All Things in Moderation

Vital Statistics:

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

The FOMC minutes will be released at 2:00 pm. This release could be market-moving as a lot of investors will be looking for the Fed’s rationale to raise its inflation target when the data were showing a slowdown.

Mortgage applications fell 13.2% over the past couple of weeks, according to the MBA. Purchases were down 12.2% while refis fell 16.3%. Refi activity is down 87% compared to a year ago. “The end of the year is typically a slower time for the housing market, and with mortgage rates still well above 6 percent and the threat of a recession looming, mortgage applications continued to decline over the past two weeks to the lowest level since 1996,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications have been impacted by slowing home sales in both the new and existing segments of the market. Even as home-price growth slows in many parts of the country, elevated mortgage rates continue to put a strain on affordability and are keeping prospective homebuyers out of the market. Refinance applications remain less than a third of the market and were 87 percent lower than a year ago as rates remained close to double what they were in 2021. Mortgage rates are lower than October 2022 highs, but would have to decline substantially to generate additional refinance activity.” 

Construction spending rose 0.2% MOM and 8.5% YOY in November, according to the Census Bureau. Residential construction spending fell 0.5% MOM and rose 5.3% on a YOY basis.

The manufacturing economy contracted in December, according to the ISM Manufacturing Index. The index came in at 48.4, the lowest since the early days of the pandemic. If the index comes in above 50, it is expanding, while below it is contracting. The prices index fell to 39.4, which is good news on the inflation front, while employment remained in expansion territory.

Job openings were more or less unchanged in November, according to the JOLTS job openings report. The quits rate (which tends to predict wage increases) ticked up as well.

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Vital Statistics:

Stocks are higher as we start the new year. Bonds and MBS are up.

The week ahead will contain some important economic data, with the ISM data and the jobs report on Friday. Given that Jerome Powell’s focus has been the surprisingly strong jobs report, I could see a situation where bad news is good news – i.e. a weak report would trigger a rally in stocks and bond as it would increase the chances that the Fed will pivot from a tight monetary policy to a neutral one.

Jerome Powell discussed the three basic inputs to inflation. First, there are the supply chain issues, which manifested themselves early on in the pandemic. Second, there is housing which had its biggest impact beginning in 2022. Finally, there is services ex-housing, which basically means service sector wage growth. The supply chain issues have largely been fixed, and housing will probably fade by summer. The final component – services ex housing – is the focus of the Fed. Which means any negative news in the labor market will perversely be positive for the markets.

Manufacturing exhibited the fastest decline since May of 2020, according to the S&P Global Purchasing Managers Index. “The manufacturing sector posted a weak performance as 2022 was brought to a close, as output and new orders contracted at sharper rates. Demand for goods dwindled as domestic orders and export sales dropped. Muted demand conditions also led to downward adjustments of stock holdings, as excess inventories built earlier in the year were depleted in lieu of further spending on inputs. With the exception of the initial pandemic period, stocks of purchases fell at the steepest rate since 2009. Sinking demand for inputs and greater availability of materials at suppliers led to a further easing of inflationary pressures. In fact, the rate of input price inflation fell below the series trend. Selling price hikes also eased, albeit still rising steeply. Slower upticks in inflation signal the impact of Fed policy on prices, but growing uncertainty and tumbling dem

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The 11th Circuit issued an opinion the other day on another trans case coming out of Florida, in which a trans person sued a school district for restricting access to bathrooms in schools on the basis of biological sex rather than self-declared gender. Most of the headlines focused on the fact that, contrary to similar cases in other circuits, the 11th Circuit ruled in favor of the school district, which makes it highly likely that the issue will finally have to be resolved by SCOTUS. But for me the most notable thing was one of the dissents, and how it substantiates the concerns that the ultimate goal of trans ideology is the elimination of the very concept of biological sex. There were 5 opinions issued apart from the majority ruling, including 1 concurrence and 4 separate dissents.

The most troubling dissent was by Judge Jill Pryor (joined in parts by Judge Rosenbaum).

