Morning Report: Forbearance requests are coming in

Vital Statistics:

 

Last Change
S&P futures 2725 80.4
Oil (WTI) 26.46 0.49
10 year government bond yield 0.74%
30 year fixed rate mortgage 3.47%

 

Stocks are sharply higher again this morning as the COVID-19 fever seems to be breaking. Bonds and MBS are down, though MBS are still holding up better than the bond market.

 

There seems to be a sense that the COVID-19 crisis has passed the exponential growth phase and is entering the manageable growth phase. I suspect we will be talking about getting people back to work by the end of the month. Bottom line, the longer this drags on, the more people are going to ignore the stay-at-home warnings.

 

Home Prices rose 4.1% in February, according to CoreLogic. That said, it is old data and doesn’t really reflect what may be about to occur. “The nearly 10-year-old recovery of the U.S. housing market has run headlong into the panic and uncertainty from the global COVID-19 pandemic. In terms of home value trends, we are in uncharted territory as we battle the outbreak with measures that are generating a never-before-seen, rapid downshift in economic activity and employment. We expect that many homeowners will initially be somewhat cushioned by government programs, ultra-low interest rates or have adequate reserves to weather the storm. Over the second half of the year, we predict unemployment and other factors will become more pronounced, which will apply additional pressure on housing activity in the medium term.” The NYC metro area is most likely to bear the brunt of any negative price movements due to COVID-19. Note that Connecticut’s price appreciation was negative in February to begin with.

 

Meanwhile, New Jersey and Florida seem to be most likely to be hit by Coronavirus foreclosures. “Some parts of the country have seen home prices surge way past what average wage earners can afford, while others may be seeing equity lag if prices have flattened out recently or dipped,” Todd Teta, ATTOM’s chief product officer, said in a statement. “Homeowners who bought in the past year, at the top of the market, are more likely to fall into that group.” In New Jersey, five of those counties were in the New York City suburban area. They included Bergen, Essex, Passaic, Middlesex, and Union counties.

 

Nationstar (aka Mr. Cooper) said that 86,000 people requested forbearance already. Requests ranged from 8,000 – 22,000 a day through last Friday. This represents 2.5% of its customer base. Jay Bray, Mr. Cooper’s CEO said: “It’s frankly frustrating and ridiculous that we do not have a solution in place,” said Bray, talking about an advance facility for servicers “There is going to be complete chaos. We’re the largest nonbank. We have a strong balance sheet, but for the industry as a whole you’re going to start seeing problems soon.” Estimates for the number of forbearance requests range from about 2 million from the government to 12 million from the Urban Institute.

 

There is a massive moral hazard problem with forbearance that the government just hasn’t thought through. In 2008, you had to prove hardship to get a mod on your mortgage. Now you merely have to attest that you have been affected (and the CARES act says “directly or indirectly”). No proof required. I suspect the government’s 2 million estimate (~4% of homes with a mortgage) is probably too low. Urban Institute’s 24% is probably going to be closer to the mark. The limiting factor on this will simply be staffing for servicers. They probably don’t have have the people to handle 12 million forbearance requests. Heck, they probably don’t have enough for 2. What happens if someone can’t get through to their servicer, stops paying, and never gets approval? Or gets partially through the process, gives up, and stops paying without a plan?

 

Aggregators are already telling originators that any loan that requests forbearance within the first two weeks of purchase is getting pushed back to the originator. I have already received several unsolicited emails from funds looking to buy this paper. I think GNMA has said that loans in forbearance are ineligible for pooling in GII securities. Warehouse lenders are refusing to fund FHA and VA loans below 640, and aggregators seem to be moving towards a 680 minimum.

 

 

 

 

Morning Report: Rates steady

Vital Statistics:

 

Last Change
S&P futures 3239 12.25
Oil (WTI) 51.46 0.19
10 year government bond yield 1.37%
30 year fixed rate mortgage 3.55%

 

Stocks are higher this morning as coronavirus fears ease. Bonds and MBS are flat.

