All Things in Moderation

Vital Statistics:

Stocks are lower this morning on COVID lockdown fears. Bonds and MBS are up small.

The upcoming week should be relatively quiet, especially with Christmas Eve on Friday. In terms of economic data, we will get the third revision to Q3 GDP on Wednesday and Personal Incomes / Spending on Thursday. Markets are closed on Friday.

The Index of Leading Economic Indicators increased in November, according to the Conference Board. “Eight of the ten indicators that comprise The Conference Board LEI for the U.S. increased in November. The positive contributors – beginning with the largest positive contributor – were average weekly initial claims for unemployment insurance (inverted), stock prices, the interest rate spread, the ISM^® New Orders Index, building permits, the Leading Credit Index™ (inverted), average weekly manufacturing hours, manufacturers’ new orders for consumer goods and materials*. The only negative contributor was average consumer expectations for business conditions, while the manufacturers’ new orders for nondefense capital goods excluding aircraft* held steady in November.”

Joe Manchin is a no on the Build Back Better bill. It should be a non-event economically, though it does give the Fed a little more breathing room.

Rents are rising rapidly, in tandem with higher home prices. “First inflation came for the for-sale housing market, and now it is coming for the rental market,” said Redfin Chief Economist Daryl Fairweather. “Many people have been priced out of the for-sale market and are looking to rent instead, but that demand is pushing up rents. Anyone who bought a home before this year can pat themselves on the back because their mortgage payments are fixed, meaning their biggest recurring expense is immune to inflation. If you are looking to buy or rent now, there’s nowhere to hide from inflation when it comes to housing costs. The good news is that the tight labor market means it’s a great time to move somewhere more affordable. Chances are good that no matter where you go, you’ll be able to find a new job relatively quickly.”

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Vital Statistics:

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

Bonds continue to rally in the wake of the Fed’s tapering decision. Not sure what is driving this, but it looks like every expert is predicting higher long term rates, and Treasury yields keep working lower. This is even more apparent at the long end of the yield curve (the 30 year Treasury). Not sure why this is the case, but it would indicate that the Treasury market is sanguine about inflation and worried about the longer-term growth of the economy. To put this into perspective, you can lend to the US government for 30 years at a rate of 1.81%, while the CPI is pushing 7%. I wonder if the Chinese real estate implosion is driving demand for US risk-free assets.

While Treasury yields are falling, mortgage rates are stuck right around current levels. I think this is nothing more than a reflection that the Fed will reduce its purchases of MBS, and investors not wanting to bid up paper. Since we are in the seasonally slow period for MBS issuance, the effect of the Fed’s reduction will be somewhat muted. It will probably become more evident in the Spring when purchase activity picks up again.

Industrial Production rose 0.5% last month, which was a touch below expectations. Capacity Utilization rose to 76.8%. Historically, high capacity utilization numbers generally corresponded with higher inflation. During the 1970s, capacity utilization was around 85%. Capacity Utilization is less important these days since the US economy is driven more by intellectual property and services.

The number 1 reason why mortgages get declined (at 32% of declines) is too-high debt-to-income ratios. The second reason is a low credit score (26% of declines).

Home flipping profits are slowing down, according to ATTOM. “Home flipping produced another round of competing trends in the third quarter of this year as more investors got in on the action but got less out of it,” said Todd Teta, chief product officer with ATTOM. “It’s clear that declining fortunes weren’t enough to repel investors amid a typical scenario of 32 percent profits before expenses on deals that usually take an average of five months to complete. We will see over the coming months whether the amount they can make on these quick turnarounds will still be enough to keep luring them into the home-flipping business or start pushing them elsewhere.”

Still amazing that Zillow managed to lose money flipping houses in this market.

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Vital Statistics:

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

The Fed increased the pace of tapering yesterday, as expected. Bonds didn’t react much to the statement, although stocks rallied. The dot plot was adjusted to more or less match what the Fed Funds futures have been predicting.

The forecast for GDP growth was downgraded for this year, however it was bumped up for next. The inflation forecast was bumped up for this year and next.

Here is the new dot plot:

Initial Jobless Claims rose to 206,000 last week. We are pretty much back to pre-COVID levels.