Recall that at the beginning of the whole trans craze, less than 10 years ago, it was repeatedly asserted that gender as a concept was wholly distinct from sex. The two terms it was claimed, referred to two separate things. The simplistic explanation that was routinely trotted out was that sex is what is between your legs, and gender is what is between your ears. This claimed distinction had its own coherency problems, but at the very least it implicitly acknowledged the reality of the binary biological categories of male and female. There was a semantic game being played in attempting to divorce the concepts of “man” and “woman” from their biological underpinnings in “male” and “female”, but the biological notions of “male” and “female” were not themselves being challenged or changed. As trans ideology takes its next reality-obscuring step forward, it appears that is no longer true.

In her dissent, Pryor argues not that bathrooms separated by biological sex are unlawful, but rather that biological sex itself is determined by one’s “gender identity”, which means that when a transgender boy (ie a female who is claiming to be a boy) is denied the use of the boys bathroom, it can only be a result of “his” transgender status, because “he” is, in fact, a biological male. You may think I am joking, or misunderstanding, or making this up. I am not.

From Pryor’s opinion:

“To start, the majority opinion simply declares—without any basis—that a person’s “biological sex” is comprised solely of chro- mosomal structure and birth-assigned sex. So, the majority opinion concludes, a person’s gender identity has no bearing on this case about equal protection for a transgender boy. The majority opinion does so in disregard of the record evidence—evidence the majority does not contest—which demonstrates that gender identity is an immutable, biological component of a person’s sex.

With the role of gender identity in determining biological sex thus obscured, the majority opinion next focuses on the wrong question: the legality of separating bathrooms by sex. Adams has consistently agreed throughout the pendency of this case—in the district court, on appeal, and during these en banc proceedings— that sex-separated bathrooms are lawful. He has never challenged the School District’s policy of having one set of bathrooms for girls and another set of bathrooms for boys. In fact, Adams’s case logi- cally depends upon the existence of sex-separated bathrooms. He— a transgender boy—wanted to use the boys’ restrooms at Nease High School and sought an injunction that would allow him to use the boys’ restrooms.”

This is a remarkable display of sophistry in several respects. but it is not Pryor’s alone. She cites and claims to be relying on “expert” testimony at the original trial in which a Dr. Ehrensaft claims that “external genitalia alone— the typical criterion for assigning sex at birth—[was] not an accurate proxy for a person’s sex” and that:

“[M]edical understanding recognizes that a person’s sex is comprised of a number of components including: chromosomal sex, gonadal sex, fetal hormonal sex (prenatal hormones produced by the gonads), internal morphologic sex (internal genitalia, i.e., ova- ries, uterus, testes), external morphological sex (ex- ternal genitalia, i.e., penis, clitoris, vulva), hypotha- lamic sex (i.e., sexual differentiations in brain devel- opment and structure), pubertal hormonal sex, neu- rological sex, and gender identity and role….When there is a divergence between these factors, neurological sex and related gender identity are the most important and determinative factors.”

Again, there is a lot of word salad and sophistry going on here, but read that one more time. It is saying, quite explicitly, that when a person’s “gender identity” diverges from biological sex-indicators, “medical understanding” is that “gender identity” is the determinative factor in establishing a person’s biological sex. Now, I don’t know how widespread this understanding actually is in the medical community, and I suspect it isn’t at all the common medical understanding (which would make the Dr.’s testimony border on perjury). But it is an indication that we are entering the next phase of the trans ideological war on objective reality, and its attempt to impose itself simply by redefining words and concepts.

The goal here is to essentially make it impossible to even talk about (and hence to think about) the historical understanding of the biological binary. Under the previous iteration of trans ideology and language, it was laborious but at least still possible to have a coherent discussion by using the words “male” and “female” where one would have in the past used “men/boys” and “women/girls”. However, if even the words “male” and “female” are going to be re-defined as being determined by “gender identity”, it will no longer be possible to have that discussion. And again, that is surely the whole point here, to make that discussion impossible.

Watch for this to start showing up more often in these cases.

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Vital Statistics:

Stocks are lower this morning as we round out a year most market participants would love to forget. Bonds and MBS are down.

The bond market closes early today, and volumes should be light as everyone heads into the long weekend.

The Chicago PMI showed the economy contracting for the fourth consecutive month, although the rate of decline decelerated in December.

Luxury home sales fell 38% over the past 3 months – the biggest decline on record according to Redfin. The areas experiencing the biggest declines were Nassau County (think the Hamptons), San Diego, San Jose, Riverside, and Anaheim.

