All Things in Moderation

Vital Statistics:

Stocks are higher this morning as we continue to digest the election news. Bonds and MBS are up.

The FOMC is set to release its decision today at 2:00 pm. There will probably be no change in policy, and bonds are going to be driven by election news.

Initial Jobless Claims came in at 750k this morning, while productivity rose 4.9% and unit labor costs fell 8.9%.

I wanted to give my thoughts on the election and things going forward. I assume Biden goes on to win. Republicans keep the Senate and Democrats control the House.

Big picture: Biden wins after a long, drawn-out litigation. Bond yields will drift lower as the fear of a blue wave is off the table. Stock rally because, well, just because. 

Divided government means no big stimulus package. Republicans will re-discover religion re government spending, which means any stimulus will be small and targeted. Maybe we will see another check made out to people. Any bailout of the big broke blue states is DOA. Nancy Pelosi will have her hands full managing the backbenchers in the House who want to see Trump in an orange jumpsuit. Washington will settle into gridlock. 

Regulatory-wise, the CFPB will become more aggressive. HUD will resume suing local governments to reduce single-family zoning. Regulatory fears will tighten FHA lending even more, which will give the affordable housing types like Urban Institute conniptions. The government will continue to have a moratorium on evictions. Luckily, rising house prices will keep a lid on strategic defaults. Multi-fam construction will probably slow as financing gets tighter, exacerbating the home supply problem. 

A lack of any sort of fiscal stimulus means the Fed keeps the pedal to the metal for a while. Neel Kashkari will urge the Fed begin to repo baseball cards and Elvis plates. Black Knight estimates the 3/4 of the US mortgage market can save 75 bps on rate, which means the refi boom continues to have legs. The mortgage industry is at capacity, and bringing on new bodies from another industry takes time (just look at how long it has taken in construction, where there are no regulatory issues). Mortgage industry should have another $3 – 4 trillion year in 2021, and the MBA will grudgingly move their forecast up from 2.5 trillion sometime in September 2021.  Margins remain wide, and salaries will continue to rise for industry professionals. 

Longer term, a more aggressive regulatory state will keep a lid on economic growth. The recovery will be shallower and longer. Interest rates will stay around here, and the economy will look more like the Obama years than the pre-COVID Trump years. For the mortgage banking industry, we should see a few more great years, but once the music stops and mortgage banks are left with bloated cost structures, a wave of consolidation will take place.

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Vital Statistics:

Stocks are higher as the election votes come in. Bonds are up after a wild night.

As I type this, the count in Michigan has narrowly gone to Biden, after leaning Trump all night. The remaining undecided states are MI, WI, PA, GA, NV, and NC. MI, WI, and NV are leaning Biden, and PA, GA and NC are leaning Trump. If those final results hold up, Biden wins.

The Senate so far is looking unchanged, although it hasn’t been declared either way. Same with the house. The only takeaway is there was no blue wave that the media had been trying to create for months. If the Senate stays Republican, we will have divided government no matter who wins, and that is good for both stocks and bonds. A huge stimulus bill with a bailout for the big broke blue states probably isn’t in the cards.

One thing to keep in mind, is that with all the expected recounts, we probably won’t have a definitive answer on the election for possibly weeks.

If Biden wins, the most likely change will a more aggressive regulatory state. My suspicion is that nothing changes with Fan and Fred, and the common stock for the GSEs will remain a litigation lottery ticket. I don’t think anything changes with the Fed.

Mortgage Applications increased 3.8% last week as purchases decreased 1% and refis increased 6%. The average rate ticked up a basis point to 3.01%.

The economy added 365,000 jobs in October, according to the ADP Jobs report. The Street was looking for around 750,000, so this is a miss. Economists are forecasting an increase of 530,000 jobs in Friday’s jobs report. “The labor market continues to add jobs, yet at a slower pace,” Ahu Yildirmaz, vice president and co-head of the ADP Research Institute, said in a statement. “Although the pace is slower, we’ve seen employment gains across all industries and sizes.”

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Vital Statistics:

Stocks are higher as we head into election day. Bonds and MBS are down small.

