The Daily Tearsheet

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

The week ahead will have some big data reports with the Employment Situation on Wednesday and the Consumer Price Index on Friday. We will also get retail sales and existing home sales. We will also get plenty of Fed speakers as well.

The Super Bowl was last night, and that means the Spring Selling Season is unofficially underway. Buyers are in a much better position than they have been in years, however affordability remains a constraint. NAR expects existing home sales to rise 14%, which would imply something like 4.6 million units. Much will depend on mortgage rates continuing to work their way downward.

Consumer confidence improved in February, according to the University of Michigan Consumer Sentiment Survey. Most of the increase was driven by the stock market. Given the recent sell-off, it probably is a case of easy come, easy go. Concerns about the labor market continue.

Year-ahead inflation expectations slipped from 4.0% to 3.5%. This is the lowest reading since January 2025. Long-term inflation expectations increased from 3.3% to 3.4%.

Bloomberg reported that the Trump Administration is considering an antitrust investigation into the homebuilders, which caused their stocks to fall on Friday. On the face of it, the concept that the big publicly-traded homebuilders have any sort of monopoly market power to set home prices is dubious at best. The latest pace for new home sales in 2025 was 737k, according to the October new home sales report. Pulte delivered just under 30k homes in 2025. D.R. Horton sold just under 85,000 and Lennar sold 82,000 homes. If you calculate the Herfindahls (a measure of market concentration) you will conclude the homebuilding market is highly fragmented, not concentrated. The antitrust attorneys at DOJ are probably thinking “you have 4 health insurers which control the entire US healthcare system and you are worrying about this?” Given that the antitrust angle is largely a farce, this is Trump putting pressure on the builders to do something about housing affordability.

Speaking of housing affordability, the House is expected to vote on a package to help ease affordability with higher loan limits for multifam, support for construction and rehab loans, along with some other measures. The program is bipartisan, so it should pass.

Cotality noticed an uptick in fraud risk in the fourth quarter of 2025. “The percentage of refinances in the Cotality data set has increased year-over-year by 19%, yet the Fraud Index is up 1.5% over that time. This is significant because historically, refis bring a much lower risk of fraud than purchases,” said Matt Seguin, Cotality Mortgage Fraud Solutions senior principal. “The two riskiest segments of the fraud index, investment properties (+34%) and multi-unit properties (50%), have jumped significantly over the last year as a portion of the overall application volume seen by Cotality. The increase in volume in these two segments has led to a slight increase in the Fraud Risk Index. This change seems to have been driven, at least partially, by the surge in popularity of the DSCR loans.”   

Given the issues we have seen in Baltimore and Philly lenders should take close look at appraisals and ensure that any big increases in appraised value are documented.

Stocks are rebounding after a tough week in the markets. Bonds and MBS are down small.

Job openings fell to 6.5 million at the end of the year, according to the JOLTS job openings report. This is down 386k from November and just under a million for 2025. Professional and business services saw the biggest decline, dropping about 360k on a YOY basis. Manufacturing was flat, despite fears about the tariffs. Education and health services also had a sizeable decline. The quits rate was flat at 2.0%.

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New Feature: Expanded Market Data with SOFR Swaps

You’ll notice our daily market data now includes SOFR swap rates, provided by Eris Innovations. These rates are derived from Eris SOFR Swap futures (native CME Group contracts), offering a transparent view of long-term rates.

Why this matters for your workflow: Since SOFR replaced LIBOR, it has become the universal benchmark for financing. Using SOFR swaps—rather than Treasuries—for modeling and hedging offers several advantages:

• Capital Efficiency: Swap futures require significantly less balance sheet than cash instruments.
• Precision Hedging: Liquid across the curve (out to 30 years), they allow you to isolate benchmark interest rate risk from credit spread exposure.
• Strategic Utility: Already widely used for hedging MSR portfolios, but they are also becoming the instrument of choice for hedging ARMs, non-QM, RTL, and key rate duration for Agency mortgage portfolios.

