Morning Report: Housing starts miss estimates by a wide margin

Vital Statistics:

S&P futures4,1583.8
Oil (WTI)66.000.07
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.20%

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

Housing starts came in at 1.57 million in April, which was way below the 1.7 million Street expectation. This is 10% below the March level of 1.73 million. Building Permits came in flat at 1.7 million. Not sure what drove the decline in starts, but it is a surprise. We might see this get revised away in later releases.

The NAHB Housing Market index was flat at 83 in May as well. “Builder confidence in the market remains strong due to a lack of resale inventory, low mortgage interest rates and a growing demographic of prospective home buyers,” said NAHB Chairman Chuck Fowke, a custom home builder from Tampa, Fla. “However, first-time and first-generation home buyers are particularly at risk for losing a purchase due to cost hikes associated with increasingly scarce material availability. Policymakers must take note and find ways to increase production of domestic building materials, including lumber and steel, and suspend tariffs on imports of construction materials.” It may turn out that lack of materials was the reason for the miss in the housing starts number.

Loans in forbearance fell to 4.22% of all mortgages last week according to the MBA. “The rate of new requests dropped to 4 basis points, which is the lowest level since last March,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Of those in forbearance extensions, more than half have been in forbearance for more than 12 months.”

The Home Despot beat earnings estimates as revenues rose 33%. I am sure higher lumber prices are playing into that number. It does speak to the shortage of single family homes – if you cannot find a suitable move-up property, the next best option may be a home renovation. I would be interested to see if HomeStyle and 203k loan volume is up on this. That said, with labor shortages etc, I would imagine managing the construction process would be much more difficult these days.

Dallas Fed Chairman Robert Kaplan thinks we could possibly see a rate hike by the end of 2022. “I haven’t seen anything from that point to today that’s changed my view,” Kaplan said during a virtual town hall conversation organized by the bank. The U.S. labor market has a “good chance” of being at full employment by then and of having inflation at the central bank’s 2% target, Kaplan said.

The Fed Funds futures are still handicapping an 11% chance of a rate hike by the end of 2021.

Morning Report: The Atlanta Fed sees 10.5% GDP growth in Q2

Vital Statistics:

S&P futures4,155-13.8
Oil (WTI)65.330.07
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.20%

Stocks are lower this morning as COVID cases increase in Asia. Bonds and MBS are down small.

The upcoming week won’t have much in the way of market-moving data, however we will get housing info with housing starts and existing home sales. We will also have a lot of Fed-speak and will get the minutes from the April FOMC meeting on Wednesday.

Manufacturing activity was flat in New York State, according to the NY Fed’s Empire Manufacturing Survey. New Orders and shipments improved strongly, although we did see shipment times expand. Prices are also increasing as raw materials get more expensive.

The Atlanta Fed’s GDP Now indicator is forecasting 10.5% GDP for the second quarter.

Three quarters of home offers were competitive situation, according to Redfin. The hottest markets are Spokane, San Diego, Boise, Salt Lake City, and Phoenix. We are seeing all-cash offers win out over offers with a financing contingency. “The homes for sale today are high-quality, desirable homes—a dynamic that’s fueling more competition. This is a contrast from the winter, when most properties coming on the market were bottom-of-the-barrel homes. The difference is that today’s sellers are folks who want to sell, whereas many sellers back in the winter had to sell and didn’t have time to do any upgrades.”

Morning Report: Retail Sales and Sentiment falls

Vital Statistics:

S&P futures4,13929.8
Oil (WTI)64.590.77
10 year government bond yield 1.63%
30 year fixed rate mortgage 3.20%

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

Retail Sales were flat in April after a big rise in March. Ex-autos they fell 0.8%. The control group, which excludes autos, gas and building products fell 1.5%.

In other economic data, industrial production fell 0.4% in April, while manufacturing production rose 0.4%. Capacity Utilization rose to 74.9%.

Consumer confidence fell in May, according to the University of Michigan Consumer Confidence survey. Consumer sentiment came in well below expectations. Both current and expectations indices fell.

Home purchase applications decreased 9% MOM, but were up 31% YOY, according to the MBA. “Purchase applications for new homes, unadjusted for typical seasonal patterns, declined in April, but the average loan size increased to its highest level in MBA’s survey,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The purchase market remains strong overall, but low housing inventory and accelerating home prices have started to adversely impact purchase activity. Additionally, homebuilders have reported significantly higher input prices, which is contributing to the ongoing rise in sales prices and average loan sizes.” 