 

The 10 year bond yield traded briefly yesterday below the 2016 closing low of 1.37%. So far, that level seems to be holding. The trader in me thinks that any sort of good news on the coronavirus front will send rates back up 10 – 20 basis points. Big moves generally have decent retracements, and the 1.37% seems to be providing technical support. Note that the German Bund is not at record lows and any bounce up in rates there will be felt in the US. While it feels like the path of least resistance is down in rates over the long term, that might not be the case over the next few weeks. Lock accordingly.

 

Home prices rose 0.4% MOM and 2.9% YOY according to the Case-Shiller Home Price Index. Separately, the FHFA House Price Index rose 0.6% MOM and 5.1% YOY. The FHFA index only looks at homes with conforming mortgages, so it excludes jumbos and distressed.

 

It looks like economic growth improved in January, according to the Chicago Fed National Activity Index. Note that Goldman and others are taking down Q1 GDP growth estimates based on Coronavirus.

 

Intuit is buying Credit Karma, which will help the company create a “personalized financial assistant” to help people manage their money. Credit Karma bought Approved, a digital mortgage platform in 2018, and this will be part of the strategy. “We wake up every day trying to help consumers make ends meet. By joining forces with Credit Karma, we can create a personalized financial assistant that will help consumers find the right financial products, put more money in their pockets and provide insights and advice, enabling them to buy the home they’ve always dreamed about, pay for education and take the vacation they’ve always wanted.”

 

Joe Biden has a housing plan, which includes returning to the Obama-era CFPB practices (presumably regulation by enforcement action), spending $100 billion on affordable housing, and a tax credit of up to $15,000 for first time homebuyers. The plan also includes aid for low-income renters and a task force to combat homelessness.

Morning Report: Big jump in employment

Vital Statistics:

 

Last Change
S&P futures 3327 23.25
Oil (WTI) 50.88 1.02
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.68%

 

Another “risk-on” day as stock markets rally overnight and bonds get sold. MBS are performing a touch better than the 10 year.

 

Mortgage applications hit a six year high last week, which included an adjustment for the MLK holiday. The index rose 5% while refis increased 15%. The refi index is up 183% from the same week a year ago. Purchases fell 10%. “The 10-year Treasury yield fell around 20 basis points over the course of last week, driven mainly by growing concerns over a likely slowdown in Chinese economic growth from the spread of the coronavirus. This drove mortgage rates lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity jumped as a result, with an increase in the number of applications and a spike in the average loan amount, as homeowners with jumbo loans reacted more resoundingly to lower rates.”

 

ADP reported that payrolls increased by 291,000 last month, a huge jump from December, which was revised upward from 139,000 to 202,000. The Street is looking for an increase of 158,000 nonfarm payrolls in Friday’s jobs report, so that number appears to be too low. There was a pretty big increase in construction workers as it looks like homebuilders are eager to finally fulfill the pent-up demand for housing out there. It looks like the ADP number was the strongest in at least a year

 

ADP report

 

Home prices rose 0.3% MOM in December, and are up 4% on an annual basis according to CoreLogic.

Morning Report: New Home Sales flat but trend is steadily upward

Vital Statistics:

 

Last Change
S&P futures 3259 20.25
Oil (WTI) 53.38 0.22
10 year government bond yield 1.62%
30 year fixed rate mortgage 3.71%

 

Stocks are up this morning as the tape exhibits a risk-on feel. Bonds and MBS are down small.

 

The FOMC meeting begins today. No changes in rates are expected, but market participants will be watching for changes in the interest on overnight reserves and changes in the Fed’s balance sheet.

 

Durable goods orders rose 2.4%, which was better than expected although the volatile transportation sector accounted for the growth. Ex-transportation they fell 0.1%. Capital expenditures continue to disappoint, falling 0.9%.

 

Home prices rose 0.5% MOM and 2.6% YOY according to the Case-Shiller home price index.

