Morning Report: Americans will be fleeing the cities.

Vital Statistics:

 

Last Change
S&P futures 3034 -8.1
Oil (WTI) 34.44 -0.69
10 year government bond yield 0.68%
30 year fixed rate mortgage 3.28%

 

Stocks are flattish this morning despite riots in major cities across the US. Bonds and MBS are flat.

 

Trump will be meeting with the Attorney General this morning to figure out how to respond to the violence in many US cities.

 

The big economic news will be the jobs report on Friday. The Street is looking for a 7.7 million drop in jobs, an unemployment rate of 20% and a 7% increase in average hourly earnings. More and more states are re-opening so hopefully this will be the last jobs report with negative payroll growth.

 

Construction spending fell 2.9% in April, which was a little bit better than expected. The ISM Manufacturing Index fell to 43, which again was a little bit better than expected.

 

Personal Income rose 10.5% in April, largely due to the CARES Act. Personal consumption expenditures fell as people were unable to go to the stores. This caused a big jump in the savings rate, up to 33% from 10%, which ironically shows how big Keynsian spending plans often don’t have the desired effect.

PCE versus PI

 

The riots are certainly not going to help the jobs situation of course. Much will depend on how long they last. If they peter out over the next few days then we probably won’t see a major effect.

 

I can’t escape the idea that the riots and COVID have set in place the circumstances for a massive exodus from the big cities, similar to what we saw in the late 60s. During the 60s, manufacturing jobs fled the cities to the suburbs as many employees no longer wanted to work there. This time, I could see white collar jobs fleeing. When people can largely work from home, why pay top dollar for office space in the cities? And if the jobs relocate, why spend ten grand a month for a 1200 square foot apartment? I could see this turning out to be the catalyst for a massive expansion of the suburbs and exurbs,  which will be good for the homebuilders. Realtor.com noted that Connecticut has seen something like a 75% increase in people moving out of NYC.

 

 

Morning Report: First quarter GDP revised downward

Vital Statistics:

 

Last Change
S&P futures 3043 5.1
Oil (WTI) 32.94 -0.69
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.28%

 

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

 

Initial Jobless Claims came in at 2.1 million, about in line with expectations. At a minimum we need to see this number fall back to the six digit area to have any prayer of a recovery.

 

Luxury homebuilder Toll Brothers beat on the top line and the bottom line. This quarter ended on April 30, so half of the quarter was pre-COVID and half was post-COVID. Revenues fell 11% YOY, while signed contracts were down 22%. Backlog was flat YOY. CEO Doug Yearley noted that deposit activity rebounded in May and was up YOY. This is a leading indicator of housing demand.

“While net signed contracts in the first four weeks of May were down 37% year-over-year, we are very encouraged by recent deposit activity. Our deposits, which typically precede a binding sales contract by about three weeks and represent a leading indicator of current market demand, were up 13% over the past three weeks versus the same three-week period last year. Importantly, our recent deposit-to-contract conversion ratio has remained consistent with pre-Covid-19 levels. Web traffic has also steadily improved from the lows we experienced in mid-March and has returned to the same strong activity we enjoyed pre-Covid-19 in February. These early trends suggest the housing market may be more resilient than anticipated just two months ago.”

Homebuilding is an early-cycle play, so you should expect to see a turnaround in that sector first. Overall, it sounds like the builders have been pleasantly surprised at how the sector has held up during the crisis.

 

First quarter GDP was revised downward to -5% from -4.8% in the second estimate. Inflation continues to be tame, with the headline number up 1.3%. Ex-food and energy it rose 1.8%. In other economic news, Durable Good Orders fell 17% in April. Most of this data is pretty much irrelevant to stock prices right now. The stock market is looking over the valley.

 

Ex-Obama staffer Jason Furman predicts that we are about to see the best economic numbers the country has ever seen. FWIW, I agree with his sentiment. The COVID Crisis is about 3 months old. There was nothing wrong with the economy going into the crisis, and the shock to the economy should feel more like a natural disaster than a traditional bubble-driven recession. If we have passed the bottom (admittedly a big “if”) then the economy could be on fire by late summer / early fall. And speaking of “fire,” the government poured a few trillion gallons of fiscal gasoline on it.

