Morning Report: GDP growth slows dramatically in Q1

Vital Statistics:

S&P futures4,098 22.0
Oil (WTI)74.53 0.19
10 year government bond yield 3.48%
30 year fixed rate mortgage 6.40%

Stocks are higher this morning after Meta’s numbers surprised to the upside. Bonds and MBS are down.

GDP growth fell to 1.1% in the first quarter, according to the BEA. This was a substantial miss as the Street was looking for a 2% gain. Interestingly, yesterday’s Atlanta Fed GDP Now estimate was spot-on, although the prior week’s estimate was 2.5%.

A slowdown in inventory and homebuilding were drags on GDP growth, while increases in income and spending were positive components. The PCE price index rose 4.2% in the first quarter compared to 3.7% in the fourth quarter. If you strip out food and energy, Q1’s PCE rose 4.9% compared to 4.4% in Q4.

Pending Home sales fell by 5.2% in March, according to the NAR. “The lack of housing inventory is a major constraint to rising sales,” said NAR Chief Economist Lawrence Yun. “Multiple offers are still occurring on about a third of all listings, and 28% of homes are selling above list price. Limited housing supply is simply not meeting demand nationally.”

That said, it isn’t all bad as NAR is more optimistic about the rest of the year: “Sales in the second half of the year should be notably better than the first half as job gains continue and more favorable mortgage rates are expected,” said Yun. “Sales of new homes are already matching 2019 pre-COVID activity and are expected to increase in 2023, largely due to plentiful inventory in this segment of the market.”

Do you think next week will be the last Fed rate increase? Recent comments from Fed officials run the gamut from hawkish to dovish and tightening credit conditions in the wake of recent bank failures contrast with surprisingly resilient economic indicators. What will it mean for the mortgage industry if this is the final rate hike? Register for the first Agile Trader Talk webinar as Tawab Abawi explores these questions with industry veterans Chris Maloney of BOK Financial and Ian Lyngen of BMO Capital Markets. Agile is working to create a better MBS market through digital platforms and industry analysis; register for the End of QT? Mortgage Markets & the Fed Webinar and subscribe to the Agile newsletter to stay in touch with future coverage.  

Sandra Thompson at FHFA put out a statement on the new LLPAs for Fannie and Freddie. These LLPA changes (increasing for high FICO, decreasing for low FICO) have garnered a lot of attention in the media. FHFA says that these LLPA adjustments are being made to better take into account the risk profiles of these loans – in other words low FICO LLPAs were too big in the past. Of course they are basing this on expected performance, and since the COVID-19 pandemic delinquencies have in fact been low. Whether that will continue into the future is an open question given that forbearance might be messing with the numbers.

Things are indeed bad in the office commercial real estate space. The Wall Street Journal has a piece on a building in San Francisco which is for sale and might trade 80% lower than its estimated value in 2019. It is 75% vacant. Nearly 30% of San Francisco’s office space is vacant – about 6x the pre-pandemic level. “We’re all really on the edge of our seats to see the first office trade in San Francisco,” said J.D. Lumpkin, executive managing director at real estate services firm Cushman & Wakefield.

Office REIT Vornado recently suspended its common stock dividend for the rest of the year, and might pay its end-of-2023 dividend with cash or a combination of cash and stock. Interestingly, they authorized a $200 million buyback, as if that will mollify shareholders. Suspend the dividend, but authorize a buyback? Weird.

Office real estate will almost certainly weigh on bank balance sheets, and will probably make banks a little more risk-averse.


Author: Brent Nyitray

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

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