Morning Report: The FOMC meets

Vital Statistics:

 

Last Change
S&P futures 322 -10.6
Oil (WTI) 41.45 -0.12
10 year government bond yield 0.6%
30 year fixed rate mortgage 2.98%

 

Stocks are lower this morning as the FOMC meeting begins. Bonds and MBS are flat.

 

The FOMC meeting begins today, and we will get the announcement tomorrow. The Fed is considering the idea of basically controlling the entire yield curve, which means it essentially sets interest rates by diktat. The Fed is reaching into its historical toolbox and returning to the Truman Administration, where the Fed pushed down rates to limit the government’s borrowing costs. Japan has experimented with the same policy. Note that the rest of the world more or less relies on the 10 year US bond yield to determine the correct price of risk, and taking that number out of the hands of the market is playing with fire. IMO, we have a sovereign debt bubble of epic proportions, with negative yields all over the globe. Like all bubbles, this one will probably blow up too, once inflation returns. I have no idea what it will look like, but I can almost assure you that politicians, the media, and academia will blame the free market and not a bunch of academics sitting in a room trying to manipulate the price of money the way the Soviets manipulated the price of corn, tractors or gasoline.

 

Durable Goods orders rose 7.3% last month, which was higher than expectations. Core Capital Goods orders (kind of a proxy for business capital expenditures) rose 3.3%.

 

The MBA reported that the share of loans in forbearance fell for the 6th straight week. Reported loans in forbearance decreased by 6 basis points to 7.74%, or about 3.9 million homeowners. Ginnie loans ticked up, while Fannie / Freddie loans fell.

 

The Senate GOP has released their $1 trillion coronavirus relief proposal, which will include another $1,200 payment to individuals, more payroll protection money, but a reduction in the additional unemployment benefits from $600 a week to $200 a week. Democrats are complaining about the drop in unemployment benefits. The increased benefits will probably get get reinstated to get enough support to get it through the House. Both parties realize that as we approach the election, it will get harder to pass anything.

 

New COVID cases are slowing in Arizona, Texas and Florida.

 

Homebuilder D.R. Horton reported a 10% increase in revenues for the quarter ended June 30. Net orders were up 38% in units. Orders were up 50% year-over-year in May and June. Note D.R. Horton has a lot of Texas exposure, which is seeing an increase in COVID cases.

The Company believes the increase in demand since May has been fueled by increased buyer urgency due to lower interest rates on mortgage loans, the limited supply of homes at affordable price points across most of the Company’s markets, and to some extent the lower levels of home sales from mid-March through early April which caused some pent-up demand.

D.R. Horton stock is up 4% pre-open

 

We saw similar order growth for MDC Holdings as well. Orders increased 5% in the June quarter and were up 53% in the month of June.

Our results this quarter reflect the favorable industry dynamics in place today, including a low interest rate environment, a lack of available supply and a highly motivated buyer. They also reflect our continued shift in focus to the more affordable segments of the market and the benefits of our build-to-order strategy, which caters to the wants and needs of a large segment of the buying population. We believe that providing homebuyers with flexibility and choice at an affordable price is a winning strategy for our company. Given the favorable market conditions we are experiencing, we now believe that we may achieve as many as 8,000 home deliveries for the 2020 full year, which would be a 15% increase from the prior year.

MDC stock is trading up 6% pre-open.

Morning Report: Existing Home Sales jump

Vital Statistics:

 

Last Change
S&P futures 3285 5.1
Oil (WTI) 41.84 -0.22
10 year government bond yield 0.59%
30 year fixed rate mortgage 3.02%

 

Stocks are flattish as earnings continue to pile in. Bonds and MBS are flat.

 

Initial Jobless Claims increased last week as we saw a wave of new COVID-10 cases. New claims increased from 1.3MM to 1.4MM

 

Despite the new COVID fears, the housing recovery is in full swing. Existing home sales rose 21% in June, to an annualized pace of 4.72 million. according to NAR. This is still down 11% on a YOY basis, but we are getting a lot of data points that show a meaningful recovery.

