Morning Report: Home prices rise

Vital Statistics:

S&P futures369115.3
Oil (WTI)47.410.24
10 year government bond yield 0.95%
30 year fixed rate mortgage 2.78%

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

President Trump has indicated dissatisfaction with the stimulus bill passed by Congress. He wants higher payments and much of the extraneous stuff pulled out. He didn’t expressly say whether he would veto the bill as-is. There are all sorts of things in there that have nothing to do with stimulus (new penalties for illegal streaming, funds to Pakistan for gender studies, etc), and my guess is that stuff is going to have to go.

Mortgage applications increased by 1% last week as purchases fell 5% and refis rose 4%. “The 30-year fixed rate – at 2.86 percent – is a full percentage point below a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Last week’s increase in refinance applications was driven by FHA and VA activity, while conventional refinances saw a slight decline. Overall refinance activity was 124 percent higher than in 2019, as borrowers continue to seek lower monthly payments or different loan terms.” Despite the drop in purchases they are still up 26% on a YOY basis.

Personal incomes fell 1.1% in November, and personal spending fell 0.4%. Inflation as measured by the personal consumption index came in at 0% on a MOM basis and 1.1% on a YOY basis. Inflation is way below where the Fed wants to see it, and unless we see a dramatic shift in these numbers, the Fed will keep the pedal to the metal with asset purchases and 0% interest rates.

Home Prices rose 1.5% MOM and 10.2% YOY according to the FHFA House Price Index. “U.S. house prices rose for the fifth straight month since states re-opened their local economies,” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “The 12-month gain of 10.2 percent in October is the highest annual appreciation observed since the 2004-2005 period. Extremely low mortgage rates and a limited supply of homes for sale continue to propel price gains. The data do not yet reflect renewals of some local and state COVID-19 restrictions.”

New Home Sales fell 11% MOM to 841,000. This is still up 21% on a YOY basis. The median sales price of new houses sold in November 2020 was $335,300. The average sales price was $390,100. I suspect that new home sales will be the big surprise of 2021.

In other economic news, durable goods rose 0.9%, while initial jobless claims fell to 800k last week. Consumer sentiment fell.

Zillow sees 2021 as the best housing market since 1983

Vital Statistics:

S&P futures36905.3
Oil (WTI)47.21-0.74
10 year government bond yield 0.93%
30 year fixed rate mortgage 2.78%

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

The House and Senate passed a stimulus bill and a funding bill. It allows for $600 checks to be sent to most Americans.

The third revision to Q3 GDP came in at 33.4%. Personal consumption expenditures rose 41%. These were both upside revisions.

Corporate profits rose 10.3% in the third quarter, which was a downward revision.

The number of mortgages in forbearance was unchanged at 5.49% last week, according to the MBA. “The share of loans in forbearance has stayed fairly level since early November, often with small decreases in the GSE loan share and increases for Ginnie Mae loans,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “That was the case last week. Additionally, forbearance requests from Ginnie Mae borrowers reached the highest level since the week ending June 14. Additional restrictions on businesses and rising COVID-19 cases are causing a renewed increase in layoffs and other signs of slowing economic activity. These troubling trends will likely result in more homeowners seeking relief.”

The spring selling season should be the biggest in 40 years, according to Zillow estimates. They expect that there will be a rush for buyers to get into the market before rates rise in the second half of 2021. I suspect that there is a lot of pent-up demand and supply from last spring, where sellers pulled homes off the market because they were worried about strangers entering their homes. Zillow is looking for home sales to hit 6.9 million units, the highest number since 1983.

Existing home sales fell 2.5% MOM to an annualized rate of 6.69 million units. This is still up 26% compared to a year ago. The median home price rose 15% to $310,600. Total for-sale inventory fell to 2.3 months worth, a record low. Homes were on the market for 21 days on average. First time homebuyers accounted for 32% of all sales. Historically that number has been closer to 40%. While low mortgage rates are helping improve affordability, rapid price increases are having the opposite effect.

