Morning Report: Inflation comes in hotter than expected.

Vital Statistics:

S&P futures4,2232.8
Oil (WTI)70.370.34
10 year government bond yield 1.52%
30 year fixed rate mortgage 3.14%

Stocks are flattish this morning after inflation came in higher than expected. Bonds and MBS are down.

Inflation at the consumer level rose 0.6% MOM and 5% YOY. Given the lockdowns of a year ago, the annual numbers will have a lot of noise in them. Used vehicles accounted for a third of the increase. Ex-food and energy, the index rose 0.7% MOM and 3.8% YOY.

Housing is poised to push up the inflation numbers going forward, according to research from Fannie Mae. The inflation metrices attempt to capture home price appreciation via a concept called owners equivalent rent. Owners equivalent rent is a pretty lagged variable, which means that it probably won’t filter into the inflation numbers until 2022.

Initial Jobless Claims rose to 376,000 last week. Given the tightness of the labor market, it is surprising to see initial claims so elevated. Pre-COVID, they were in the low 200ks on average.

Home equity rose 19%, or about $1.9 trillion in the first quarter, according to CoreLogic. Negative equity fell about 24% to 1.8 million homes. This rise in equity will make cash-out refis a much bigger chunk of business going forward. “Homeowner equity has more than doubled over the past decade and become a crucial buffer for many weathering the challenges of the pandemic,” said Frank Martell, president and CEO of CoreLogic. “These gains have become an important financial tool and boosted consumer confidence in the U.S. housing market, especially for older homeowners and baby boomers who’ve experienced years of price appreciation.”

A bipartisan group of Senators are trying to craft an infrastructure plan that avoids tax hikes. This will be a tug-of-war between the left which wants to hike taxes and Republicans who are dead-set against raising them. While the Democrats nominally control the Senate, they will need 10 Republicans to go along to get a plan through.

Morning Report: The quits rate signals wage growth.

Vital Statistics:

S&P futures4,2339.8
Oil (WTI)70.340.33
10 year government bond yield 1.49%
30 year fixed rate mortgage 3.14%

Stocks are flattish this morning as oil rises above $70 per barrel. Bonds and MBS are up again.

The 10 year bond yield has started falling again, and this seems to be a global trade. The German Bund is back to negative 25 basis points, and just about every other sovereign bond yield is dropping. Some of this is a reversal of early-taper bets. Mortgage rates have been lagging the move as usual. Note the World Bank is forecasting that global growth will hit 5.6% this year, which would be the fastest growth since 1940. This would be incongruous with current bond yields, but with global central banks intervening so much in the market it might be useless as an economic signal.

Mortgage Applications fell 3.1% last week as purchases increased 0.3% and refis fell 13%. “Most of the decline in mortgage rates came late last week, with the 30-year fixed-rate mortgage declining to 3.15 percent. This likely impacted refinance applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “With fewer homeowners able to take advantage of lower rates, the refinance share dipped to the lowest level since April. Purchase applications were up slightly last week, and the large annual decline was the result of Memorial Day 2021 being compared to a non-holiday week, as well as the big upswing in applications seen last May once pandemic-induced lockdowns started to lift.”

Job openings hit a record high of 9.3 million at the end of April, according to the JOLTS job openings report. The biggest increase in openings came in food services. The quits rate hit 2.7%, and 4 million employees, both series records. Increases in the quits rate generally precedes increases in wages, and if the relationship holds, we should expect to see wage inflation into the second half of the year.

The increase in wages will undoubtedly contribute to further home price appreciation. I would expect to see this filter down into more esoteric mortgage products, as home price appreciation makes taking credit risk more appealing.

Morning Report: Small Business is becoming pessimistic on the economy

Vital Statistics:

S&P futures4,2359.8
Oil (WTI)69.340.11
10 year government bond yield 1.53%
30 year fixed rate mortgage 3.17%

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

Almost half of small businesses report being unable to fill job openings, according to the NFIB Small Business Optimism Survey. “Small business owners are struggling at record levels trying to get workers back in open positions,” said NFIB Chief Economist Bill Dunkelberg. “Owners are offering higher wages to try to remedy the labor shortage problem. Ultimately, higher labor costs are being passed on to customers in higher selling prices.”

