The Daily Tearsheet

Stocks are flattish after a higher-than-expected CPI. Bonds and MBS are down.

The consumer price index rose 0.4% MOM in October, according to the BLS. This was above the 0.3% forecast. Ex-food and energy, the index rose 0.3%, which was above the 0.2% forecast. Because of the government shutdown last year, there are no year-over-year numbers this month.

Shelter rose 0.3% and accounted for 30% of the increase in the index. The YOY increase in shelter CPI was 3.2% in September. IMO there is something wrong in the way BLS is calculating shelter CPI and they are overstating it by at least a percentage point on a YOY basis. The major real estate indices like Case-Shiller and FHFA show a 2% increase in prices. Median asking rents are flat YOY and average asking rents are up 1.5%. The idea that owner’s equivalent rent is rising 3.2% a year is baffling in this context.

Mortgage credit availability increased in October, according to the MBA’s Mortgage Credit Availability Index. “Mortgage credit availability ticked up in October after two months of declines, with greater availability of conventional credit while the government segment remained flat over the month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “With current mortgage rates still elevated, lenders increased their offerings of ARM loans for lower LTV borrowers, including some that allow for cash-out refinancing. This also boosted the jumbo index, which was up to its highest level in three months.”

Small business optimism fell slightly in October, according to the NFIB. “There was little change in optimism among small businesses in October as owners navigated enduring challenges, though there were some encouraging developments,” said NFIB Chief Economist Bill Dunkelberg. “Even with inflation pressures continuing to strain operations, more Main Street owners reported their businesses in good or excellent health, and actual sales improved. Looking ahead, continued strength in consumer spending will support economic growth, while persistent inflation, labor shortages, and policy risks will weigh on the small business outlook.”

Home equity reached a record high of $17.5 trillion, up 1.4% on a YOY basis, according to the ICE Mortgage Monitor. About 1 in 7 locks were cash-out refinances. “Homeowners are sitting on substantial housing wealth, with 2.4 million mortgage holders now holding at least $1 million in equity,” said Andy Walden, Head of Mortgage and Housing Market Research at ICE. “In a higher rate environment, cash-outs are making up a greater share of refinances, with those homeowners giving up historically low mortgage rates and taking on higher monthly payments to tap into their equity.”

An interesting tidbit from the report: Servicers retained 27% of refinances, down 4 percentage points from the prior quarter. Rate / term refinance retention fell 9 percentage points to 30% while cash-outs were flat at 26%. Servicers retained only 15% of cash-out refinances for 2019 vintages.

“Traditional rate-based retention strategies aren’t effective for borrowers who are motivated by access to equity rather than interest rate savings,” said Bob Hart, President of Mortgage Technology at ICE. “To retain these borrowers, servicers need better visibility into their equity positions and the ability to engage them before they look elsewhere. By combining ICE’s retention analytics with connected technologies like MSP, Servicing Digital and Encompass, we’re helping lenders and servicers identify opportunities, connect borrowers with financing options and keep those relationships intact.”

Servicing valuations have increased from about 4x the servicing strip prior to the pandemic to 6+ times after. Much of this jump in valuation has been due to servicing models valuing the retention (in other words, assigning a value to a potential refinance down the road). If the servicer isn’t getting that refinance, then the servicing is overvalued.

Richmond Fed President Tom Barkin said that the path of monetary policy is “relatively straightforward:” In sum, today, with demand healthy and inflation stubbornly elevated, the appropriate direction of monetary policy is relatively straightforward. However, risks to the demand outlook remain easy to envision. Because of that, it is wise to move policy with care.

The elephant in the room is AI. AI could under-deliver, causing repercussions in the financial markets, particularly stock valuations and credit spreads. As asset prices fall, consumers could pull back, negatively impacting demand. On the other hand, AI could over-deliver and we could see increased numbers of workers replaced, which would again negatively impact demand.

When Wall Street gets excited about some new technology or phenomenon, they rarely undershoot when it comes to valuations and potential. It is usually the opposite. The more likely scenario is that AI will fail to live up to the hype and these companies will survive and eventually the underlying business will catch up with the stock price. We saw it in 2000 when investors paid $77 per share for Cisco Systems, which was the Nvidia of its day. The bloom came off the rose, and it took 26 years for Cisco to return to that high. Cisco was dead money for a decade and a half.

We saw this with the Nifty Fifty stocks in the 1970s, and even during the Roaring 20s, when the Nvidia of its day was Radio Corporation of America (RCA). It peaked in 1929 and didn’t recover its previous peak until the mid 1960s.

The more likely scenario is that AI will under-deliver and the action in the stocks and the debt is signaling that is the more likely outcome.