Morning Report: Stimulus deal

Vital Statistics:

S&P futures3648-55.3
Oil (WTI)47.17-2.34
10 year government bond yield 0.91%
30 year fixed rate mortgage 2.78%

Stocks are lower this morning on news of a second strain of COVID in the UK. Bonds and MBS are up.

Congress came to an agreement on a $900 billion stimulus package, which will send $600 checks to people, and an extra $300 per week in unemployment benefits. Here is a chart to show where the money is going

There is no aid to state and local governments, which the Democrats desperately want. Chuck Schumer is already saying that there will be another stimulus bill when Biden takes office. Much will depend on the special election in Georgia which will determine which party controls the Senate.

The week ahead should be quiet as we head into the holidays. Markets will close early on Thursday and be closed all day on Friday. We will get a bit of housing data with existing home sales, new home sales, and the FHFA House Price Index.

United Wholesale, which is going public via a SPAC, pushed its IPO to January.

Morning Report: COVID costs NYC $1.2 billion

Vital Statistics:

S&P futures37185.3
Oil (WTI)48.770.34
10 year government bond yield 0.93%
30 year fixed rate mortgage 2.78%

Stocks are flattish as investors hope for some sort of stimulus package. Bonds and MBS are down.

Congress is working on stimulus bill and also a stopgap measure to keep the government funded. There is a tiny possibility that funding could run out over the weekend, but nothing prolonged is envisioned.

Despite the increase in the 10 year bond yield, mortgage rates are at record lows. “Mortgage rate dynamics over the past several months have been less dependent on economic data and more on policy-related matters — both fiscal and monetary — as well as epidemiological developments,” said Matthew Speakman, a Zillow economist. “A new spending package may place some upward pressure on mortgage rates, particularly if the package contains more than has been reportedly debated. Investors have expected the spending package for a while now, meaning it’s likely that most of their reaction has already been priced in. Overall, mortgage rates remain very low and are unlikely to shift unless a blockbuster spending package is passed before the end of the year.”

Falling real estate prices have dented NYC revenues by 1.2 billion. Sales of commercial and resi properties have fallen 49% compared to last year. This has translated into a 42% decrease in tax revenue for the City. The next shoe to drop should be office vacancies as big financial firms like JP Morgan and Goldman have talked about moving more jobs out of the City. Manhattan apartment prices are at 10 year lows, apparently. I have to imaging the apartments in more marginal areas of Brooklyn and Queens are getting absolutely hammered.

Morning Report: The Fed maintains rates

Vital Statistics:

S&P futures371117.3
Oil (WTI)48.270.44
10 year government bond yield 0.90%
30 year fixed rate mortgage 2.78%

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

The Fed maintained interest rates at current levels and releases a new set of economic projections. The projections for 2020 and 2021 GDP were moved upwards, while the unemployment forecasts for both years were moved downwards. Treasury and MBS purchases will continue. In the press conference, Jerome Powell said that he expects the economy to accelerate in the second half of 2021.

The dot plot was more or less unchanged from September, and the message is the Fed isn’t going to even think about hiking rates in 2021, and they will probably stay right here through 2023.

The Fed’s policy means that housing will be well-supported for the foreseeable future. There was hope that the Fed might increase MBS purchases, but it is probably unnecessary given that mortgage rates are at record lows despite the recent increase in the 10-year. We are starting to see more competitive behavior from other lenders, however this could be somewhat driven by seasonality.

Housing starts came in at 1.55 million last month, while building permits rose to 1.6 million. Given the flood of people leaving the cities and the supply / demand imbalance, housing should be a bright spot in the economy during 2021 and beyond.

Initial Jobless Claims rose again to 885,000.

Morning Report: Fed day

Vital Statistics:

S&P futures36862.3
Oil (WTI)47.570.24
10 year government bond yield 0.93%
30 year fixed rate mortgage 2.78%

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

The Fed announcement is expected to announce its decision at 2:00 pm this afternoon. The market will focus most closely on the economic forecasts and any changes in Treasury / MBS purchases.

Retail sales fell 1.1% in November, which was well below expectations. Ex vehicles and gasoline, they fell 0.8%.

