Morning Report: New home sales soar

Vital Statistics:

S&P futures3225-12.6
Oil (WTI)39.87-0.16
10 year government bond yield 0.66%
30 year fixed rate mortgage 2.94%

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

New Home sales topped the 1 million seasonally adjusted annual rate in August, according to Census. This is the highest number since June 2006. There are only 282,000 new homes for sale at the moment, which translates into a 3.3 month supply.

The rise in new home sales should hopefully trigger a similar increase in housing starts. Housing has been the missing piece of the puzzle in the US economy since the bust of 12 years ago.

Loan Depot filed to go public yesterday. That makes Rocket, United Wholesale, and Loan Depot as big mortgage banking IPOs in 2020. Loan Depot planned to go public about 5 years ago, and scrapped the plan at the last minute. Initial estimates would value the company at somewhere between $12 and $15 billion. While the mortgage origination business is certainly hot, stock market valuations are not. Quicken is trading at a 2020 P/E of about 6, and PennyMac is trading with a 2020 P/E of about 3.5. Like Quicken, it looks like Loan Depot is going public with a dual voting class structure.

Durable Goods orders rose 0.4% last month, which was a bit below expectations. The core capital goods orders number, which is a proxy for capital expenditures, rose 1.8%.

Morning Report: MBA raises its origination forecast

Vital Statistics:

S&P futures3209-25.6
Oil (WTI)39.87-0.16
10 year government bond yield 0.67%
30 year fixed rate mortgage 2.94%

Stocks are lower after yesterday’s sell-off. Bonds and MBS are flat.

Initial Jobless Claims came in at 870k. This is worrying since the prior justification of high numbers was attributed to catch-up in state unemployment systems. You would think that would be finished by now. That said, retailers are beginning to pay rent again, so perhaps things are getting better.

The MBA raised its forecast for 2020 origination to $3 trillion. We saw that Black Knight estimated that 19.3 million “high quality” refinances are out there. They define “high quality” as being able to save 0.75% in rate, at least 20% equity and a FICO over 720. Assuming an average mortgage amount of $350k (which is probably a touch conservative), then that works out to be $6.8 trillion. If you take away these constraints, roughly 3/4 of the US mortgage market is in-the-money.

The big question for this however is the adverse market fee. Since 50 basis points roughly translates into maybe 0.17% in rate, the universe will shrink somewhat. Still, the most likely outcome is that margins will fall and we should assume that 3/4 of the US mortgage market will find it makes financial sense to refinance their homes as long as rates stay here.

Remote working is driving demand for renovation loans. I suspect that rising real estate prices will also begin to affect the move-up homebuyer, and they will choose to renovate versus move.

Morning Report: Housing inventory at record lows

Vital Statistics:

S&P futures33099.6
Oil (WTI)39.97-0.46
10 year government bond yield 0.68%
30 year fixed rate mortgage 2.94%

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

Quicken’s crosstown rival United Wholesale is going public via one of those Special Acquisition Corporations (SPACs). The deal will value the company at $16 billion. When do we get to rebrand The Motor City as the Mortgage City?

Existing home sales rose 2.4% MOM to 6 million, according to NAR. They were up 10% YOY, and the median home price rose 11% to $310,600.

“Home sales continue to amaze, and there are plenty of buyers in the pipeline ready to enter the market,” said Lawrence Yun, NAR’s chief economist. “Further gains in sales are likely for the remainder of the year, with mortgage rates hovering around 3% and with continued job recovery.”

Total housing inventory sits at 1.49 million units, or about 3 month’s worth of inventory. Historically, 6.5 months worth was considered a balanced market. In addition to the dearth of inventory, NAR believes that remote work will be a growing feature of the US economy, even after a COVID vaccine is found. You can see below we are pretty much in record territory as far as housing supply goes.

Mortgage Applications rose 7% last week as purchases rose 3% and refis rose 9%. “Mortgage applications activity remained strong last week, even as the 30-year fixed-rate mortgage and 15-year fixed-rate mortgage increased to their highest levels since late August,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications were up over 25 percent from a year ago, and the demand for higher-balance loans pushed the average purchase loan size to another record high.”

