment plan? The borrower or the servicer?  Plus, since Fannie will reimburse the 4 months of advances immediately, does the servicer have any financial incentive to choose one plan or the other?

One of the biggest deterrents to taking forbearance was that you would be unable to refinance your mortgage until the missed payments are made up. But, since this contemplates paying it off on a refi, then I guess that isn’t the case? I am sure FHFA and the GSEs will provide more guidance.

Remember the huge Fannie and Freddie LLPAs for loans that go into forbearance before they are sold to Fannie Mae? Correspondent lenders are removing them. I haven’t seen anything official, but it looks like the government might have backtracked on that one.

While Jerome Powell was greasing the skids for a prolonged recession, that might not be what happens. Don’t forget, there was nothing wrong with the economy to begin with. No bubbles, no buildup of inventory and bad debt, no mal-investments to work off. The economy was put into a medically-induced coma. The real work of recessions – working off excess inventory, disposing of bad assets, trimming bloated payrolls, isn’t applicable here.

The stimulus dollars (along with people being free to not pay their mortgage for a year) will provide an immense jolt to the economy. Think of what you would do if you all of a sudden could just, stop, paying your mortgage for a year. And you didn’t have to pay it off until you refinance or move? That is a lot of additional disposable income.

Even with COVID-19, some of the hottest markets are still going strong. The Denver area is still going strong. FWIW, I was listening to the Equity Residential earnings call the other day, and the company noted that traffic and applications started off down 50% on a YOY basis in March when the government initiated the stay at home orders. Things have improved so much that traffic and applications are now flat YOY. Delinquencies? About 5%. While Equity Residential is mainly affluent renters, this is a pretty interesting data point. Note however that the Multifamily Housing Council reported that 20% of renters have failed to make their May payment as of May 6, so it isn’t all great. But so far so good.

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Vital Statistics:

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

Mortgage Applications rose 0.3% last week as purchases rose 11% and refis fell 3%. “There continues to be a stark recovery in purchase applications, as most large states saw increases in activity last week. In the ten largest states in MBA’s survey, New York – after a 9 percent gain two weeks ago – led the increases with a 14 percent jump. Illinois, Florida, Georgia, California and North Carolina also had double-digit increases last week,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “We expect this positive purchase trend to continue – at varying rates across the country – as states gradually loosen social distancing measures, and some of the pent-up demand for housing returns in what is typically the final weeks of the spring home buying season.” Interesting comments about New York. It looks like people are fleeing NYC after the COVID-19 issue, and why not? NYC is expensive as heck, and the main thing to recommend it is the easy commute if you work there and all the great bars and restaurants. With work at home now becoming mainstream, is it worth the expense and the risk?

Delinquencies ticked up in the first quarter after hitting a record low in the fourth, according to the MBA. “The mortgage delinquency rate in the fourth quarter of 2019 was at its lowest rate since MBA’s survey began in 1979. Fast-forward to the end of March, and it is clear the COVID-19 pandemic is impacting homeowners. Mortgage delinquencies jumped by 59 basis points – which is reminiscent of the hurricane-related, 64-basis-point increase seen in the third quarter of 2017,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “The major variances from the fourth quarter of 2019 to this year’s first quarter are tied to the increase in early-stage delinquencies for all loan types. For example, the 30-day FHA delinquency rate rose by 113 basis points, the second-highest quarterly ramp-up in the survey series. The 30-day VA delinquency rate rose by 78 basis points – the highest quarterly increase.”

Wholesale prices fell in April, according to the PPI. The headline number was down 1.3% MOM and 1.2% YOY. Even ex-food and energy, trade services, etc, it was down on a YOY basis.

Jerome Powell warned of a prolonged recession after the Coronavirus issue get sorted out. He points out that this recession was not caused by a burst bubble or an inflationary spate which caused a tightening. “This downturn is different from those that came before it. Earlier in the post–World War II period, recessions were sometimes linked to a cycle of high inflation followed by Fed tightening. The lower inflation levels of recent decades have brought a series of long expansions, often accompanied by the buildup of imbalances over time— asset prices that reached unsupportable levels, for instance, or important sectors of the economy, such as housing, that boomed unsustainably. The current downturn is unique in that it is attributable to the virus and the steps taken to limit its fallout. This time, high inflation was not a problem. There was no economy-threatening bubble to pop and no unsustainable boom to bust. The virus is the cause, not the usual suspects—something worth keeping in mind as we respond.”  For this reason, I think the economic damage won’t be as bad as the media is hoping. I also think a prolonged period of social distancing is not in the cards either, people aren’t going to put up with that, not even in deep blue states like NY and CA.

