Stocks are higher this morning as earnings continue to come in. Bonds and MBS are flat.
Home Prices rose 18.5% YOY, according to the latest FHFA House Price Index. “Annual house price gains remained extremely high in August but the pace of month-over-month gains continues to decelerate,” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “This does not mean house prices are at risk of declining—far from it, they continue to climb at a double-digit pace in all regions—but it does suggest we may have seen the peak in annual gains for the time being.”
Based on that home price appreciation gain, we should see 2022 conforming loan limits around $650k. Of course the FHFA might not increase it by that much. Next month’s report will be the one FHFA uses to set the new limit.
The share of loans in forbearance fell to 2.28% last week, according to the MBA. “Following two weeks of rapid declines, the share of loans in forbearance dropped again, but at a reduced rate. As reported in the past, many servicers process forbearance exits at the beginning of the month, therefore it is not surprising to see the pace of exits slow again mid-month,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “The composition of loans in forbearance is evolving. More than 25% of loans in forbearance are now made up of new forbearance requests and re-entries, while many other homeowners who have reached the end of 18-month terms are successfully exiting into deferrals or modifications.”
Separately, Treasury distributed about $2.8 billion worth of rental aid in September. While the eviction moratoriums issued by the Center for Disease Control have expired, many states still prohibit foreclosures and evictions.
Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.
The upcoming week has a lot of important economic data. We will get new home sales and the FHFA House Price index on Tuesday, the advance estimate of third quarter GDP on Thursday, and personal incomes / outlays on Friday.
The FHFA House Price Index will cover August, and the new FHFA limits will be based on the third quarter numbers. We are seeing a lot of lenders start to accept loans based on the expected new limits. Given the pace of home price increases, the new limit will be around $650k or so.
The Street is looking for GDP growth to come in around 2.7%. This is a deceleration from the first half of the year, and it definitely looks like shortages are beginning to show up in the numbers. The Chicago Fed National Activity went negative last month, which indicates the US economy is grew below trend in September. This index is a meta-index of about 85 indicators, so it is a pretty broad based look at the economy.
Jerome Powell pretty much confirmed that tapering will begin this year: “I do think it is time to taper,” Mr. Powell said Friday. “I don’t think it is time to raise rates.” He went on further to discuss the economy: “We think we can be patient and allow the labor market to heal,” he said. But at the same time, “no one should doubt that we will use our tools to guide inflation back down to 2%” if it looked like more persistent inflationary pressures were taking root, Mr. Powell added.
Despite the repeal of limits on non-owner occupied properties, the private label market is still going strong. IMO, this was the ultimate rationale for the limits in the first place. The private label market disappeared in the aftermath of the 2008 financial crisis, which meant that something like 90% of all mortgage production was backed by the taxpayer. Mick Mulvaney ended up forcing the issue by creating a need for it.
One thing to keep in mind: while there is probably a contingent of the far left that likes the fact that the taxpayer backs the vast majority of mortgages, most housing professionals are uncomfortable with it. What happens if the the government says “yes, the FHFA House Price Index is up 20% YOY, but we don’t want to be subsidizing every loan below $650k.” If the limits get raised by something below 14%, then a lot of these wholesalers who are betting on the FHFA price index might find themselves caught short.
Stocks are higher this morning after troubled Chinese property developer Evergrande made an interest payment last night ahead of the default deadline. Bonds and MBS are up.
Globally, we are seeing improved sentiment based on the Evergrande situation, however manufacturing activity in Europe is down to an 8 month low as shortages are clogging up the system. European manufacturers are able to pass along price increases relatively easily, so you have falling GDP and rising inflation. The German Bund yield is trading at a 2.5 year high of negative 9 basis points, which is part of a global move higher in yields.
Existing home sales rebounded 7% MOM in September, according to NAR. This was still down a couple of percent on a YOY basis however. “Some improvement in supply during prior months helped nudge up sales in September,” said Lawrence Yun, NAR’s chief economist. “Housing demand remains strong as buyers likely want to secure a home before mortgage rates increase even further next year.”