Mortgage applications increased 1.1% last week as mortgage rates continued to fall. Purchases increased 2%, while refis rose 1%. “U.S. Treasury rates stayed low last week, in part due to uncertainty over the prospects of additional pandemic-related government stimulus, as well as concerns about the continued rise in COVID-19 cases across the country. Mortgage rates as a result fell to another survey low, with the 30-year fixed mortgage rate dropping five basis points to 2.85 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Homeowners once again acted on the decline in rates, with refinance activity rising for the second straight week and up 105 percent from a year ago.”

14.5 million people will leave the cities for the suburbs, according to an analysis by RedFin. They also anticipate that many will move to cheaper cities as well, which will benefit places like Buffalo, Cleveland, and Pittsburgh. 2021 should see a massive relocation in general. Second, they anticipate the homeownership rate will hit 70% next year, which will be the highest number since 2005. They also see mortgage rates staying low, with the 30 year fixed rate mortgage finishing the year around 3%.

The NAHB Homebuilder Index slipped in December, with the index falling to 86 from recent record highs. If the Redfin study is correct, housing starts will be the highest since 2006 next year.

Morning Report: Forbearances fall

Vital Statistics:

S&P futures366628.3
Oil (WTI)47.270.44
10 year government bond yield 0.91%
30 year fixed rate mortgage 2.78%

Stocks are higher this morning after the FDA said that Moderna’s vaccine is highly effective. Bonds and MBS are flattish.

The Fed begins its two day FOMC meeting today. The decision will be announced tomorrow afternoon.

In other economic news, industrial production rose 0.4% last month while manufacturing production rose 0.8%. Capacity utilization rose to 73.3%.

The fate of the GSEs will likely be left up to Biden, according to Steve Mnuchin. The idea of privatizing the GSEs during the lame duck session was always more of a fantasy than reality. GSE reform will likely require legislation and DC has been kicking the can down the road due to how difficult that will be. Personal opinion: the government is more likely to reinstate the profit sweep in order to compensate the government for COVID-related losses due to forbearance than it is to let the GSEs go. There is a reason why the 30 year fixed rate mortgage exists nowhere else in the world except for the United States, and that is due to the government backstop. Maintaining that product is the first priority, which means the Fan and Fred will have to maintain some sort of explicit government guarantee.

New home mortgage applications fell 16% in November, but are up 35% compared to a year ago. “November new home sales activity, both mortgage applications and home sales, ran at a pace considerably ahead of 2019, showing the ongoing strong growth in housing demand and new residential construction,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “However, MBA estimates that after climbing to a new survey high in October, the seasonally adjusted pace of new home sales declined in November. Signs of a slowdown in the economic recovery likely contributed to the expected monthly decrease in activity.” 

The number of loans in forbearance fell last week by 6 basis points to 5.48% according to the MBA. “The share of loans in forbearance decreased in the first week of December; however, more borrowers sought relief, with new forbearance requests reaching their highest level since the week ending August 2, and servicer call volume hitting its highest level since the week ending April 19,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Compared to the last two months, more homeowners exiting forbearance are using a modification – a sign that they have not been able to fully get back on their feet, even if they are working again.”

Morning Report: Fed week

Vital Statistics:

S&P futures368026.3
Oil (WTI)46.970.44
10 year government bond yield 0.93%
30 year fixed rate mortgage 2.78%

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

The Fed will meet this week on Tuesday and Wednesday. No changes in interest rates are expected, however we will get a new round of economic projections and future rate forecasts. The big question will concern whether the Fed intends to increase MBS purchases. Several Fed speeches have alluded to the possibility, which has probably explained much of the disconnect between Treasuries and mortgage rates. The 10 year keeps inching upwards, while mortgage rates keep hitting record lows. I still think the US 10 year cannot continue to ignore what is happening to sovereign yields overseas and the path of least resistance will continue to be down.

Aside from the Fed meeting, we will get some housing data this week with the NAHB Housing Market index and housing starts. We will also get retail sales and industrial production this week as well.