By benchmarking against SOFR, and easily trading this with Eris SOFR Swap futures, investors can more effectively monitor the “pure” credit spread of their mortgage assets, which can then be separately managed using Mortgage TBAs. Contact john.douglas@erisfutures.com to learn how Eris SOFR can help you improve your execution.

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Home price appreciation decelerated in January, according to the Clear Capital Home Data Index. The index declined 0.6% on a quarterly basis and rose only 1.7% on an annual basis. The Northeast was the only bright spot, with the South, Midwest and West showing quarterly declines. The New York City MSA took the top spot with prices rising 1.0% on a quarterly basis and 5.8% annually.

The laggards include a list of MSAs that were red-hot just a few years ago: Denver, Raleigh, Seattle, Nashville, etc. The hip-to-be-square trade continues.

Pennymac Financial Services stock got hammered on earnings last week, falling 38% over two days after releasing earnings. Production was up 10% on a YOY basis, lower than other companies but not terrible.

What was the issue with Pennymac? Prepays. The MSR portfolio exhibited higher than expected “realization of cash flows” which means loans were paying off faster than expected.

Mortgage companies had historically valued conventional mortgage servicing rights around 4 times the expected cash flow, however in the past few years, valuations have increased to the 5-6 range as companies accounted for potential recapture profits.

Recapture means what it sounds like – that if the company refinances its own MSR that potential p/l has some value. While Pennymac is complicated with its structure of two companies – PMT and PFSI – this stock behavior should serve as a shot across the bow for MSR valuations. If the loan prepays and you don’t get the refi, then a multiple over 5 simply doesn’t make sense.

Stocks are lower this morning as the “software as a selloff” trade continues. Bonds and MBS are up.

Job cuts surged in January, according to the Challenger, Gray and Christmas Job Cut report. Last month, nearly a quarter of a million job cuts were announced, which was the highest January since 2009. “Generally, we see a high number of job cuts in the first quarter, but this is a high total for January. It means most of these plans were set at the end of 2025, signaling employers are less-than-optimistic about the outlook for 2026,” said Andy Challenger, workplace expert and chief revenue officer for Challenger, Gray & Christmas.

Transportation was hit the hardest after a layoff announcement from UPS. Tech also was hit hard after layoff announcements from Amazon. Hiring plans were around 5,000 which was again the lowest since 2009.

Notwithstanding the January Challenger numbers, there continues to be a big difference between consumer confidence and the actual numbers in the labor market. The current consumer confidence numbers are at similar levels as the depths of the Great Recession, or the 1980-1981 recession, which was a doozy. If you look at the unemployment rate of 4.4%, an economist in the 1980s would have figured consumers would be jumping for joy.

After COVID, the negative correlation between the unemployment rate and consumer confidence broke down. The University of Michigan Consumer Sentiment Survey noted there is a big partisan breakdown – currently Republicans have a much more sanguine view of the economy than Democrats. They haven’t been tracking the partisan split for long, so it will be interesting to see if that dynamic flips once we get a Democrat in the White House.

I suspect the explanation lies in the fact we now live in media silos, where Team Blue media highlights all of the negative economic numbers while Team Red media highlights the positive ones. Unemployment is at 4.4%, Q3 GDP rose 4.4% in the fourth quarter, and the Atlanta Fed GDP Now index predicts GDP will grow at 4.2% in the first quarter.

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New Feature: Expanded Market Data with SOFR Swaps

You’ll notice our daily market data now includes SOFR swap rates, provided by Eris Innovations. These rates are derived from Eris SOFR Swap futures (native CME Group contracts), offering a transparent view of long-term rates.