Luxury homes probably correlate pretty tightly with the fortunes of the stock market, and are often looked at as investments. With home prices beginning to decline potential buyers are pulling in their horns.

With the mortgage banks so battered over the past year, I am wondering if they might be good candidates for the January Effect.

Wishing everyone a happy and prosperous new year.

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Vital Statistics:

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

The FHFA reported that 30-60 day delinquencies rose 0.4 ppts YOY to 1.2% in the third quarter of 2022. This was a 0.2% increase on a QOQ basis. All buckets – enterprise, government, and other conventional – increased, however government increased the most. Government loans were 3.1% in the 30-60 day bucket which was up 1.4% YOY and 0.6% QOQ. Given that FHA loans are usually high LTV loans, we should see things get worse as home prices decline and these loans slip into negative equity.

Investor confidence turned dour in December, according to the State Street Investor Confidence Index. The index fell 14.4 points to 75.9.

We are seeing investors rotate into defensive names such as utilities and consumer non-discretionary stocks ahead of an expected recession in 2023. The bright side is the next phase will be early-stage cyclicals which includes financials and homebuilders. 2023 will start out as downright awful for housing, however the second half could be brighter, especially if we finally see a pick up in homebuilding.

Initial Jobless claims ticked up 9k to 225k last week. The labor market continues to prove resilient despite other measures of weakness.

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Vital Statistics:

Stocks are higher this morning on optimism over China’s latest bout with COVID. Bonds and MBS are down.

Pending Home Sales fell 4% in November to the lowest level in 20 years. They are down a whopping 38% on a YOY basis. “Pending home sales recorded the second-lowest monthly reading in 20 years as interest rates, which climbed at one of the fastest paces on record this year, drastically cut into the number of contract signings to buy a home,” said NAR Chief Economist Lawrence Yun. “Falling home sales and construction have hurt broader economic activity.”

Note that sales tend to lag moves in the mortgage market by a couple of months, so sales today represent rates in October and November. Mortgage rates peaked in mid-November and have been falling since. The Spring Selling Season should see a pickup in sales. Geographically, the West has seen the biggest declines.

The WSJ had an interesting article about non-traded single-family REIT funds, which have outperformed their publicly traded counterparts by a lot this year. Blackstone’s BREIT fund has reported a gain of 8.5% this year, versus the bloodbath that has been the publicly-traded REIT stocks. About half of the assets in these private REITs is residential. Compare that to the stock price of Invitation Homes, a single family rental REIT, which is down 34% so far this year.

The outperformance means that a lot of the fast money in these funds want to ring the register and pull their money out. Blackstone has been forced to freeze redemptions, as has Starwood. If these funds are similar to American Homes 4 Rent or Invitation, they have heavy exposure to Southern California and Phoenix, which is where iBuyers like Zillow and Redfin have also been slammed. End-of-year redemptions could mean some forced selling for these funds, which would certainly impact property prices in these MSAs.

Transactions in general have been slowing in commercial real estate. This is usually a sign of falling prices. As interest rates increase, cap rates have to rise as well to reflect the cost of financing. I think this is most pronounced in office properties. Manhattan’s landlord – S.L. Green just cut its dividend to conserve cash.

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Vital Statistics:

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

We should have a quiet week ahead as investors (and mortgage bankers) wrap up a year they would love to forget. We don’t have much in the way of market-moving data so any large movements in the markets should be read in the context of light holiday trading.

House prices were flat in October, according to the FHFA House Price Index. They increased 9.8% on a YOY basis. “U.S. house prices have seen two consecutive months of near-zero appreciation,” said Nataliya
Polkovnichenko, Ph.D., Supervisory Economist, in FHFA’s Division of Research and Statistics. “Higher mortgage rates continued to put downward pressure on demand, weakening house price growth. The U.S. house price index growth decelerated as it posted the first 12-month growth rate below 10 percent after 24 consecutive months of double-digit appreciation rates.” The Pacific Division had the lowest YOY home price appreciation, while New England had the highest.