Depleted inventory remains the biggest issue for the housing market and is largely responsible for the upward pressure in prices. Inventory fell 13% YOY to 1.27 million units, which represents a 2.4 month supply at the current sales pace. A balanced market is generally considered to be around 6 month’s worth. The average home sold in just 17 days.
The median home price rose 13% to $352,800, and all-cash sales accounted for 23% of transactions. First time homebuyers are being squeezed by professional investors and institutional money which is flooding into the residential rental space. With cap rates around the mid single-digits and double digit home price appreciation, the returns in this strategy dwarf every other asset out there.
Yesterday’s Treasury Inflation Protected Securities (TIPS) auction was strong, and is useful as a market-driven look at inflationary expectations. The way these work is the face value of the bond increases by the Consumer Price Index during the life of the bond. You can therefore compare it to a corresponding Treasury and calculate the expectations for inflation going forward. This is called the “breakeven” inflation rate, which means if inflation rises above the breakeven rate, you are better off in the TIPS bond. If it doesn’t you are better off in the Treasury.
If you take a look at yesterday’s auction, the breakeven inflation rate rose to 2.94% for the next 5 years. This is pretty much an all-time record. Note TIPS are a relatively new security and weren’t around during the high inflation 70s and 80s.
Stocks are lower this morning on no real news. Bonds and MBS are down again.
Initial Jobless Claims fell to 290k last week, which was lower than expected. We are still well above pre-COVID levels however.
The economy grew at a “modest to moderate” rate in September, according to the Federal Reserve Beige Book, which is a report by all of the regional Fed banks on the economy. The overall punch line is that growth is slowing and supply chain issues and a lack of labor are pushing up prices.
On the overall economy, they said: “Economic activity grew at a modest to moderate rate, according to the majority of Federal Reserve Districts. Several Districts noted, however, that the pace of growth slowed this period, constrained by supply chain disruptions, labor shortages, and uncertainty around the Delta variant of COVID-19.”
On the labor market, they observed: “Employment increased at a modest to moderate rate in recent weeks, as demand for workers was high, but labor growth was dampened by a low supply of workers….Firms reported high turnover, as workers left for other jobs or retired….The majority of Districts reported robust wage growth. Firms reported increasing starting wages to attract talent and increasing wages for existing workers to retain them. Many also offered signing and retention bonuses, flexible work schedules, or increased vacation time to incentivize workers to remain in their positions.”
And on inflation: “Most Districts reported significantly elevated prices, fueled by rising demand for goods and raw materials. Reports of input cost increases were widespread across industry sectors, driven by product scarcity resulting from supply chain bottlenecks. Price pressures also arose from increased transportation and labor constraints as well as commodity shortages. Prices of steel, electronic components, and freight costs rose markedly this period. Many firms raised selling prices indicating a greater ability to pass along cost increases to customers amid strong demand. Expectations for future price growth varied with some expecting price to remain high or increase further while others expected prices to moderate over the next 12 months.”
What does all of this mean? For the Fed, the issue of inflationary expectations is critical. Once the population expects higher prices in the future, it tends to create a self-reinforcing cycle. Consumers accelerate purchases in order to avoid paying more in the future. This exacerbates supply shortages. Workers demand bigger cost-of-living wage increases which bumps up labor costs. Economists call this the wage-price spiral and this was a big component to the 1970s inflationary period.
There are many similarities between the 1970s and today: commodity price increases, shortages, profligate government spending and extremely easy monetary policy. As long as the economy is strong, people grudgingly accept it. The problems begin when the economy slows, because fiscal / monetary policy have reached the point of diminishing returns. Economists call this “pushing on a string” which means that further stimulus doesn’t create growth – it just creates inflation.
Jimmy Carter referred to it as “malaise.” Economists called it stagflation. Regardless of what you call it, I suspect it will be the template going forward. The government spent a crap-ton of money stimulating the economy over the past year and a half, the Fed has cut interest rates to 0% and has been buying MBS and Treasuries to support the economy. In return, economic growth is “modest to moderate,” which is Fed-speak for “meh.”
