All Things in Moderation

Vital Statistics:

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

The services economy rebounded in June, according to the ISM Non-Manufacturing Survey. Production-related indicators are leading employment indicators. That said, many of the comments in the survey pointed to higher-then-expected demand and shortages. “Sales have picked up tremendously. Sporadic supply issues. Biggest concern for us is lumber shortages.” (Construction). Overall, the headline number for the index was 57, much higher than the 50 that was expected and is consistent with an economy that is growing quickly. Further evidence that the recession probably ended in early May some time.

CoreLogic is predicting that home prices will fall at an annual rate of 6.6% by May of 2021.

Strong home purchase demand in the first quarter of 2020, coupled with tightening supply, has helped prop up home prices through the coronavirus (COVID-19) crisis. However, the anticipated impacts of the recession are beginning to appear across the housing market. Despite new contract signings rising year over year in May, home price growth is expected to stall in June and remain that way throughout the summer. CoreLogic HPI Forecast predicts a month-over-month price decrease of 0.1% in June and a year-over-year decline of 6.6% by May 2021.

Unlike the Great Recession, the current economic downturn is not driven by the housing market, which continues to post gains in many parts of the country. While activity up until now suggests the housing market will eventually bounce back, the forecasted decline in home prices will largely be due to elevated unemployment rates. This prediction is exacerbated by the recent spike in COVID-19 cases across the country.

While this is certainly possible, the supply / demand imbalance is so stark right now, I suspect that anyone who decides to wait for lower prices will regret it. I could see weakness in the luxury end of the market, where there is more inventory. Certainly urban luxury apartments are going to experience a perfect storm of people fleeing the cities and a potential drop in foreign buyer interest due to the violence. A drop of 6.6% seems aggressive to me.

Zillow Offers resumes activity in 5 more markets. Zillow Offers is a program where the company will purchase a home directly from a buyer, which would allow the buyer to submit a non-contingent offer on their next home. Zillow would then make any necessary repairs, clean and stage the home for sale. I think Zillow charges around 7.5% to do this, which is probably about the cost of the realtor charges and any fix-up costs the seller would have to pay otherwise.

Interesting reaction to COVID-19: Potential buyers need a pre-approval letter to enter the house. “Having a pre-approval letter has long been a preferred requirement by agents when submitting an offer, but having a pre-approval letter before looking at homes given the COVID-19 environment is an absolute must,” says Cara Ameer, a real estate agent with Coldwell Banker Vanguard Realty in Ponte Vedra Beach, Fla. “Sellers and listing agents are cautious about who is coming into their homes, and they want to ensure that only those that are truly qualified are coming through their doors.”

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Vital Statistics:

Stocks are higher this morning on overseas strength. Bonds and MBS are down small.

The week after the jobs report is usually pretty data-light and the upcoming week is no exception. We do have a lot of Fed-speak, but that is it.

The number of borrowers in forbearance plans declined last week, according to Black Knight. The number of loans in forbearance dropped by 104k, and brings us back to levels last seen in early May. Black Knight doesn’t have a concrete reason for the decline, but it does postulate that many of the initial forbearance plans were for 90 days or so, and if you received forbearance in mid-March, it was up by mid-June. Of course, the economy is improving as well, and many people who were put out of work due to stay-at-home orders are now back on the job.

Luxury home prices are falling, according to Redfin. “The pandemic is playing an outsized role in the luxury market, as very expensive homes are particularly sensitive to periods of economic uncertainty,” said Redfin economist Taylor Marr. “Many luxury buyers are nervous about pouring money into an investment that may be difficult to sell if the economy takes a nosedive. By comparison, people buying starter homes they plan to live in for 10 years are less concerned with volatile financial markets as long as they have money for a down payment and can afford monthly mortgage payments. And although access to credit is loosening up now, it tightened considerably for jumbo loans, which a lot of luxury buyers use, in April and May.”

Tappable home equity just topped $6.5 trillion, which is a record.