The share of loans in forbearance fell by 7 basis points last week to 5.83%, according to the MBA. “With more borrowers exiting forbearance in the prior week, the share of loans in forbearance declined across all loan types,” said MBA Senior Vice President and Chief Economist Mike Fratantoni. “Almost half of forbearance exits to date have been from borrowers who remained current while in forbearance, or who were reinstated by paying back past-due amounts.”

Apparently Morgan Stanley was out with a call yesterday calling for markedly higher bond yields, with the 10 year yield rising 100 basis points. Apparently the analyst is using 2016 as a template, where an unexpected Trump victory translated to a big “risk on” trade where investors sold Treasuries and bought stocks. Regardless, traders are betting on volatility stemming from the election. As MBS investors know, volatility is kryptonite for the asset class. And sort of dislocation in the bond market will translate into lower MBS pricing, which in turn means higher mortgage rates at the margin. FWIW, with global sovereign debt at or close to record lows, COVID, a Federal Reserve who wants low rates, and a lot of uncertainty regarding the disease and the recovery, I am not seeing the case for higher rates, but I guess anything is possible these days.

Construction spending rose 0.3% MOM and 1.5% YOY in September, according to the Census Bureau. Residential construction was up 2.7% MOM and over 10% YOY. That said, office and lodging spending was down.

Home prices rose 1.1% MOM and 6.7% YOY, according to CoreLogic. They are predicting flat prices going forward however.

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Vital Statistics:

Stocks are higher this morning as we head into an important week for the markets. Bonds and MBS are down.

Aside from the election this week, we also have a FOMC meeting. Plus, we have a slew of important economic data including the jobs report on Friday. Lots going on.

An election surprise could prove to cause some increase in market volatility. I remember in 2016 after Trump won, the S&P futures were down 100 points in the overnight Asian markets. Paul Krugman was penning his New York Times essay predicting Great Depression II, while famed investor Carl Icahn was buying every contract he could get his hands on in the overnight session. The stock market closed up about 1% on the day after the election. People forget the bond market also had a pretty substantial move. The 10 year yield increased 39 basis points in the immediate aftermath of the election.

The polls all show a Biden victory, but pollsters are increasingly in the opinion moving business, not the opinion measuring business. So a lot of the margin is nothing more than wishful thinking. I am wondering if the move up in yields lately is the bond market hedging its bets.

The manufacturing sector is still expanding, despite COVID-19. The ISM Survey for October came in at 53.4, which was higher than expected.

Redfin is getting sued by a bunch of housing organizations over its minimum listing price. The lawsuit claims that this amounts to discrimination since many urban neighborhoods especially in the cities they cited (Detroit, St. Louis) are low-priced. Redfin says it is a business decision, but the activists believe it has no legitimate business purpose. The problem is that many properties in these areas are extremely low priced (around $10,000 – $20,000) due to property tax arrears that have piled up for years. A real estate broker simply isn’t going to get excited about putting in the work for a $300 check. Redfin will pay a minimum commission for brokers, but someone has to eat the difference.

Ever notice the MBA’s origination forecasts seem to be low and raised only grudgingly? The latest MBA forecast for 2020 origination (which was only recently raised) came in at around $3.2 trillion. According to Black Knight Financial’s rate lock data, 2020 originations could come in over $4 trillion.

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Vital Statistics:

Stocks are lower this morning as big tech earnings report fail to excite investors. Bonds and MBS are down.

Pending home sales declined 2.2% according to NAR. Despite the decline, it is still the second highest reading on record.

“The demand for home buying remains super strong, even with a slight monthly pullback in September, and we’re still likely to end the year with more homes sold overall in 2020 than in 2019,” said Lawrence Yun, NAR’s chief economist. “With persistent low mortgage rates and some degree of a continuing jobs recovery, more contract signings are expected in the near future.”

“Additionally, a second-order demand will steadily arise as homeowners who had not considered moving before the pandemic begin to enter the market,” Yun said. “A number of these owners are contemplating moving into larger homes in less densely populated areas in light of new-found work-from-home flexibility.”

