Morning Report: GDP growth estimates falling

Vital Statistics:

S&P futures4,48128.2
Oil (WTI)70.590.95
10 year government bond yield 1.33%
30 year fixed rate mortgage 3.07%

Stocks are higher this morning as commodities continue to rally. Bonds and MBS are flat.

The upcoming week will contain some important economic data with the consumer price index, industrial production, retail sales, and consumer sentiment. We won’t have any Fed-speak this week as we are in the quiet period ahead of next week’s FOMC meeting.

Foreclosure activity picked up after the Federal Government’s foreclosure moratorium expired at the end of August. “As expected, foreclosure activity increased as the government’s foreclosure moratorium expired, but this doesn’t mean we should expect to see a flood of distressed properties coming to market,” said Rick Sharga, Executive Vice President at RealtyTrac, an ATTOM company. “We’ll continue to see foreclosure activity increase over the next three months as loans that were in default prior to the moratorium re-enter the foreclosure pipeline, and states begin to catch up on months of foreclosure filings that simply haven’t been processed during the pandemic. But it’s likely that foreclosures will remain below normal levels at least through the end of the year.”

Professional investors hoping for a 2008-style foreclosure deluge of distressed merchandise will be disappointed. Unlike 2008, hope prices are appreciating at close to a 20% clip. Very few (if any) of these properties will be underwater, and therefore will be “money good” for the lender. Given the housing shortage, there will be plenty of buyers and any foreclosure discount will be minimal.

Mortgage bankers expect profit margins to decline according to Fannie Mae’s third quarter Lender Sentiment Survey.

“Mortgage lenders appear to have adopted a more neutral posture, reporting to us via the MLSS mixed expectations for purchase and refinance mortgage demand over the next three months,” said Fannie Mae Vice President and Deputy Chief Economist Mark Palim. “In the third quarter, more lenders than not reported expectations that purchase mortgage demand will continue to grow, though the total share expecting such growth fell substantially compared to the previous quarter. Meanwhile, a plurality of mortgage lenders expects refinance activity to continue to wane from the highs of the past year and a half – even so, their outlook on likely refi volumes was improved compared to the prior quarter. Of the lenders who expect purchase mortgage demand to decrease in the coming months, high home prices and a limited supply of homes for sale were the primary reasons given – these were also among the top reasons provided by the 63% of consumers who believe it’s a ‘bad time to buy a home’, according to our latest Home Purchase Sentiment Index® result.”

“On net, mortgage lenders’ profitability outlook improved slightly from last quarter, although more lenders than not continue to expect profit margins to decline in the months ahead,” Palim continued. “The primary-secondary spread, an indicator of potential profitability, remains wider than the previous decade’s average – a positive sign for lenders – though in August it was at its narrowest since February and 53 basis points below the peak seen in August 2020. While lenders continue to overwhelmingly cite increased competition as their primary concern regarding future profitability, the share citing personnel costs for their diminished profit margin outlook increased significantly, suggesting that mortgage lenders’ ability to efficiently manage their workforces will be critical to their bottom lines as competitive pressures remain intense.”

The meta-story for 2021 was that a rapidly accelerating economy into the end of the year was going to force interest rates higher. Instead, it seems like the big second-half rebound is not materializing. According to the Atlanta Fed’s GDP Now index, growth is expected to come in at 3.7% for the quarter ending September 30. As recently as three weeks ago, the index was predicting 6% growth.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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