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Vital Statistics:

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

Inflation at the consumer level fell in April, which was the biggest drop since 2008. The headline index fell 0.8% MOM and rose 0.3% YOY. This was primarily due to energy and airline flights. Ex-food and energy it fell 0.4% MOM and rose 1.4% YOY. Energy was the dominant trend, however food prices increased due to supply chain issues.

Small business optimism fell in April according to the NFIB. “The impact from this pandemic, including government stay-at-home orders and mandated non-essential business closures has had a devasting impact on the small business economy,” said NFIB Chief Economist William Dunkelberg. “Owners are starting to benefit from the PPP and EIDL small business loan programs as they try to reopen and keep employees on staff. Small business owners need more flexibility, though, in using the PPP loan to support business operations and liability protection so that all these efforts to support small businesses are not ultimately lost in costly litigation.”

Homebuilders are beginning to offer incentives to entice buyers. FWIW, D.R. Horton noted in its first quarter earnings that it hasn’t had to resort to price cutting. For the most part, the builders went into the crisis without a ton of inventory, so we shouldn’t see big price drops.

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Vital Statistics:

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

About 80% of renters made a full or partial May payment as of May 6, according to the National Multifamily Housing Council’s Rent Tracker.  “Despite the fact that over twenty million people lost their jobs in April, for the second month in a row, we are seeing evidence that apartment renters who can pay rent are stepping up and doing so,” said Doug Bibby, NMHC President. “We expect May to largely mirror April, when the payment rate increased throughout the month as financial assistance worked its way to people’s bank accounts.” Meanwhile, New York extended its eviction moratorium until August. Note that rent strikes are a thing now.

Matt Taibbi discusses the mortgage servicers. The balloon payment issue is a hot button one for the left, and they are sounding the alarm. Basically Taibbi interviewed all the usual consumer advocate types on the left – guys like Richard Cordray, analysts at liberal think tanks and advocacy groups, and take the servicers to task for not having 4 months of advances laying around.

Should the Fed open its war chest and create a “liquidity facility” to help mortgage servicers? It seemed like the obvious move — this really was a problem caused by a bailout that encouraged even people who didn’t need forbearance to accept it — but how could this be done in a way that didn’t put homeowners at more risk?

“This is the script of a heist flick, where homeowners get screwed in the end while servicers get the money,” says Carter Dougherty of Americans for Financial Reform. “If you combine money for servicers with strong consumer protections and a vigorous regulator, then the film could have a happy ending. But I’m not holding my breath.”

That said, this unfortunately IS what the industry is up against, and a good indicator of how the regulators (at least on the left) view the industry. It is why getting some sort of liquidity facility for the servicers might be harder than it looks. Which is pretty sad when the Fed is considering buying corporate junk bonds to stabilize the economy.

More economic forecasters are predicting a “swoosh” style recovery. “This is not going to be a quick recovery,” said Mark Schneider, chief executive officer of Nestlé SA, the world’s biggest packaged foods maker, recently. “This is going to be a several-quarter, if not several-year kind of process.”

For what its worth, I am somewhat skeptical of the long, drawn out recovery argument. Most recessions in the past started for a reason – a long expansion encouraged a buildup of inventory, or asset bubbles. Once the economy slows down the problems that have been building become apparent. That isn’t what happened this time around. We didn’t have a slowdown driven by organic issues in the economy. We had a government-engineered crash. Sure, there were pockets of the economy like retail which were weak to begin with, but for the most part the economy was super healthy going into the COVID Crisis. I think comparing this to the Great Depression or the Great Recession has to be done carefully. Both were driven by rotten timbers in the economy that finally collapsed. That wasn’t the case this time around, and I think that argues for a V-shaped recovery.

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