Personal incomes rose 0.9% in September, much higher than the consensus estimate of 0.3%. Personal spending rose 1.4%, higher than the 1% estimate, which is good news for the economy. Inflation (at least as the Fed measures it) remains well under control with the personal consumption expenditures index only up 1.4% on an annual basis.

It sounds like the flight out of urban areas is beginning to be felt for landlords. Apartment REIT Equity Residential reported a big decline in earnings, driven by concessions and turnover in its NYC, SF and Boston markets. Suburban apartments are holding up reasonably well however.

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Vital Statistics:

Stocks are flattish this morning after yesterday’s bloodbath. Bonds and MBS are flat as well.

COVID cases are surging in Europe, prompting many governments to institute strict social distancing measures.

Third quarter GDP rose 33%, while personal consumption rose 41%. These numbers were higher than expectations. Personal incomes fell by $540 billion after increasing $1.45 trillion in the second quarter, which was supported by government stimulus payments. Overall, the economy is improving, but it is still way below pre-COVID levels.

Initial Jobless Claims fell to 751k last week.

Corelogic reported that mortgage fraud risk fell by 26.3% YOY in the second quarter. This decrease was largely driven by a shift in the purchase / refi mix. Note that these are second quarter numbers, so they are a bit old.

Freddie Mac reported that the seriously delinquent rate fell by 13 basis points to 3.04% in September.

I will be a panelist at the IMN Mortgage Servicing Rights forum this morning at 10:45 this morning. It should be a good conference.

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Vital Statistics:

Stocks are lower this morning as COVID-19 cases continue to rise. Bonds and MBS are up.

Mortgage applications rose 1.7% last week as purchases rose 0.2% and refis rose 3%. “Mortgage applications to buy a home were flat compared to the prior week, but overall activity remains strong this fall,” said Joel Kan, MBA Associative Vice President of Economic and Industry Forecasting. “Applications jumped 24 percent compared to last year, and the average loan size reached another record high at $372,600. These results highlight just how strong the upper end of the market is right now, with outsized growth rates in the higher loan size categories.”

Rental issues (nonpayment, evictions) could usher in the next housing crisis. Eviction moratoriums will end on January 1 for the Federal Government and many states. These tenants could then face eviction processes and will be on the hook for missed rent payments. Second, many landlords rely on that rental income to make the mortgage payment or to live on. That said, it probably won’t be worse than the 2009 financial crisis.

CoreLogic has received multiple bids for the stock, valuing it at over $80 per share. CoreLogic has been pursued by Cannae, which is trying to replace the board of directors.

The homeownership rate ticked down in the third quarter, from 67.9% to 67.4% according to Census. The homeownership rate topped out at 69.2% during the real estate bubble.

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Vital Statistics:

Stocks are lower this morning as COVID-19 cases continue to rise and the window to pass a stimulus bill closes. Bonds and MBS are up.

New Home Sales fell 3.5% month over month in September to a seasonally-adjusted annual rate of 959,000. This is up 32% on a YOY basis. Inventory remains tight at 284,000 homes, or a 3 month supply.

The upcoming week will have a slew of important economic data, including GDP, personal income / spending, and house prices.

Guild mortgage went public at $15 a share. It also settled a FHA lawsuit from back in the day when the HUD sued everyone under the False Claims Act. While the mortgage bankers are making huge amounts of money, multiples are disappointing. IMO, the Street is underestimating how much money will be made when 75% of the $16 trillion mortgage market is refinanceable.

Mortgage rates are at the lowest on record. This goes back to the early 70s when the surveys started. Chances are these are the lowest mortgage rates ever, going back to the New Deal when the 30 year fixed rate mortgage was first created.

The typical homeowner made $85,000 on their home sale, according to ATTOM Data Solutions.

