Morning Report: Job openings are at a record level

Vital Statistics:

S&P futures4,5114-2.2
Oil (WTI)68.64-0.65
10 year government bond yield 1.34%
30 year fixed rate mortgage 3.07%

Stocks are lower this morning after the European Central Bank said it would start reducing asset purchases. Bonds and MBS are flat.

Initial Jobless Claims came in at 310k which was a touch below expectations. Separately, the JOLTS report showed 10.9 million job openings, which is a record. Check out the chart below of the JOLTs data going back 20 years:

I suspect the market response to the huge number of unfilled jobs will be to increase investment in labor-saving technology. If the issue simply that expanded government benefits are driving the labor shortage, then it should reverse pretty rapidly once the extended benefits expire. If the government is keeping these expanded benefits in hopes of driving up wages, I suspect it will backfire, and any bump in wages will be temporary. The fatal flaw in that analysis is that workers don’t just compete with each other – they compete with technology which only gets better and cheaper.

Mortgage credit availability expanded last month, according to the MBA. “This expansion was heavily driven by the addition of refinance loan programs at a time when the 30-year fixed rate has been above 3% for the past month, and refinance activity has trended lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Of note, jumbo credit availability increased 9% to its highest level since March 2020, as more non-QM jumbo and agency-eligible high balance loan programs were offered. In the conforming space, more lenders offered GSE refinance programs catered for lower-income borrowers to help reduce their rates and payments. There was also a slight expansion in government credit, as more investors offered streamline refinance options for FHA and VA loans.”

Mortgage applications fell 1.9% last week as purchases declined 0.2% and refis fell 3%. “Mortgage application volume fell last week to its lowest level since mid-July, as mortgage rates have stayed just above 3% for several weeks. Refinance volume has been moderating, while purchase volume continues to be lower than expected given the lack of homes on the market,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “Economic data has sent mixed signals, with slower job growth but a further drop in the unemployment rate in August. We expect that further improvements will lead to a tapering of Fed MBS purchases by the end of the year, which should put some upward pressure on mortgage rates.”  

Economic growth “downshifted slightly” in August according to the latest Fed Beige Book. The decline was primarily due to decreased dining and travel, however supply chain shortages also played a part. The report discusses the labor market:

All Districts continued to report rising employment overall, though the characterization of the pace of job creation ranged from slight to strong. Demand for workers continued to strengthen, but all Districts noted extensive labor shortages that were constraining employment and, in many cases, impeding business activity. Contributing to these shortages were increased turnover, early retirements (especially in health care), childcare needs, challenges in negotiating job offers, and enhanced unemployment benefits. Some Districts noted that return-to-work schedules were pushed back due to the increase in the Delta variant. With persistent and extensive labor shortages, a number of Districts reported an acceleration in wages, and most characterized wage growth as strong—including all of the midwestern and western regions. Several Districts noted particularly brisk wage gains among lower-wage workers. Employers were reported to be using more frequent raises, bonuses, training, and flexible work arrangements to attract and retain workers.

Rapid home price appreciation has led to an increase in tappable home equity to $9.1 trillion, according to Black Knight. The average mortgage holder has $173k in tappable equity, an increase of $20,000 from the first quarter. What does this mean for originators? Debt consolidation refinances are a powerful tool for people with high interest credit card debt. Loan officers should be pitching these to their borrowers.

Morning report: Weak payroll growth

Vital Statistics:

S&P futures4,5394.2
Oil (WTI)70.240.25
10 year government bond yield 1.33%
30 year fixed rate mortgage 3.05%

Stocks are flattish after a weak jobs report. Bonds and MBS are down.

The economy added 235,000 jobs in August, which was way below the Street expectations of 740,000. It looks like the driver for the miss was leisure and hospitality, which added zero jobs in August, after adding 400k in June and July. Retail also fell, which is surprising given that we should be seeing the boost of seasonal hiring as we head into back-to-school and the holidays. Total nonfarm employment has risen by 17 million since April of 2020, however we are still about 5 million jobs below pre-pandemic levels. The two-month revision was up 134,000 which was a small positive.

The unemployment rate fell to 5.2%. The labor force participation rate was flat at 61.7% and the employment-population ratio ticked up 0.1% to 58.5%. Average hourly earnings rose 0.6% MOM and 4.3% YOY. This was again well above Street expectations, but I suspect the surprises in leisure / hospitality and retail hiring were playing a part in the numbers.