Stocks are higher this morning despite problems at Nvidia. Bonds and MBS are flat.

More trouble in the tech space. Nvidia’s CEO admits to an affair with a Chinese spy and Coreweave debt is around 16%.

The week ahead will be dominated by the consumer price index on Tuesday and the Producer Price Index on Friday. Markets will be closed on Wednesday for the Veteran’s Day holiday. We will also get existing home sales and NFIB Small Business Optimism.

Consumer sentiment picked up in November, according to the University of Michigan Consumer Sentiment Survey. Lower and middle-income consumers saw an improvement in mood, while wealthier investors were bruised by the tech sell-off in the stock market. Year-ahead inflation expectations declined from 4.7% to 4.3% while longer-term expectations declined from 3.5% to 3.4%. “Moreover, consumers’ comments revealed growing anxiety over a possible AI bubble. AI worries, however, were dwarfed by cost of living concerns, which continue to be at the forefront of consumers’ minds across the population. About 57% spontaneously mentioned that their living standards have been eroded by high prices, the highest seen since May and up from 46% in February, just prior to the Iran conflict.

San Francisco Fed President Mary Daly said that higher rates are likely needed to beat inflation. “My expectation is we’re going to have to tighten policy further. Exactly when and how much is still to be decided because we just have to take all the variables that are coming in,” Daly told CNBC’s Steve Liesman during a live interview. “More is likely to be needed, and certainly … I’m prepared to do that if that’s what the economy calls for.”

“They see that they can get jobs, they continue to spend. They’re not out of the game, but they are on a treadmill of high inflation,” she said. “This has been high for too long, almost six years, and we’re really starting to feel the burden of that spread everywhere.”

“The job market remains stable and solid, but not booming, and you see real wages falling because those wages are not really keeping up with inflation,” Daly said. “I think that’s the crux of this. Good news on the jobs front, not so clear that Americans are going to gain ground in the labor market.”

Stocks are rebounding after yesterday’s brutal tech sell-off. Bonds and MBS are down after a stronger-than-expected jobs report.

There wasn’t any identifiable catalyst for yesterday’s tech sell-off, which drove the NASDAQ down 5.5%. The AI darlings have been vulnerable for a while, and credit default swaps continue to widen which signals more financial distress in the space. Politics was a contributing factor, but these stocks had gotten a bit ahead of themselves and are being re-priced.

The economy added 165,000 jobs in October, according to BLS. This was well above the street estimate of 62,000 jobs. The unemployment rate fell to 4.1%. The household survey indicated that 463k more people were employed in October as the number of unemployed fell 49k and the number of discouraged workers fell by 293k.

Professional / business services saw the biggest increase in jobs – 70k – and health care rose by 53k. Transportation and warehousing rose 25k.

Nonfarm productivity increased 3.6% in Q3 as output rose 3.7% and hours worked fell 0.1%. Unit labor costs decreased 0.7% as compensation rose 2.9% and productivity rose 3.7%.

Home prices fell 0.1% quarterly and rose 2% annually according to the Clear Capital Home Data Index. Quarterly home price appreciation has been declining with rising rates. The Northeast region saw the biggest appreciation while the West lagged.

In the commentary, I write about the stress in the AI / data center space and what it means for real estate prices and interest rates.

Richmond Fed President Thomas Barkin said that interest rates might have to rise gradually in order to get inflation back to the 2% goal. “Unemployment’s near record lows, and inflation is too high. That means the path is pretty straightforward. The question, of course, is pace,” Barkin said in the talk with CNBC’s Steve Liesman.

“Gradual makes sense if you think there’s uncertainty in the world, and if you think that there’s information you’re going to get in the period. And I think that’s still a pace that makes sense to me,” he added.

Cleveland Fed President Beth Hammack expressed similar views yesterday.

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

J.D. Vance yesterday admitted the Iran War was a big factor in the midterm losses (no kidding) and that admission sent oil down about 10%. This also pushed down global sovereign yields. Not sure how durable this move is, but it is certainly welcome.

There still isn’t a satisfying reason for why rates spiked so much in September and early October. It was a global move, not limited to the US. Regardless of the catalyst it didn’t last. The September sell-off in bonds has been largely re-couped.

It looks like the closing yield topped out around 5.33% on October 5. The Economist reliably marked the top of the market with this cover:

Despite the move down in yield, mortgage rates remain stubbornly high. MBS spreads have remained wide despite a marked downward move in bond market volatility which drives MBS spreads. Maybe it is just lagging more than usual. Regardless, falling Treasury rates and declining bond market volatility will lead to lower mortgage rates.