Rocket’s big announcement (which it has been hyping for weeks now) is the rebranding of its broker business from Quicken Loans Mortgage Services to Rocket Pro TPO. It will allow for e-signature technology, better visibility into loan status and allow borrowers to upload documents electronically.

“We have two pieces of technology that brokers love: One is ‘The Guru,’ and it’s kind of a Google platform for mortgage guidelines – searchable. Brokers love it,” Niemiec said in an interview. “We also have ‘The Answer,’ which is a piece of technology that brokers can interact with to ask questions and it communicates back and forth leading them to the proper answer. We actually partnered with Google over the last few months to create a new piece of technology that merges everything they love about Guru and everything they love about Answer into one tool called Pathfinder by Rocket. We’ll be rolling that out on the day of the announcement.” 

Home prices rose 1% in July and are up 6.5% YOY, according to the FHFA House Price Index.

“U.S. house prices posted a strong increase in July,” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “Between May and July 2020, national prices increased by over 2 percent, which represents the largest two-month price increase observed since the start of
the index in 1991. The dramatic increase in prices this summer can be attributed to the historically low interest rate environment and rebounding housing demand even as the supply of homes for sale remains constrained.”

Morning Report: Jerome Powell heads to the Hill

Vital Statistics:

S&P futures32793.6
Oil (WTI)39.63-0.46
10 year government bond yield 0.67%
30 year fixed rate mortgage 2.94%

Stocks are higher this morning as Jerome Powell heads to Capitol Hill. Bonds and MBS are flat.

Jerome Powell heads to the Hill for his semi-annual Humprey-Hawkins testimony. Here are his prepared remarks.

Economic activity has picked up from its depressed second-quarter level, when much of the economy was shut down to stem the spread of the virus. Many economic indicators show marked improvement. Household spending looks to have recovered about three-fourths of its earlier decline, likely owing in part to federal stimulus payments and expanded unemployment benefits. The housing sector has rebounded, and business fixed investment shows signs of improvement. In the labor market, roughly half of the 22 million payroll jobs that were lost in March and April have been regained as people return to work. Both employment and overall economic activity, however, remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain.

Loans in forbearance fell to 6.93% last week, according to the MBA. Fan and Fred loans decreased to 4.55%, while Ginnies increased to 9.15%. “The share of loans in forbearance has dropped to its lowest level in five months, driven by a consistent decline in the GSE share in forbearance,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “However, not only the did the share of Ginnie Mae loans in forbearance increase, new requests for forbearance for these loans have increased for two consecutive weeks. While housing market data continue to show a quite strong recovery, the job market recovery appears to have slowed, and we are seeing the impact of this slowdown on FHA and VA borrowers in the Ginnie Mae portfolio.”

The MBA and NAR are pushing back against proposed VA funding fee increases for IRRRL loans. “MBA and NAR have consistently registered our opposition to legislation that increases VA home loan funding fees to offset the costs associated with non-housing-related expenditures,” the letter said. “Although this proposed legislation would use the fee increase to fund job training and education programs that both organizations support, we believe the use of the VA home loan program for this purpose is inappropriate, particularly in the midst of a pandemic and a widespread economic downturn. This is exactly the time at which veterans should be encouraged to use streamlined refinancing options, such as IRRRLs, to lower their monthly mortgage payments. These savings are particularly important for those veterans who have suffered temporary job losses or reductions in income.”

The refi wave has the MBA forecasting $1.75 trillion in refis this year. The MBA believes this wave could be cresting. The MBA is forecasting that refinance volume will fall to $722 billion in 2021. That seems hard to square with the numbers out of Black Knight, who estimated that 19.3 million “high quality” refis were out there. 19.3 million loans (with an average loan size of say $350k) works out to be about $7 trillion. Taking away the “high quality” constraints (>20% equity, FICO > 720), there are 32.4 million refis (or over $11 trillion) out there. Currently 75% of homeowners have rates 75 basis points over the Freddie average rate. That 2021 forecast just seems off. The only way it can happen is if mortgage rates drift upward, which will probably require a resurgence of inflation and the Fed to take the foot off the gas with its MBS purchases.

