Morning Report: Fannie forecasts little changes to mortgage rates through 2023

Vital Statistics:

S&P futures4,70915.2
Oil (WTI)76.020.08
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.26%

Stocks are higher this morning on M&A news. Bonds and MBS are down small.

The upcoming week contains the Thanksgiving holiday, so volumes should be relatively light. Market are closed on Thursday, and Friday is an early close in the bond market. The big day for data will be Wednesday, when we get GDP, personal incomes and spending, and new home sales.

The Wall Street Journal is reporting that Jerome Powell will be re-nominated to run the Fed. Lael Brainard will be the Vice Chairman. The difference between the two is probably not of any issue to the markets – the big issue is inflation and whether the Fed has the stomach to raise rates. The left wanted Brainard who would supposedly be tougher on the banks and climate change. I wonder what the correlation is between the overnight reverse repo rate and the temperature of Gaia.

Existing home sales rose 0.8% in October, according to NAR. The median home price rose 13.1% to $353,900. Inventory remains tight, with only 2.4 months’ worth at the current sales pace. “Home sales remain resilient, despite low inventory and increasing affordability challenges,” said Lawrence Yun, NAR’s chief economist. “Inflationary pressures, such as fast-rising rents and increasing consumer prices, may have some prospective buyers seeking the protection of a fixed, consistent mortgage payment.”

Investors comprised 17% of all sales, and the first time homebuyer accounted for 29% of all transactions.

The Chicago Fed National Activity Index improved in October, after declining in September. This means the economy grew above trend during the month.

Fannie Mae is predicting that mortgage rates will rise to 3.5% by the end of 2023, which is not too far from where they are now.

“The Fed has taken pains to broadcast its tapering and rate hiking plans to avoid a repeat of the 2013 temper tantrum, when market expectations suddenly shifted regarding the long-run real rate, and for now both financial market and survey measures of long-term inflationary expectations remain mostly anchored,” Fannie Mae forecasters said. “Therefore, our baseline forecast is that these effects are largely ‘baked in,’ leading to only a modest drift upward in mortgage rates over the next few years.”

Note that the MBA sees rates heading much higher in the second half of 2022. Fannie Mae is forecasting that the Consumer Price Index could hit 7% or 8% in the back half of 2022 as all of the home price appreciation from the past 18 months begins to filter through to the CPI.

Morning Report: Home sales fall 10% compared to a year ago

Vital Statistics:

S&P futures4,690-10.2
Oil (WTI)76.35-2.63
10 year government bond yield 1.52%
30 year fixed rate mortgage 3.28%

Stocks are lower as parts of Europe re-enter lockdown mode. Bonds and MBS are up.

Home sales were down 6.2% MOM and 10.2% YOY, according to data from Re/Max. “We’re seeing the effects of a long, sustained run-up in prices and month-over-month home sales and the market may be moving past the days of immediate sales, multiple offers and bidding wars on virtually every property,” said Nick Bailey, president of RE/MAX, LLC. “That’s okay — the October dip in sales, especially after such a busy September, is a step toward a more balanced market and was somewhat overdue.”

Redfin predicts that we will have a more balanced housing market in 2022 as listings increase. The company expects mortgage rates to rise to 3.6%, and for new listings to hit a 10-year high. Rents are expected to increase 7% as well.

Separately, Redfin’s Home Demand Index hit an all-time high. “The economy is recovering strongly and mortgage rates are still near all-time lows. Those two forces combined have caused homebuying demand to hit a record high,” said Redfin Chief Economist Daryl Fairweather. “People who tried to buy a home in the spring are coming back for round two, only to find the market is still quite difficult because of a lack of homes for sale. A lot of homebuyers wish they had bought last year, now that it’s not just homes that are more expensive, but also gas, groceries and dining out. Many buyers today are limited to move-in ready homes because it is so difficult and expensive to purchase new appliances or find contractors to make improvements.”

