Morning Report: 37% of New York City renters can’t make June rent

Vital Statistics:


Last Change
S&P futures 3104 -14.1
Oil (WTI) 36.84 0.39
10 year government bond yield 0.78%
30 year fixed rate mortgage 3.23%


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


Initial jobless claims fell to 1.9 million last week. Separately, Challenger and Gray reported that 397,000 job cuts were announced last month.


Homebuilder Hovnanian reported a 22% increase in revenues for the second quarter. The cancellation rate ticked up slightly, but it looks like the homebuilders are seeing a recovery already. We should hear from Lennar and KB Home in a week or two.


Productivity was revised upward in the first quarter to -0.9% and unit labor costs were revised upward to 5.1%.


It looks like June rental payments are falling a touch, after holding up reasonably well in April and May. According to a survey, 37% of all New York City renters don’t have the money to pay June rent.


Another sign the recovery is upon us: Investors are starting to pick at bank stocks. “There’s optimism things will be better a year from now. And because banks have trailed just about everything else in the market they’re being dragged up,” said Rick Meckler, partner at Cherry Lane Investments, in New Vernon, New Jersey.


Morning Report: How many jobs have we lost due to COVID?

Vital Statistics:


Last Change
S&P futures 3096 18.1
Oil (WTI) 36.64 0.39
10 year government bond yield 0.73%
30 year fixed rate mortgage 3.23%


Stocks are higher this morning on evidence that the global economy is recovering from the COVID crisis. Bonds and MBS are down.


The economy lost 2.76 million jobs in May, according to the ADP employment report. This was well above the street estimate of 9 million. The Street is looking for a loss of 7.5 million jobs in Friday’s jobs report, so perhaps we could see an upside surprise there. “The impact of the COVID-19 crisis continues to weigh on businesses of all sizes,” said Ahu Yildirmaz, cohead of the ADP Research Institute. “While the labor market is still reeling from the effects of the pandemic, job loss likely peaked in April, as many states have begun a phased reopening of businesses.”




So, according to AFP, we have lost about 22.7 million jobs over the past 3 months. And, according to initial jobless claims it is over 40 million. And if you take the government’s nonfarm payroll numbers plus Friday’s estimate we get around 30 million jobs lost. Pretty wide variation between estimates. While people have been thinking that initial jobless claims have been undercounted due to computer problems, it is the outlier on job losses. Note that there has been evidence of unemployment fraud.


initial jobless claims


Mortgage Applications fell 3.9% last week as purchases rose 5% and refis fell 7%. “Purchase applications continued their recent ascent, increasing 5 percent last week and 18 percent compared to a year ago. The pent-up demand from home buyers returning to the market continues to support a recovery from the weekly declines observed earlier this spring,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “However, there are still many households affected by the widespread job loss and current economic downturn. High unemployment and low housing supply may restrain a more meaningful rebound in purchase applications in the coming months.”


The Fed promised to roll out a program to buy corporate bonds as a way to thaw the credit markets back in April. So far, they are getting no takers. It is largely a stigma issue, but also reflects the fact that credit markets have eased up over the past several weeks.



Morning Report: Loans in forbearance rise slightly

Vital Statistics:


Last Change
S&P futures 3062 8.1
Oil (WTI) 35.84 0.39
10 year government bond yield 0.67%
30 year fixed rate mortgage 3.28%


Stocks are flattish this morning as riots continued overnight. Bonds and MBS are flat as well.


The share of loans in forbearance rose slightly to 8.46%, according to the MBA. “MBA’s survey continues to indicate that fewer homeowners are seeking forbearance as more states across the country reopen their economies and prospects begin to improve,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The share of loans in forbearance increased by only 10 basis points over the week of May 24. Policy support for households, including expanded unemployment insurance benefits and other transfers, have helped many stay on their feet during this crisis. With 11.82 percent of Ginnie Mae loans currently in forbearance, FHA and VA borrowers are struggling the most.”


For what its worth, housing seems to be picking up more or less right where it left off. Homebuilder Taylor Morrison said that home sales picked up significantly in May, and traffic was 3 times higher than it was in early April, the height of the pandemic. Note that Toll Brothers said that deposit activity (which is a leading indicator of signed contracts) was up on a YOY basis in May.