There are 17.8 million homes that have more than 50% equity, according to the latest ATTOM data. This is about a third of the 55.8 million mortgaged properties in the US. On the other side of the coin, about 2.6 million are seriously underwater which they take to mean a LTV of 125% or more.

Morning Report: Wholesale inflation jumps

Vital Statistics:

S&P futures4,06910.8
Oil (WTI)64.79-1.27
10 year government bond yield 1.69%
30 year fixed rate mortgage 3.19%

Stocks are higher this morning after a two-day sell-off. Bonds and MBS are up small.

The producer price index rose 0.6% MOM and 6.2% YOY in April. Again, year-over-year comparisons are going to be distorted by the lockdowns of a year ago, so take those numbers with a grain of salt. Unlike the hot CPI reading of yesterday, the bond market took these numbers in stride.

Initial Jobless Claims fell to 473,000 last week. So despite the lousy jobs report, at least unemployment claims are going in the right direction.

Federal Reserve Vice Chairman Richard Clarida said that the jobs report and the hot CPI reading does not change the Fed’s outlook or plans for the economy. “We would not hesitate to act to bring inflation down,” if needed, Clarida said. But “this is one data point, as was the labor report … We have been saying for some time that reopening the economy would put some upward pressure on prices.” Note that Clarida characterized last Friday’s jobs report as the “biggest miss in history.”

Morning Report: Hot CPI spooks the bond market

Vital Statistics:

S&P futures4,117-28.8
Oil (WTI)66.210.97
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.13%

Stocks are lower this morning as the global stock sell-off continues. Bonds and MBS are down.

Inflation at the consumer level rose 0.8% month-over-month and 4.2% on a year-over-year basis. The index for used autos and trucks supposedly drove the increase. The index for food at home (in other words groceries) rose 0.4% MOM and 1.2% YOY. Energy fell 0.1% MOM but is up 25% on a YOY basis. It is unfortunate that COVID shutdowns are messing with the YOY numbers just when inflation data matters more than ever. Bond prices sold off on the report, with the 10 year bond yield rising to 1.65%.

Mortgage Applications rose 2.1% last week as purchases rose 1% and refis rose 3%. “Mortgage rates fell last week to the lowest levels since February, tracking the dip in Treasury yields,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The decline in rates helped the refinance index reach its highest level in eight weeks, driven by a 4 percent increase in conventional refinances. Additionally, refinance loan balances increased for the fourth straight week, an indication that higher-balance borrowers acted to take quick advantage of lower rates.”

United Wholesale reported first quarter earnings, however the forward margin guidance is worrisome. In the first quarter of 2021, gain on sale margin came in at 219 basis points. Second quarter margins are expected to fall to a range of 75 – 110 basis points. CEO Matt Ishbia said: “We welcome the shift to more of a purchase market and the pressure on margins as we believe our business model is built to outperform competitors under those conditions.” Rocket forecasted a big decrease in margins as well, although nothing similar to this. It feels like we are in for a rematch of the Great Detroit Price War of 2019.

Job openings hit a record high of 8.1 million in March, according to the JOLTs survey. The quits rate was flat at 2.4 million.

Back to the Consumer Price Index. FWIW, I find the grocery number hard to reconcile with the steep climb in agricultural prices. Commodity prices are up big over the past year.

Front-month corn:

Front-month wheat

Front-month pork

Back in the mid ’00s, we saw many funds begin to treat commodity products as an asset class in of itself and they would buy futures contracts and hold them as a way to fight off the effect of lower interest rates. I wonder if the same thing is happening now.

Morning Report: Small Business is raising prices

Vital Statistics:

S&P futures4,150-31.8
Oil (WTI)64.45-0.47
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.10%

Stocks are lower this morning as the global tech stock sell-off continues. Bonds and MBS are down.

Small business optimism rose to a level of 99.8 in April, according to the NFIB Small Business Optimism Survey. Interestingly, the biggest problem for companies is finding qualified workers. 44% of companies reported having issues in hiring, which is a record. Companies are offering higher compensation and bonuses. On the inflation front, a net 36% of business owners reported increasing prices, which is the highest level since April 1981 when a net 43% reported raising prices. The big question is whether this is a temporary phenomenon, driven by COVID shortages or something more permanent.