At the end of August, the difference between the 30 year fixed rate mortgage and the 10 year bond was 198 basis points. If we return to that spread with rates at these levels, we are looking at a 6.87% mortgage rate.

The Services PMI declined in October, driven by a decline in new orders. Employment increased and price appreciation decelerated from September. That said, the diffusion reading of 70 is still a historically high number.

“Tariffs and fuel cost impacts continued to be the most-cited issues impacting respondents’ supply chains, while many respondents indicated they are not yet seeing the full impact of these cost escalations or have not passed them through to customers. This indicates that more pricing pressure is on the way if oil and tariff cost impacts are not mitigated, even if they do not increase from current levels. Commentary on supply chain constraints increased significantly month over month, while the Backlog of Orders Index increased to 58 percent, its highest reading since it registered 58.3 percent in July 2022. The commodities identified as in short supply, however, decreased month over month, from seven to three. The Employment Index’s second consecutive reading above 50 percent may indicate help is on the way for slowing supplier deliveries and increasing order backlogs. While the Backlog of Orders index hit its highest level since July 2022, the Supplier Deliveries Index reading in October is the second highest in that timeframe, exceeded only by April 2026 (56.8 percent).”

Data center construction is going to slow down. The midterms demonstrated increasing political pressure on them and financing costs are rising. Decreasing data center construction will help improve the situation in commodities.

UWM reported earnings of 9 cents a share after suffering a MSR hedging loss in the the second quarter that dragged down earnings. Volume fell 20% YOY to $33 billion. Gain on sale margin also declined from 1.33% to 1.24% on a quarterly basis.

The results for the homebuilders were largely dismal for the third quarter as affordability issues, oversupply and rising costs depressed margins and volumes. Know who didn’t have issues in Q3? Champion Homes, who builds manufactured and modular homes.

Champion reported revenues rose 6.2% while margins remained strong at 25.5% Average selling prices rose 4.1% to $102,700. Modular homes are built to similar standards to sticks and bricks homes and are much more affordable.

“We delivered strong results in our second quarter that were in line with our expectations,” said Tim Larson, President and Chief Executive Officer of Champion Homes. “Our team’s focused execution against our strategic priorities enabled us to outperform the housing market in the quarter and build meaningful order momentum. From a product and regulatory perspective, our team flawlessly executed and delivered our two-story home, the New Horizon, to the National Mall for Homes on the Hill in September. This innovative home, which was built to the HUD Code, features a removed second-floor chassis and is designed for vertical construction in narrow urban infill lots offering a unique solution for attainable housing. In addition to delivering new and innovative products, we continue to drive long-term growth across our business, including in our retail channel through the recently announced planned acquisition of Timberline Homes.”

Modular homes will be a crucial part of addressing the affordabilitiy issue.

Stocks are higher this morning after the midterm results. Bonds and MBS are up.

As expected, Democrats swept the midterm elections as voters rebuked Trump for being Trump. Tariffs and Iran were the main catalysts. What does this mean for markets? Not much. Nothing was getting passed legislatively before and the Democrats will probably spend the next two years investigating their political enemies and passing messaging legislation that will get vetoed.

Yesterday’s vote resembles the voter rebuke in 94 against Clinton, 2006 against Bush and 2010 against Obama. Midterm results like this are voters expressing dissatisfaction with the current state of affairs. Trump is officially a lame-duck at this point and it will be interesting to watch how he reacts to that. The substance probably won’t mean much. If there was any plan to release the GSEs that isn’t happening since legislation won’t be happening.

Voters passed some 29 measures yesterday restricting data center construction. It is clear that voters are concerned about AI and its impact on jobs (the objections about noise, environmental issues, water etc. are just fig leaves – the real issue is job losses).

There is some $500 million of AI and data center debt already out there and the costs of servicing that debt are going up. If we get a tightening of credit and financial stress, it is is probably going to come from there. Credit default swaps are signaling problems in some areas of this space, and I can’t imagine the recovery value of a half-built data center is all that much. Credit problems in general mean good things for the origination space as investors seek out safe harbor in government-guaranteed MBS and Treasuries.

We have retraced nearly 80% of the September / early October increase in rates. Since there wasn’t any real catalyst to drive them up, there isn’t one pushing them back down. Regardless, it is helpful for the real estate industry and makes 2027 forecasts look a little better.

With the midterms out of the way, the focus turns to Friday’s jobs report. The Street is looking for 62,000 jobs and a 4.2% unemployment rate.

There were 7.5 million job opening at the end of September according to the JOLTs jobs report, which was a decent increase from August’s 7.1 million number. Hires rose from 5.27 million to 5.4 million. The quits rate rose from 1.9% in August to 2.1% in September, which is usually a precursor to higher wages. The quits rate jumped in construction from 1.8% to 2.4%.