Despite COVID, construction spending did exceed last year’s numbers by 3%, which is impressive in of itself. Residential construction was up 6.3% on a YOY basis.


Home prices rose 5.4% YOY in April, according to CoreLogic. Inventory remains tight, especially for entry-level homes, which fell 25%.


The Congressional Budget Office says it will take 10 years for the economy to reach the levels it was forecasting in January. FWIW, I am skeptical that a 3 month lockdown will reverberate for a decade.

Morning Report: Americans will be fleeing the cities.

Vital Statistics:


Last Change
S&P futures 3034 -8.1
Oil (WTI) 34.44 -0.69
10 year government bond yield 0.68%
30 year fixed rate mortgage 3.28%


Stocks are flattish this morning despite riots in major cities across the US. Bonds and MBS are flat.


Trump will be meeting with the Attorney General this morning to figure out how to respond to the violence in many US cities.


The big economic news will be the jobs report on Friday. The Street is looking for a 7.7 million drop in jobs, an unemployment rate of 20% and a 7% increase in average hourly earnings. More and more states are re-opening so hopefully this will be the last jobs report with negative payroll growth.


Construction spending fell 2.9% in April, which was a little bit better than expected. The ISM Manufacturing Index fell to 43, which again was a little bit better than expected.


Personal Income rose 10.5% in April, largely due to the CARES Act. Personal consumption expenditures fell as people were unable to go to the stores. This caused a big jump in the savings rate, up to 33% from 10%, which ironically shows how big Keynsian spending plans often don’t have the desired effect.

PCE versus PI


The riots are certainly not going to help the jobs situation of course. Much will depend on how long they last. If they peter out over the next few days then we probably won’t see a major effect.


I can’t escape the idea that the riots and COVID have set in place the circumstances for a massive exodus from the big cities, similar to what we saw in the late 60s. During the 60s, manufacturing jobs fled the cities to the suburbs as many employees no longer wanted to work there. This time, I could see white collar jobs fleeing. When people can largely work from home, why pay top dollar for office space in the cities? And if the jobs relocate, why spend ten grand a month for a 1200 square foot apartment? I could see this turning out to be the catalyst for a massive expansion of the suburbs and exurbs,  which will be good for the homebuilders. noted that Connecticut has seen something like a 75% increase in people moving out of NYC.



Morning Report: First quarter GDP revised downward

Vital Statistics:


Last Change
S&P futures 3043 5.1
Oil (WTI) 32.94 -0.69
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.28%


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


Initial Jobless Claims came in at 2.1 million, about in line with expectations. At a minimum we need to see this number fall back to the six digit area to have any prayer of a recovery.


Luxury homebuilder Toll Brothers beat on the top line and the bottom line. This quarter ended on April 30, so half of the quarter was pre-COVID and half was post-COVID. Revenues fell 11% YOY, while signed contracts were down 22%. Backlog was flat YOY. CEO Doug Yearley noted that deposit activity rebounded in May and was up YOY. This is a leading indicator of housing demand.

“While net signed contracts in the first four weeks of May were down 37% year-over-year, we are very encouraged by recent deposit activity. Our deposits, which typically precede a binding sales contract by about three weeks and represent a leading indicator of current market demand, were up 13% over the past three weeks versus the same three-week period last year. Importantly, our recent deposit-to-contract conversion ratio has remained consistent with pre-Covid-19 levels. Web traffic has also steadily improved from the lows we experienced in mid-March and has returned to the same strong activity we enjoyed pre-Covid-19 in February. These early trends suggest the housing market may be more resilient than anticipated just two months ago.”

Homebuilding is an early-cycle play, so you should expect to see a turnaround in that sector first. Overall, it sounds like the builders have been pleasantly surprised at how the sector has held up during the crisis.


First quarter GDP was revised downward to -5% from -4.8% in the second estimate. Inflation continues to be tame, with the headline number up 1.3%. Ex-food and energy it rose 1.8%. In other economic news, Durable Good Orders fell 17% in April. Most of this data is pretty much irrelevant to stock prices right now. The stock market is looking over the valley.