I found one particular aspect of the report interesting:

While the consensus from the Fed and most economists is that the economy is poised to accelerate into the second half of the year, this survey sees increased pessimism. Expected earnings trends are down as well. That said, the survey also showed increasing numbers for the “good time to expand” issue, so maybe it is just some weirdness in the data. A tight labor market and a weakening economy don’t generally go together.

If NFIB is correct and earnings trends are heading downward, that is a canary in the coal mine. Stocks gotta be vulnerable here. I wonder if that report explains some of the move in the 10-year this morning.

Freddie Mac lowered the limit of NOO / Second homes it will buy from 7% to 6% yesterday.

To complement those efforts, we have updated our requirements for Investment Property and second home Mortgages as follows: for the month of July 2021, if the Seller sells more than five Mortgages secured by second homes and/or Investment Properties, the Seller’s deliveries of such Mortgages may not, by measure of aggregate UPB, exceed 6.5% of the total UPB for all Mortgages sold during that month. After July, on a monthly basis, if the Seller delivers more than five Mortgages secured by second homes and/or Investment Properties, deliveries of such Mortgages may not exceed 6% of the total UPB of all Mortgages sold.

There seems to be an appetite for these loans from investors, so this probably won’t be that big of an issue. NOO pricing seems to have found a level here. This makes sense – these loans are generally <75 LTV, and with home price appreciation in the double digits, the collateral means these loans are going to be money good.

TIAA’s correspondent lending division is being acquired by Pen Fed.

The number of loans in forbearance fell slightly to 4.16% last week, according to the MBA. “The share of loans in forbearance declined for the 14th straight week, with small drops across most investor types and all servicer types,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Forbearance exits dropped to 6 basis points, the lowest weekly level since mid-February, but new forbearance requests, at 4 basis points, matched the recent weekly low from early May.”

Morning Report: Home prices rise 15% in April

Vital Statistics:

S&P futures4,2313.8
Oil (WTI)69.43-0.17
10 year government bond yield 1.57%
30 year fixed rate mortgage 3.17%

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

The upcoming week will be relatively data-light, however we will get some inflation data with the consumer price index. Year-over-year comparisons will be noisy given the lockdown of a year ago.

Home prices rose 14.8% in April, according to Black Knight Financial Services. There is just two months of inventory available for sale, which is the lowest since Black Knight started keeping records. Higher prices are driving down affordability, and the company estimates that it costs 20.5% of median income to make monthly payments on the median home price. This is high compare to the past decade, but below the historical average of 23.6%. The number of listings in April was down 60% compared to the 2017-2019 average. Note that Redfin says that asking prices are beginning to fall.

Lumber was limit down on Friday, as supply is finally catching up with demand.

The Fed is thinking about talking about considering the concept of reducing bond purchases, according to the Wall Street Journal. It wants to avoid the “taper tantrum” of 2013. “We’re going to have discussions about our stance of policy overall, including our asset-purchase programs, and including our interest rates,” Cleveland Fed President Loretta Mester said Friday on CNBC shortly after the Labor Department released what she described as “a solid employment report.” Note the Fed is planning on selling its holdings of corporate bonds and ETFs which it purchased last year to stabilize the credit markets.

June might be the pivot point for the economy’s second-half acceleration. Baseball stadiums will be back to full capacity, and the rest of California’s draconian COVID restrictions will end on June 15. The expanded COVID-19 unemployment benefits will lapse in September, which should be a catalyst for people to get back to work.

Morning Report: Jobs report disappoints.

Vital Statistics:

S&P futures4,20918.8
Oil (WTI)69.510.07
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.16%

Stocks are higher this morning despite a disappointing jobs report. Bonds and MBS are flat.

The economy added 559,000 jobs in May, according to BLS. This number was below Street expectations. Leisure and hospitality accounted for about half of the new jobs created. The April number was revised upward to 278,000 so that report remains surprisingly weak.