Housing starts rose to 1.679 million in November, beating estimates. Building Permits ticked up to 1.63 million. Housing starts were up 11.8% MOM and 8.3% YOY. As we saw yesterday, builder sentiment remains elevated, however shortages of labor and materials remain a constraint.

Speaking of materials, lumber is back again on the rise. Sticks and bricks will add to the cost of new houses, so expect prices to continue to rise.

Rising prices for new homes will put upward pressure on existing home prices as well. As long as we have a housing shortage, home prices will continue to rise. In addition, we are seeing strong wage growth, which will more than offset any decline in affordability due to rising rates. Put simply, I am not buying into the forecast that home price appreciation is going to disappear next year.

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Vital Statistics:

Stocks are flattish as we await the FOMC decision at 2:00 pm today. Bonds and MBS are flat.

The market doesn’t anticipate any changes in interest rate policy, however the expectations is that the Fed will step up the pace of tapering, with an eye to wrap up the process by March in order to clear the decks for rate hikes later in 2022.

The Fed Funds futures are predicting 3 rate hikes next year:

Retail Sales rose 0.3% in November, which was way below the 0.8% Street estimate. Gasoline spending increased, while motor vehicles fell. Discretionary spending (electronics, department stores) fell.

Mortgage Applications fell 4% last week as purchases rose 1% and refis fell 6%. “Fewer homeowners have a strong incentive to refinance at current rates,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity increased slightly, as a 1.7 percent rise in conventional applications offset a 1.6 percent decline in applications for government loans. The strength in conventional purchase activity continues to support higher loan balances, which moved back over $400,000. Housing demand remains strong as the year comes to an end amidst tight inventory and steep home-price growth.”

Below is a chart of the MBA refinance index over the past 10 years. We are still pretty elevated compared to pre-COVID history.

Homebuilder sentiment remained strong in December, according to the NAHB Housing Market Index. Housing starts have been gradually increasing, however shortages of labor, lots, and materials remain.

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Vital Statistics:

Stocks are lower this morning as we begin the December Federal Open Market Committee meeting. Bonds and MBS are down small.

Inflation at the wholesale level rose 0.8% MOM and 9.6% YOY, according to the Producer Price Index. These readings were well above Street expectations. Ex-food and energy, prices rose 0.7% MOM and 7.7% YOY. This is the biggest increase in over 10 years. The PPI tends to lead the CPI, so this is indicating that pricing pressures will accelerate over the near term.

Small Business Optimism increased in November, according to the NFIB. A couple of interesting data points regarding inflation: First, a net 44% of companies reported increasing compensation, which is a 48-year record high reading. 10% of businesses said labor costs were their biggest problem and 29% said that labor quality was their biggest problem. Second, a net 59% of businesses reported raising prices. You can see the chart going back to the mid-80s below:

At the same time, small business earnings are being squeezed by higher prices and shortages.

These two charts don’t look bullish for stocks. Especially since the Fed is taking away the punch bowl.

Home prices rose 1.3% MOM and 18% YOY according to CoreLogic. They forecast that home price appreciation will stall out over the next 12 months as interest rates rise and negatively affect affordability. FWIW, I don’t see it as wage growth will more than offset any increase in mortgage rates, and the supply / demand situation is too imbalanced.

In inflationary times, real estate is one of the best-performing investments. Real Estate outperformed inflation during the 1970s, and destroyed stocks and Treasuries.

New York and New Jersey mortgage brokers throw down in AC.

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Vital Statistics:

Stocks are higher as we head into the December FOMC meeting. Bonds and MBS are up.

The FOMC meeting is scheduled for Tuesday and Wednesday. The Street is looking for no changes in the Fed Funds rate, however the expectation is that the Fed will reduce its purchases of Treasuries and MBS at an accelerated rate. The Bank of England and the European Central Bank will all meet this week as well. Bond yields have been correlating pretty tightly globally, so it pays to watch what happens to yields overseas.

The Atlanta Fed’s GDP Now estimate is heading higher again. The current modeling has Q4 GDP coming in at 8.7%. Note that this is being driven by inventory build. With higher inflation in place, there will be more noise in the GDP numbers in general. Note the Street is less optimistic than the Atlanta Fed.