The private sector added 86,000 jobs in October according to the ADP Employment Report. Trade / Transportation / Utilities saw a 39,000 increase in jobs while Professional / Business Services saw a 27,000 decrease. Education / Health Services rose 28,000.

Pay rose 3.2% overall, with a 3.0% bump for job-stayers and a 4.8% increase for job leavers. Construction and manufacturing saw the biggest increases.

“Employers of all sizes were hiring last month, and our data suggests that job changers were lured by a combination of bonuses, overtime, and more hours in addition to higher base pay,” said Dr. Nela Richardson, chief economist, ADP. “Taken together, earnings growth for these workers hit its fastest pace since March 2024.”

Redwood Trust announced earnings and its conversion from a REIT structure to a C Corp. Shareholders will be able to exchange their shares for 11% preferreds and the company slashed its quarterly dividend from $0.18 per share to $0.02. REITs are required to distribute 90% of their net income as dividends, so this limits their ability to re-invest in growth and that is one of the reasons why Redwood is converting. They also believe it will help lower their cost of capital. The Street saw the dividend cut coming as the stock was yielding over 20%, and those sorts of yields never last. Book value per share fell 5% to $6.56. The stock is getting slammed this morning, down over 9% after losing 4% yesterday. It is currently trading at 42% of book value per share.

“The third quarter of 2026 was among the most challenging for our industry since the onset of the COVID-19 pandemic. We prioritized liquidity while maintaining strong returns in mortgage banking,” said Christopher Abate, Chief Executive Officer of Redwood Trust. “We distributed $8.8 billion of mortgage loans during the quarter, while continuing to serve our seller network. In aligning our corporate structure with our business model going forward, we can leverage our competitive advantages and continue growing market share—a major strategic priority as housing inventory for sale hits multi-year highs and the need for purchase-money mortgages potentially rises.”

Sequoia originated $5.1 billion in loans, which was similar to the same quarter last year and 9% lower than the previous quarter. Aspire originated $1.1 billion, well below the $2.1 billion originated in the previous quarter. There were rumors at the MBA conference in Chicago that Aspire was “pulling back” and that appears to be the case.

Non-QM MBS spreads have been widening, and a graph in Redwood’s presentation shows the AAA tranche of non-QM RMBS has shot upward. Remember, these are spreads, so they tack onto the overall increase in rates:

I suspect the post-October increase is being driven by falling rates and stagnant RMBS pricing. As volatility in the bond market falls, we should hopefully see some improvement in spreads. As investors found out the hard way in Q3, non-QM loans have some serious negative convexity.

Mortgage applications fell 1.2% last week as refis dropped 0.1% and purchases fell 2%. Mortgage rates fell, but so far it hasn’t translated into increased volumes. “Mortgage rates drifted down to their lowest level since September 2026 last week in the wake of the Federal Reserve’s decision to hold on additional rate hikes at its October meeting,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “While the 30-year rate declined to 7.3%, activity is still quite slow, with purchase application volume down for the week and refinance volume effectively flat at a very low level. As we have highlighted in recent weeks, more borrowers are choosing ARMs in this environment to lower their initial payments, with the ARM share at its highest level since September 2025.”

Stocks are lower after disappointing numbers out of Apple. Bonds and MBS are down small. Oil is up a touch after military operations overnight.

Voters head to the polls today to determine control of Congress. Given that midterms usually favor the party that doesn’t control the presidency, Democrats should do well. Some of the business press thinks that a Democratic sweep should be negative for stocks, but I struggle with that assessment. Stocks are overvalued and ripe for a fall, but it won’t be politics driving it. If Democrats take both the House and Senate, they will almost certainly impeach Trump, but won’t have the 67 votes in the Senate to remove him. So there will be a lot of sound and fury from investigations and a lot of messaging legislation that will go nowhere.

Impeachment and investigations will prevent any possibility of bipartisan legislation which means more of the same. That said, gridlock is generally good for stocks so I am not seeing the bear case based solely on politics. There are other good bear cases, but this isn’t one.

The manufacturing economy improved in October according to the ISM Manufacturing Report. New orders rebounded after 4 consecutive months of contraction. Production also increased. The Price Paid index fell which indicates pricing pressures are abating.

“In October, U.S. manufacturing activity remained in expansion territory. Of the five subindexes that make up the PMI^®, four (New Orders, Production, Supplier Deliveries and Inventories) grew faster than the previous month, while Employment growth slowed down by 0.3 percentage point. In October, general sentiment got worse for a third month in a row, with 34 percent of the comments positive and 66 percent negative (a 1-to-2 ratio of positive to negative sentiment). Among negative comments, pricing volatility was mentioned in 62 percent, longer lead times 41 percent, tariffs 25 percent and the Iran war 21 percent; most comments mentioned multiple factors.