Overall, it looks like the Delta variant is depressing leisure and hospitality hiring, which makes perfect sense. It is still hard to reconcile the lack of job growth in that sector with all the “help wanted” signs out there. The labor market of the last year has been an anomaly to say the least.

The punch line is that I think we will see the Street (and the Fed) begin to take down Q3 GDP numbers, and I wouldn’t be surprised if the Fed Funds Futures begin cutting their probability estimates for a rate hike next year.

I doubt that the jobs report will affect the tapering decision, and I think the Fed will gradually begin to cut its purchases of mortgage backed securities. While MBS spreads widened significantly during the 2013 taper tantrum, I don’t think that is in the cards this time around. I think in 2013 the market expected that the Fed might sell its holdings into the market. That isn’t going to happen this time around – heck the Fed decided that even letting the portfolio run off naturally was having too big of a negative effect on the economy. So I think they will gradually reduce purchases and will almost assuredly re-invest maturing proceeds back into the market.

Where does that leave interest rates? The Fed’s projected path of inflation and interest rates was based on an assumption that economic growth would accelerate into the end of the year and through 2022. Given the economic data we have been seeing, that doesn’t seem to be materializing. If we decelerate and begin having recession fears, I suspect the 10 year yield will fall and during the next recession we will join our brethren like German and Japan in the subzero club.

The housing market is becoming slightly more favorable to buyers, as soaring prices are decreasing demand. “The housing market has clearly become slightly more favorable to buyers,” said Redfin Chief Economist Daryl Fairweather. “Homes are taking longer to sell, which gives buyers more time to make thoughtful decisions about whether to make offers. Home prices have plateaued, so buyers shouldn’t feel rushed to buy before prices rise further. And the fact that more sellers are dropping their list price is a sign that sellers have to be realistic about their price expectations.”

Morning Report: Weak jobs report

Vital Statistics:

S&P futures4,53824.2
Oil (WTI)70.141.65
10 year government bond yield 1.29%
30 year fixed rate mortgage 3.05%

Stocks are higher this morning as the Street rows to work. Bonds and MBS are flat.

Initial Jobless Claims came in at 340k last week. This is still elevated compared to historical levels and has seemed to be the new normal post-COVID. Separately, there were 15,723 announced job cuts last month according to outplacement firm Challenger, Gray and Christmas.

The economy created 374,000 jobs in August, according to the ADP Jobs Report. The Street was looking for 600,000 jobs, so this was a pretty big miss. The consensus estimate for tomorrow’s jobs report is 740,000. It does look like the big acceleration in job growth has petered out.

Manufacturing is expanding in the US, according to the ISM Manufacturing Report. New Orders and Production drove the increase, and it looks like pricing pressures are abating.  “Business Survey Committee panelists reported that their companies and suppliers continue to struggle at unprecedented levels to meet increasing demand. All segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products. The new surges of COVID-19 are adding to pandemic-related issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — that continue to limit manufacturing-growth potential.”

Productivity in the second quarter was revised downward to 2.1%, while unit labor costs increased to 1.3%.

Mortgage Applications fell by 2.4% last week as purchases increased 1% and refis fell 4%. “Despite low rates, refinance applications declined, with some borrowers still waiting for rates to drop even lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Recent uncertainty around the economy and pandemic have kept rates low over the past month, which is why the refinance index has oscillated around these levels.”

New York State is going to extend the eviction moratorium until January 15.

Morning Report: Home Price Appreciation still strong

Vital Statistics:

S&P futures4,520-4.2
Oil (WTI)68.44-0.85
10 year government bond yield 1.29%
30 year fixed rate mortgage 3.05%

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

Home prices rose 1.6% MOM and 17.4% YOY, according to the FHFA House Price Index. We saw torrid price appreciation in several MSAs including Boise, Austin, and Salt Lake City. As we saw from the latest FOMC minutes, the Fed is focusing on home price appreciation and how its MBS purchases affect it. Separately, the Case-Shiller Home Price Index rose 2.2% MOM and 18.6% YOY.

Home Price appreciation is driving up asking rents for single family homes. They are up 13% YOY for SFR, while up only 8.3% for apartments. We have seen all sorts of institutional money flood into the SFR space over the past year, as high cap rates and home price appreciation create returns that are hard to replicate elsewhere. While eviction moratoriums have been an issue, many investors are targeting higher-income renters who have been less affected by COVID job losses.