Ex-Obama staffer Jason Furman predicts that we are about to see the best economic numbers the country has ever seen. FWIW, I agree with his sentiment. The COVID Crisis is about 3 months old. There was nothing wrong with the economy going into the crisis, and the shock to the economy should feel more like a natural disaster than a traditional bubble-driven recession. If we have passed the bottom (admittedly a big “if”) then the economy could be on fire by late summer / early fall. And speaking of “fire,” the government poured a few trillion gallons of fiscal gasoline on it.


Pending Home Sales fell 22% in April, according to NAR. “While coronavirus mitigation efforts have disrupted contract signings, the real estate industry is ‘hot’ in affordable price points with the wide prevalence of bidding wars for the limited inventory,” NAR Chief Economist Lawrence Yun said. “In the coming months, buying activity will rise as states reopen and more consumers feel comfortable about homebuying in the midst of the social distancing measures. Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded for both home sales and prices, with home sales to decline by only 11% in 2020 with the median home price projected to increase by 4%,” Yun said. “In the prior forecast, sales were expected to fall by 15% and there was no increase in home price.”


Those hoping to snap up recession-driven bargains in the real estate market may be disappointed. That said, the bargains (if any) would be in the higher priced area, not the more affordable price points. “The mix of homes that are on the market now is a little bit different,” says Ratiu. “What’s really selling at a premium are lower-priced homes. The higher-priced homes are sitting on the market longer.”

Morning Report: Purchase applications up 54% since early April

Vital Statistics:


Last Change
S&P futures 3011 15.1
Oil (WTI) 33.64 -0.69
10 year government bond yield 0.69%
30 year fixed rate mortgage 3.28%


Stocks are higher this morning on news of further global stimulus and optimism that the COVID crisis is in the rear view mirror. Bonds and MBS are flat.


The MBA reported that 8.4% of mortgages are in some sort of forbearance plan right now.  “Although job losses continue at extremely high rates, mortgage servicers are reporting only modest increases in the share of loans in forbearance as of May 17,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The decline in employment and income is hitting FHA and VA borrowers harder, leading to 11.6 percent of Ginnie Mae loans currently in forbearance.”


Mortgage Applications increased 2.7% last week as purchases increased 3% and refis declined by 0.2%. “The home purchase market continued its path to recovery as various states reopen, leading to more buyers resuming their home search,” said Joel Kan MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications increased 9 percent last week – the sixth consecutive weekly increase and a jump of 54 percent since early April. Additionally, the purchase loan amount has increased steadily in recent weeks and is now at its highest level since mid-March.”  Home purchase applications have increased 54% since early April.


Job losses from COVID show a pretty large regional distribution, with the Northeast and the Midwest bearing the brunt of the losses versus the South and West.

regional job losses

Morning Report: New Home Sales encouraging

Vital Statistics:


Last Change
S&P futures 3008 55.1
Oil (WTI) 34.34 1.19
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.28%


Stocks are higher this morning on optimism about the economy re-opening. Bonds and MBS are flat.


The upcoming week is somewhat data-light. The big numbers will be the second revision to GDP and construction spending.


Home prices rose 1.7% in the first quarter and were up 5.7% on a YOY basis, according to the FHFA House Price Index.  That said, the report noted that the data in the report probably doesn’t take into account the effects of COVID. The Mountain states led the charge, with Idaho, Montana, and Wyoming posting double-digit gains.

Home price appreciation by state

The Case-Shiller index reported a 4.4% annual gain. The difference between the FHFA and Case-Shiller indices? FHFA is limited to transactions with a conforming mortgage, while Case-Shiller includes all sales.


New Home Sales came in at 623,000 which was up from March, but down 6.7% on a YOY basis. Since April was the worst of the crisis, this is an encouraging number. Note that these are estimates with wide confidence intervals. So there is a chance these could get revised lower. I listened to pretty much every homebuilder earnings call and pretty much every one said that the second half of April was unexpectedly strong.


I went to a restaurant in Connecticut last night. Outdoor seating, long line out the door to get a table. Sample size of 1, but it looks like people are antsy to get out of the house and put COVID behind them. Barring any sort of second wave of infections, I think the economy rebound by the 4th of July and will have shaken off most of the economic damage by Labor Day.