“The sales recovery is strong, as buyers were eager to purchase homes and properties that they had been eyeing during the shutdown,” said Lawrence Yun, NAR’s chief economist. “This revitalization looks to be sustainable for many months ahead as long as mortgage rates remain low and job gains continue.”

The median home price rose 3.5% YOY to $295,300, while inventory is at 4 months’ worth. The first time homebuyer percentage is approaching normalcy, at 35%. Historically it has been closer to 40%.

 

Speaking of housing, homebuilder Meritage Homes reported second quarter numbers yesterday. Orders increased 32% year-over-year. May and June were record selling months for the company, which focuses on entry-level homebuyers.

“Demand for new homes is being driven by historically low mortgage interest rates, a shortage of used homes for sale, and an increased need for homes that can accommodate entire families working from home more than ever before. Many of those families are choosing safe suburban communities rather than crowded urban centers and many often prefer to purchase a home virtually rather than physically,” he explained. “That is exactly what Meritage offers. 100% of our communities are open for both in-person and virtual sales, and our virtual selling capabilities have been very beneficial. More than half of our communities are designed for the entry-level market with a wide selection of affordable homes ready for quick move-in, while our streamlined design selection process in Studio M  allows first move-up customers to move quickly into a new home.”

The company took up guidance for full year earnings to about $9 bucks a share, when the Street was looking for about $6.

 

A record number of people are leaving the expensive urban areas to move to cheaper locations with more outdoor space and better weather. Phoenix, Sacramento, Austin, and Las Vegas are growing, while buyers flee New York City, Los Angeles and Sacramento. The subtext to all of this is remote working, which is a game-changer. From one realtor:

“We’re seeing tons of interest from clients moving to Austin from major cities on both coasts, particularly tech workers,” Vallejo said. “Buyers who have discovered they don’t love being quarantined in an apartment building in San Francisco or New York and can work remotely are looking for a house, and they can afford that here in Austin. I have a client moving from the Bay Area who just closed on a home site unseen, and another client from Portland who is in the process of buying a home here.”

 

Democrats are promoting a bill that would prohibit the GSEs and Ginnie Mae from charging fees for forbearances. Fannie and Fred introduced the idea of adding big LLPAs for loans in forbearance. The unintended consequence of forbearance has been a tightening of credit, particularly for government lending. Part of this is due to low or even negative servicing values for FHA and VA loans.

 

Home sellers are reaping gains of almost $76k according to ATTOM Data Solutions. Taking into account time held, this represents a return of 36% compared to the original purchase price. Of course if you take into account the equity you actually contributed, it is probably much higher.

Morning Report: KB Home misses earnings

Vital Statistics:

 

Last Change
S&P futures 3039 -13.1
Oil (WTI) 37.84 -0.49
10 year government bond yield 0.66%
30 year fixed rate mortgage 3.16%

 

Stocks are lower this morning on an increase in COVID cases in states like AZ and TX. Bonds and MBS are up.

 

Initial Jobless Claims were more or less flat at 1.5 million last week.

 

The third estimate for first quarter GDP came in at -5%, more or less in line with estimates. The price index (inflation) came in at 1.4%, which is lower than the Fed’s target.

 

The MBA is urging FHFA to expand access to the Federal Home Loan Banking network, by allowing REITs and independent mortgage banks to borrow from the FHLB. The FHLB provides longer-term financing at competitive rates. The collapse in the jumbo and non-QM market was directly related to mortgage REITs which funded their balance sheets with repurchase agreements and had to sell paper / stop buying when the margin calls came in March and April. It isn’t a panacea (some REITs with FHLB loans still were forced to deleverage) however it would have mitigated the collapse at least somewhat. Giving the independent mortgage banks access would make them more stable as well.