That said, FHA loan spreads have widened compared to conforming loans, which is probably being driven by forbearance fears and the decline in servicing values, especially for FHA.

The jumbo-conforming spread, after spending the last several years at negative levels (in other words, jumbos had lower rates than Fannie / Freddie loans) spreads reverted back to positive numbers and is now around 35 basis points.

Affordable suburbs outside big cities are seeing the hottest real estate markets. Places like Camden County (outside Philly), Fairfield County CT, and El Dorado CA (outside Sacramento) are booming as people can get so much more for their dollar.

Morning Report: Home equity increases

Vital Statistics:

S&P futures3260-56.6
Oil (WTI)40.43-0.46
10 year government bond yield 0.65%
30 year fixed rate mortgage 2.94%

Stocks are lower this morning as the banks are getting hammered over a money laundering report. Bonds and MBS are up.

Bank stocks are getting slammed this morning after a report alleges that over $2 trillion in transactions were flagged as possible money laundering.

We don’t have much in the way of market-moving data this week, although we will get some housing numbers with existing home sales, new home sales, and the FHFA Home Price Index. Jerome Powell will be speaking Tuesday, Wednesday and Thursday this week.

The average homeowner gained $9,800 in home equity in the second quarter according to CoreLogic. There are still about 1.7 million homes with negative equity. Negative Equity still remains a problem in a few states, but the home price appreciation of the past decade has largely solved the issue.

The housing market remains red hot according to Redfin. The median home price rose 13% YOY to $319k. Active listings fell 28% to an all-time low, while sales prices were 99.3% of listing prices, which is an 11 year high.

“Seasonality is going to become more noticeable now that schools have started and Labor Day is over,” said Redfin lead economist Taylor Marr. “There is still a lot of room for more homes for sale to hit the market to make up for lost ground during the pandemic. This increase in supply is likely to drive more strong year-over-year growth in home sales. Leading indicators of home sales like mortgage applications and pending sales are still showing tremendous strength as we head into fall.”

Morning Report: Why mortgage rates will continue lower

Vital Statistics:

S&P futures3317-66.6
Oil (WTI)39.830.46
10 year government bond yield 0.65%
30 year fixed rate mortgage 2.94%

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

The Fed maintained rates at current levels yesterday. There were no major changes in the predicted path of interest rates, although the dot plot introduced the 2023 forecast, which shows predicts rates staying at 0%. The language in the statement shifted slightly however:

The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

The statement about inflation being “on track to moderately exceed 2 percent for some time” reflects the new thinking at the Fed that it will target an average rate of inflation. Since inflation has been well below the Fed’s target rate, in order to get the average to 2%, it will have to permit higher inflation for a while. The other thing to note is that the current levels of QE (MBS and Treasury purchases) should be considered a floor for the time being.

The economic projections were tweaked slightly, with 2020 GDP growth boosted from -6.5% to -3.7%. That said, 2021 and 2022 GDP growth rates were cut by 50 basis points each year. The expected unemployment rate was cut to 7.6% from 9.3%. Finally, the dot plot shows the Fed expects to maintain a 0% Fed funds rate through 2023.

The part about Treasuries and MBS should be noted as well. Right now, mortgage rates are being pushed upward by the sheer amount of hedging supply in the TBA market. In other words, when a borrower locks a rate, the mortgage bank will sell a mortgage backed security to hedge that lock. That selling puts downward pressure on TBA prices, which puts upward pressure on rates (remember bond prices and interest rates move in opposite directions). On the other side of the coin, we have the Fed buying TBAs in an effort to push mortgage rates down. At the moment, it seems like we kind of have a balanced market, since mortgage rates are pretty stable. As we head into the seasonally slow period selling pressure will dry up, at least a little. But the Fed isn’t going to take the foot off the gas. It just told you it won’t. I wouldn’t be surprised to see the Fed’s buying pressure become the dominant force in the MBS market this fall and winter. What does that mean? Mortgage rates will continue to ratchet lower, even if the 10 year bond goes nowhere. Why? mortgage spreads will tighten.