Why this matters for your workflow: Since SOFR replaced LIBOR, it has become the universal benchmark for financing. Using SOFR swaps—rather than Treasuries—for modeling and hedging offers several advantages:

• Capital Efficiency: Swap futures require significantly less balance sheet than cash instruments.
• Precision Hedging: Liquid across the curve (out to 30 years), they allow you to isolate benchmark interest rate risk from credit spread exposure.
• Strategic Utility: Already widely used for hedging MSR portfolios, but they are also becoming the instrument of choice for hedging ARMs, non-QM, RTL, and key rate duration for Agency mortgage portfolios.

By benchmarking against SOFR, and easily trading this with Eris SOFR Swap futures, investors can more effectively monitor the “pure” credit spread of their mortgage assets, which can then be separately managed using Mortgage TBAs. Contact john.douglas@erisfutures.com to learn how Eris SOFR can help you improve your execution.

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Fed President Tom Barkin said he expected the US economy to remain resilient in 2026 and that productivity would continue to help in the fight against inflation. He compared the current boom in AI with the productivity boost we saw in the 1990s with the massive increase in PC capability and the early days of the Internet.

It was “a different question than the one we’re living with now,” with current inflation about a percentage point above target, not improving for the past year and the public contending with what is now a five-year inflation miss by the central bank, Barkin said.

“In their case, demand was quite strong … but inflation wasn’t. In our case, demand is not as strong, and inflation is higher. It is just a different conversation,” he said.

One of the biggest differences from the 1990s and today is that US was importing deflation as the Japanese economy collapsed. There is a possibility we could see a repeat of that with the Chinese economy as it wrestles with its own burst real estate bubble.

Stocks are flattish as earnings continue to come in. Bonds and MBS are up small.

The House reached a deal to re-open the government, which heads to Trump’s desk today to sign. The BLS has already delayed Friday’s jobs report, but hopefully the overall disruption will be small this time around. Yesterday’s JOLTS job openings report was delayed as well.

The deal funds most of the government through the remainder of the fiscal year, however the Department of Homeland Security only got two more weeks of funding. Democrats want to add more guardrails to immigration enforcement, so the negotiations on this aspect will continue.

The economy added 22,000 jobs in January according to the ADP Employment Report. This was below expectations and indicates that the labor market continues its low hiring / low firing mode. “Job creation took a step back in 2025, with private employers adding 398,000 jobs, down from 771,000 in 2024,” said Dr. Nela Richardson, chief economist, ADP. “While we’ve seen a continuous and dramatic slowdown in job creation for the past three years, wage growth has remained stable.”

We saw a sizeable jump in education / health services with 74,000 new jobs, however that was offset by a big decline in professional / business services, where 57,000 jobs were lost.

Compensation growth continues to moderate with pay increasing 4.5% for job stayers (unchanged) and falling to 6.4% from 6.6% for job changers.

______________________________________

New Feature: Expanded Market Data with SOFR Swaps

You’ll notice our daily market data now includes SOFR swap rates, provided by Eris Innovations. These rates are derived from Eris SOFR Swap futures (native CME Group contracts), offering a transparent view of long-term rates.

Why this matters for your workflow: Since SOFR replaced LIBOR, it has become the universal benchmark for financing. Using SOFR swaps—rather than Treasuries—for modeling and hedging offers several advantages:

• Capital Efficiency: Swap futures require significantly less balance sheet than cash instruments.
• Precision Hedging: Liquid across the curve (out to 30 years), they allow you to isolate benchmark interest rate risk from credit spread exposure.
• Strategic Utility: Already widely used for hedging MSR portfolios, but they are also becoming the instrument of choice for hedging ARMs, non-QM, RTL, and key rate duration for Agency mortgage portfolios.

By benchmarking against SOFR, and easily trading this with Eris SOFR Swap futures, investors can more effectively monitor the “pure” credit spread of their mortgage assets, which can then be separately managed using Mortgage TBAs. Contact john.douglas@erisfutures.com to learn how Eris SOFR can help you improve your execution.