Morning Report: Economy accelerating into the fourth quarter

Vital Statistics:

S&P futures4,70013.2
Oil (WTI)78.550.23
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.27%

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

Initial Jobless Claims came in at 268k last week. We are still well above pre-COVID levels, but at least the numbers are trending down.

The index of leading economic indicators increased in October, according to the Conference Board. The index rose 0.9% after increasing 0.7% in August and September.

“The U.S. LEI rose sharply in October suggesting the current economic expansion will continue into 2022 and may even gain some momentum in the final months of this year,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Gains were widespread among the leading indicators, with only the average workweek and consumers’ outlook making negative contributions.

“However, rising prices and supply chain bottlenecks pose challenges to growth and are not expected to dissipate until well into 2022. Despite these headwinds, The Conference Board forecasts growth to remain strong in the fourth quarter at around 5.0 percent (annualized rate), before moderating to a still historically robust rate of 2.6 percent in Q1 2022.”

Here is a good video describing what happened with Zillow Offers and the Orlando housing market. The Wall Street Journal also had a long piece about how Zillow’s algorithm got it so wrong. Zillow was obviously chasing properties in the hottest markets (especially Phoenix) and was overestimating the value that its improvements. It looks like the company is stuck with inventory and will be selling them at a 5% – 7% loss.

New York Fed Head John Williams spoke yesterday about Fed interventions into the Treasury and financial markets. If you were hoping that the Fed might allow the market for interest rates to become, well, a market, then you might be disappointed.

It’s also clear that we need not start from a position of how things are, but instead, how they should be. Let’s not think of how we can reform, but how we can design. Let’s create a system that can better withstand the unforeseeable and the unpredictable.

The problem with “designing a market” is that interest rates are an important input into the economy. They transmit critical information about the supply and demand for capital. For the last 12-13 years, the Fed has been actively intervening in the interest rate markets. God knows how they will handle the disruption if / when the sovereign debt bubble bursts.

The choice for the next Fed Head is between Jerome Powell and Lael Brainard. She is perceived as more dovish than Powell. The market perceives Brainard as more political than Powell: “Powell, I think, will be much less concerned about the midterm elections in determining when they should raise interest rates,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “I’m not saying that’s what Brainard is going to do if she’s in that seat, but that’s going to be the perception.” FWIW, the Fed has historically been loath to make any monetary policy changes late in a Presidential election year, but this is the first time I have heard a mention of midterms.

The impact on the Treasury market would be worse (at least for mortgage bankers) if Biden nominates Brainard. She will be viewed as more inflationary. FWIW, the Fed Funds futures are still handicapping either two or three rate hikes next year. Brainard would mean a steeper yield curve (in other words a bigger difference between long-term and short-term rates).

Morning Report: Housing starts disappoint

Vital Statistics:

S&P futures4,687-8.2
Oil (WTI)79.82-0.93
10 year government bond yield 1.63%
30 year fixed rate mortgage 3.27%

Stocks are lower as investors fret about inflation. Bonds and MBS are down.

Housing starts disappointed again, coming in at 1.52 million. Building Permits were a bit better, rising to 1.65 million. Given the shortage of housing in the US, these numbers should be north of 2 million. This has been going on for years, so it cannot be blamed on the supply chain shortages of the past two years.

Housing starts are stuck around the average level since 1959. When you consider that the US population has risen 85% since then you can see the issue. Below is a chart of housing starts divided by population.

According to the National Association of Realtors, we have a shortage of about 5 million units. That is 3 years of housing starts alone.

Separately, homebuilders sentiment rose 3 points, according to the NAHB / Wells Fargo housing index. “The solid market for home building continued in November despite ongoing supply-side challenges,” said NAHB Chairman Chuck Fowke. “Lack of resale inventory combined with strong consumer demand continues to boost single-family home building. In addition to well publicized concerns over building materials and the national supply chain, labor and building lot access are key constraints for housing supply,” said NAHB Chief Economist Robert Dietz. “Lot availability is at multi-decade lows and the construction industry currently has more than 330,000 open positions.”