The comments were generally surly, with manufacturers expressing frustration with lead times, prices and uncertainty out of DC. Data Center construction is causing an insatiable appetite for commodities. The percent of manufacturing in strong contraction increased to 6% however.

Construction spending declined 1.9% MOM and 1.7% YOY in September according to the Census Bureau. Residential construction was down 5.5% MOM and 8.8% YOY. The decline is in both multi-family and single-family.

Office (which includes data centers) rose 5.5% MOM and is up 33% YOY.

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The sell-off in tech stocks has dampened expectations for Anthropic’s IPO valuation. Estimates have fallen from roughly $2 trillion a few months ago to closer to $1.5 trillion. Anthropic reported quarterly revenues increased to $17 billion from $11.6 billion in the prior quarter.

One potential fly in the ointment for Anthropic has been the behavior of AI-related debt. Credit default swaps for AI companies like Coreweave have blown out to 1100 basis points. Oracle and Softbank swaps are out some 300 basis points as well. It appears that stocks are noticing the action in the bond market and valuations are coming back to Earth. Despite the widening of Oracle spreads, the company announced a shelf offering of equity and debt on Monday.

There is about half a trillion worth of AI and data center debt outstanding.

The week ahead will be dominated by the jobs report on Friday. We will also get ISM data and consumer sentiment. Oil is down after reports that Trump wants to try diplomacy again with the Iranians.

The midterm elections are on Tuesday and could potentially impact markets, but that is unlikely. The most likely scenario is that Democrats win the House and possibly the Senate, which means gridlock. Democrats in the House will spend the next two years investigating and impeaching Trump which will foreclose any possibility of bipartisan legislation.

A lot of tech bellwethers got slammed on disappointing earnings last week. We are in the heart of earnings season, with companies like Apple, Champion Homes, LGI Homes, Redwood Trust, Lending Tree, Loan Depot, Angel Oak, Finance of America, Equity Residential, American Homes 4 Rent, Zillow, Radian, MFA Financial, and UWM.

Employment costs increased 0.8% for the third quarter, according to BLS. Salaries rose by 0.7% while benefit costs rose 0.9%. For the full year, salaries rose 3.1% while benefits rose 3.9%. The ECI for the full year ending 9/30 rose 3.4%. Health benefit costs rose 6.4%.

Dallas Fed President Lorie Logan advocated for two more rate hikes in a speech on Friday.

Economic growth is strong. Consumer spending is solid, especially among wealthier households that have benefited most from the soaring stock market. And business investment is robust. While data centers get the headlines, manufacturers, defense contractors and energy companies are also ramping up investment.

A growing economy creates jobs, and the labor market is balanced and perhaps tightening a bit. Unemployment continues to hover just above 4 percent. That is down slightly from late last year and close to most estimates of the lowest sustainable level. On average, employers are adding at least enough jobs each month to absorb trend growth in the labor force.

Turning to price stability, the FOMC aims for an annual inflation rate of 2 percent as measured by the price index for personal consumption expenditures, or PCE. We have missed that goal for nearly six years. While inflation has come down from the post-pandemic peak, it is not yet headed all the way back to our target.

And skipping a meeting does not change the monetary policy destination. Indeed, by making the destination clear, the FOMC can better help the economy adapt and obtain the promised benefits of a skip. It remains clear to me, given the current outlook, that the FOMC needs to implement at least two more 25-basis-point rate increases. After that, it would make sense in my view to pause and examine economic and financial developments to determine what further action may be appropriate. The end goal should be to make policy modestly restrictive so we can sustainably deliver both maximum employment and stable prices. Of course, I will change my policy views if the economic outlook and risks change.

Odd that she sees the labor market tightening a bit after Microsoft offered buyouts to over a quarter of its labor force. We are seeing big job cuts in tech, and nobody is unaware of the cuts going on in finance, particularly mortgage banking.

Data center construction has been a big driver of the economic growth this year, and all the signs are pointing towards less construction going forward. Credit spreads are widening on data center debt and the politics of data centers mean more regulatory red tape. The costs of data center construction are rising.

The Fed Funds futures now have a roughly 25% chance that the Fed won’t hike in December, which is the highest in a while. That said, the March 27 and June 27 contracts do predict two more hikes as the base case.

The Chicago PMI dropped 3.5 points to 55.3 in October as supplier deliveries, production, new orders and backlog fell. Employment increased however. Supplier deliveries fell to the lowest level since February. while employment hit the highest level since April 2021.