“Tappable equity rose by 8% year-over-year in the first quarter of 2020 to a record high of $6.5 trillion,” said Graboske. “What’s more, with mortgage interest rates hitting record lows, 90% of homeowners with tappable equity now have first lien rates above the prevailing market average. But while Q1 2020 saw overall refinance lending climb to a 7-year high, the number of cash-out refinances, as well as the dollar value of equity withdrawn via refinance, fell for the first time since early 2019. All in, cash-outs accounted for just 42% of refinance loans in the first quarter, roughly half of what was seen at the recent high in Q4 2018 and the lowest such share since Q1 2016. Likewise, the $38.7 billion in equity withdrawn from the market via cash-out refinances was down 8% from the prior quarter. Further, rate lock data – a good indicator of lending activity – suggests the trend is likely to continue, as the cash-out share of refinance activity has continued to fall throughout the second quarter.

As COVID started a mass tightening in credit, jumbos and cash-out refinances became unattractive to many lenders and MBS investors. Fears of rapid prepayment speeds meant that investor demand was weak. As confidence returns to the markets, cash out refis should provide a long-lasting opportunity for the industry. To put that $6.5 trillion into perspective, the MBA estimates that 2020 volume will be around $2.5 trillion. So this could have some legs.

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Vital Statistics:

Stocks are higher after the jobs report comes in better than expected. Bonds and MBS are down.

Jobs report data dump:

• Nonfarm payrolls up 4.8 million.
• Unemployment rate 11%
• Labor force participation rate 61.5%
• Average hourly earnings down 1.2% MOM, up 5% YOY

Overall, an extremely positive report. The Street was looking for an increase of 3 million jobs, so the payroll number was much better than expected. The labor force participation rate increased by 0.7%, but is still 1.9% below February’s level. The unemployment rate fell by 2.2 percentage points despite concerns that a statistical error had understated May’s rate. The drop is average hourly earnings was simply a reversal of previous increases as lower-paid hospitality and restaurant / retail workers return to the workforce.

The FOMC minutes pretty much said what everyone expected: that rates will remain low for the forseeable future, and the Fed is going to probably err on the side of caution given how intractable low inflation has been. The FOMC seems to be considering the idea of yield capping, and idea the Fed used in the 1940s to lower the government’s borrowing costs.

The second staff briefing reviewed the yield caps or targets (YCT) policies that the Federal Reserve followed during and after World War II and that the Bank of Japan and the Reserve Bank of Australia are currently employing. These three experiences illustrated different types of YCT policies: During World War II, the Federal Reserve capped yields across the curve to keep Treasury borrowing costs low and stable; since 2016, the Bank of Japan has targeted the 10-year yield to continue to provide accommodation while limiting the potential for an excessive flattening of the yield curve; and, since March 2020, the Reserve Bank of Australia has targeted the three-year yield, a target that is intended to reinforce the bank’s forward guidance for its policy rate and to influence funding rates across much of the Australian economy. The staff noted that these three experiences suggested that credible YCT policies can control government bond yields, pass through to private rates, and, in the absence of exit considerations, may not require large central bank purchases of government debt. But the staff also highlighted the potential for YCT policies to require the central bank to purchase very sizable amounts of government debt under certain circumstances—a potential that was realized in the U.S. experience in the 1940s—and the possibility that, under YCT policies, monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank.

You can cue the jokes about the government believing that interest rates (and asset prices) are too important to be determined by a mere market. While these are unprecedented times, the Fed runs the risk of staying too long at the party. Inflation is always a risk, but the bigger risk is asset bubbles fueled by ultra-low interest rates. When pension funds etc cannot earn a yield with Treasuries they will be forced to reach for yield because their future liability streams are not affected by interest rates.

I hope the Fed can stick the landing here, but the quote about the risks to the independence of the central bank is not an idle threat. It also assumes the Fed can fight the market indefinitely. That is by no means guaranteed, as we saw when George Soros broke the Bank of England. The Fed has been swelling its balance sheet without any injection of equity, which means the margin for error is becoming smaller and smaller. If the markets get a whiff of inflation, nobody is going to willingly tie up their money for 10 years at 70 basis points. The inverse of interest rates is bond prices, and it won’t take much of an increase in market rates to wipe out the Fed’s equity.

