Morning Report: FGMC shuts down

Vital Statistics:

S&P futures3,92711.82
Oil (WTI)107.51-0.14
10 year government bond yield 3.18%
30 year fixed rate mortgage 5.85%

Stocks are higher as markets continue to rebound. Bonds and MBS are down.

We are heading into a pretty big week for data, although the jobs report will slip into next week. We will get home prices and consumer confidence tomorrow, the final revision to Q1 GDP on Wednesday, personal incomes and outlays on Thursday, and ISM data on Friday. Markets will have an early close on Friday ahead of the 4th of July weekend.

First Guaranty mortgage laid off almost all of their staff on Friday. It sounds like they were short on cash and unable to strike a deal to raise more. Instead of ponying up more cash, main backer PIMCO decided to pull the plug instead.

Durable Goods orders increased in May, according to the Census Bureau. Orders were up 0.7% while shipments increased 1.3%. The report shows that demand remains strong, and some of the supply side numbers show that supply chain issues may be easing a touch, which is good news for the inflation numbers and the economy overall.

Pending Home Sales rose 0.7% in May, according to NAR. The Northeast saw the biggest gain, with home sales rising 15.4%. “Despite the small gain in pending sales from the prior month, the housing market is clearly undergoing a transition,” said NAR Chief Economist Lawrence Yun. “Contract signings are down sizably from a year ago because of much higher mortgage rates. Trying to balance the housing market by choking off demand via higher mortgage rates is damaging to consumers and the economy,” Yun added. “The better way to balance the market is through increased supply, which also helps the broader economy.”

His point about housing construction being the answer to soaring home prices is spot-on. Historically housing has led the economy out of a recession. It wasn’t unusual to see housing starts spike above a 2 million annualized pace coming out of recessions in the past. This was almost par for the course in the 1970s and 1980s.

The 2008 financial crisis never witnessed a rebound in home construction as we did have an overhang of foreclosures and excess new construction. That overhang was probably balanced out by the mid teens, and now we have an abject shortage of housing. The government would love to see new home construction, however the constraints are on the supply side – materials and especially labor.

I suspect the recovery from the current / imminent recession will finally be the one that ushers in a wave of new home construction. The big question will be whether we have the workers to do it.


Author: Brent Nyitray

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

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