Loans in forbearance fell again last week, declining 11 basis points to 4.36% of servicers’ portfolios. Private label loans were unchanged while government and GSE both fell. “The pace in the declining share of loans in forbearance quickened in the last week of April. This 10th week of decreases reflected a faster rate of exits and a steady, low level of new requests,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Homeowners who have exited forbearance and been able to take up their original payment again are performing at almost the same rate as the overall mortgage servicing portfolio.”

Mortgage credit expanded in April, according to the MBA. “Credit availability rose in April, fueled by a 5 percent increase in conventional mortgage credit, as well as an expansion in agency programs for ARMs and high-balance loans,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The uptick in credit supply comes as the housing market and economy continue to strengthen. One trend that has developed in recent months is the rising demand for ARMs, driven by higher rates for fixed mortgages and faster home-price appreciation.” 

Despite the new limits out of Fannie and Fred, demand for second homes is more than double pre-pandemic levels. “The combination of the wealthy becoming wealthier, remote work turning into the new normal and low mortgage rates is creating an ideal environment for affluent Americans to buy vacation homes,” said Redfin Chief Economist Daryl Fairweather. “As long as the economy continues to grow, I don’t foresee demand for second homes slowing down anytime soon.” In seasonal towns, home prices are up a whopping 27%.

Dallas Fed President Robert Kaplan thinks the job market will strengthen this year and we should be ready to discuss tapering bond purchases soon. “Discussion is healthy, again sooner rather than later, because of these, maybe, side effects or even in some cases unintended consequences,” Kaplan said on Bloomberg TV, noting “excesses and imbalances” in financial markets including a sharp rise in house prices with private investors increasingly squeezing out families. “I hope at some point here in the not too distant future we can begin discussing this.”

One of the biggest quandaries for business and economists revolve around the disconnect between what employers say about the availability of labor and the unemployment numbers. Policymakers and the Fed are pulling out all the stops trying to support the labor market, believing that we have a major labor problem. At the same time finding qualified workers is the biggest problem for business. Wages are increasing, but jobs are not getting filled. What is going on?

If you ask the left, they will say that business owners are being greedy and they need to be forced to increase wages via higher minimum wage laws. If you ask the right, they will say that unemployment insurance is acting as a disincentive to work. I suspect that there is still a large number of people who are worried enough about COVID that they would rather stay home and avoid working. As more of the population gets vaccinated that number should fall.

Below is a chart of inflation versus productivity. Productivity determines real wage growth, although wages do correlate with inflation. Take a look at where inflation was in 1981, the last time the NFIB Small Business Survey reported this number of businesses raising prices.

To me, the big takeaway from the chart above is that inflation cycles are long and I don’t think we are headed back to the 1970s. That said, global central banks are working overtime trying to create inflation (and have engineered a sovereign debt bubble in the process). Given that COVID will create all sorts of statistical noise over the next year, I would be reluctant to buy into the inflation story quite yet.

Morning Report: Regulation adds 24% to the price of a house

Vital Statistics:

S&P futures4,2304.8
Oil (WTI)65.380.47
10 year government bond yield 1.57%
30 year fixed rate mortgage 3.15%

Stocks are flattish this morning on no major news. Bonds and MBS are flat.

The upcoming week will have some important inflation data with the Consumer Price Index on Wednesday and the Producer Price Index on Thursday. Even though the Fed prefers the Personal Consumption Expenditure index the bond market will watch these two indices to see if we are getting any cost-push inflation.

Delinquencies fell to 6.38% of all loans outstanding in the first quarter, according to the Mortgage Bankers Association. This is down 35 basis points from the fourth quarter, but up 202 bp from a year ago. The historical average is about 5.33%. DQ rates track pretty closely with unemployment rates, so as the unemployment rate falls we should see a decrease in delinquencies.

The CFPB says that COVID made more borrowers delinquent than any time since the Great Recession. Luckily this time around, home prices are rising, not falling. Homeowners who find themselves with a home they cannot afford are probably able to downsize without issues. The housing market is so hot that just about everyone has home equity. That is the biggest difference between the Great Recession and today.

Fan and Fred’s high LTV refinancing products will be subject to the high risk loan limits of 3%. So don’t look for these to be priced aggressively for long.