Unfortunately, prices paid rose 8.9 points to the highest level since December 2021.

Stocks are lower after an earnings miss from Alphabet (Google). Bonds and MBS are up small. The European Central Bank maintained rates at current levels. ECB President Christine Lagarde will step down in February.

As expected, the Fed maintained the Fed Funds rate at current levels. There were two dissenters – Cook and Hammack who wanted to raise by 25 basis points. “Economic activity is expanding at a strong pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little. Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal. The Committee will deliver price stability.”

During the press conference Kevin Warsh said that starting next year, one of the Fed meetings will not discuss monetary policy but will focus on other strategic issues. Beginning in 2028, there will be two meetings that won’t concern policy.

The comments about the economy and the labor market are interesting with the backdrop of Microsoft offering buyouts to 27% of its workforce. Lots of people are employed in data center construction, but the pace of construction there probably isn’t sustainable given political opposition and the increasing cost of financing them.

The takeaway from the meeting is that a December hike is pretty much a lock, and the Fed Funds futures see a 86% chance they raise rates at the end of the year.

Trump was obviously mad that the Fed didn’t cut rates, but Treasury Secretary Scott Bessent expressed confidence in Kevin Warsh: “I think Chair Warsh is off to a great start,” Bessent said. “As I often say, I have great confidence in him.” When asked if a December rate hike would be a policy mistake, he said “That’s not necessarily so.”

At this point, the markets are ignoring Trump and viewing it all as a sideshow. Reminds me of the legendary Earl Weaver and Bill Haller in 1980.

Baltimore Oriole’s Earl Weaver argues with Umpire Bill Haller in 1980.

Personal incomes rose 0.2% MOM and personal outlays rose 0.5%. The incomes number was a touch light. The all-important PCE Price Index rose 0.5% MOM and 3.6% YOY, while the core rate rose 0.3% MOM and 3.1% YOY. Inflation ticked up in September versus August:

Home prices rose 0.3% MOM and 2.4% YOY according to the FHFA House Price Index. The next FHFA Home Price Index report will set the conforming loan limits for next year, though a few lenders have already put out estimates. You can see the divergence between the different regions below. The Midwest is where the action is, while the West Coast is struggling.

Note the Middle Atlantic contains the New York City MSA which also hot these days.

Consumer confidence rebounded from very low levels in October according to the Conference Board. The index rose 7.5 points to 91.7. “Consumer confidence advanced in October, driven primarily by improved perceptions of current and expected business conditions,” said Fergus McCormick, Senior Economist, Global Indicators, The Conference Board. “The recovery was in line with retail gasoline prices easing from September to October. Yet, despite the increase in October, consumer confidence remained on the long-term downward trend that’s persisted over the past few years. Consumers planned less spending on services and durable goods over the next six months. This likely reflected higher price levels and persistent inflation, which eroded consumers’ purchasing power.”

Consumers continue to be frustrated with rising costs, especially energy. Given that heating oil and diesel are essentially the same thing, I expect consumers in the Northeast will be particularly surly this year.

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During the MBA Conference, there was a lot of chatter about non-QM loans and speculation that some aggregators lost money during the month by being underhedged. I wanted to take a look and see if that was true. If you aren’t a secondary guy you will probably find the following of limited use.

A typical mortgage banker hedges a pool of Fannie / Freddie or Ginnie loans with TBAs. Non-QM aren’t deliverable into TBAs so the lender needs to think about duration, which refers to a loan’s expected life and its interest rate sensitivity.

During September, rates moved up violently, and many lenders with lower-coupon non-QM loans found they were unable to find an attractive bid for them. Basically anything with a coupon below 7% was highly unattractive to the buy-side due to extension risk and pricing was hit hard.

Below is a snippet from a well-known NQM correspondent’s DSCR rate sheet on 8/31 and 9/30 for a few coupons. You can see how much the lower note rates got slammed (the last column):

Below is a table of the Eris SOFR Futures prices based on 8/31 and 9/30 prices

The lower coupon 6.5s probably have a duration of 10 years while the 8s have a duration of 5 years or lower. If you have a Bloomberg terminal you can calculate them directly, or your broker-dealer may be able to give you an estimate. Knowing the duration of the underlying loans is a critical component to hedging non-QM loans, and getting this wrong will affect hedging performance.

Below I looked at how the Eris SOFR futures performed as a hedge for these loans. The 6.5 loan had a 10-year hedge, the 7 had a 7 year, the 7.5 had a 5 year, and the 8 had a combo of 5s and 2s.

The lower coupons struggled and shows why lenders may need some out-of-the-money options to hedge the tail risk of a big move. But for most coupons, the hedges were within 25 basis points.