Housing starts fell to 1.41 million last month, which was a bit below expectations. Declines in multi-fam were offset by increases in single family residences. Building permits were more or less flat.

Initial Jobless Claims came in at 860k last week. It sounds like the recording of claims was somewhat backed up, which means we are getting claims from a few weeks ago.

Morning Report: Retail Sales disappoint

Vital Statistics:

S&P futures340812.6
Oil (WTI)39.330.46
10 year government bond yield 0.67%
30 year fixed rate mortgage 2.94%

Stocks are higher this morning as we await the Fed announcement at 2:00 pm. Bonds and MBS are up

The Fed is expected to maintain rates at 0%, however the action will be in the projection materials. Most market-watchers expect the Fed to keep rates at this level until 2023. In June, the Fed was predicting unemployment would end 2020 at 9.3%, and we are already well below that. They were also predicting GDP would fall 6.5% this year. What would make stocks happy? Big upward revisions in the economic predictions, along with a commitment to hold rates at 0% through 2022.

Retail Sales came in a little below expectations, rising 0.6%. Ex-vehicles and gasoline, they rose 0.7%. The control group, which also excludes building materials fell 0.2%. Note that lumber is on a tear these days.

The retail sales numbers don’t bode well for the holiday shopping season, as back-to-school is often a good predictor. One other interesting data point: the banks have been reporting credit card delinquency rates are actually falling, which means people are paying down debt and not spending. I am guessing less entertainment spending is driving this, however it is something to keep an eye on.

Mortgage Applications fell 2.5% last week as purchases fell 1% and refis fell 4%. The week did contain an adjustment for the Labor Day holiday, so that could be introducing some noise into the numbers. “Mortgage rates held steady last week, and the 30-year fixed rate – at 3.07 percent – has now stayed near the 3 percent mark for the past two months,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “A 5 percent decline in conventional refinances pulled the overall index lower, but activity was still 30 percent higher than last year. With the flurry of refinance activity reported over the past several months, demand may be slowing as remaining borrowers in the market potentially wait for another sizeable drop in rates.”

Morning Report: Loans in forbearance fall

Vital Statistics:

S&P futures340229.6
Oil (WTI)37.710.46
10 year government bond yield 0.69%
30 year fixed rate mortgage 2.92%

Stocks are higher this morning on good overseas economic news. Bonds and MBS are flat

The FOMC meeting begins today. We will get the official policy announcement tomorrow afternoon. There is talk that the Fed will change its inflation targeting policy from managing a single point in time to an average over time. The practical effect will be for the Fed to let inflation build before raising rates.

August new home purchase applications rose 33% YOY, according to the MBA. “The housing market continued to exceed expectations in August, as housing demand for new homes stayed strong and the job market continued to recover,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite economic uncertainty and the pandemic’s distortions to typical seasonal patterns, the comparisons to August 2019 show strength.”

The number of loans in forbearance fell by 15 basis points to 7.01% of mortgage servicers’ portfolio. Fannie and Freddie loans fell to 4.65%. Ginnie Mae loans fell to 9.12% and non-QM / portfolio rose to 10.71%. Part of the reason for the big drop in Ginnies / increase in portfolio loans was due to early buyout activity, where investors buy delinquent Ginnie loans out of the pool and portfolio them.

“The beginning of September brought another drop in the share of loans in forbearance, with declines in both GSE and Ginnie Mae forbearance shares,” said MBA Chief Economist Mike Fratantoni. “However, at least a portion of the decline in the Ginnie Mae share was due to servicers buying delinquent loans out of pools and placing them on their portfolios. As a result of this transfer, the share of portfolio loans in forbearance increased. Forbearance requests increased over the week, particularly for Ginnie Mae loans. With just under 1 million unemployment insurance claims still being filed every week, the lack of additional fiscal support for the unemployed could lead to even higher increases of those needing forbearance.”