 

New home sales were roughly flat with November, but are up 23% on a year-over-year basis. For the year, new home sales came in at 681,000, up 10% from 2018. As you can see from the chart below, we are back towards historical norms, but given the increase in population, that isn’t enough.

 

new home sales

 

Homebuilder D.R. Horton reported Q1 earnings that impressed the Street, with earnings up 53% and revenues up 14%. Orders were up 19% in units and 22% in dollar volume. The cancellation rate fell to 20% from 24%. The stock was up 2% in what was otherwise a putrid tape.

 

Black Rock’s bond strategist sees bond yields falling another 10 – 15 basis points, as uncertainty over coronavirus and the election seeps into the market. If the virus gets materially worse, and travel and business becomes curtailed, then we could be looking at 1.3% on the 10 year.

 

The CFPB has issued a statement on how it intends to police abusive behavior by lenders. The Bureau has decided that the definition of abusive behavior is too vague, and that uncertainty is having a negative effect on consumers by driving overly-cautious behavior in lenders. The money quote:

First, consistent with the priority it accords to the prevention of harm, the Bureau intends to focus on citing conduct as abusive in supervision or challenging conduct as abusive in enforcement if the Bureau concludes that the harms to consumers from the conduct outweigh its benefits to consumers. Second, the Bureau will generally avoid challenging conduct as abusive that relies on all or nearly all of the same facts that the Bureau alleges are unfair or deceptive. Where the Bureau nevertheless decides to include an alleged abusiveness violation, the Bureau intends to plead such claims in a manner designed to clearly demonstrate the nexus between the cited facts and the Bureau’s legal analysis of the claim. In its supervision activity, the Bureau similarly intends to provide more clarity as to the specific factual basis for determining that a covered person has violated the abusiveness standard. Third, the Bureau generally does not intend to seek certain types of monetary relief for abusiveness violations where the covered person was making a good-faith effort to comply with the abusiveness standard.

The MBA has more analysis of the change here.

Morning Report: Existing home sales rise

Vital Statistics:

 

Last Change
S&P futures 3315 -4.25
Oil (WTI) 55.58 -0.64
10 year government bond yield 1.74%
30 year fixed rate mortgage 3.84%

 

Stocks are lower on overseas market weakness. Bonds and MBS are up after the European Central Bank left rates unchanged.

 

Existing home sales rose 3.6% in December, according to NAR. The seasonally adjusted annual rate of 5.54 million was up 11% from a year ago. Lawrence Yun, NAR’s chief economist, said home sales fluctuated a great deal last year. “I view 2019 as a neutral year for housing in terms of sales,” Yun said. “Home sellers are positioned well, but prospective buyers aren’t as fortunate. Low inventory remains a problem, with first-time buyers affected the most.” The median home price came in at $274,500, up 7.8% from a year ago. Total housing inventory sat at 1.4 million units, down 14.5% from November and about 8% from a year ago. At current levels, this represents about 3 months worth of inventory.

 

NAR is optimistic about 2020: “NAR is expecting 2020 to be a great year for housing,” said NAR President Vince Malta, broker at Malta & Co., Inc., in San Francisco, California. “Our leadership team is hard at work to secure policies that will keep our housing market moving in the right direction, like promoting infrastructure reform, strengthening fair housing protections and ensuring mortgage capital remains available to responsible, mortgage-ready Americans.”

 

ATTOM data solutions said home sellers realized a price gain of $65,500 on the typical home sale, which represents a 34% return on investment. “The nation’s housing boom kept roaring along in 2019 as prices hit a new record, returning ever-higher profits to home sellers and posing ever-greater challenges for buyers seeking bargains. In short, it was a great year to be a seller,” ATTOM Chief Product Officer Todd Teta said. “But there were signs that the market was losing some steam last year, as profits and profit margins increased at the slowest pace since 2011. While low mortgage rates are propping up prices, the declining progress suggests some uncertainty going into the 2020 buying season.”