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Mortgage applications fell 9% last week as refis fell 5% and purchases fell 14%. Weather probably had a significant impact. “Application volume was down last week, led by a 14% drop in purchase applications. Winter Storm Fern likely had an impact as much of the country was snowed in, hampering homebuying activity,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The annual increase in purchase applications was the weakest since April 2025. Refinance activity also decreased over the week, despite mortgage rates moving lower. The 30-year fixed rate averaged 6.21% last week, a slight decline, but not significant enough to incentivize more borrowers to refinance. Additionally, this week’s results are being compared to the week that included the MLK Jr. holiday.”

Private credit stocks like Blue Owl, KKR, TPG, Apollo have been getting crushed lately, which is something people in the mortgage business should watch. Blackrock TCP Capital Fund took a 19% writedown to net asset value last week and a lot of these funds have exposure to software companies.

While this doesn’t directly affect the mortgage business credit crises tend to spread and the area most likely to be affected is non-QM lending. With real estate prices flattening, average asking rents continuing to decline, overall suspicions about appraisal values there is the chance that the buy-side might pull back from the space.

Not saying this is imminent (they really are different spaces altogether) but credit problems can intensify and propagate to strange places.

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.

Friday’s jobs report will be delayed due to the partial government shutdown. “The Employment Situation release for January 2026 will not be released as scheduled on Friday, February 6, 2026. The release will be rescheduled upon the resumption of government funding,” Emily Liddel, associate commissioner of the BLS, said in a statement.

The Senate has passed a funding measure however it remains held up in the House. House Democrats want ICE reined in and are using the bill as leverage. Some Republicans are holding out because they want voter ID put into the bill.

The manufacturing economy expanded in January, according to the ISM Manufacturing Report. The index rose to 52.6 (any number over 50 indicates expansion) after 26 straight months of contraction. The number was higher than Wall Street analysts expected, driven by a huge jump in new orders. December saw a big decline in new orders, so the rebound may have been a “catch-up” phenomenon.

Inventory levels remain low, which is generally a good sign for the economy because it signals future production will be needed to meet demand. Prices also increased, which isn’t helpful for the Fed’s inflation-fighting mission. Employment is still in contraction mode as companies continue to manage headcount as opposed to hiring new workers.

The comments from manufacturers revolve around tariff uncertainty, however the rebound in the index is a good signal for the economy.

_____________________________________________

New Feature: Expanded Market Data with SOFR Swaps

You’ll notice our daily market data now includes SOFR swap rates, provided by Eris Innovations. These rates are derived from Eris SOFR Swap futures (native CME Group contracts), offering a transparent view of long-term rates.

Why this matters for your workflow: Since SOFR replaced LIBOR, it has become the universal benchmark for financing. Using SOFR swaps—rather than Treasuries—for modeling and hedging offers several advantages:

• Capital Efficiency: Swap futures require significantly less balance sheet than cash instruments.
• Precision Hedging: Liquid across the curve (out to 30 years), they allow you to isolate benchmark interest rate risk from credit spread exposure.
• Strategic Utility: Already widely used for hedging MSR portfolios, but they are also becoming the instrument of choice for hedging ARMs, non-QM, RTL, and key rate duration for Agency mortgage portfolios.

By benchmarking against SOFR, and easily trading this with Eris SOFR Swap futures, investors can more effectively monitor the “pure” credit spread of their mortgage assets, which can then be separately managed using Mortgage TBAs. Contact john.douglas@erisfutures.com to learn how Eris SOFR can help you improve your execution.

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US population growth slowed in 2025, according to the Census Bureau. The population grew at 0.5%, about half the growth rate of 2024. This was the lowest rate since 2021 when it grew at 0.2%. Immigration (or net migration to be more precise) was the driver of decrease as enforcement at the border resumed. We saw a similar decline during the first Trump Administration, followed by a bump during the Biden admin, and now net migration is falling again.

An under-appreciated driver of affordability is taxes and insurance (T&I) payments. For decades, the T&I aspect of the mortgage payment was more or less an afterthought as the principal and interest (P&I) portion accounted for the vast majority of the payment. No longer.