The unemployment rate fell from 6.1% to 5.8%, however the labor force participation rate fell from 61.7% to 61.6%. The employment-population ratio did rise however to 58%

Average hourly earnings rose 0.5% MOM and 2% YOY. The big increase in lower-paid leisure / hospitality jobs is pulling down average hourly earnings, and is a reversal of what we saw a year ago.

Note that the ADP report showed that close to a million jobs were added in May, so there is a good chance this payroll number gets revised upward in the next couple of reports. One other point to keep in mind is that the seasonal adjustments have probably been introducing noise into the series as last year’s payroll volatility was a huge shock. The non-seasonally-adjusted payroll number was close to ADP’s estimate.

Independent mortgage bankers made $3,361 on each loan in the first quarter of 2021, which was the best first quarter on record. It was a decline from the fourth quarter, however that reflects the normal seasonality of the business. “Despite dropping slightly from the fourth quarter of 2020, net production profits reached their highest level for any first quarter since the inception of MBA’s report in 2008,” said Marina Walsh, CMB, MBA Vice President of Industry Analysis. “Triple-digit basis-point profitability was seen for the fourth consecutive quarter – another record that surpasses the 2012 boom generated from Home Affordable Refinance Program.”

Average volume fell slightly to $1.44 billion in the first quarter, and production revenue came in at 408 basis points. Net secondary marketing revenue decreased to 331 basis points from 346 in the fourth quarter. Purchase percentage fell to 39% from 43%.

Productivity fell to 3.6 loans per production employee from 4.2 in the fourth quarter. Since volumes were pretty much the same, it shows that mortgage banks added a lot of people in the first quarter.

Morning Report: The US economy added a million jobs last month

Vital Statistics:

S&P futures4,183-22.8
Oil (WTI)68.910.07
10 year government bond yield 1.59%
30 year fixed rate mortgage 3.16%

Stocks are lower this morning on overseas weakness. Bonds and MBS are flat.

The economy added 978,000 jobs last month, according to ADP. Leisure / hospitality added 440k of these jobs. Education and health were the next biggest category at 139k. Note that the Street is looking for about 650k jobs in tomorrow’s employment situation report.

Nonfarm productivity increased 5.4% in the first quarter as output increased 8.6% and hours worked increased 3%. Unit labor costs rose 1.7% as compensation increased 7.2% and productivity rose 5.4%. The increase in productivity should be considered bond-bullish because it will counteract inflationary pressures. Productivity issues were a big driver of 1970s inflation as US plants were aged and becoming inefficient, while union contracts had big automatic escalators.

Initial Jobless Claims fell to 385,000 last week. We are still pretty elevated relative to historical norms, but nowhere near where we were a few months ago. Outplacement firm Challenger and Gray reported companies announced 24,586 job cuts last month.

A DC Appeals Court rejected an appeal by landlords to resume evictions. The moratorium is supposed to expire at the end of June. Sure would be nice to see property rights again in the US.

The Biden Budget is out, and like most of these documents is an aspirational document not meant to be taken seriously. Of note however is their interest rate assumptions: that negative real interest rates will continue for the next 10 years. In other words, the budget envisions the 90-day T-bill rate to be below inflation through 2031. GDP is expected to stabilize around 1.8% per year and unemployment is going to find a level around 3.8%. The 10 year bond yield is expected to gradually rise to 2.8%.

I don’t know what the assumptions are behind that projection, however it definitely assumes that the sovereign debt bubble that global central banks have inflated will not burst. Bubbles generally do not work that way, and we have never seen a sovereign debt bubble before, at least none that I am aware of.

China has followed the model of rapidly-growing states (the US in the early 1900s, Japan in the mid-1900s) where rapid growth creates credit and real estate bubbles. These bubbles inevitably burst, and the country goes through a multi-decade deflationary episode. The US deflation episode lasted from the mid 1920s through the early 1950s. Japan is still in its episode which started in the 1990s. If China does see the same thing, it will try and export its way out of it, which will mean inflation will remain low as it floods world markets with cheap goods.