 

Homebuilder KB Home reported earnings yesterday. Earnings per share beat the Street, but revenues and orders disappointed the Street and sent the stock down 13% on the open. “The prolonged stay-at-home public health orders, resulting economic shutdown and our conservative approach to navigating the uncertain environment significantly impacted our orders during the quarter. However, following a low point in April, we are very encouraged by the resilience of housing market demand. We experienced steady and significant improvement in our order trends beginning in May, which was further fueled by welcoming walk-in traffic to our communities. This improvement has accelerated dramatically in the first three weeks of June during which time we have achieved a modestly positive year-over-year comparison, as orders have returned to more normalized levels,” concluded [KB Home CEO] Jeffrey Mezger. Orders fell 4% in March, 59% in April, and 42% in May. For the first 3 weeks of June, orders were up 4%. Still demand for housing remains robust.

 

Treasury is considering delaying Tax Day past July 15. “As of now, we’re not intending on doing that, but it is something that we may consider,” Treasury Secretary Steve Mnuchin said in a June 23 interview at the Bloomberg Invest Global 2020 virtual summit. He said he was considering another delay to Sept. 15.

Morning Report: New Home Sales rise

Vital Statistics:

 

Last Change
S&P futures 3099 -19.1
Oil (WTI) 39.94 -0.49
10 year government bond yield 0.71%
30 year fixed rate mortgage 3.16%

 

Stocks are lower this morning as COVID cases increase. Bonds and MBS are up small.

 

Mortgage Applications decreased 8.7% last week as purchases decreased 3% and refis fell 12%. “Refinance applications dropped to their lowest level in three weeks, but the index remained 76 percent higher than a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite the decline last week, MBA still anticipates refinance originations to increase to $1.35 trillion in 2020 – the highest level since 2012.” There has chatter in the market that originators are backing off on their pricing as they are inundated with files.

 

New Home sales increased 13% compared to a year ago to 676,000. This is up 17% on a month-over-month basis. From what we have been hearing from the homebuilders, demand is robust. Note that KB Home reports after the close today. Note that the builders are not cutting prices either.

 

Home prices rose 0.2% MOM in April, and are up 5.5% YOY, according to the FHFA House Price Index. “U.S. house prices posted another positive monthly increase in April,” according to Dr. Lynn Fisher, Deputy Director of the Division of Research and Statistics at FHFA. “Regionally, results varied. Two of the usually stronger growth areas, the Mountain and Pacific divisions, were flat over the month but other divisions continued to experience strong price appreciation even with all of the COVID-19 challenges. Both the New England and South Atlantic regions saw monthly decreases in prices, but all divisions posted positive year over year growth of at least 5 percent. The number of
transactions used to estimate the HPI were slightly down from March to April but were still a robust sample. We expect the normal spring bump in sales was pushed off by the COVID-19 shutdowns and may extend into the summer months as states reopen and real estate sales pick back up.”

 

The National Multifamily Housing Council reported that 92.2% of tenants paid their June rent as of 6/20. “With the support of expanded unemployment benefits, stimulus funds and significant efforts by apartment community owners and operators to help residents impacted by the outbreak of COVID-19 and resulting financial hardships, it seem most renters were once again able to meet their obligations,” said Doug Bibby, NMHC President. “The early steps taken by lawmakers have proven critical to keeping many safely and securely housed. As we move forward and the economy begins to recover, it will be vitally important that lawmakers continue to support the nation’s renters and forestall even greater economic harm.”

 

 

Morning Report: Lennar reports a huge turnaround in May

Vital Statistics:

 

Last Change
S&P futures 3126 4.1
Oil (WTI) 37.94 -0.39
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.16%

 

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

 

Initial Jobless Claims came in a little higher than expected – 1.5 million versus 1.3 million expected. Meanwhile, the Philly Fed survey was way stronger than expected.

 

The Conference Board Index of Leading Economic Indicators improved 2.8% in May versus the Street expectation of 2.3%. “In May, the US LEI showed a partial recovery from its sharp decline over the previous three months, as economic activity began to pick up again,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The relative improvement in unemployment insurance claims is responsible for about two-thirds of the gain in the index. The improvements in labor markets, housing permits, and stock prices also buoyed the LEI, but new orders in manufacturing, consumers’ outlook on the economy, and the Leading Credit Index™ still point to weak economic conditions. The breadth and depth of the decline in the LEI between February and April suggest the economy at large will remain in recession territory in the near term.”