The share of loans in forbearance was unchanged last week at 3.25% or about 1.6 million homeowners. “The share of loans in forbearance changed little once again this week, as both new requests and exits remained at a slow pace,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “We expect a sharp increase in forbearance exits over the next month as many borrowers reach the 18-month mark and see their forbearance plans end. For those borrowers who have exited in August, the majority either enter deferral plans or obtain modifications.”

While the Federal Government’s eviction ban was shot down by SCOTUS, several states still have eviction moratoriums in place, including California, New Jersey, and DC.

Latest from Fannie Mae regarding homeowners affected by Hurricane Ida. “We urge everyone in the path of the storm to focus on their safety,” said Cyndi Danko, Vice President, Single-Family Risk Management, Fannie Mae. “Fannie Mae is committed to ensuring assistance is available to homeowners and renters in need and we encourage residents impacted by this storm to seek assistance as soon as possible.”  

Consumer confidence slipped in July, according to the Conference Board. While the employment situation remains strong, consumers were less optimistic about present and future business conditions.

Morning Report: Powell soothes the markets

Vital Statistics:

S&P futures4,5116.2
Oil (WTI)68.940.35
10 year government bond yield 1.31%
30 year fixed rate mortgage 3.07%

Stocks are higher this morning after Jerome Powell’s speech on Friday contained no negative surprises for the markets. Bonds and MBS are up.

The big takeaway from Powell’s speech on Friday is that tapering (or the reduction of asset purchases) is on the horizon, but rate hikes are not.

We have said that we would continue our asset purchases at the current pace until we see substantial further progress toward our maximum employment and price stability goals, measured since last December, when we first articulated this guidance. My view is that the “substantial further progress” test has been met for inflation. There has also been clear progress toward maximum employment. At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.

The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.

Interestingly, MBS spreads remain surprisingly tight given that language. During the 2013 “taper tantrum” MBS spreads widened to 150 basis points as mortgage rates rose 120 bps ahead of the first reduction. I think we are sitting around 70-ish. I am not sure what that implies, however my guess is that in 2013, the markets were anticipating that the Fed could actually sell its portfolio into the market. They never did that, and couldn’t even go as far as to let prepayments do the job. This time around, sales are probably off the table, and the Fed will probably re-invest maturing proceeds from MBS as well, so the anticipated future shock is much l0wer. That is probably the reason why MBS investors are sanguine this time around.

The Fed Funds futures bumped up the probability of no change in rates in 2022 from 39% to 48% on Powell’s speech. Here is the latest handicapping in the markets:

The trend is looking dovish. Note the Atlanta Fed’s GDP Now index is turning down sharply as well. The index is much more bearish than the Street right now.

The upcoming week will have a lot of data, with home prices on Tuesday, ISM on Wednesday and Friday and the jobs report on Friday. The Street is looking for 740,000 jobs to have been created in August.

The Biden Administration’s end-around extension of the eviction moratorium was shot down by SCOTUS last week, so the issue goes back to Congress. It doesn’t look like Congress has the votes to pass legislation on it, so we are at the posturing and finger-pointing stage.

Pending home sales fell in July, according to NAR.

“The market may be starting to cool slightly, but at the moment there is not enough supply to match the demand from would-be buyers,” said Lawrence Yun, NAR’s chief economist. “That said, inventory is slowly increasing and home shoppers should begin to see more options in the coming months. Homes listed for sale are still garnering great interest, but the multiple, frenzied offers – sometimes double-digit bids on one property – have dissipated in most regions,” Yun said. “Even in a somewhat calmer market, a number of potential buyers are still choosing to waive appraisals and inspections.”

Morning Report: Eviction moratorium again ruled unconstitutional

Vital Statistics:

S&P futures4,4759.2
Oil (WTI)68.791.35
10 year government bond yield 1.35%
30 year fixed rate mortgage 3.07%

Stocks are flattish as we await Jerome Powell’s speech at Jackson Hole. Bonds and MBS are up small.

Personal Incomes rose 1.1% in July, which was well above the 0.3% consensus. Personal consumption expenditures rose 0.3%, in line with the Street. The headline inflation reading (Personal Consumption Expenditure Index) rose 0.4% MOM and 4.2% YOY. The core PCE price index increased 0.3% MOM and 3.6% YOY.

The PCE Price index is the Fed’s preferred inflation indicator, and we are seeing more and more Fed Presidents advocate for a reduction in asset purchases.