In Florida, escrow payment have risen 70% over the past 5 years, with T&I now accounting for 38% of the mortgage payment. On average, escrow payments have increased 45%, driven primarily by rising insurance costs.

“Escalating escrow costs are reshaping the financial reality of homeownership across the U.S.,” says Cotality Principal Economist Archana Pradhan. “This financial strain can deter many from entering the housing market, ultimately affecting their ability to achieve homeownership. At the same time, existing homeowners are getting squeezed, especially those who are on fixed incomes or tight budgets.”

Something to keep in mind when looking at payment-to-income ratios since rising costs can make a mortgage which looks affordable now unaffordable in a few years. This is also why you are seeing seniors flee Florida. It is no longer cheap and people on fixed income cannot handle the uncertainty of rising costs.

Stocks are lower this morning despite a sizeable drop in oil prices. Bonds and MBS are flat.

The week ahead will be dominated by the jobs report on Friday. We will also get ISM data and some Fed-speak.

The partial government shutdown began on Sunday morning, with the House expected to return today. House Democrats are demanding changes in immigration enforcement as a condition to back a resolution. The Senate already passed a plan on Friday to keep the government open, so this is limited to a few recalcitrant House Democrats. If there is a deal today, the brief shutdown probably won’t have any noticeable effects.

That said, there doesn’t appear to be the appetite for a prolonged shutdown like we had in the fall.

Precious metals had a wild ride on Friday, with silver losing 30% after a meteoric rise. Silver’s rise had nothing to do with naturals (i.e. industrial demand); it was completely driven by speculative activity driven by dollar bearishness.

Gold was also smacked around on Friday. The fun continues in the commodity markets as oil is down big this morning after Trump commented positively on the situation in Iran.

____________________________________________

New Feature: Expanded Market Data with SOFR Swaps

You’ll notice our daily market data now includes SOFR swap rates, provided by Eris Innovations. These rates are derived from Eris SOFR Swap futures (native CME Group contracts), offering a transparent view of long-term rates.

Why this matters for your workflow: Since SOFR replaced LIBOR, it has become the universal benchmark for financing. Using SOFR swaps—rather than Treasuries—for modeling and hedging offers several advantages:

• Capital Efficiency: Swap futures require significantly less balance sheet than cash instruments.
• Precision Hedging: Liquid across the curve (out to 30 years), they allow you to isolate benchmark interest rate risk from credit spread exposure.
• Strategic Utility: Already widely used for hedging MSR portfolios, but they are also becoming the instrument of choice for hedging ARMs, non-QM, RTL, and key rate duration for Agency mortgage portfolios.

By benchmarking against SOFR, and easily trading this with Eris SOFR Swap futures, investors can more effectively monitor the “pure” credit spread of their mortgage assets, which can then be separately managed using Mortgage TBAs. Contact john.douglas@erisfutures.com to learn how Eris SOFR can help you improve your execution.

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Fed Governor Michelle Bowman still considers monetary policy to be restrictive. “After excluding one-off tariff effects, and with unemployment near estimates of its natural rate but at risk of deteriorating, I continue to see policy as moderately restrictive,” she said.

She said she could have voted to reduce rates, and absent an improvement in the labor market, thinks the Fed should continue to move towards neutrality.

The Spring selling season unofficially kicks off this weekend, and buyers are in the best position in years. The typical buyer got a discount ended up buying the home at 7.9% below listing price, the best since 2012. Overall, most buyers got a 3.8% discount.

“Homebuyers in 2026 shouldn’t write off homes that are slightly above their budget because there’s a good chance they’ll get some sort of concession from the seller, be it a price cut, money toward closing costs or funds for repairs,” said Redin Senior Economist Asad Khan. “This marks a reversal from the pandemic homebuying frenzy, when house hunters were advised to search for homes below their budget because fierce bidding wars were causing properties to sell far above the asking price.”

Florida condos are seeing the biggest discounts, with West Palm seeing close to 11%.