The Case-Shiller Home Price Index fell 0.3% in October and was up 9.2% on a YOY basis. “October 2022 marked the fourth consecutive month of declining home prices in the U.S.,” says Craig J. Lazzara, Managing Director at S&P DJI. “For example, the National Composite Index fell -0.5% for the month, reflecting a -3.0% decline since the market peaked in June 2022. We saw comparable patterns in our 10- and 20-City Composites, both of which stand -4.6% below their June peaks after October declines of -0.7% and -0.8%, respectively. These declines, of course, came after very strong price increases in late 2021 and the first half of 2022. Despite its recent weakness, on a year-over-year basis the National Composite gained 9.2%, which is in the top quintile of historical performance levels.

Personal Incomes rose 0.4% in November, while personal consumption rose 0.1%. The Personal Consumption Expenditures Index (the Fed’s preferred measure of inflation) rose 0.1%. Excluding food and energy, it rose 0.2%. The monthly numbers are back at levels that should make the Fed happy, although the annual increases are still too high.

The drop in consumption is a worry, and I suspect the narrative is going to shift quite rapidly from fears of inflation to fears of a recession. Another signal of the change: retail. Dollar Stores are back in fashion.

New Home Sales rose 5.8% to a seasonally-adjusted annual rate of 640,000. This was down about 16% compared to a year ago. Meanwhile, Lennar is looking to sell about 5,000 homes to single-family rental funds.

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Vital Statistics:

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

Third quarter GDP was revised upward from 2.9% to 3.2%, according to the BEA. The revision was driven primarily by an upward adjustment to consumer spending, primarily in services. The PCE price index was revised upward by 0.1% to 4.8%. The PCE price index (ex-food and energy) was revised upward by 0.1% as well.

The Atlanta Fed’s GDP Now model sees 2.7% GDP growth in Q4.

The index of leading economic indicators declined sharply in November, according to the Conference Board. “The US LEI fell sharply in November, continuing the slide it’s been on for most of 2022 after peaking in February,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “Only stock prices contributed positively to the US LEI in November. Labor market, manufacturing, and housing indicators all weakened—reflecting serious headwinds to economic growth. Interest rate spread and manufacturing new orders components were essentially unchanged in November, confirming a lack of economic growth momentum in the near term. Despite the current resilience of the labor market—as revealed by the US CEI in November—and consumer confidence improving in December, the US LEI suggests the Federal Reserve’s monetary tightening cycle is curtailing aspects of economic activity, especially housing. As a result, we project a US recession is likely to start around the beginning of 2023 and last through mid-year.”

Purchase application payments (a proxy for mortgage affordability) fell slightly in November as mortgage rates fell. The national median mortgage payment fell from $2,012 to $1,977. The MBA attributed this to a slowing in home price appreciation and a 26 basis point decrease in the mortgage rate.

It is important to understand that affordability is more than just the mortgage payment – it is also a function of incomes. Since incomes are rising at the fastest rate in decades that helps blunt the impact of rising payments. Last October / November almost certainly will be the peak of unaffordability as rates continue to fall and home price appreciation slows. As Keynes discussed about “sticky wages” they generally won’t fall, so higher incomes are baked into the cake already. Falling rates and prices will square the circle.

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Vital Statistics:

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

Mortgage applications rose 0.9% as purchases rose 0.1% and refis rose 6%. “The Federal Reserve raised its short-term rate target last week, but longer-term rates, including mortgage rates, declined for the week, with the 30-year conforming rate reaching 6.34 percent – its lowest level since September,” said Mike Fratantoni, MBA SVP and Chief Economist. “Refinance application volume increased slightly in response but was still about 85 percent below year-ago levels. This is a particularly slow time of year for homebuying, so it is not surprising that purchase applications did not move much in response to lower mortgage rates.”

Consumer confidence improved in November, according to the Conference Board. “Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. This shift in consumers’ preference from big-ticket items to services will continue in 2023, as will headwinds from inflation and interest rate hikes.”

Existing home sales fell 7.1% in November, according to the National Association of Realtors. “In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the COVID-19 economic lockdowns in 2020,” said NAR Chief Economist Lawrence Yun. “The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows.”

The median home price rose 3.5% on a YOY basis, which is more evidence that home price appreciation is slowing. Affordability has been a big issue, as the first time homebuyer accounted for 28% of sales, which is just above the series low of 26%. Historically, the first time homebuyer has been around 40%.