The business press and politicians like to pretend that regulation is “free,” as in it imposes de minimus costs on business and consumers. The National Association of Home Builders found that regulation adds $93.878 in additional costs to a new home, which works out to be about 24% on the average sales price of $397,300. “This study illustrates how overregulation is exacerbating the nation’s housing affordability crisis and that policymakers need to take bold steps to reduce or eliminate unnecessary regulations that will help builders increase the production of quality, affordable housing to meet growing market demand,” said NAHB Chairman Chuck Fowke. Don’t forget that lumber has quadrupled over the past year as well. New Homes are going to be expensive this year.

Chicago Fed President Charles Evans said that he wouldn’t mind seeing 2.5% inflation, and he wants more improvement in unemployment before making any changes. Speaking on Friday’s disappointing jobs report: It’s a little more complicated. We’re restarting the economy. A lot of sectors are experiencing growth pains,” Evans said on CNBC’s “Squawk Box.” “Hopefully, it’s just a one-month kind of thing and we’re going to get better employment. I certainly think so.”

Morning Report: Lousy jobs report

Vital Statistics:

S&P futures4,2059.8
Oil (WTI)64.33-0.37
10 year government bond yield 1.52%
30 year fixed rate mortgage 3.15%

Stocks are flattish this morning after a disappointing jobs report. Bonds and MBS are up.

The economy added 266,000 jobs in April, which was a huge disappointment compared to expectations of about a million. The unemployment rate ticked up to 6.1%. The labor force participation rate increased from 61.5% to 61.7%. Average hourly earnings were up a disappointing 0.3%, however this is due to more lower-paid leisure and hospitality workers getting jobs, which pulls down the average.

The 10-year traded down to 1.48% immediately after the news, but has recovered back above the 1.5% level. Mortgage backed securities are lagging the move, which is typical behavior when the 10 year has a big move one way or the other.

Note that the March payroll number was also revised downward by 146,000 jobs as well. Punch line: this is a lousy report, and the Fed isn’t going to even think about raising rates any time soon.

Apparently Google searches for “when is the housing market going to crash” are up big over the past month.

One of my pet peeves with the business press is the casual way people throw around the term “bubble.” Bubbles are extremely rare events, and housing bubbles happen once or twice a century. For a housing bubble to happen we need everyone – regulators, lenders and borrowers to buy in to the concept that real estate is special and cannot go down in price. Anyone old enough to sign a mortgage doc knows that isn’t the case.

Home prices are up big because we have underbuilt for 15 years and because interest rates are so low. This situation is nothing like 2007 when companies like Washington Mutual were offering negative amortization loans to anyone who could fog a mirror.

We don’t have a housing bubble right now. That said, you could make the argument that we have a sovereign debt bubble, especially overseas where there are still negative yields on the 10-year.

Housing affordability dropped in the first quarter, according to the Wells Fargo / NAHB Housing Opportunity Index. The index compares the typical mortgage payment for a 90 LTV loan at the median house price and calculates how many borrowers would have a 28% front-end DTI or lower. Right now, about 63% of borrowers earning the median income would have a 28 DTI or lower if they bought the median house and put 10% down.

This graph demonstrates how much interest rates play into the calculation. Yes, home prices matter, but they aren’t the only story. People who focus only on prices are missing half the picture.

Rocket was pummeled yesterday on its results and fears of a replay of the Great Pricing War of 2018 between Rocket and crosstown rival United Wholesale. United Wholesale is down 45% year-to-date while Rocket is more or less flat. Fun fact: at current levels, UWMC has a 5.6% dividend yield (at a 31% payout ratio). If you divide Rocket by the $1.11 special dividend it paid in March, you get a 5.8% yield (48% payout ratio). We are getting into REIT territory with these yields. I know mortgage bankers have never gotten love from the Street, but this nuts.

Morning Report: Rocket disappoints

Vital Statistics:

S&P futures4,159-0.8
Oil (WTI)65.33-0.37
10 year government bond yield 1.59%
30 year fixed rate mortgage 3.15%

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

Initial Jobless Claims fell slightly to 493k last week. Meanwhile outplacement firm Challenger, Gray and Christmas reported that there were 22,913 announced job cuts last week.

Productivity increased 5.4% in the first quarter as output increased 8.4% and hours worked rose 2.9%. Unit Labor Costs fell 0.3% as compensation rose 5.1% and productivity rose 5.4%.

Rocket is getting pummeled this morning after reporting first quarter earnings and a slew of investment banks downgraded the name. Volume was up 100% compared to the first quarter of 2020 to $103.5 billion. Earnings per share came in at $1.07. Gain on sale margins increased 49 basis points compared to a year ago to 3.74%. Not sure why the stock is down 14% pre-open, but I haven’t checked out the conference call yet. FWIW, the Street is in a “shoot first and ask questions later” mode when it comes to the mortgage bankers.