 

Pending Home Sales fell 22% in April, according to NAR. “While coronavirus mitigation efforts have disrupted contract signings, the real estate industry is ‘hot’ in affordable price points with the wide prevalence of bidding wars for the limited inventory,” NAR Chief Economist Lawrence Yun said. “In the coming months, buying activity will rise as states reopen and more consumers feel comfortable about homebuying in the midst of the social distancing measures. Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded for both home sales and prices, with home sales to decline by only 11% in 2020 with the median home price projected to increase by 4%,” Yun said. “In the prior forecast, sales were expected to fall by 15% and there was no increase in home price.”

 

Those hoping to snap up recession-driven bargains in the real estate market may be disappointed. That said, the bargains (if any) would be in the higher priced area, not the more affordable price points. “The mix of homes that are on the market now is a little bit different,” says Ratiu. “What’s really selling at a premium are lower-priced homes. The higher-priced homes are sitting on the market longer.”

Morning Report: Purchase applications up 54% since early April

Vital Statistics:

 

Last Change
S&P futures 3011 15.1
Oil (WTI) 33.64 -0.69
10 year government bond yield 0.69%
30 year fixed rate mortgage 3.28%

 

Stocks are higher this morning on news of further global stimulus and optimism that the COVID crisis is in the rear view mirror. Bonds and MBS are flat.

 

The MBA reported that 8.4% of mortgages are in some sort of forbearance plan right now.  “Although job losses continue at extremely high rates, mortgage servicers are reporting only modest increases in the share of loans in forbearance as of May 17,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The decline in employment and income is hitting FHA and VA borrowers harder, leading to 11.6 percent of Ginnie Mae loans currently in forbearance.”

 

Mortgage Applications increased 2.7% last week as purchases increased 3% and refis declined by 0.2%. “The home purchase market continued its path to recovery as various states reopen, leading to more buyers resuming their home search,” said Joel Kan MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications increased 9 percent last week – the sixth consecutive weekly increase and a jump of 54 percent since early April. Additionally, the purchase loan amount has increased steadily in recent weeks and is now at its highest level since mid-March.”  Home purchase applications have increased 54% since early April.

 

Job losses from COVID show a pretty large regional distribution, with the Northeast and the Midwest bearing the brunt of the losses versus the South and West.

regional job losses

Morning Report: New Home Sales encouraging

Vital Statistics:

 

Last Change
S&P futures 3008 55.1
Oil (WTI) 34.34 1.19
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.28%

 

Stocks are higher this morning on optimism about the economy re-opening. Bonds and MBS are flat.

 

The upcoming week is somewhat data-light. The big numbers will be the second revision to GDP and construction spending.

 

Home prices rose 1.7% in the first quarter and were up 5.7% on a YOY basis, according to the FHFA House Price Index.  That said, the report noted that the data in the report probably doesn’t take into account the effects of COVID. The Mountain states led the charge, with Idaho, Montana, and Wyoming posting double-digit gains.

Home price appreciation by state

The Case-Shiller index reported a 4.4% annual gain. The difference between the FHFA and Case-Shiller indices? FHFA is limited to transactions with a conforming mortgage, while Case-Shiller includes all sales.

 

New Home Sales came in at 623,000 which was up from March, but down 6.7% on a YOY basis. Since April was the worst of the crisis, this is an encouraging number. Note that these are estimates with wide confidence intervals. So there is a chance these could get revised lower. I listened to pretty much every homebuilder earnings call and pretty much every one said that the second half of April was unexpectedly strong.

 

I went to a restaurant in Connecticut last night. Outdoor seating, long line out the door to get a table. Sample size of 1, but it looks like people are antsy to get out of the house and put COVID behind them. Barring any sort of second wave of infections, I think the economy rebound by the 4th of July and will have shaken off most of the economic damage by Labor Day.

Morning Report: Existing home sales fall

Vital Statistics:

 

Last Change
S&P futures 2963 -4.1
Oil (WTI) 34.54 1.19
10 year government bond yield 0.68%
30 year fixed rate mortgage 3.28%

 

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

 

Initial Jobless Claims came in at 2.4 million. which was a touch higher than expectations.

 

3.6 million Americans were past due on their April mortgage payment according to Black Knight Financial Services. This is the largest number since January 2015. Foreclosure starts and completions were at record lows due to government-imposed moratoriums. Miami, NYC and Las Vegas were the hardest hit cities. Note that sales in NYC are down 61%. I suspect we are going to see a mass exodus to the suburbs after this is over.

 

The Census Bureau estimates that almost half of all households has lost employment income during the pandemic. States that rely heaviest on tourism like Nevada and Hawaii saw close to 60%.