The Supreme Court again upheld the concept of property rights and re-blocked the CDC’s eviction moratorium. “The equities do not justify depriving the applicants of the District Court’s judgment in their favor,” the justices wrote in an unsigned order. “The moratorium has put the applicants, along with millions of landlords across the country, at risk of irreparable harm by depriving them of rent payments with no guarantee of eventual recovery.”

The Biden Administration responded: “The Biden Administration is disappointed that the Supreme Court has blocked the most recent CDC eviction moratorium while confirmed cases of the Delta variant are significant across the country,” White House press secretary Jen Psaki said in a statement. “As a result of this ruling, families will face the painful impact of evictions, and communities across the country will face greater risk of exposure to COVID-19.”  

Supposedly this kicks the issue to Congress now, unless we are about to see an eviction moratorium issued by the Navy.

Refinance activity is declining, but it might not be for the reason people think. According to a Bankrate survey, almost 40% of borrowers don’t even know what rate they are paying and how much they can save. According to Black Knight, about 15 million borrowers can save by refinancing, and the number is really more if you delve into their numbers. Bottom line: Interest rates aren’t the issue; education is.

Morning Report: Bullard sees an “incipient bubble” in housing

Vital Statistics:

S&P futures4,489-3.2
Oil (WTI)67.33-0.95
10 year government bond yield 1.36%
30 year fixed rate mortgage 3.07%

Stocks are flattish this morning after the GDP and jobless claims numbers. Bonds and MBS are down.

The second revision to Q2 GDP inched up 0.1% to 6.6%. This was in line with Street expectations. Personal Consumption Expenditures rose to 11.9%, which was a tad higher than expectations.

Initial Jobless Claims came in at 353,000. This is still elevated compared to pre-COVID, but is the lowest since.

Corporate profits rose 69% in Q2, which is benefiting from easy comparisons from a year ago.

St. Louis Fed President James Bullard thinks the central bank should begin the tapering process soon and end it by March 2022. “We do have a new framework we did say that we would allow inflation to run above target for some time, but not this much above target. So for that reason I think we want to get going on taper. Get the taper finished by the end of the first quarter next year,” he continued. “And then we can evaluate what the situation is and we’ll be able to see at that point whether inflation has moderated and if that’s the case we’ll be in great shape. If it hasn’t moderated, we’re going to have to be more aggressive to contain inflation.”

He also mentioned house prices: “I think that there is worry that we’re doing more damage than helping with the asset purchases because there is an incipient housing bubble in the U.S. The median house price, at least the number I saw, was approaching $400,000,” he said. “We got into a lot of trouble in the mid-2000s by being too complacent about housing prices, so I think we want to be very careful on that this time around.”

FWIW, I don’t think we have a housing bubble, since the necessary conditions for one (a belief that an asset can’t fall in price that is shared by buyers, lenders, and regulators) simply aren’t in place – the memories of 2008 are still fresh. Not only that, something like 90% of all origination is government-guaranteed. You will never get the forced selling since there will be little to no credit losses borne by the financial sector.

That said, the torrid pace of home price appreciation should begin to abate as we bump up against affordability constraints.

New Rez has completed its purchase of Caliber Home Loans. “The completion of the Caliber acquisition is another significant step in growing a leading mortgage company with tremendous earnings power within New Residential,” said Michael Nierenberg, Chairman, Chief Executive Officer and President of New Residential. “We are very pleased to reach this milestone and officially welcome Caliber into the New Residential family. With this acquisition we have extended our ability to offer a broad spectrum of mortgage products to borrowers throughout their homeownership journey. We expect the combination of Caliber and Newrez to contribute meaningfully to New Residential’s growth in 2021 and beyond.”

Morning Report: Durable Goods orders flat

Vital Statistics:

S&P futures4,4831.2
Oil (WTI)68.030.95
10 year government bond yield 1.30%
30 year fixed rate mortgage 3.05%

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

Durable goods orders fell 0.1% last month. Ex-transportation, they rose 0.7%. Core Capital Goods (which is a proxy for business capital expenditures) was flat. “Core capital goods orders have made a remarkable comeback over the past year and have shown little signs of slowing,” said Sam Bullard, a senior economist at Well Fargo in Charlotte, North Carolina. “While overall durable goods orders may cool in the coming months as consumers pull back on goods spending and the auto sector contends with supply problems, businesses’ desire to invest and restock inventories should provide a solid demand floor.”