New Rez reported first quarter earnings of $0.65 per share. Origination rose 14% sequentially to $27.2 billion. Gain on sale margin slipped QOQ to 143 basis points compared to 157 in the fourth quarter. The company is guiding for Q2 origination to fall to $22 to $24 billion. The company sees its servicing portfolio driving results going forward. The stock is unchanged this morning.

Despite the lousy sentiment for the mortgage banking sector, Genworth is IPO-ing its mortgage insurance arm, setting a price range of $22-$24 per share.

A Federal Judge ruled that the Center for Disease Control overstepped its bounds when it imposed a foreclosure moratorium last year. “It is the role of the political branches, and not the courts, to assess the merits of policy measures designed to combat the spread of disease, even during a global pandemic,” the order states. “The question for the Court is a narrow one: Does the Public Health Service Act grant the CDC the legal authority to impose a nationwide eviction moratorium? It does not.” This ruling won’t affect any state-level moratoriums.

Fed Vice Chairman Richard Clarida said that the Central Bank is comfortable with current policy. “We’re still a long way from our goals, and in our new framework, we want to see actual progress and not just forecast progress,” Clarida said. “As we go into next year and beyond, if there are unforeseen, persistent upward pressures on prices that would move inflation to a level inconsistent with our mandate, we would use our tools to bring it down,” he said. “We don’t see overheating as our baseline. Of course, in any outlook there’s risks.”

Morning Report: The economy adds 742k jobs

Vital Statistics:

S&P futures4,17720.8
Oil (WTI)66.440.77
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.13%

Stocks are higher as commodity prices continue to rise. Bonds and MBS are flat.

Janet Yellen caused a stir in the markets yesterday when she said that interest rates may have to rise somewhat to prevent overheating in the US economy. She later walked back that comment (the Treasury Secretary is not supposed to be suggesting policy to the Fed), and clarified her statement. Regardless, the Fed Funds futures are handicapping at least a chance of a rate hike this year despite the language out of the Fed that the labor market is nowhere near ready for rate hikes.

The private sector added 742,000 jobs in April, according to the ADP Employment Survey. Roughly a third of these jobs were in leisure / hospitality however employment grew is pretty much every category. Note that the Street is looking for about 940,000 jobs in Friday’s Employment Situation Report, so that estimate could be a touch high.

Mortgage applications decreased modestly last week as purchases fell 3% and refis were basically flat. “There was a mixed bag of action in the mortgage market last week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates were slightly higher, refinance applications were essentially unchanged and purchase applications fell for the second straight week. Both conventional and government purchase applications declined, but average loan sizes increased for each loan type. This is a sign that the competitive purchase market, driven by low housing inventory and high demand, is pushing prices higher and weighing down on activity. The higher prices are also affecting the mix of activity, with stronger growth in purchase loans with larger-than-average balances.”

The MBA refinance index is below. You can see we are still quite elevated compared to historical numbers

Factory orders rose 1.1% in March. Part of the uptick we are seeing in inflation is due to inventory restocking. In many ways, this is reminiscent of the economy back before things like just-in-time inventory management and globalization. The economy would expand, companies would aggressively build inventory to compete, inflation would rise, which would trigger a response from the Fed, which would cause a recession and then the cycle would repeat.

For companies, inventory is a big use of cash, so they try to minimize it. Technology and data allowed them to use just as much as was necessary to meet demand, which improved cash flows. The COVID-19 pandemic revealed some of the issues with that model, and perhaps we will see some sort of reversal. These issues won’t necessarily show up in corporate financials as increased costs as much as they will manifest as lost opportunities.

I suspect the re-adjustment to this will take years and this will improve economic performance over the next few years. The big question revolves around commodity prices and whether they trigger inflation. My guess is they will not, as producers will invariably ramp up production and energy demand can be met quickly. People forget that 10 years ago, oil was trading around $125 a barrel. Lots of wells were drilled then that can be turned on pretty quickly.

Commodities rallied hard 10-15 years ago, driven by insatiable demand for everything out of China. We didn’t see a wave of consumer inflation then, though we did see a wave of asset inflation, especially real estate. Regardless, the Fed generally views commodity-push inflation as transitory and will probably not react to it. The economy should be relatively strong over the next few years, driven by inventory build, and housing.