 

Homebuyer mortgage demand spiked to an 11-year high. “The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said MBA economist Joel Kan.

 

Homebuilder Lennar reported better than expected earnings and re-introduced its guidance for the year. On the conference call, the company talked about how the markets turned around in May:

In May, our new orders increased each week sequentially and were up 7% over the prior year. Our cancellation rate in May also dropped from 18% — dropped to 18% from the 23% high in April. More importantly, our increase in sales was generally achieved while raising prices and reducing incentives throughout the month of May. We rarely comment on sales activity outside of the quarter we are reporting. However, given these fluid market dynamics, I will give you some insight on June. For the first two weeks of June, our new orders were up 20% over the same period last year. 

Now some of that might be catch-up from the March and April weakness, but it does point to a robust homebuilding market, certainly better than yesterday’s housing starts number would suggest.

 

The FHFA extended the eviction moratorium until August 31.

 

 

Morning Report: MFA Financial describes the chaos in the MBS market in late March

Vital Statistics:

 

Last Change
S&P futures 3126 4.1
Oil (WTI) 37.94 -0.39
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.16%

 

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

 

Housing starts rose 4% MOM in May to 974,000. This is still 23% below last year. Building Permits rose 14% MOM but are down 9% YOY. Shelter-in-place orders were still in force for most of the country in May. Despite the drop in May, homebuilder confidence rebounded in June.

 

Jerome Powell heads to Capitol Hill for his second day of Humphrey-Hawkins testimony. Powell was cautious yesterday about how quickly jobs would come back. That said, investors ignored him, pushing stocks higher. Note that the Fed was consistently over-optimistic about the economy during the Obama Administration and has been consistently over-pessimistic about the economy during the Trump Administration. Note the COVID epidemic has swelled the Fed’s balance sheet even more. The Fed now holds $7.2 trillion in assets. Before the Great Recession, it held about $800B.

 

Fed assets

 

Mortgage REIT MFA Financial reported earnings yesterday. On the conference call, the company talked about how bad things got in the MBS market in late March:

January, February and the first two weeks of March were very normal and a good start to the new year. And in only a few days, the financial markets and the mortgage market in particular completely collapsed. With the onset of the COVID-19 pandemic, pricing dislocations for markets and residential mortgage assets was so extreme that liquidity evaporated. Prices of legacy non-agencies, which had not changed by more than 3 points in the last two to three years, were suddenly lower by 20 points. CRT securities dropped as much as 20 points to 50 points and MSR-related asset prices were lower by 20 points to 30 points, all in a few days. MFA received almost $800 million in margin calls during the weeks of March 16 and March 23 and over $600 million of these were on mortgage-backed securities. In contrast, we received $7 million of margin calls on these portfolios during the entire week of March 2 and $37 million during the week of March 9. And during the months of December, January, and February, we received a total of six margin calls, all related to factor changes with a total aggregate amount of $4 million.

MFA received almost $800 million in margin calls, and entered the year with about $70 million in unrestricted cash. This was the dislocation in the market that caused the Fed to react so aggressively to support the MBS market. Of course they almost killed the smaller originators and TBA brokers in the process….

 

Mortgage Applications increased 8% last week as purchases rose 4% and refis increased 10%. “The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates dropped to another record low in MBA’s survey, leading to a 10 percent surge in refinance applications. Refinancing continues to support households’ finances, as homeowners who refinance are able to gain savings on their monthly mortgage payments in a still-uncertain period of the economic recovery.”

Morning Report: Homebuilding is back

Vital Statistics:

 

Last Change
S&P futures 3141 74.1
Oil (WTI) 38.34 1.39
10 year government bond yield 0.78%
30 year fixed rate mortgage 3.16%

 

Green on the screen this morning as Jerome Powell heads to Capitol Hill for Humprey-Hawkins testimony. Bonds and MBS are down.