In other economic data, the New York Empire State Survey improved last month, while industrial production rose 0.4% while manufacturing production rose 1%. Capacity Utilization rose to 71.4%.

Morning Report: 19 million refinanceable mortgages.

Vital Statistics:

S&P futures336136.6
Oil (WTI)36.91-0.24
10 year government bond yield 0.67%
30 year fixed rate mortgage 2.92%

Stocks are higher this morning as a bunch of mergers are announced. Bonds and MBS are flat.

The September FOMC meeting begins this week. No changes are expected in the Fed Funds rate. We will get a new set of economic projections and dot plot. That could potentially be market-moving.

There are 19 million high quality refinance candidates, representing 43% of all 30 year mortgages. Black Knight defines “high quality” as a FICO > 720, 20%+ equity, current on the mortgage, and could save 75 basis points on their mortgage. “With rates near historic lows, millions of consumers have an opportunity to find savings by refinancing and, in many cases, significantly lowering their interest rate and monthly payments,” said Will Pendleton, senior managing director of third party originations at Home Point Financial. “We feel that the low-rate environment is likely to persist well into 2021, and a great amount of focus in the lending community is on building capacity to meet the explosion of consumer demand.”

Note that 19 million mortgages at $250k a pop works out to be about $5 trillion in originations… So this has a few years to run.

Home prices are up 13%, according to Redfin. “Home price growth this high is making the housing market especially difficult for first-time homebuyers right now,” said Redfin chief economist Daryl Fairweather. “Rising prices are just one more reason for people to leave expensive urban neighborhoods behind. The sudden rise of remote work has allowed homebuyers who are priced out of one neighborhood to expand their search to more affordable areas. In turn, they are pushing up home prices in those relatively affordable areas, causing more people to look to even more affordable areas, and so on. Price growth may slow in 2021, but even if it does, high prices are going to continue to make affordability a concern for buyers.”

Morning Report: Inflation remains below the Fed’s target

Vital Statistics:

S&P futures335022.6
Oil (WTI)37.17-0.24
10 year government bond yield 0.68%
30 year fixed rate mortgage 2.92%

Stocks are higher this morning after we end a volatile week. Bonds and MBS are up.

Inflation at the consumer level rose 0.4% MOM and 1.3% YOY. Ex-food and energy, it rose 0.4% MOM and 1.7% YOY. You can see that inflation has been on a general downtrend since peaking around 1980. The Fed is deeply concerned about inflation going below 0%, and has set a 2% target rate.

Here are some possible changes to the QM rule. Note that a change in administration will bring in a new head of the agency, which could mean other possibilities. The CFPB wants to get away from the current QM patch, which allows loans guaranteed by Fan and Fred to be exempt from the 43% debt-to-income limit.

Fannie Mae says that about half of all lenders expect profit margins to increase over the next 3 months. FWIW, on its second quarter conference call, Rocket mortgage guided analysts to to contracting margins this quarter. As refis dry up, lenders will get more competitive, although that might not be a Q3 phenomenon.

“This quarter’s MLSS results align with the strong housing recovery amid the larger economic downturn due to COVID-19,” said Doug Duncan, Fannie Mae SVP and chief economist. “Purchase demand growth expectations for the next three months reached the highest third-quarter readings since survey inception. For the third consecutive quarter, lenders’ profitability outlook has remained a strong positive.”

Manhattan apartment vacancies hit 15,000, up from 5,600 a year ago. “The rental market is weak and getting weaker,” said Jonathan Miller, CEO of Miller Samuel. “The first-time buyers in outlying areas are largely coming from the Manhattan rental market.” Rents are falling as well, as studio rents are down 9% and one-bedroom rents are down 5%. Landlords are on average offering 2 months of free rent.