Mortgage Applications fell by 3% last week as purchases increased by 2% and refis fell by 5%. “Refinance applications decreased for the seventh time in eight weeks, as mortgage rates moved higher after two weeks of declines.” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Activity has been particularly sensitive to rate movements, and last week’s decline was driven by a drop in conventional and FHA refinance applications, which offset an increase in VA refinance applications. All mortgage rates in MBA’s survey increased, with the 30-year fixed rate climbing to 3.2 percent.”

Morning Report: Strong retail sales report

Vital Statistics:

S&P futures4,6801.2
Oil (WTI)81.220.43
10 year government bond yield 1.63%
30 year fixed rate mortgage 3.27%

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

Retail Sales rose 1.7% in October, according to the Census Bureau. On a YOY basis, they rose 16.3%. Gasoline prices were a big driver of the increase. Electronics retailers also saw decent gains. Ecommerce sales were up 4%.

Overall, this is a good start for the holiday shopping season. Note that Walmart reported third quarter numbers this morning. Same store sales rose 9.2%, which is a strong reading, albeit it is an easy comparison to a year ago.

Industrial Production rose 1.6% MOM in October, while manufacturing production rose 1.2%. Capacity Utilization rose to 76.4% from 75.8%.

Applications for new home mortgages rose 6% from September, but are down 15% compared to a year ago. “The strong monthly gain puts MBA’s estimate of new home sales at its strongest pace since January,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity continues to be dominated by higher loan balance transactions, which pushed the average new home loan size up to over $412,000, another new record in the survey. Recent U.S. Census data show an increasing share of new sales are for homes yet to be built or still under construction, and a shrinking share of completed homes. Housing demand remains strong, and buyers are making quick decisions in a still very competitive market.”

Renters who are exiting from the eviction moratorium are seeing a 10% increase in asking rent. “Single-family rental vacancy rates remained near 25-year lows in the third quarter of 2021, pushing annual rent growth to double digits in September,” said Molly Boesel, principal economist at CoreLogic. “Rent growth should continue to be robust in the near term, especially as the labor market improves and the demand for larger homes continues.”

Rent growth was strongest in Miami, rising 27%. Phoenix and Las Vegas rose 20% and 16% respectively. On the other side was the Northeast, where rents rose under 5% on average.

Real Estate investors bought 18.2% of homes in the third quarter, according to Redfin. This has made it difficult for homebuyers who have to compete with these folks. We are seeing lots of institutional money flood into the space as the potential returns in rentals dwarf anything else in the financial markets.

Morning Report: Quits rate signals wage inflation ahead.

Vital Statistics:

S&P futures4,69314.2
Oil (WTI)79.72-1.03
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.27%

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

The upcoming week won’t have much in the way of market-moving data, although we will get some important housing data with housing starts and the NAHB Housing Market Index. The biggest day for non-housing data will be tomorrow when we get retail sales and industrial production.

Mohammed El-Arian says the Fed has a credibility problem when it comes to inflation. “I think the Fed is losing credibility,” El-Erian said Monday. “I’ve argued that it is really important to reestablish a credible voice on inflation and this has massive institutional, political and social implications….We are in this transition of central banks mischaracterizing inflation. The repeated narrative: ‘It is transitory, it is transitory, it is transitory.’ It is not transitory,” El-Erian said, warning the Fed risked making a major policy mistake….We have ample evidence that there are behavioral changes going on….Companies are charging higher prices [and] there’s more to come. Supply disruptions are lasting for a lot longer than anybody anticipated. Consumers are advancing purchases in order to avoid problems down the road — that of course puts pressure on inflation. And then wage behaviors are changing.”

The Atlanta Fed’s GDP Now estimate has fourth quarter GDP accelerating to 8.2%. Much of this will hinge on consumer spending for the holidays and whether supply chain issues work themselves out.

There were 10.4 million job openings at the end of September, according to the JOLTS jobs report. The quits rate, which tends to lead wage growth, rose to a series high of 3%. This will alarm the Fed as we have the pieces in place for a wage-price spiral.