Escape from New York: Manhattan apartment sales the worst in 30 years, falling by 54%. Median prices fell by 18%. There were only 1147 sales in the quarter, the lowest on record. Renters are fleeing the City, and we should see an increase in rental renegotiations. While some of this is COVID-19 related, New York City seems determined to return to the 1970s.

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Vital Statistics:

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

Yesterday’s stock market rally capped the best quarter for the stock market since 1998. Pretty much the economy bottomed in early April and seems to be springing back.

ADP reported that 2.4 million jobs were added in June. The Street was looking for about 3 million so that was a bit of a miss. Note that the Street is looking for 3 million tomorrow in the jobs report. “Small business hiring picked up in the month of June,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “As the economy slowly continues to recover, we are seeing a significant rebound in industries that once experienced the greatest job losses. In fact, 70 percent of the jobs added this month were in the leisure and hospitality, trade and construction industries.” There was a big jump in construction hiring, with almost 400,000 new jobs added.

The Markit PMI Index rebounded in June, according the IHS Markit.

“US manufacturers have reported a marked turnaround in business conditions through the second quarter, with collapsing production and demand in April at the height of the COVID-19 lockdown turning rapidly to stabilisation by June. The PMI posted a record 10-point rise in June amid unprecedented gains in the survey’s output, employment and order book gauges.
“The record rise in the New Orders Index, coupled with low inventory holdings, bodes well for a further improvement in production momentum in July. A record upturn in business sentiment about the year ahead likewise hints that business spending and employment will start to revive. “However, while the PMI currently points to a strong v-shaped recovery, concerns have risen that momentum could be lost if rising numbers of virus infections lead to renewed restrictions and cause demand to weaken again.”

I think the last statement there really nails it. If we don’t have a big enough resurgence of COVID cases to warrant another nationwide lockdown, then the economy is pretty much out of the woods, and if anything will accelerate as the unprecedented amount of monetary and fiscal stimulus over the past 3 months takes effect.

Construction spending fell 2.1% MOM in May but was up 4.5% YOY.

Low mortgage rates will fuel housing affordability this summer, even as buyers bid up the affordable inventory. “The economic fallout and impacts to the housing market from the pandemic appeared to peak in April. The number of existing-home sales fell 18% relative to March, housing starts fell 26%, and the supply of homes available for sale approached record lows,” said Mark Fleming, chief economist at First American. “While historically low mortgage rates made it more affordable for those with stable incomes to buy a home, tightening credit standards and limited supply of homes for sale made it more difficult for some to obtain financing and find the home they want.”

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Vital Statistics:

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

Many states are slowing or reversing re-opening plans.

The Supreme Court ruled that the CFPB is permitted to stay, but the Director can be fired at will. This was a Solomon-esqe decision that split the difference between people who wanted the entire bureau eliminated and those that wanted the bureau to to run on autopilot.

Jerome Powell and Steve Mnuchin will appear before the House Financial Services Committee this afternoon. There will probably not be anything market moving however just be aware.

Home prices rose 0.3% MOM and 4% YOY according to the Case-Shiller index. These are April numbers. The South and West were the hot spots, while the Northeast was weak.

Ginnie Mae put out a APM which deals with re-securitizing re-performing Ginnie loans. These loans are ineligible for traditional Ginnie pools and will have to go into new custom pools which will presumably trade far back of normal GII pools. In a nutshell, this will impact FHA and VA pricing for the worse.

Democrats are preparing a nationwide eviction moratorium. Meanwhile, FHFA is working on continuing forbearance for multifamily borrowers who suspend evictions. Obviously, nothing here is going to be good for investment properties, so expect pricing to soften here (or programs get pulled back).

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Vital Statistics:

Stocks are flattish a the US gets more cases of COVID. Bonds and MBS are flat.

We have a short week, with the markets closed on Friday and SIFMA recommending an early close on Thursday. We will get the FOMC minutes and the jobs report, which could be market-moving.

Freddie Mac reported that delinquencies hit a 2 year high, rising to 0.81% in May from 0.64% in April.