If you have any questions about hedging non-QM with Eris SOFR futures, please contact John Douglas or Geoff Sharp at Eris Futures.

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The single family rental market is humming along, according to earnings from single family REIT Invitation Homes. Total revenues rose 6.3% while rents rose 3%. The occupancy rate was 96.4%. Due to the new institutional investor limits on single family homes, Invitation is selling parts of its portfolio and buying back stock with the proceeds.

Stocks are flattish as we await the Fed decision. Bonds and MBS are down small.

The Fed decision is due at 2:00 pm EST today. Kevin Warsh will hold a press conference afterward. The market is looking for a hawkish pause, where the Fed maintains policy but signals further hikes ahead.

New Home Sales fell 0.6% MOM and 5.3% YOY to a seasonally adjusted annual rate of 680,000 units. At the end of September, there were 476,000 new homes in inventory, which represents a 8.4 month supply. The median new home price fell 3.9% YOY to $400,400.

The inventory of new homes for sale is still elevated:

Housing isn’t going to be much of a contributor to GDP growth until some of this inventory gets worked off.

Microsoft is offering buyouts to about a quarter of its global workforce – 60,000 employees in all. The company is expected to report earnings today. Capital expenditures for AI are taking a toll on the company’s finances, so it is cutting its workforce aggressively. I wonder if Microsoft is the first salvo in tech downsizing. If so, we could see the labor market break out of its low hire / low fire equilibrium and weaken.

Home prices rose 2.1% YOY according to the Case-Shiller Home Price Index. The hip-to-be-square trade continues with Chicago seeing the biggest gains and Seattle seeing the biggest losses. Real, inflation-adjusted home prices continue to decline, however affordability remains stretched as incomes haven’t caught up with the 2022 spike in prices and mortgage rates continue to work their way higher.

Mortgage applications rose 3.4% last week as purchases rose 4% and refis rose 3%. “Mortgage rates declined for the second week in a row, with the 30-year fixed rate decreasing to 7.37 percent, the lowest in three weeks. The decline in rates gave borrowers some relief, with applications rebounding slightly, particularly conventional applications,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “Mortgage rates are still more than a percentage point higher than the same week last year and most homeowners still have rates much lower than prevailing market rates. The ARM share of applications increased to 11.3 percent, the highest level in more than a year, as more borrowers applied for ARM loans to lower their monthly payments.”

Purchase applications are down 18% YOY while refis are down 60%.

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During the MBA Conference, there was a lot of chatter about non-QM loans and speculation that some aggregators lost money during the month by being underhedged. I wanted to take a look and see if that was true. If you aren’t a secondary guy you will probably find the following of limited use.

A typical mortgage banker hedges a pool of Fannie / Freddie or Ginnie loans with TBAs. Non-QM aren’t deliverable into TBAs so the lender needs to think about duration risk, which refers to a loan’s expected life and its interest rate sensitivity.

During September, rates moved up violently, and many lenders with lower-coupon non-QM loans found they were unable to find an acceptable bid for them. Basically anything with a coupon below 7% was highly unattractive to the buy-side due to extension risk and pricing was hit accordingly. Does that mean that the hedges didn’t work? Not necessarily.

Below is a snippet from a well-known NQM correspondent’s DSCR rate sheet on 8/31 and 9/30 for a few coupons. You can see how much the lower note rates got slammed (the last column):

Below is a table of the Eris SOFR Futures prices based on 8/31 and 9/30 prices

The lower coupon 6.5s probably have a duration of 10 years while the 8s have a duration of 5 years or lower. If you have a Bloomberg terminal you can calculate them directly, or your broker-dealer may be able to give you an estimate. Knowing the duration of the underlying loans is a critical component to hedging non-QM loans, and getting this wrong will affect hedging performance.

Below I looked at how Eris SOFR futures performed as a hedge for these loans. The 6.5 loan had a 10-year hedge, the 7 had a 7-year, the 7.5 had a 5-year, and the 8 had a combo of 5s and 2s.

The lower coupons struggled and shows why lenders may need some out-of-the-money options to hedge the tail risk of a big move. But for most coupons, the hedges were within 25 basis points. An important note about duration and extension risk: Duration is not a set-it-and-forget-it number. It changes with rates. This is what happened to the lower coupons. They might have a duration of 10 years with the 10 year at 4.8% and a much longer duration when the 10 year hits 5.3%.

Like any mortgage backed security, non-QM loans have negative convexity and therefore hedged portfolios will be vulnerable to interest rate shocks. Non-QM loans are hedgeable, but they have to be handled differently than conforming loans.