Morning Report: Consumer sentiment falls to 2011 levels

Vital Statistics:

S&P futures4,65714.2
Oil (WTI)80.22-1.03
10 year government bond yield 1.55%
30 year fixed rate mortgage 3.17%

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

Volatility in the Treasury market is back to March and April of 2020. While this volatility isn’t as bad as the 2013 taper tantrum, we should still expect volatility in the interest rate market as the Fed begins its tapering process. FWIW, MBS spreads are still super-tight, which means the mortgage backed securities market is sanguine about the process. I have received some emails from NQM lenders saying that conditions in the NQM securitization market are deteriorating, and there is the possibility that this could start flowing through to other markets.

The Evergrande situation in China has the potential to affect financial markets outside of China. There is so much leverage in the system that financial distress gets transmitted quite quickly. Don’t forget in 2008, pain in the subprime market (which theoretically should have been contained in the hedge fund / investment bank community) ended up making it impossible for retailers to borrow money in the commercial paper market to fund inventory for the holiday shopping season. This is why I keep harping on this situation.

Mortgage delinquencies fell for the fifth straight quarter, according to the MBA. Delinquency rates fell by 59 basis points on a quarterly basis and 277 on an annual basis to 4.88% of all loans outstanding. “For the fifth consecutive quarter, the mortgage delinquency rate declined, commensurate with a decline in the U.S. unemployment rate over the same time period,” said Marina Walsh, CMB, MBA Vice President of Industry Analysis. “The improvement was driven entirely by a decline in later-stage delinquent loans – those loans that are 90 days or past due, but not in foreclosure. By the end of the third quarter, many borrowers were approaching the 18-month expiration point of their forbearance terms and were being placed in permanent home retention solutions, such as modifications and loan deferrals.”

Consumer sentiment fell again, according to the University of Michigan Consumer Sentiment Survey. This is the lowest level in a decade. The index hit 66.3, which goes back to 2011 levels. Consumers cited inflation as the prime reason, along with a belief that government policy will be unable to address it. FWIW, consumer sentiment surveys tend to mirror gasoline prices, but the inflation issue is something we haven’t dealt with for a long time.

On the issue of policy responses, the government has 3 options. First, they can hope that things eventually work out. That is Plan A, and is what the Biden Admin is pursuing. The second option is for the Fed to tighten, which will probably cause a recession since GDP growth is around 2%, and productivity is highly negative. The third option is price controls, which is probably going to be pursued as well. It will start with fire and brimstone speeches alleging profiteering and price gouging. Next year is an election year, so expect Plan C to be utilized.

Morning Report: Inflation hits a 30 year high

Vital Statistics:

S&P futures4,663-16.2
Oil (WTI)84.220.33
10 year government bond yield 1.48%
30 year fixed rate mortgage 3.17%

Stocks are lower this morning after the inflation numbers came in hotter than expected. Bonds and MBS are down.

The Consumer Price Index rose 0.9% MOM and 6.2% on an annual basis. Ex-food and energy, it rose 4.6%. This was the highest reading in 30 years. Energy prices drove the month-over-month increase, but we are seeing increases across the board. Aside from energy, meat / poultry / fish and used cars were up big.

Mortgage Applications rose 5.5% last week as purchases rose 3% and refis rose 7%. “Although overall activity remains close to January 2020 lows, homeowners acted on the decrease in rates,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity was up 7 percent overall, with gains in both conventional and government refinances. Additionally, the average loan balance for a refinance application was the highest in a month.”

Initial Jobless Claims came in at 267k last week. We are still pretty elevated compared to pre-pandemic numbers.

United Wholesale reported third quarter numbers yesterday. Originations rose 16% YOY and 6% QOQ to $63 billion. Gain on sale margins came in at 94 basis points, an improvement from the 81 bps in Q2 but much lower than the 318 from a year ago. For the fourth quarter, they are guiding for gain on sale margins to come in between 85 and 105 basis points and for production to fall by around 11%.