 

Existing home sales fell 18% in April, according to NAR. The median home price rose 7.4% YOY. Inventory was down 1.3% from March and down 19.7% from a year ago. “The economic lockdowns – occurring from mid-March through April in most states – have temporarily disrupted home sales,” said Lawrence Yun, NAR’s chief economist. “But the listings that are on the market are still attracting buyers and boosting home prices.”

 

The index of leading economic indicators came in at -4.4, better than expected, and an improvement from the March number.

Morning Report: Over 70% of the loans in forbearance don’t need the help

Vital Statistics:

 

Last Change
S&P futures 2966 37.1
Oil (WTI) 32.84 1.19
10 year government bond yield 0.71%
30 year fixed rate mortgage 3.28%

 

Stocks are higher this morning as retailer earnings are coming in better than expected. Bonds and MBS are flat.

 

The FHFA put out new guidance yesterday on forbearance and refinances. Essentially, you will will be eligible to refinance your property provided you are current with whatever repayment plan you negotiated for 3 months after exiting forbearance. “Homeowners who are in COVID-19 forbearance but continue to make their mortgage payment will not be penalized,” said Director Mark Calabria. “Today’s action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.” According to the MBA, 4.1 million borrowers are in forbearance right now and over 70% don’t need the help. That is a huge number, but i guess it is to be expected since there is no requirement to demonstrate hardship.

 

Mortgage Applications fell 2.6% last week as purchases increased 6% and refis fell 6%. “Applications for home purchases continue to recover from April’s sizable drop and have now increased for five consecutive weeks,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity – which was 35 percent below year-ago levels six weeks ago – increased across all loan types and was only 1.5 percent lower than last year. Government purchase applications, which include FHA, VA and USDA loans, are now 5 percent higher than a year ago, which is an encouraging turnaround after the weakness seen over the past two months. As states gradually reopen and both home buyer and seller activity increases, we will be closely watching to see if these positive trends continue, or if they reflect shorter-term, pent-up demand.”

 

41% of home sales had bidding wars, according to Redfin. “Demand for homes has picked back up after hitting rock bottom in April, and that uptick paired with a lack of supply is a recipe for bidding wars,” said Redfin lead economist Taylor Marr. “Homebuyers are getting back out there, searching for more space as they realize using their home as an office and school may become the norm. But sellers are still holding off on listing their homes, partially due to economic uncertainty and concerns of health risks. In some hot neighborhoods, there may only be one or two homes for sale, with multiple homebuyers vying for them.”

 

22% of builders reduced home prices to move inventory, according to the NAHB. This is much less than the housing recession of 2008, which was about 50%.

Morning Report: Forbearance curve is flattening

Vital Statistics:

 

Last Change
S&P futures 2940 -7.1
Oil (WTI) 33.54 1.19
10 year government bond yield 0.73%
30 year fixed rate mortgage 3.28%

 

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

 

Fed Chairman Jerome Powell and Treasury Secretary Steve Mnuchin head to Capitol Hill to testify in front of the Senate today.  In his prepared remarks, Jerome Powell basically laid out everything the Fed has done so far, so it doesn’t look like anything new is going to come out of this.

 

Social distancing took a bite out of housing starts in April, falling 30% to 891 thousand. Building Permits also fell 19% from March. Separately, the NAHB Housing Market index increased in May to 37 from 30.

 

CNBC explains why this isn’t the Great Depression, even though the unemployment numbers are up there. The simplest explanation – there was no economic rot that caused the drop in the economy. No asset bubbles, no bad investments, no bank failures – it isn’t comparable. This was a healthy economy that was put in a deep freeze in response to a pandemic. Recessions generally exist because bad debt needs to be written off, excess inventory needs to be sold, and bad businesses liquidated. There isn’t any of that this time around. Just like the predictions of millions of deaths in the US from COVID turned out to be overly pessimistic, I think many of the predictions of a long, drawn out recovery will be too.

 

The Despot missed earnings expectations this morning, but maintained its dividend. It also withdrew its guidance for the rest of the year. The company took some actions to help its employees including paid time off, bonuses, and healthcare expense help which hit earnings by 60 cents a share. Meanwhile, WalMart reported strong numbers this morning as shoppers stockpile necessities.

 

It looks like the “forbearance curve” is flattening. “The pace of forbearance requests continued to slow in the second week of May, but the share of loans in forbearance increased,” said Mike Fratantoni, MBA’s chief economist. “There has been a pronounced flattening in loans put into forbearance – despite April’s uniformly negative economic data, remarkably high unemployment, and it now being past May payment due dates.”