If you have any questions about hedging non-QM with Eris SOFR futures, please contact John Douglas john.douglas@erisfutures.com or Geoffrey Sharp geoffrey.sharp@erisfutures.com at Eris Futures.

Stocks are higher as we begin the FOMC meeting. Bonds and MBS are up small.

The Fed begins its meeting today. The Fed Funds futures are signaling basically a hawkish pause, where no changes are made this month and a hike comes in December. The futures see only a 8% chance of hike tomorrow, but a 79% chance of a hike in December. The proximity to the midterm election is an optics issue and hiking rates will be treated as political, whether it is or not.

The economy accelerated in September according to the Chicago Fed National Activity Index (CFNAI). This is sort of a meta-index of a broad base of economic indicators which gives a 30,000 foot view of the economy. Production-related indicators drove the increase, while consumption and housing were a drag. I suspect this was mainly due to housing, as retail sales were pretty decent and the consumer has been a bright spot in the economy. Employment and sales indicators had marginal effects on the index.

Anthropic filed the S-1 for its IPO yesterday. It certainly makes interesting reading. The market thinks this is a $1.5 – $2 trillion company, with about $19.7 billion in trailing 12 month revenues. There are some 5 different classes of stock as well.

The risk factors section, which usually contains every imaginable risk, has a new one to me at least: “Concerns have been raised advanced AI systems could pose catastrophic or existential risks to humanity”

I have heard of all sorts of ways an investment can blow up, but being an existential risk to humanity is a new one. I can imagine the lawyers discussing whether this should go in the risk factors. “I’m telling ya, Jake, if we blow up humanity and we didn’t disclose it in the prospectus, I don’t even want to think about what the SEC is gonna do to us, let alone Robbins Geller.”

Delinquencies for commercial mortgage backed securities increased in the third quarter, according to the MBA. 4.97% of the loans backing CMBS were delinquent in Q3 compared to 4.82% in Q2. “Overall, delinquency rates for commercial mortgage loans increased modestly in the third quarter. Challenging fundamentals, particularly in the multifamily and office markets, along with higher rates, are having an impact on performance,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “However, delinquency rates remain historically low across most capital sources. The large number of scheduled maturities coming due amidst the recent spike in interest rates will continue to be a headwind for commercial mortgage performance in the quarters ahead.”

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During the MBA Conference, there was a lot of chatter about non-QM loans and speculation that some aggregators lost money during the month by being underhedged. I wanted to take a look and see if that was true. If you aren’t a secondary guy you will probably find the following of limited use.

A typical mortgage banker hedges a pool of Fannie / Freddie or Ginnie loans with TBAs. Non-QM aren’t deliverable into TBAs so the lender needs to think about duration risk, which refers to a loan’s expected life and its interest rate sensitivity.

During September, rates moved up violently, and many lenders with lower-coupon non-QM loans found they were unable to find an acceptable bid for them. Basically anything with a coupon below 7% was highly unattractive to the buy-side due to extension risk and pricing was hit accordingly. Does that mean that the hedges didn’t work? Not necessarily.

Below is a snippet from a well-known NQM correspondent’s DSCR rate sheet on 8/31 and 9/30 for a few coupons. You can see how much the lower note rates got slammed (the last column):

Below is a table of the Eris SOFR Futures prices based on 8/31 and 9/30 prices

The lower coupon 6.5s probably have a duration of 10 years while the 8s have a duration of 5 years or lower. If you have a Bloomberg terminal you can calculate them directly, or your broker-dealer may be able to give you an estimate. Knowing the duration of the underlying loans is a critical component to hedging non-QM loans, and getting this wrong will affect hedging performance.

Below I looked at how Eris SOFR futures performed as a hedge for these loans. The 6.5 loan had a 10-year hedge, the 7 had a 7-year, the 7.5 had a 5-year, and the 8 had a combo of 5s and 2s.

The lower coupons struggled and shows why lenders may need some out-of-the-money options to hedge the tail risk of a big move. But for most coupons, the hedges were within 25 basis points. An important note about duration and extension risk: Duration is not a set-it-and-forget-it number. It changes with rates. This is what happened to the lower coupons. They might have a duration of 10 years with the 10 year at 4.8% and a much longer duration when the 10 year hits 5.3%.

Like any mortgage backed security, non-QM loans have negative convexity and therefore hedged portfolios will be vulnerable to interest rate shocks. Non-QM loans are hedgeable, but they have to be handled differently than conforming loans.

If you have any questions about hedging non-QM with Eris SOFR futures, please contact John Douglas john.douglas@erisfutures.com or Geoffrey Sharp geoffrey.sharp@erisfutures.com at Eris Futures.