The Fed and the government have been conducting a stealth experiment in modern monetary theory over the past year and a half. Investors should ignore any gaslighting out of the media that offers MMT as a potential solution, as if we aren’t already there. We are. And we should get the verdict on that experiment soon.
Stocks are higher this morning as the numbers out of the banks continue to be strong. Bonds and MBS are down.
Housing starts rose 7.4% YOY to 1.55 million, according to Census. Building Permits were flat YOY at 1.59 million. To put the housing starts number into perspective, we are at the same level we were in 1959, when the government first started keeping track. Mind you, the US population has increased by something like 85% since then.
The NAHB Housing Market index improved in September. Homebuilder sentiment has been strong for the past several years as tight inventory conditions give them pricing power.
Separately, mortgage applications for a new home fell 16.2% in September, according to the MBA. “New home sales purchase activity was weaker in September, and the average loan size rose to another record high, as homebuilders continue to grapple with rising building materials costs and labor shortages. The survey-high average loan size of $408,522 is evidence of higher sales prices from these higher costs, as well as the shift in new construction to larger, more expensive homes,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The estimated pace of new home sales decreased 3.5 percent last month after a strong August reading, but the two-month sales pace is at its strongest since January 2021.”
Mortgage applications fell 6.3% last week as refinances fell 7% and purchases fell 5%. “Refinance applications declined for the fourth week as rates increased, bringing the refinance index to its lowest level since July 2021. The 30-year fixed rate has increased 20 basis points over the past month and reached 3.23 percent last week – the highest since April 2021. The 15-year fixed rate increased to 2.54 percent, which is the highest since July,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Purchase activity declined and was 12 percent lower than a year ago, within the annual comparison range that it has been over the past six weeks. Insufficient housing supply and elevated home-price growth continue to limit options for would-be buyers.”
Demand for second homes jumped during the pandemic, according to Redfin. This was probably due to rapidly falling rates and a desire for people to leave crowded urban areas. The decline after March 2021 corresponds with the temporary limits on second homes and investor loans from the GSEs and it looks like demand is back on the upswing.
Stocks are higher this morning as good numbers are being reported by the banks. Bonds and MBS are down.
Retail Sales rose 0.7% MOM, which was well above the consensus. Ex-vehicles and gas, they rose 0.7% as well. This report covers the back-to-school shopping season, which is a good indicator of what the holiday season will look like. That said, we have no problem with demand right now, the problem is supply. Higher gas prices were a big factor in the increase, as they are up 38% YOY.
“Services spending may see some renewed strength over the next couple of months, as virus cases continue to drop back,” Capital Economics senior U.S. economist Andrew Hunter wrote. “But with goods shortages likely to persist, and the resulting surge in prices eating into real incomes, we expect consumption growth to remain subdued.”
The supply issues are also evident in import and export prices. Import prices rose 9.2% on a YOY basis, while export prices rose 16%.
Jerome Powell is still expected to be re-nominated to run the Fed, however he is getting some pushback from the hard left, particularly Elizabeth Warren. If he isn’t the nominee, Lael Brainard, who was nominated by Barack Obama, seems to be the next best bet. Brainard is considered more dovish than Powell, however that probably doesn’t matter all that much – after all the FOMC is a committee and decisions are usually arrived by consensus and voting.
“You could see a different path of monetary policy with a Brainard-led Fed” that pushes back initial interest rate hikes and follows with a shorter tightening cycle, said Paul Herbert, Managing Director at Harbor Capital Advisors, who expects Powell to be renominated but is preparing to hold shorter duration bonds for longer in the case of a Brainard-led Fed.
Consumer sentiment slipped in October, according to the University of Michigan Consumer Sentiment Survey. The numbers are well below September’s numbers and October 2020’s. The survey blames the debate in DC over the stimulus bill and the debt ceiling, but IMO that stuff probably doesn’t resonate with the typical US citizen.
If you look at consumer sentiment surveys historically, they have historically correlated (negatively) with gasoline prices, and I suspect that is what is driving the numbers. If gas prices rise, people’s mood sours. That said, the Delta variant of COVID is probably playing a part too.