Aside from the FOMC meeting, we will also get retail sales and housing starts this week. Retail Sales will carry added weight given that it will be a good read on the holiday shopping season.

Better.com’s CEO is taking leave effective immediately, as the mass firing over Zoom didn’t go over the way he had hoped. Better did raise capital at the same time, and I wonder if the investors demanded he do a layoff as a condition of financing. My guess is that they wanted the layoffs and severance payments to hit this year for tax reasons, which would explain why he didn’t do it early next year.

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Vital Statistics:

Stocks are higher this morning after the inflation came in more or less as expected. Bonds and MBS are flat.

Inflation at the consumer level rose 0.8% MOM and 6.8% YOY in November. This was the highest reading since 1982. Ex-food and energy prices rose 4.9% YOY. Rising energy prices were a big driver of the increase in prices. Used cars were another big contributor. Shelter was up only 3.5% YOY, and that number will be rising over the next year. The near 20% increase in home prices will impact the index, albeit with a 12-18 month lag. So these sorts of numbers might be with us for a while.

The Fed prefers the PCE Index (Personal Consumption Expenditures) index to measure inflation. That said, this reading on the CPI probably seals the deal that the central bank will step up the pace of tapering, and will probably get back to neutrality some time in early spring.

If you have noticed that the 10 year yield continues to fall, but mortgage rates are going nowhere, you aren’t alone. Mortgage Backed Securities spreads are widening as the market evaluates how much the reduced central bank demand will affect MBS pricing. The Fed currently owns about 30% of all the MBS outstanding. While the Fed experimented with reducing the amount they hold by runoff, they ended up abandoning it after some unintended consequences.

It is important to remember that the Fed is still buying MBS, just not as much as they used to. Even once they reduce their monthly purchase rate to zero, they will probably still buy enough MBS in the market to compensate for runoff.

Consumer sentiment improved in December, according to the University of Michigan Consumer Sentiment Survey. That said, consumer sentiment is down from a year ago.

Interestingly, the sentiment is improving more in the lower income tiers than the middle and higher income tiers. Richard Curtain, the Chief Economist discussed what is going on:

Sentiment posted a small overall gain in early December (+4.5%), although it was still nearly identical to the average reading in the prior four months (70.6). The more interesting result was the large disparity between monthly gain among households with incomes in the lowest third (+23.6%) of the income distribution compared with the modest losses among households in the middle (-3.8%) and top third (-4.3%). While small differences in the direction of change are rather common, it is quite unusual to record such a large change in the bottom third: a larger one-month percentage was recorded only once before, a gain of 29.2% in June 1980. While it is usually assumed that such extreme changes represent an erroneous result due to small samples, in 1980 it was the households in the bottom income third that initially signaled the end of the first part of the double recession in 1980-82, with upper income households following in subsequent months. The core of the renewed optimism among the bottom third was the expectation of income increases of 2.9% during the year ahead; the last time a higher gain for this group was expected was in 1981. This suggests an emerging wage-price spiral that could propel inflation higher in the years ahead. 

The punch line: the wage-price spiral is probably here. Start looking for Gerald Ford Whip Inflation Now buttons on Ebay.

Mortgage Credit Availability decreased in November, according to the MBA. This was the first decline in 5 months. “Credit availability in November was down slightly, even as the housing market continues to thrive amidst the improving job market,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “However, the picture was different depending on the market segment. An increase in conventional credit availability was offset by a decrease in government credit, as lenders reduced their offerings of government loan programs with lower credit scores, as well as those for investment homes. Credit supply for jumbo loans increased for the fifth straight month.”

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Vital Statistics:

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

Initial Jobless Claims fell to 184k last week, which included the Thanksgiving Day holiday. Initial Jobless Claims had remained stubbornly high, but it looks like it might have finally turned the corner.

Meanwhile, job openings were close to record levels at 11 million. The quits rate edged down to 2.8% after hitting a high in September. The quits rate is one of the leading indicators of wage inflation, and we are certainly seeing evidence of wage inflation – witness the lousy productivity numbers from a couple of days ago.

Wage inflation will be the story for the Fed as it wrestles with inflation. Despite the strength of the labor market, numbers like the employment-population ratio and the labor force participation rate show that there is still additional supply in the labor market. These numbers represent people who were working before the pandemic, and are not now. The unemployment rate doesn’t count people who haven’t worked for over 6 months, so those folks are not reflected in that number.