In the past, investors would judge the sentiment of global government debt using gold. The barbarous relic is no longer considered much of an indicator, however cryptocurrencies will be the new barometer. I suspect more and more money will own crypto as a hedge against government profligacy. Which is why the government wants to ban it under the guise of preventing criminality.

Morning Report: High end home prices are soaring

Vital Statistics:

S&P futures4,2078.8
Oil (WTI)68.410.67
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.15%

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

Mortgage applications fell 4% last week as purchases fell 3% and refis fell 5%. “Tight housing inventory, obstacles to a faster rate of new construction and rapidly rising home prices continue to hold back purchase activity,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “ The government purchase index declined to its lowest level in over a year and has now decreased year-over-year for five straight weeks. Purchase applications were down almost 2 percent from a year ago, but that was compared to the week of Memorial Day 2020.”

Loans in forbearance fell 1% last week to 4.18%, according to the MBA. “The share of loans in forbearance slightly declined, dropping by only 1 basis point, due to a slower pace of forbearance exits,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Forbearance re-entries increased to almost 5.6 percent, as more homeowners who had canceled forbearance needed assistance again. There was also an increase in the share of PLS and portfolio loans in forbearance, while the share for Fannie Mae, Freddie Mac and Ginnie Mae loans decreased.”

In a bit of a post-bubble reversal, the highest-priced homes are seeing the biggest price appreciation. Up until very recently, high priced homes languished on the market, as there was little demand for anything over $1.5 million except for a few metros on the West Coast. Now, luxury properties in places like Austin, San Diego, and Phoenix are are seeing price appreciation approaching 20%.

“In the high-end market, we’re not only seeing multiple offers—we’re seeing buyers waiving appraisal and inspection contingencies, which doesn’t normally happen,” said Vincent Shook, a Redfin real estate agent in Phoenix. “The biggest driver is the influx of people from California. Still, competition remains toughest for buyers of affordable and mid-priced homes.”

Shook continued: “Some buyers with more modest budgets are coming to me and saying, ‘I want a four-bedroom home and here’s my maximum price.’ I’ve had conversations where I’ve had to be brutally honest and tell them that home literally does not exist anymore. It existed eight months ago when they started looking, but they wanted to wait in hopes that prices would come down. Prices didn’t come down, and now they’re priced out of the market.”

The Biden Administration has unveiled a home rehab tax credit, which is targeted towards low-and-median income borrowers. The idea is to encourage rehabbing of older homes. The buyer must make no more than 140% of the area median income, and will apply to only 1 in 4 census tracts, and the final sale price of the home cannot exceed four times the area median income.

Morning Report: Home Prices rise 13%

Vital Statistics:

S&P futures4,22522.8
Oil (WTI)68.592.27
10 year government bond yield 1.63%
30 year fixed rate mortgage 3.15%

Stocks are higher this morning after we return from a 3-day weekend. Bonds and MBS are down.

The big event this week will be the jobs report on Friday. Given April’s disappointing payroll number, investors will be looking to see if it is revised upward.

Home prices rose 13% in April according to CoreLogic / Case-Shiller. They are forecast to rise only 2.8% over the following 12 months. A lack of inventory is driving home prices higher, and that is often due to older homeowners preferring to stay in their homes longer. Boomer owner-occupants are staying in their homes for 13 years, which is 50% longer than previous generations. Most of the country has seen double digit appreciation except for New York, where appreciation is close to 0%.

The eviction moratorium is scheduled to expire at the end of June. The CDC estimates that 15% of renters are behind on their rental payments, which means that eviction filings should have a huge bump if the CDC doesn’t extend the moratorium again. Housing advocates are arguing that it should be extended, at least until some rental aid checks are distributed, but with the economy re-opening, it is getting harder to argue that the original reason for the moratorium is still a valid one.

Manufacturing expanded in May, according to the ISM Manufacturing Report. New Orders improved, while production and employment-related sub-indices fell. Prices fell, which is surprising given that shortages continue to be an issue.

The manufacturing economy continued expansion in May. Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.

Construction spending rose 0.2% MOM and 9.8% YOY, according to Census. Residential construction rose 30% on a YOY basis, which was driven by depressed numbers during the lockdown days.