Congress is still trying to hammer out some sort of stimulus bill. The big sticking point is aid to state and local governments.

Retention rates dropped to 18% last quarter, according to data from Black Knight.

Morning Report: The CFPB updates the QM rule

Vital Statistics:

S&P futures3638-22.3
Oil (WTI)46.810.04
10 year government bond yield 0.89%
30 year fixed rate mortgage 2.80%

Stocks are lower this morning on fears of a nasty Brexit. Bonds and MBS are up.

The FDA is working aggressively to get Pfizer’s COVID-19 vaccine approved for emergency use.

The CFPB updated its QM rule by going with a price-based rule as opposed to strict DTI. Essentially, the new rule compares the rate on the loan and compares it to the average prime offer rate (APOR) of comparable transactions. If the rate is higher by less than 1.5%, then it is QM. If it exceeds the APOR by 1.5% – 2.25%, there is a rebuttable presumption that the borrower has the ability to repay.

“Through this General QM Final Rule, we are working to create an appropriate, more flexible General QM loan definition,” said CFPB Director Kathleen L. Kraninger.  “Our final rule’s price-based approach strikes the best balance between assessing consumers’ ability to repay and promoting access to responsible, affordable mortgage credit.”

Inflation at the wholesale level remains below the Fed’s target. The Producer Price Index rose 0.1% MOM and 0.8% YOY. Stripping out food, energy, and trade services, it rose 0.1% MOM / 0.9% YOY.

Morning Report: You have to pay to lend to Portugal

Vital Statistics:

S&P futures3653-19.6
Oil (WTI)46.430.94
10 year government bond yield 0.92%
30 year fixed rate mortgage 2.80%

Stocks are down as stimulus negotiations stall. Bonds and MBS are up.

Initial Jobless Claims rose to 853,000 last week. Meanwhile job openings increased to 6.52 million.

Inflation at the consumer level remains under control. The Consumer Price Index rose 0.2% month-over-month and 1.2% year-over-year. If you strip out food and energy prices, it rose 0.2% MOM and 1.6% YOY.

Homeowner equity rose 10.8% in the third quarter, which was the highest gain since 2014. Overall equity rose by $1 trillion, which works out to be about $17,000 on average for each homeowner. The average home with a mortgage had $194,000 in equity. The increase in home prices has been a huge boost to an otherwise difficult economy.

Lawmakers are looking at including an eviction moratorium until February 2021. This would only apply to people earning less than 50% of their area’s median income, so we would be talking about people making in the $30k and below range.

Remember the PIIGS crisis from about 8 – 10 years ago? The PIIGS was an acronym for the struggling European economies of Portugal, Italy, Ireland, Greece, and Spain. These countries had severe economic problems, which drove up the funding costs. Greece actually defaulted on its debt in 2015. Fast forward to today. The Portuguese 10 year is trading with a negative yield. Yes, if you want to lend money to the Portuguese government, you have to pay them. Spanish 10 year bonds yield 2 basis points. Italy and Greek yields are lower than the US 10 year. Let’s not forget that the Greek 10 year yielded 35% 5 years ago.

We are truly in the midst of a government-created experiment in direct market intervention like the world has never seen before. Global central banks have manipulated interest rates to the point where the signal-to-noise ratio is close to zero. Academics are setting the price of money the way Soviet bureaucrats set quotas for the Volograd Tractor Plant. There is zero market-driven influence on risk-free interest rates in the world right now.

If these rates were market-driven it would mean the market is telling you that we will experience a global deflationary wave, similar to what Japan has experienced for the last 30 years.

The planet’s collective bond markets are at a party. Germany and Japan are passed out in the corner. Spain and Portugal are puking in the bathroom, and the US and the UK are still staggering at beer pong table. But hey, they are the most sober ones there.

What does this mean for investors? No idea, since this is completely unprecedented. In the short term, I cannot see how US bond yields manage to escape the global vortex pulling down rates. While it is hard to argue that US rates will go negative, I think that the path of least resistance for rates in the US is down, even after the economy recovers. In other words, the mortgage business should continue to experience a refi boom.