Stocks are higher this morning as earnings season begins in earnest. Bonds and MBS are up.
The FOMC minutes pretty much confirmed what we already knew – that that the Fed will begin its tapering process shortly – either at the November or December meeting.
In the discussion of the economy, the job market and inflation seem to have differing views. The Fed participants thought that employment would continue to accelerate, and that the labor force participation rate would increase. So far, that is not happening. The Fed is not sure why this is happening, but it offered explanations like COVID resurgence, school and childcare.
On the inflation front, there is some concern that the identifiable COVID bottlenecks are translating into higher inflationary expectations, although the consensus seems to be that inflation will moderate back to 2% or so once these bottlenecks have worked out.
Overall, the explanation for the worker shortage seems to be largely boilerplate, and it seems unsatisfying. The Great Resignation seems to be something different, and so far no one seems to have a good explanation for it. Much of it is falling down ideological lines.
Initial Jobless Claims fell to 293,000 last week. We are still elevated, however we are well above pre-COVID levels.
Inflation at the wholesale level came in below expectations, however the numbers are still pretty high. The producer price index rose 0.5% MOM and 8.6% YOY. Ex-food and energy, it rose 0.2% MOM and 6.8% YOY.
Stocks are flattish this morning after the consumer price index came in higher than expectations. Bonds and MBS are up.
Prices at the consumer level rose 0.4% MOM and 5.4% YOY. Both numbers were a touch above expectations. Ex-food and energy, they rose 0.2% MOM and 4.0% YOY. FWIW, the Fed will dismiss the current numbers as “transitory” however that term is living on borrowed time. If we don’t see the numbers come down by next summer, then the Fed will probably have to act.
Mortgage applications were up marginally last week as purchases rose 2% and refis fell by 1%. “Mortgage rates reached their highest level since June 2021, but application activity changed little this week. An increase in home purchase applications offset a slight decline in refinances,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The increase in purchase applications was welcome news, but was primarily driven by a 2 percent gain in conventional purchase applications, which kept the average loan size elevated.”
JP Morgan reported earnings this morning. QOQ, numbers were flat, however they rose 28% on a YOY basis. It looks like a big part of the increase in earnings was driven by credit reserve releases. Net income was $11.7 billion, and credit release reserves were $2.1 billion.
Mortgage banking volume rose smartly to $41.6 billion compared to $29 billion a year ago. The increase was driven primarily by a 116% uptick in correspondent volume. Servicing was marked up to 3.85x. The stock is down a couple of percent so far today.
New Rez purchased Genesis Capital, a fix-and-flip / business purpose originator from Goldman Sachs. “The acquisition of Genesis adds a new complementary business line to our Company and advances our ability to create and retain additional strong housing assets for our balance sheet,” said Michael Nierenberg, Chairman, Chief Executive Officer and President of New Residential. “We are excited to work with the seasoned Genesis team and add business purpose lending to our suite of products, furthering our connectivity with a new subset of borrowers. We see the acquisition of Genesis as a great opportunity that supports our growing single-family rental strategy and one that allows us to capture additional unmet demand from our Retail and Wholesale origination channels.”
Mortgage credit availability increased 1.5% last month, according to the MBA. “Last month’s expansion was driven by a 4.5 percent increase in the conventional index, while the government index slightly decreased,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Even with increases in seven out of nine months thus far in 2021, total credit availability is still around 30 percent less than it was in February 2020 before the pandemic.”
Post-COVID, we are back to real estate bust levels of mortgage availability.
Stocks are higher this morning on no real news. Bonds and MBS are up small.
The number of job openings slipped in August to 10.4 million from a record in July. Trade / Transportation and Leisure / Hospitality are the big leaders in job openings. The quits rate, which tends to lead wage increases, rose 20 basis points to 2.9%. Check out the quits rate in some other industries: 4.7% in retail, 6.4% in leisure / hospitality, 6.8% in accommodation and food services.