Morning Report: Personal Incomes fall

Vital Statistics:

S&P futures4,20911.8
Oil (WTI)67.290.47
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.16%

Stocks are higher this morning as we head into a 3 day weekend. Bonds and MBS are flat. Note the bond market closes early today.

Personal Incomes fell 13.1% in April, which was driven by March stimulus checks. Personal spending rose 0.5%, while the savings rate came in at 14.9%. The Personal Consumption Expenditures index (inflation) rose 0.6%, and 0.7% ex-food and energy. On a YOY basis it was up 3.6% overall and 3.1% ex-food and energy. We will see elevated annual figures for the next several months as COVID lockdowns a year ago introduce noise into the numbers.

The US savings rate has been elevated since the COVID lockdowns were imposed. I suspect a lot of this has been due to reduced spending on experiential stuff – i.e. vacations, eating out, etc. The economic consensus seems to be that the elevated savings rate will reverse this year and that higher spending will drive growth in the second half of the year. That said, the Atlanta Fed’s GDP now tracker for the second quarter has been trending down, having just fallen from 10% to 9%.

Pending Home Sales fell 4.4% in April, according to NAR numbers. On a YOY basis, however sales were up 51.7%. “Contract signings are approaching pre-pandemic levels after the big surge due to the lack of sufficient supply of affordable homes,” said Lawrence Yun, NAR’s chief economist. “The upper-end market is still moving sharply as inventory is more plentiful there.”

Loans in forbearance increased according to numbers out of Black Knight Financial. The number rose 16k to 2.2 million homes. This is 4.1% of homeowners.

Fannie Mae’s new “Refinance Now” program opens June 5. These are basically high LTV refis. They will be limited to primary borrowers at lower than 80% of the area median income income, and will be subject to the GSE high risk loan limits. They also must have a DTI under 65% and an LTV below 97. The minimum FICO is 620.

Morning Report: Is real estate an inflation hedge?

Vital Statistics:

S&P futures4,1911.8
Oil (WTI)65.73-0.47
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.13%

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

The second estimate for Q1 GDP was unchanged at 6.4%. On the other hand, personal consumption was revised upward from 10.7% to 11.3%. The personal consumption expenditures index (the preferred inflation index by the Fed) rose 3.7% in the first quarter. Ex-food and energy, it rose 2.5%. This is above the Fed’s 2% target.

Corporate profits were flat in the first quarter. Note the stock market was up 9% over the quarter while the 10-year bond picked up 83 basis points in yield during the same period. The stock market looks like it is over its skis a little

Initial Jobless Claims came in at 406,000 last week. While the number is going in the right direction, it is still almost double where we were pre-COVID. These sorts of numbers were what we saw in the bad old days of 2009-2010

Durable goods orders fell 1.3% in April. Ex-transportation they rose 1%. Core capital goods (a proxy for business capital investment) rose 2.3%.

Luxury builder Toll Brothers reported a 21% increase in revenues in its second quarter earnings. EPS rose 71% while backlog hit a record. Higher input prices are evidently not a factor as gross margins increased and the company is guiding for them to increase further.

Newco-spelled-backwards bought a $48 billion servicing portfolio from Amerihome which was recently bought by Western Alliance.

Is real estate really an inflation hedge? Investors are piling into real estate right now, at least on the residential side. Academic studies have looked at the 1970s as kind of a test for this hypothesis. During the 70s, stocks languished while real estate rose in price. The big question however concerns rent growth and that is a tougher issue. Apartment REITs have struggled to raise rents over the past year, however that is certainly COVID-19 related.

The 1970s also corresponded to the baby-boom’s first housing purchases, while the inflation of the 1970s was pretty much unrelated to demographics (OPEC and declining productivity was the culprit in the 70s).

Investors IMO are buying SFR real estate because the cap rates (mid-single digits) are attractive enough in this low interest rate environment, and when you add in double-digit home price appreciation, you have an outsized return compared to the other asset classes out there. Multi-fam is probably less attractive, given the current political environment.