 

 

Morning Report: Fannie Mae gets more bullish on housing and the economy

Vital Statistics:

 

Last Change
S&P futures 3195 -3.25
Oil (WTI) 60.88 -0.04
10 year government bond yield 1.93%
30 year fixed rate mortgage 3.96%

 

Stocks are flat this morning on no major news. Bonds and MBS are down.

 

Initial Jobless Claims fell to 234k last week. The prior week had a big jump to over 250k, which really didn’t comport with other labor market data. 234,000 is still above where we were a couple weeks ago, though. As of now, assume this is just noise but it there is going to be a turnaround in the labor market, initial jobless claims is where it first shows up.

 

Fannie Mae has taken up their estimates for housing in 2020. Tuesday’s strong housing starts numbers, combined with what we are hearing out of the homebuilders, indicate that the US housing market will be an “engine of growth” for the economy in 2020. All of the talk about a trade-driven recession was more partisan wishful thinking than anything else. Fannie expects new home sales to increase 12% in 2020, and has taken up their forecast for GDP growth from 2% to 2.2%. “We now expect single-family housing starts and sales of new homes to increase substantially, aided by a large uptick in new construction as builders work to replenish inventories,” Duncan said. “Despite the expected increase in the pace of construction, the supply of homes for sale remains tight and strong demand for housing is continuing to drive home prices higher.”

 

Separately, Fannie is offering early retirement to 25% of its workforce as the company readies itself for sale. “As is common in many American companies, Freddie Mac is offering employees who meet certain age and tenure requirements a voluntary opportunity to retire early. As we prepare for our next chapter, we anticipate this will help realign our workforce to create a company attractive to outside investors as well as current and future employees,” a spokesman for Freddie Mac said in an email statement.

 

Shades of things to come? Sweden is ending its 5 year experiment with negative interest rates. Their central bank expects rates to remain at 0% for the next few years. Global interest rates are rising as a result, with the German 10 year Bund trading at negative 22 basis points, and the Japanese Government Bond trading at a hair under 0%.

 

Home prices rose 5% in November, according to Redfin. Listings fell by 5.9%, while sales increased 3%. “Given that inventory is falling quickly, we’d expect to see even stronger price growth, especially when compared to last year’s soft market,” said Redfin chief economist Daryl Fairweather. “The fact that homes are selling faster indicates that there are buyers ready to pull the trigger and take advantage of low interest rates. If lack of inventory and high demand continues, buyers who take a wait-and-see approach could face less favorable conditions in the spring season like bidding wars and faster price growth.” Note that the biggest gains were in the areas hardest hit by the real estate bust: Detroit, Camden and Bakersfield.

Morning Report: Big jump in building permits

Vital Statistics:

 

Last Change
S&P futures 3128 6.25
Oil (WTI) 56.29 -0.74
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.94%

 

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

 

Housing starts came in a little light, at 1.31 million but the big news was the permits number, which rose to 1.46 million. This is up almost 15% compared to October 2018 and is the highest print since the bubble years. The action was in the Northeast and the South. Completions were up big as well, coming in at 1.26 million, which is up double digits compared to last month and a year ago.

 

building permits

 

The MBA reported that applications for new home purchases increased by 9% from September and by 31.5% from a year ago. “The new home sales market continues to be strong and was reinforced by October’s increase in applications for new home purchases,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “At an annual pace of 791,000 units, our estimate of new sales has reached its highest level since the inception of our survey in 2012. Home builder sentiment remains close to 18-month highs, and housing starts and permits have increased for four straight months. These are promising signs for the housing market, as the rise in new and existing housing supply has led to slower home-price growth and improving affordability.”

 

While a couple data points don’t necessarily indicate a trend yet, we might finally start seeing new home construction begin to meet the pent-up demand out there. And if this is finally happening, GDP forecasts are probably too low.

 

The Home Despot reported disappointing third quarter earnings and lowered FY 2019 guidance. Comp store sales were up, but tariffs are taking a bite out of earnings. The stock is down 5% pre-open.