Demand for affordable homes is outpacing the demand for more expensive ones. According to Redfin, affordable home prices rose 5.5%, while luxury homes rose 2%. “Spending so much time at home during quarantine has made a lot of people realize that it might be time to stop renting a cramped apartment in the city and time to start owning their first single-family home,” said Pam Henderson, a Redfin agent in Dallas. “With mortgage rates at record lows and remote work on the rise, some renters are having an epiphany: They could buy a lower-priced home in the suburbs for close to what they’re paying in rent.”

Pending home sales rose 44% in May as the real estate market rebounded. “This has been a spectacular recovery for contract signings, and goes to show the resiliency of American consumers and their evergreen desire for homeownership,” said Lawrence Yun, NAR’s chief economist. “This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery. More listings are continuously appearing as the economy reopens, helping with inventory choices,” Yun said. “Still, more home construction is needed to counter the persistent underproduction of homes over the past decade.”

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Vital Statistics:

Stocks are lower this morning on fears of a COVID-19 resurgence. Bonds and MBS are flat.

Personal Incomes fell 4.2% in May, as government stimulus checks were offset by wage declines from furloughed workers. Consumer spending rose 8.2% MOM, led by a big uptick in paper products.

Forbearances ticked up last week according to Black Knight’s forbearance report. There were 4.68 million homeowners in forbearance, or 8.8%, an uptick of 79,000 or 0.1%.

The migration out of urban areas is real. A record 27% of homebuyers are looking to relocate from places like San Francisco and Seattle to less dense and cheaper locations. “While there has been a huge increase in the number of people looking online at homes in small towns, the long-term impact of the pandemic on people actually moving from one part of the country to another remains to be seen,” said Redfin economist Taylor Marr. “People are starting to take the plunge and move away from big, expensive cities, though most of them were probably already considering a lifestyle change. The pandemic and the work-from-home opportunities that come with it is accelerating migration patterns that were already in place toward relatively affordable parts of the country. But for many people, the lure of large homes in wide open spaces will be a passing dream fueled by coronavirus-induced isolation. ”

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Vital Statistics:

Stocks are lower this morning on an increase in COVID cases in states like AZ and TX. Bonds and MBS are up.

Initial Jobless Claims were more or less flat at 1.5 million last week.

The third estimate for first quarter GDP came in at -5%, more or less in line with estimates. The price index (inflation) came in at 1.4%, which is lower than the Fed’s target.

The MBA is urging FHFA to expand access to the Federal Home Loan Banking network, by allowing REITs and independent mortgage banks to borrow from the FHLB. The FHLB provides longer-term financing at competitive rates. The collapse in the jumbo and non-QM market was directly related to mortgage REITs which funded their balance sheets with repurchase agreements and had to sell paper / stop buying when the margin calls came in March and April. It isn’t a panacea (some REITs with FHLB loans still were forced to deleverage) however it would have mitigated the collapse at least somewhat. Giving the independent mortgage banks access would make them more stable as well.

Homebuilder KB Home reported earnings yesterday. Earnings per share beat the Street, but revenues and orders disappointed the Street and sent the stock down 13% on the open. “The prolonged stay-at-home public health orders, resulting economic shutdown and our conservative approach to navigating the uncertain environment significantly impacted our orders during the quarter. However, following a low point in April, we are very encouraged by the resilience of housing market demand. We experienced steady and significant improvement in our order trends beginning in May, which was further fueled by welcoming walk-in traffic to our communities. This improvement has accelerated dramatically in the first three weeks of June during which time we have achieved a modestly positive year-over-year comparison, as orders have returned to more normalized levels,” concluded [KB Home CEO] Jeffrey Mezger. Orders fell 4% in March, 59% in April, and 42% in May. For the first 3 weeks of June, orders were up 4%. Still demand for housing remains robust.

Treasury is considering delaying Tax Day past July 15. “As of now, we’re not intending on doing that, but it is something that we may consider,” Treasury Secretary Steve Mnuchin said in a June 23 interview at the Bloomberg Invest Global 2020 virtual summit. He said he was considering another delay to Sept. 15.

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