Yesterday’s bond market sell-off had some people asking about how Japan’s change in policy could cause such a seismic change in US rates. First of all, in the grand scheme of things, yesterday was really just noise. The moves in Japan will have little bearing on US rates longer-term. The move in Japan also caused yields to jump higher in Europe, with the German Bund and UK Gilt yields rising by 15 bps or so.

Sovereign debt markets tend to correlate. This makes sense since global economies are dependent on the health of each other. That said, the Japanese government bond market is different in that the Bank of Japan has a yield cap, which means the Bank of Japan (BOJ) won’t let the Japanese Government Bond (JGB) fall far enough to cause the yield to rise above the cap. It is the way the BOJ decided to conduct QE. This is different than the Fed and ECB’s version of QE, where they bought bonds to push down rates but didn’t draw any bright lines.

I suspect that Japanese bond fund managers (who invest all across the spectrum of sovereign yields) re-weighted their bond portfolios to increase exposure to Japan and sold off Treasuries, Gilts, and Bunds to raise the capital. And I suspect this adjustment will probably wrap up by the end of the year.

United Wholesale CEO Mat Ishbia is purchasing the Phoenix Suns. It would be wild to see a championship between the Cavaliers (which Dan Gilbert of Rocket owns) and the Suns.

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Vital Statistics:

Stocks are lower this morning after the Bank of Japan unexpectedly increased rates. Bonds and MBS are down.

The Bank of Japan announced it will allow its 10 year bond yield to rise up to 0.50%. This was a surprise announcement, and we are seeing reverberations throughout global sovereign debt markets. Most benchmark yields are up about 10 basis points this morning, and the US 10 year is up to 3.68%. While this is a surprise, I think the global narrative is moving from global inflation to a global recession, which will push rates lower next year.

Housing starts in November fell to a seasonally-adjusted annual rate of 1.427 million units. This is flat with October and down 16.4% compared to a year ago. Building Permits fell 11% MOM and 22% YOY to a seasonally-adjusted annual rate of 1.342 million. Rising rates and higher construction costs have caused the builders to hold off until things normalize. I do wonder on the last part if work from home will cause a change in mindset for builders. It would seem that exurbs will become more popular again as a way for builders to avoid the zoning and land availability headaches of building close to urban areas.

The MBA put out its forecast for 2023. Total originations are expected to fall to $1.9 trillion. The first quarter of 2023 is projected to be the nadir for this cycle, with total originations expected to fall to $345 billion before increasing to $510 billion in Q2, where it will begin to increase throughout the year. To put 2023 into perspective: it will be similar to 2018, and much better than 2014.

Mortgage rates are expected to fall throughout 2023, with the 30 year mortgage rate falling to 5.2% by the end of the year. Housing starts are expected to remain depressed around 1.4-1.5 million per year. Existing home sales are expected to remain on the low side, however they will improve throughout the year. Finally, home price appreciation should plateau and turn negative at the end of 2023, although we aren’t talking a crash, just low single digit decreases.

Historically, housing has led the economy out of a recession, and we have historically seen housing starts reach something like 2 billion in early stage recoveries. This was the missing piece of the puzzle in the post-2008 recovery, and it seems that forecasters don’t expect it to ever return. Housing starts of 1.4 million units are the pre-bubble historical average since the late 1950s. Given that the US population has been growing since then there are more heads that need beds. The National Association of Realtors sees a 5 – 6 million unit deficit in needed housing, so the demand is there. I suspect the surprise of 2023 will be a rebound in homebuilding. It can’t stay depressed forever.

New home applications rose 1% in November, according to the MBA. “New home purchase applications recovered slightly in November, as mortgage rates retreated from their October highs and brought some prospective buyers back into a market that still faces affordability challenges,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “Similarly, estimated new home sales for November saw an annual pace of 660,000 units – a 10 percent increase from October. While mortgage rates remain high compared to the past few years, the 30-year fixed rate was 6.49 percent at the end of November after reaching 7.16 percent in mid-October, providing a slight boost in purchasing power for buyers. However, both applications and sales remained over 20 percent below last year’s pace.”

Like everything else, we are back at 2018 levels.

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