 

Home prices rose 5.4% in October, according to Redfin. “Low mortgage rates are propping up homebuyer demand and juicing prices, said Redfin chief economist Daryl Fairweather. “However, home sales have been slow to grow since there are so few homes for sale and not many new listings hitting the market, especially affordable ones. The market is split: It’s a seller’s market for moderately priced homes, but a buyer’s market for pricier homes.” 

 

 

Morning Report: High frequency traders and mortgage rates

Vital Statistics:

 

Last Change
S&P futures 2907 -16.5
Oil (WTI) 53.33 -1.74
10 year government bond yield 1.50%
30 year fixed rate mortgage 3.78%

 

Stocks are lower this morning on trade issues. Bonds and MBS are flat.

 

The holiday-shortened week ahead looks to be relatively quiet, with the exception of a spate of Fed-speak on Wednesday and the jobs report on Friday. The September Fed Funds futures are pricing in a 100% chance of another 25 basis point cut, and the Fed seems to be in market-following mode, so the data should take a backseat.

 

Manufacturing activity slipped in August, according to the ISM Manufacturing Survey, which came in at 49.1, well below expectations. This was the first contraction in the manufacturing sector since mid-2016. The level for the ISM typically corresponds with 1.8% GDP growth.

 

Separately, construction spending rose 0.1%, which was lower as well, however the previous month’s drop was revised upward from -1.3% to -.7%.

 

Home prices rose .5% MOM / 3.6% YOY in July, according to CoreLogic. Home price appreciation slowed in 2018 as rates rose. That effect will reverse over the next year, and Corelogic expects annual home price appreciation rates to settle in around 5%. Tight supply, especially amongst starter homes will support prices, as well as a robust labor market and a move out of urban areas to the suburbs. About 37% of the US housing stock in the top 100 MSAs is overvalued. This metric is based on wage growth and housing supply.

 

Hurricane Dorian is expected to miss direct landfall, however it is slow-moving and dumping a lot of rain. Coastal areas will be at risk of flooding as the storm parallels the Eastern Seaboard this week.

 

The WSJ has an interesting article this morning about thinning liquidity in the markets. Late summer is often characterized by thinning liquidity, which means fewer active investors are trading, which causes exaggerated market movements when a big buyer or seller wants to execute an order. They mention what has been going on in the Treasury market:

Some analysts point to high-frequency traders. They have dominated the government-bond market, making up a big chunk of trading activity compared with slower counterparts, according to JPMorgan analysts. These traders withdrew last month, the firm said, suggesting that they amplified turbulence. Investors said liquidity worries are even more pronounced in riskier corporate bonds.

“As you go further down the credit spectrum, it starts to get a bit more volatile,” said Gautam Khanna, a fixed-income portfolio manager at Insight Investment. “Liquidity is definitely thinner in this market than it has been.”

This might help explain why mortgage rates have lagged the move in Treasuries. In essence, high frequency traders help establish a liquid market, where it is easier for large investors such as banks, sovereign wealth funds, pension funds, etc to trade large positions. When these high frequency traders withdraw, bid / ask spreads widen, and volatility increases. Here is the issue: MBS investors hate volatility because it makes their portfolios hard to hedge, and adds uncertainty about prepayment speeds. This causes them to be more conservative with respect to the prices they are willing to pay for mortgage backed securities, which flows through to mortgage rates falling less than the move in Treasuries would predict. Below is a chart of 10 year Treasury futures volatility. You can see the spike in the index beginning in August, which corresponds with the dramatic drop in rates, and the exit of high frequency traders from the market.

 

treasury futures volatility

 

 

Morning Report: Existing home sales disappoint, but some internals are better

Vital Statistics:

 

Last Change
S&P futures 2999 -8.5
Oil (WTI) 56.94 0.14
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.06%

 

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are flat.

 

Today is a big day for earnings, with numbers coming out for Ford, Boeing, Caterpillar, Facebook, and Tesla.