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

Donald Trump has nominated Kevin Warsh to succeed Jerome Powell as Fed Chairman. “I have known Kevin for a long period of time, and have no doubt that he will go down as one of the GREAT Fed Chairmen, maybe the best,” Trump said in a Truth Social post announcing the selection.

Warsh has previous experience at the Fed and is considered to be a safe choice for the markets. While he will probably support lowering rates, he is considered to be independent enough that he can resist Trump’s worst instincts.

Inflation at the wholesale level rose 0.5% month-over-month in December and rose 3.0% for 2025. This is an acceleration from the benign 0.1% and 0.2% increases in October and November. The increase was driven by final demand services, which was attributable to an increase in retailer and wholesaler margins.

____________________________________________

New Feature: Expanded Market Data with SOFR Swaps

You’ll notice our daily market data now includes SOFR swap rates, provided by Eris Innovations. These rates are derived from Eris SOFR Swap futures (native CME Group contracts), offering a transparent view of long-term rates.

Why this matters for your workflow: Since SOFR replaced LIBOR, it has become the universal benchmark for financing. Using SOFR swaps—rather than Treasuries—for modeling and hedging offers several advantages:

• Capital Efficiency: Swap futures require significantly less balance sheet than cash instruments.
• Precision Hedging: Liquid across the curve (out to 30 years), they allow you to isolate benchmark interest rate risk from credit spread exposure.
• Strategic Utility: Already widely used for hedging MSR portfolios, but they are also becoming the instrument of choice for hedging ARMs, non-QM, RTL, and key rate duration for Agency mortgage portfolios.

By benchmarking against SOFR, and easily trading this with Eris SOFR Swap futures, investors can more effectively monitor the “pure” credit spread of their mortgage assets, which can then be separately managed using Mortgage TBAs. Contact john.douglas@erisfutures.com to learn how Eris SOFR can help you improve your execution.

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The median rent in January fell 1.4% to $1,353, according to Apartment List. The vacancy rate hit 7.3%, which is a record high. “Early last year, it appeared that annual rent growth was on track to flip positive for the first time since mid-2023; however, that rebound stalled out and reversed course during a slow summer moving season that has now dragged into the winter,” wrote Chris Salviati, chief economist at Apartment List.

Multifamily units under construction have fallen back to prepandemic levels however there is still a decent amount of supply that has yet to hit the market.

Stocks are flattish this morning after the Fed maintained rates. Bonds and MBS are flat.

As expected, the Fed maintained the Fed Funds rate at its current level of 3.5 – 3.75%. The statement removed the “The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months.” statement that was in the December statement. Miran and Waller dissented, preferring to cut rates by 25 basis points.

In the press conference Powell suggested he is in no hurry to cut rates: “We’re not trying to articulate a test for when to next cut…What we’re saying is we’re well positioned.” In other words, the labor market has to deteriorate or inflation has to move markedly closer to the 2% target before the Fed cuts again. Suffice it to say we have seen our last cut out of the Powell Fed.

The March Fed Fund futures still see the Fed standing pat, with only a 14% chance for a cut. The December futures still see 2 cuts as the most likely scenario.

It is interesting to see the Fed remove the reference to the downside risks to the labor market given that nothing much has changed from December. The consumer confidence report from earlier this week shows a substantial difference between consumers’ perception of the labor market and the actual numbers coming out of BLS.

I plotted consumer confidence versus the unemployment rate, and we are definitely seeing an breakdown of the inverse correlation between confidence and unemployment:

I’m not sure what is causing the breakdown, which is definitely a post-pandemic phenomenon.

________________________________________

New Feature: Expanded Market Data with SOFR Swaps

You’ll notice our daily market data now includes SOFR swap rates, provided by Eris Innovations. These rates are derived from Eris SOFR Swap futures (native CME Group contracts), offering a transparent view of long-term rates.