“Home prices and seller profits across the nation continue racking up new highs as the housing market remains relatively immune from the economic havoc caused by the Coronavirus pandemic. It’s almost as if the housing market and the overall economy are operating in different worlds,” said Todd Teta, chief product officer at ATTOM Data Solutions. “Things remain in flux, given the significant uncertainty about when the pandemic might recede or what impact the recent resurgence could have in different areas of the country. But with mortgage rates at rock-bottom levels and declining supplies of homes for sale, conditions remain in place for continued strong prices and returns.”

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Vital Statistics:

Stocks are up this morning as earnings continue to come in better than expected. Bonds and MBS are down.

Existing home sales rose 9.4% to a seasonally adjusted annual pace of 6.5 million in August. This is up over 21% from a year ago. The inventory of about 1.5 million units represents a 2.7 month supply, which is a record low. 71% of homes were on the market for less than a month.

“Home sales traditionally taper off toward the end of the year, but in September they surged beyond what we normally see during this season,” said Lawrence Yun, NAR’s chief economist. “I would attribute this jump to record-low interest rates and an abundance of buyers in the marketplace, including buyers of vacation homes given the greater flexibility to work from home.”

The median home price rose 14.8% (!) to $311,800. Properties stayed on market 21 days, which is a record low. First time homebuyers accounted for about 31% of sales, which is still well below pre-Great Recession levels of around 40%.

The index for leading economic indicators rose in September, according to the Conference Board. “The US LEI increased in September, driven primarily by declining unemployment claims and rising housing permits. However, the decelerating pace of improvement suggests the US economy could be losing momentum heading into the final quarter of 2020,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The US economy is projected to expand in Q4, but at a substantially slower rate of 1.5 percent (annual rate) according to The Conference Board’s GDP forecast. Furthermore, downside risks to the recovery may be increasing amid rising new cases of COVID-19 and continued labor market weakness.”

The National Multifamily Housing Council reported that 90.6% of all tenants made a full or partial rent payment by October 20. This is an increase from the 90.1% who did the same by September 20. We are still below historical averages however. By October 20, 2019 92.4% of renters had made a full or partial payment. “The importance of the initial support provided to apartment residents by the CARES Act is becoming increasingly clear,” said Doug Bibby, NMHC President. “However, that support has now long since expired and the savings households were able to build are evaporating quickly. NMHC continues to urge lawmakers to come together and pass meaningful assistance to support renters and keep America’s rental housing sector stable.”

Black Knight Financial reported that mortgage delinquencies declined in September for the first time since the pandemic began. The national delinquency rate fell to 6.66% from 6.88% in August. We are seeing the biggest improvement in the early stage delinquencies

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Vital Statistics:

Stocks are flattish this morning as earnings continue to pile in. Bonds and MBS are flat.

Initial Jobless Claims fell to 787k last week. We are still a long way from normalcy here.

Amerihome has filed to go public, the latest in a wave of mortgage bankers. That makes Rocket, United Wholesale, Guild, Amerihome, and Caliber. Am I missing anyone? If you were Bank of America, would you resurrect the Countrywide brand and spin it off?

The MBA forecasts that originations will increase to $3.2 trillion this year, and then slowing to $2.5 trillion next year. They see purchase originations hitting $1.5 trillion this year, however they see refinance activity falling to under $1 trillion next year as they forecast the 30 year mortgage rate hitting 3% by the end of the year and rising to 3.3% by the end of 2021. That said, if Black Knight’s numbers are correct – that there are 32 million homes that could save 75 basis points in rate by refinancing – then the refi boom should last as long as rates stay in this neighborhood. Don’t forget, the Fed is actively buying MBS in order to hold down rates. I don’t see that changing. The other wild card is homebuilding. Demand is insatiable for homes right now, and the builders will probably be snapping up undeveloped land in the exurbs all winter. Working from home has changed the entire calculus about living in the exurbs. Bidding wars for starter homes are common these days.

Financial firms are preparing for a Biden Administration, which will mean a return to the Richard Cordray days of “regulation by enforcement action.” This basically means that the agency wouldn’t tell anyone what the rules were; the only way to figure out what they were thinking was from reading an enforcement action after the fact. This would be like driving on a road with no speed limit signs, and the only way to find out the speed limit would be to get a ticket.

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