 

House prices rose 0.1% in May, according to the FHFA House Price Index. They were up 5% on a YOY basis. Home price appreciation has been decelerating across the board, but it is most pronounced in the Pacific and Mountain regions.

 

FHFA regional

 

Mortgage Applications fell by 2% last week as purchases and refis fell by the same amount. This was despite a 4 basis point drop in rates.

 

Existing Home Sales fell 1.7% in June, according to NAR. “Home sales are running at a pace similar to 2015 levels – even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country,” said Lawrence Yun, NAR’s chief economist. Yun says the nation is in the midst of a housing shortage and much more inventory is needed. “Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices,” he said.

 

Inventory was 1.93 million units, which represents a 4.4 month supply. Historically a balanced market had 6 – 6.5 months’ worth of supply. As Yun notes above, there is a big mismatch in inventory, with a complete dearth of properties at the low / mid price points. McMansions abound, however. Despite these issues, the first time homebuyer accounted for 35% of sales in June, which is approaching the historical norm of 40%. The first time homebuyer had been largely MIA for most of the post-crisis timeframe, accounting for 30% of sales (or even less). On the flip side, investors (represented by all cash sales) fell to 10%. With home price appreciation leveling out, we may start to see some funds who raised capital for the REO-to-Rental trade in the aftermath of the crisis ring the register and sell some of these properties as the funds wind down. Certainly cap rates are not what they were 10 years ago.

 

The median home price reached an all-time high of 285,700. Sentier Research has the median income at $63,400 as of May 2019. This puts the median house price to median income rate at just about 4.5x. Historically this is a very high number, however it is important to note that interest rates will influence this number. If you look at other metrics besides incomes and prices, homes are not that expensive on a historical basis.

 

 

Morning Report: New Home Sales disappoint

Vital Statistics:

 

Last Change
S&P futures 2955 4.5
Oil (WTI) 57.89 -0.03
10 year government bond yield 2.01%
30 year fixed rate mortgage 4.03%

 

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

 

Fed Chairman Jerome Powell is scheduled to speak at 1:00 pm. These are generally not market-moving events, however given the expectations gulf between the Fed and the markets, it is possible that something could spook investors.

 

Home prices rose 3.5% in April, according to the Case-Shiller Home Price Index. This is down from a 3.7% annual gain in the prior month. “Home price gains continued in a trend of broad-based moderation,” says Philip Murphy, Managing Director and Global Head of Index Governance at S&P Dow Jones Indices. “Year-over-year price gains
remain positive in most cities, though at diminishing rates of change. Seattle is a notable exception, where the YOY change has decreased from 13.1% in April 2018 to 0.0% in April 2019.

Mortgage rates are driving the deceleration in home price appreciation. That said, these are April numbers, which correspond with a 10 year bond yield about 50 basis points higher than today. It will be interesting to see if home price appreciation starts picking up.

 

Compare the Case-Shiller numbers to the FHFA House Price Index. In April, home prices rose 5.2% according to that index. The FHFA index ignores cash transactions and jumbos, so it is more weighted towards starter homes. It shows that there is still plenty of strength at the lower price points. Note as well the deceleration in the previously hot markets, especially Left Coast.

 

FHFA regional

 

New Home sales fell to an annualized pace of 680,000 in May, according to Census. This is down 7.8% MOM and 3.7% YOY. New Home Sales is a notoriously volatile number, with a wide margin for error, but it looks like builders are still sitting on their hands.

 

Bernie Sanders promises to forgive student loan debt paid for with a transaction tax. He expects the tax to raise $2.4 trillion. No details on the tax are available, but it will make mortgages more expensive as it would probably increase hedging costs. Also, it will never raise that kind of money since the immediate effect will be to kill high frequency trading, which is more than half the volume on the US stock exchanges. Many of these high frequency traders are liquidity providers who have automated the role of the specialist and market maker of yesteryear. The net effect will be widen bid-ask spreads and increase the market reaction to orders.