Why this matters for your workflow: Since SOFR replaced LIBOR, it has become the universal benchmark for financing. Using SOFR swaps—rather than Treasuries—for modeling and hedging offers several advantages:

• Capital Efficiency: Swap futures require significantly less balance sheet than cash instruments.
• Precision Hedging: Liquid across the curve (out to 30 years), they allow you to isolate benchmark interest rate risk from credit spread exposure.
• Strategic Utility: Already widely used for hedging MSR portfolios, but they are also becoming the instrument of choice for hedging ARMs, non-QM, RTL, and key rate duration for Agency mortgage portfolios.

By benchmarking against SOFR, and easily trading this with Eris SOFR Swap futures, investors can more effectively monitor the “pure” credit spread of their mortgage assets, which can then be separately managed using Mortgage TBAs. Contact john.douglas@erisfutures.com to learn how Eris SOFR can help you improve your execution.

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Homebuyers are cancelling deals at the highest rate on record, according to research from Redfin. Roughly 40,000 contracts were cancelled in December, which is a record high. This works out to 16.3% of properties that went under contract. “High housing costs and rising inventory have made homebuyers more selective,” said Chen Zhao, head of economics research at Redfin. “Home sellers outnumber buyers by a record margin, meaning the buyers who are in the market have options and may walk away if they believe they can find a better or more affordable home.”

Atlanta and the Bay Area saw the biggest number of cancellations. “Buyers have options and aren’t shy about negotiating to find the right home,” said Alison Williams, a Redfin Premier real estate agent in Sacramento, CA. “Cost is a major barrier right now, so if the seller hasn’t fixed maintenance issues or the home is priced too high, the buyer may back out.”

Stocks are higher as we await the Fed decision. Bonds and MBS are flat.

The FOMC decision is due at 2:00 pm today. The most likely outcome is that they make no move on rates. The thing to look for will be their body language on future cuts. If the statement (or Jerome Powell) says something like “if progress on inflation continues the way we expect future cuts may be warranted.” will be a good sign. If they imply that they are pausing for an indefinite time, then that would be a bad sign. Look for language like “policy is still modestly restrictive” as a clue for where they think policy is. There has been indications they think r-star (the neutral rate of interest) is higher than they previously thought.

Home prices rose 1.4% YOY in November, according to the Case-Shiller Home Price Index. On a month-over-month basis, prices fell 0.1%. The hip-to-be-square trade continues, with MSAs like Chicago, New York and Cleveland leading the pack. On the other side of the coin, Florida continues to struggle, with home prices in Tampa down 3.9%. Phoenix, Dallas and Miami also saw YOY declines.

“High mortgage rates continue to cast a long shadow over housing,” Godec concluded. “Thirty-year loan rates hovered in the mid-6% range during November, weighing on affordability even as they eased slightly from recent peaks. This elevated financing cost continues to cap home price growth. Inflation has erased most nominal gains, leaving home values essentially flat in real terms.”

Given that inflation is still running around 3% or so, we are seeing real (inflation-adjusted) declines in home prices. As long as wage inflation continues and home price appreciation flattens we should see a continued, gradual improvement in home affordability. If we want durable improvements in affordability, this is the least painful way to do it. Sugar-high steps like QE won’t do the job, and price controls will only make it worse.

Consumer confidence tumbled in January, according to the Conference Board. The index fell by almost 10 points as current conditions and future expectations deteriorated. Perceptions of the labor market continued to deteriorate, which the Fed noticed in its “low hiring / low firing” characterization. There is a noted political bifurcation with Republicans holding much more optimistic views on the economy than Democrats and Independents. Demographically, Gen X and Boomers are the most depressed.

“Confidence collapsed in January, as consumer concerns about both the present situation and expectations for the future deepened,” said Dana M Peterson, Chief Economist, The Conference Board. “All five components of the Index deteriorated, driving the overall Index to its lowest level since May 2014 (82.2)—surpassing its COVID-19 pandemic depths.”