I mentioned yesterday that Goldman Sachs sees US GDP coming in around 2% in the second half of 2021. This is a gutsy call given the consensus is for strong growth next year. Their call is for the supply chain issues to work themselves out and for inflation to return to its 2% level. They see no rate hikes in 2022 as inflation will be on the way down and growth will be too anemic to justify it.
As it stands right now, the December 22 Fed Funds futures see an 85% chance of a rate hike next year.
Note that we are seeing European confidence indices fall and we are on the cusp of third quarter earnings season. The banks will begin announcing numbers tomorrow, and investors are relatively sanguine about the financials. It is tech and industrial stocks that are the concern as rising input costs will reduce profits.
Small business optimism slipped in in September, according to the NFIB. “Small business owners are doing their best to meet the needs of customers, but are unable to hire workers or receive the needed supplies and inventories,” said NFIB Chief Economist Bill Dunkelberg. “The outlook for economic policy is not encouraging to owners, as lawmakers shift to talks about tax increases and additional regulations.”
A net 30% of companies intend to raise compensation in the next 6 months, which is a record for the survey, which goes back to almost 50 years. Interestingly capital expenditures remain low, as uncertainty regarding everything inhibits risk-taking. I think at some point businesses will start investing in labor-saving technology as it will help reduce costs and make it easier to fill orders.
The share of loans in forbearance fell to 2.68% last week, according to the MBA. This was a drop of 27 basis points, which is the fastest so far. “Many borrowers reached the expiration of their forbearance term as we entered October,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Payment performance has remained steady for those who have exited forbearance and into a workout since 2020, with more than 85% of those borrowers current as of October. It also continues to be striking that so many homeowners in forbearance have continued to make their payments. Almost 16 percent of borrowers in forbearance as of October 3rd were current.”
Stocks are lower this morning as energy prices continue to rise. The bond market is closed for the Columbus Day holiday.
The upcoming week is relatively data-light, which is typical for the week after the jobs report. We will get inflation data as well as retail sales. The minutes from the September FOMC meeting will be released on Wednesday.
Goldman Sachs cut its US growth forecasts as consumer spending slips. They took down 2021 estimates rom 5.7% to 5.6% and 2022 estimates from 4.4% to 4%. “After updating our estimates of the key growth impulses that drive our consumption forecast—reopening, fiscal stimulus, pent-up savings, and wealth effects—and incorporating a longer-lasting virus drag on virus-sensitive consumer services spending, we now expect a more delayed recovery in consumer spending,” the economists said.
Semiconductor shortages are forecasted to last until the second half of next year. Ultimately they believe that slowing of fiscal support will be a drag. Again, the Federal Government has spent an extraordinary amount of money over the past year and a half, and even if it falls government spending is still highly stimulative. Again I think we are at the “pushing on a string” point of fiscal stimulus.
The wheels are coming off the Chinese real estate bubble. Evergrande is the face of the bust, but we are seeing additional companies miss debt payments. The canary in the coal mine – the corporate bond market – however is flashing warning signs. The ICE / Bank of America index of Chinese developer corporate bonds shows 24 of 59 companies trading with yields over 20%, which are distressed levels. If 40% of the industry is trading at distressed levels then it looks like the bust is here and it will be almost impossible to reverse.
Japanese bank Nomura estimates that there is $5 trillion in debt that has been raised by developers over the past 5 years. To put that number in perspective, it is about the size of Japan’s GDP, the third largest economy in the world. China has a tight grip on the financial system and it will be a fascinating to watch how they manage it. As I said before I expect them to follow the Japanese model and to prevent any major defaults. The weaker companies will be bought by the stronger companies, and the economy will enter a long recession as the bad debt accumulated during the bubble years gets worked off.
The bust will send another global deflationary wave which will pull interest rates lower and commodity prices lower. The US will probably be able to get away with profligate spending and super-low interest rates for a while longer. The problem is what happens during the next recession. Interest rates are already at the floor, and fiscal stimulus has reached the point of diminishing returns. So during the next recession, the 10 year yield probably hits zero.
Brent Nyitray
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Let the mutherfuker burn!
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Kevin S. Willis
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markinaustin
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ScottC
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All Things in Moderation 