Ideally, if the people who exited the labor force during the last 2 years come back, it could help alleviate the shortages we are seeing. A shortage of workers ultimately limits the potential economic output of the economy and acts as a governor on the economy. Faster growth then translates into higher inflation.

Homeowner equity increased 31% in the third quarter, according to CoreLogic. This is a $3.2 trillion increase. The average homeowner picked up about $57,000 in equity over the past year. Frank Martell, CEO of CoreLogic said “Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth. This financial reserve will be especially helpful for homeowners looking to fund renovation projects.“

This increase in homeowner equity means that refinance activity will not be entirely dependent on interest rates. Cash-out debt refinancings will remain a great source of loans and represent evergreen activity.

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Vital Statistics:

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

Nonfarm productivity declined 5.2% in the third quarter as output increased 1.8% and hours worked rose 7.4%. This is the lowest reading since 1960. Nonfarm business productivity fell 0.6%, the biggest decline since 1993. Unit labor costs increased 9.6% as compensation increased 3.9% and productivity fell by 5.2%.

Productivity is the key to non-inflationary growth. It is also the key to higher living standards. This is certainly an issue that will concern the Fed. FWIW, productivity is generally a pretty volatile measure, so one bad reading isn’t the end of the world. But it does comport with supply chain issues, rising wages and slower output increases.

Mortgage applications increased 2% last week as purchases fell 9% and refis increased 5%. The index includes an adjustment for the Thanksgiving holiday. “Mortgage rates declined for the first time in a month, prompting a pickup in refinancing, with government refinances increasing more than 20 percent over the week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “While the 30-year fixed mortgage rate and 15-year fixed mortgage rate both declined only one basis point, the FHA rate fell 7 basis points, driving the surge in government refinances. Borrowers are continuing to act on these opportunities, but if rates trend higher as MBA is forecasting, the window of opportunity to refinance will continue to get smaller.”

Saule Omarova has withdrawn her name from consideration to run the OCC. She was torpedoed due to some pretty out-there writings which advocated for state control of banking. Not the ideal person to regulate banks. I could see Biden tapping ex-CFPB head Richard Cordray to run the agency. He has been mentioned as a possibility for the Fed, but since he is a lawyer and not an economist he would be a better fit at OCC.

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Vital Statistics:

Stocks are higher this morning as Omicron fears subside. Bonds and MBS are down.

Home Prices rose 20% in November, according to the Clear Capital Home Data Index. The Western region rose 24%, while the Midwest increased 16%. Note that the Clear Capital Index is one month ahead of CoreLogic / Case-Shiller and 2 months ahead of FHFA.

Home prices rose 18% in October, according to CoreLogic. Prices are expected to rise only 2.5% next year, however. New household formation, investor purchases and pandemic-related factors driving demand for the limited supply of available for-sale homes continues to propel the upward spiral of U.S. home prices. However, we expect home price growth to moderate over the near term as many buyers take a break for the holidays.”

Overall, the consensus seems to be that as mortgage rates rise next year, home price appreciation should slow. The MBA forecasts that rates will rise to 4%, and if you think that buyers focus on the monthly payment versus the price, then increased rates should dampen price growth. Ultimately what will lower prices will be increased supply, and so far housing starts remain around long-term averages.

Apartment vacancy rates hit a high of 97.5%, and asking rents are rising at almost 14%. “The demand from renters is really strong, especially for the luxury product. As the economy has recovered we’ve done a better job in high- paying employment than we have in the lower paying jobs,” said Greg Willett, chief economist at RealPage.

It looks like Chinese real estate developer will default on its dollar debt after missing a payment yesterday. I suspect that foreign investors will be in the first-loss category, however the losses will spiral past that. So far, experts seem to be sanguine about this, as they assume that the Chinese government will be able to contain it. I am skeptical. Residential real estate bubbles throw off all sorts of shrapnel when they explode, and often hit innocent bystanders. Remember 2008? What got everyone’s attention was the collapse of the money market funds and the commercial paper market. Retailers were unable to fund inventory for the holiday shopping season. That is a long way from CDO squareds.

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