Mortgage Applications rose by 1.6% last week as purchases increased 3% and refis increased 1%. “Treasury yields fell last week, as investors continue to anxiously monitor if the rise in COVID-19 cases in several states starts to dampen economic activity,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting.  “Mortgage rates slightly declined as a result, with the 30-year fixed rate decreasing for the first time in three weeks. Lower rates led to an increase in refinance applications, with government loan applications jumping 10 percent to the highest level since May 2021.”

Independent mortgage banks reported a net gain of $2,023 on each loan they originated in the second quarter, down from $3,361 in the first quarter. Average pre-tax production profit slipped to 73 bps, down from 124 bps in Q1 and 167 bps a year ago. Average volume fell 6% QOQ to $1.35 billion. Secondary marketing income fell to 297 bps from 331 in Q1.

iBuyers and fintechs are pushing up the percentage of cash purchases, according to NAR. Cash sales were 23% of all sales, compared to 15% a year ago. There are also several types of companies which will back a buyer with cash. For example, OpenDoor launched a program in March which will allow the buyer to submit a non-contingent offer on a house. This is separate from companies like Zillow which will buy houses outright.

Aid to landlords and renters continues to be disbursed at a slow pace. Since December, just $4.7 billion of the $46 billion allocated to rental aid has been delivered to renters and landlords. The program is managed by Treasury, however it relies on state and local governments to help distribute it, which is causing bottlenecks.

It turns out that the labor shortage isn’t strictly an American problem. China has the same issue as well. This was exacerbated by the country’s one-child policy. This has the potential to create global wage-push inflation, which we haven’t seen since the 1970s.

Morning Report: New Home Sales fall big YOY.

Vital Statistics:

S&P futures4,4796.2
Oil (WTI)66.530.95
10 year government bond yield 1.27%
30 year fixed rate mortgage 3.05%

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

New home sales rose 1% MOM to a seasonally-adjusted annual rate of 708,000 in July, according to Census. This was down 27% compared to July of 2020, when people were escaping the cities. The median price rose 18.5% to $390,500. New Home prices have been on a tear.

The number of loans in forbearance fell 1 basis point last week to 3.25% of servicers’ portfolios. “The share of loans in forbearance was little changed this week, as both new requests and exits were at a slower pace compared to the prior week. In fact, exits were at their slowest pace in over a year,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “There were more new forbearance requests and re-entries for portfolio and PLS loans, leading to a 10-basis-point increase in their share. Portfolio and PLS loans now account for almost 50% of all depository servicer loans and almost 40% of IMB servicer loans in forbearance, which highlights the importance of this investor category.”

The Urban Institute thinks that Fannie Mae’s new policy of including rental history will expand access to home ownership. That said, Fannie expects few borrowers to actually benefit from this new system. This is because lenders cannot request bank statements directly from the banks due to PI restrictions, and banks will be reluctant to release the data to lenders due to the information security risks.

Morning Report: Existing home sales rise

Vital Statistics:

S&P futures4,45626.2
Oil (WTI)64.732.55
10 year government bond yield 1.26%
30 year fixed rate mortgage 3.05%

Stocks are higher this morning on overseas strength. Bonds and MBS are flat.

We have a pretty heavy week of data coming up, with new home sales, GDP, and personal incomes / outlays. The annual Fed Jackson Hole conference is this week as well. Jerome Powell speaks on Friday.

The Chicago Fed National Activity Index showed the economy expanding well above historical trends in July. The CFNAI is a sort of meta-index of a bunch of disparate economic indicators.

Private label securitizations hit $42 billion in the second quarter, which was about the highest number since the 2008 financial crisis. This was driven by Fannie and Freddie’s limits on investment properties and second homes. Non-QM was a part of this as well, but the growth is coming from NOO properties that F&F won’t insure. This was the whole point of Mick Mulvaney’s caps on F&F, and it looks like it worked.

Existing home sales rose 2% in July to a seasonally-adjusted annual rate of 6 million properties, according to NAR. “We see inventory beginning to tick up, which will lessen the intensity of multiple offers,” said Lawrence Yun, NAR’s chief economist. “Much of the home sales growth is still occurring in the upper-end markets, while the mid- to lower-tier areas aren’t seeing as much growth because there are still too few starter homes available.”

Inventory increased 7.3% to 1.7 million properties, which represents a 2.6 month supply. The median home price rose 18% to 359k. “Although we shouldn’t expect to see home prices drop in the coming months, there is a chance that they will level off as inventory continues to gradually improve,” said Yun.

The first time homebuyer accounted for 30% of all sales, and 23% of transactions were all-cash sales.