Morning Report: Inflation at the wholesale level hits a record

Vital Statistics:

S&P futures4,6962.2
Oil (WTI)82.220.33
10 year government bond yield 1.44%
30 year fixed rate mortgage 3.17%

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

Inflation at the wholesale level rose 0.6% MOM and 8.6% YOY. Ex-food and energy, they rose 6.8% on a YOY basis. About a third of the increase was due to higher gasoline prices. The producer price index is upstream of the consumer price index, which means it will percolate down to the consumer level. While the history of the PPI doesn’t go back as far as the CPI, we are seeing record inflation.

Small business optimism slipped again, according to the NFIB Small Business Optimism Index. This is the lowest overall reading since March of this year. “The Optimism Index decreased slightly in October by 0.9 points to 98.2. One of the 10 Index components improved, seven declined, and two were unchanged. The NFIB Uncertainty Index decreased 7 points to 67. Owners expecting better business conditions over the next six months decreased 4 points to a net negative 37 percent. Owners have grown pessimistic about future economic conditions as this indicator has declined 17 points over the past three months to its lowest reading since November 2012.

You can see the increase in prices below, which corroborates the PPI:

Mortgage credit availability increased in October, according to the MBA. “Credit availability inched forward in October, but the overall index was 30 percent lower than February 2020 and close to the lowest supply of mortgage credit since 2014,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Within the subindexes, a 4 percent increase in the jumbo index was essentially offset by a 6 percent drop in the conforming index. There was an increase in the supply of jumbo ARM and non-QM products, which drove most of the increase in the jumbo index. On the conforming side, there was a pullback in ARMs, higher LTV loans, and lower credit score products.

Home prices rose 18% in September, according to CoreLogic. They see home price appreciation moderating to only 2% over the next year, however. The flight out of urban areas into the suburbs and exurbs continued, however CoreLogic sees that trend reversing over the next year.

Morning Report: Powell and Brainard visit Biden.

Vital Statistics:

S&P futures4,70212.2
Oil (WTI)81.520.63
10 year government bond yield 1.48%
30 year fixed rate mortgage 3.17%

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

The upcoming week will be relatively data-light as is typical in the week after the jobs report. We will get inflation data with the Producer Price Index tomorrow and the Consumer Price index on Wednesday.

Jerome Powell will be speaking today and tomorrow at Jackson Hole. Note that the bond market will be closed on Thursday for Veteran’s Day.

Fannie and Freddie made $5.3 billion from the adverse market fee. The proceeds from the fee are expected to partially cover the losses Fan and Fred are eating from the foreclosure moratorium. The FHFA anticipates that the moratorium will cost the GSEs between $7 and $8 billion over the next couple of years.

Chinese high-yield bondholders have lost about a third on their investment this year as the property developers begin to default on their debt. FYI, the Chinese stock market is flattish on the year. As a general rule, when the bond market and the stock market disagree on the future the bond market usually has it right.

Chinese media claims that Evergrande has made all of its interest payments. It looks like offshore investors have not received a November 6 interest payment.

Rocket reported that it originated $88 billion in the third quarter. This was an increase from the second quarter, and roughly flat on a YOY basis. Gain on sale margins rose from 2.8% in the second quarter to 3.05% in the third. I guess they see the market getting more competitive in the fourth quarter. Guidance for gain on sale margins are expected to come in between 2.65% and 2.95%.

Jerome Powell and Lael Brainard met with Joe Biden presumably to discuss who will lead the Fed when Powell term expires soon. Brainard is viewed as more dovish than Powell. Whoever gets the nod might end up being the G William Miller of this generation. Miller was nominated by Jimmy Carter to run the Fed in 1978, and lasted a little over a year before getting kicked upstairs to run Treasury.

During this time period, the inflation rate rose from about 6.5% in March of 1978 to almost 12% in August of 1979 when he was replaced. Below is a chart of the last inflation cycle, which pretty much lasted from 1965 to 1980.