Part of the decline could be due to the drip-drip announcements of job cuts. Yesterday, UPS announced 30k job cuts. Today Amazon announced 16k. Consumers also indicated they are less likely to spend going forward.

Overall this number is hard to reconcile with the Atlanta Fed’s GDP Now model which forecasts a whopping 5.4% GDP growth in Q4.

Granted, the trade balance is adding a lot to GDP, and some items parts matter more than other when it comes to perceptions of the overall economy. If GDP is rising because imports are decreasing, people probably won’t feel it much. You could say the same with government spending – if government spending is rising because healthcare spending is rising, people won’t get a warm fuzzy feeling about the economy either, even though the GDP numbers look good on paper.

The Fed will be wrestling with these considerations as they make their decision on rate cuts.

Mortgage applications fell 8.5% last week as purchases fell 4% and refis fell 16%. Apps are still up in the high teens compared to a year ago. “Mortgage rates increased for the first time in a month, and as expected, refinance applications fell by 16%. The 30-year fixed rate was the highest in three weeks at 6.24%,” said MBA’s Joel Kan, Vice President and Deputy Chief Economist. “FHA refinance activity bucked the overall trend and increased, as FHA rates remained almost 20 basis points lower than conforming rates. With rates holding in the 6%range, the refinance market is likely to remain sensitive to week-to-week rate movements.”

FHA refinances make me thing we are seeing borrowers with high levels of credit card debt doing debt-consolidation refis into FHA loans. This is an overall sign of stress in consumers, which does create opportunities for loan officers to offer a solution.

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

The Fed begins its meeting today. The announcement will be tomorrow, with no changes in monetary policy expected.

The current appropriations bill runs out on Saturday, and Democrats are demanding changes to the Department of Homeland Security in the wake of violence in Minneapolis. The Department of Homeland Security would theoretically be closed if the government shuts down which would supposedly restrict immigration enforcement agencies like ICE. The bill includes funding for the Pentagon and DHS, along with HHS and the Department of Labor, so there are priorities for both parties.

The AP noticed that FHFA Director Bill Pulte increased the caps on Fannie and Fred’s allowable holdings of MBS in response to Trump’s suggestion that the GSEs buy more MBS to lower rate. Trump wanted the GSEs to buy $200MM, however the caps have been raised to $225 billion each so this seems to contemplate further purchases.

Pulte said: “FHFA simply gave each entity legal flexibility to go beyond their previous caps,” Pulte wrote Friday, adding that despite the lenders’ new bond purchasing authority, they would not “exceed $200 billion.”

After the story was published, the agency put out additional statement saying that “Fannie and Freddie will not be allowed to go beyond the president’s buy.”

Prior to entering conservatorship, the GSEs were allowed to hold $450 billion worth of MBS, which means we are going back to pre-GFC levels. Of course the difference this time is that Fan and Fred are not purchasing subprime loans – they are limited to conforming paper which is much less risky.

Will purchasing $200 billion of MBS move the needle for mortgage rates? Maybe in the short term. It would make more sense if MBS spreads were wide, but you can’t make that argument either – MBS spreads are around historical averages.

Durable goods orders rose 5.3% in November, according to the Census Bureau. If you strip out transportation, they rose 0.5%. This offset drops in October. Excluding defense, orders rose 6.6%.

Western Alliance reported better than expected earnings. Earnings per share increased 13.6% and revenues rose 4.6%. NPLs fell to 0.85% of the portfolio. The stock is up a couple of percent pre-open.

Prepayment activity is picking up according to ICE’s First Look. “December’s numbers show that lower interest rates drove refinance activity and prepayments to near multi-year highs,” said Andy Walden, Head of Mortgage and Housing Market Research at ICE. “At the same time, there was a divergence in delinquency trends, with early-stage delinquencies improving and late-stage delinquencies continuing to rise. Foreclosure activity also increased, driven mainly by FHA and VA loans.”

Foreclosure activity is increasing, primarily in government loans. Early-stage delinquencies are declining.