 

Retail Sales came in way better than expected, rising 17.7% versus expectations of a 8% gain. Last month was revised from -16.4% to -14.7%. The control group, which excludes gas, autos, and building materials rose 11% versus expectations of a 4.7% increase.

 

Industrial production rose 1.4% in May, a little better than expected. Capacity Utilization rose to 64.8% and manufacturing output rose 3.8%.

 

Lennar reported second quarter earnings yesterday, with a 27% increase in earnings per share. Lennar is on a November fiscal year, so the quarter included both March and April, the worst months of the economic pandemic. That said, everything turned around in May, with CEO Stuart Miller saying this in the press release: “Business rebounded significantly in May, and by quarter’s end, our total new orders declined by only 10%, and deliveries ended flat year-over-year. In sync with the market rebound, we resumed starts and land spend to match the improving market conditions, and this rebound has continued into the first two weeks of June.” He also mentioned the effect COVID has had on demand: “While unemployment increased throughout the quarter due to impacts from the COVID-19 pandemic, customers moved from rental apartments and from densely populated areas to purchase homes, and home sales grew steadily, as record-low interest rates and low inventory levels drove a favorable rebound in the homebuilding industry.” Finally, the company re-instituted its 2020 guidance.

 

The MBA reported that new home purchase applications increased 26% MOM in May and 11% on YOY basis. “The solid increase in new home purchase applications in May is another indication of a recovery in the housing market,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “MBA estimates that new home sales rebounded 26 percent last month – a healthy turnaround after three months of declines. Homebuyer traffic is rising, and homebuilders are continuing to ramp up production following the COVID-19 pandemic-related restrictions. We expect to see additional near-term strength in the coming months from the resumption of delayed sales activity caused by the social distancing and stay-at-home orders during March and April.”

 

The MBA reported that the share of mortgages in forbearance has leveled out at 8.55%. “Results from the first week of June showed a slight uptick in the overall share of loans in forbearance, but this increase was primarily driven by a larger share of portfolio and PLS loans in forbearance,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Half of the servicers in our sample saw the forbearance share decline for at least one investor category. Although there continues to be layoffs, the job market does appear to be improving, and this is likely leading to many borrowers in forbearance deciding to opt out of their plan.” Given the way the CARES Act was drafted, there was almost no penalty for taking forbearance, and it sounds like many took it pre-emptively. Ginnie loans was flat at 11.8%, while GSE loans came in at 6.4% and private label mortgages were 10.2%.

 

The housing market outside New York City is booming. Local builders are getting slammed with inquiries and are selling homes at a rapid pace. “People who are now in the Hudson Valley looking for homes, many of them have never been to the Hudson Valley before,” Mr. Petersheim said. “That’s new to the marketplace, that urgency.” I guess being cooped up for 3 months in an 800 square foot studio that costs 5 grand a month will wear on anyone.

 

Fed Head Robert Kaplan says the economy will experience a historic contraction before rebounding in the second half of the year. From the sound of it, the economy is already bouncing back.

 

I will be doing a podcast for the Information Management Network this morning. I will be discussing economics, housing, and the markets. I will leave a link once I get one.

Morning Report: 37% of New York City renters can’t make June rent

Vital Statistics:

 

Last Change
S&P futures 3104 -14.1
Oil (WTI) 36.84 0.39
10 year government bond yield 0.78%
30 year fixed rate mortgage 3.23%

 

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

 

Initial jobless claims fell to 1.9 million last week. Separately, Challenger and Gray reported that 397,000 job cuts were announced last month.

 

Homebuilder Hovnanian reported a 22% increase in revenues for the second quarter. The cancellation rate ticked up slightly, but it looks like the homebuilders are seeing a recovery already. We should hear from Lennar and KB Home in a week or two.

 

Productivity was revised upward in the first quarter to -0.9% and unit labor costs were revised upward to 5.1%.

 

It looks like June rental payments are falling a touch, after holding up reasonably well in April and May. According to a survey, 37% of all New York City renters don’t have the money to pay June rent.

 

Another sign the recovery is upon us: Investors are starting to pick at bank stocks. “There’s optimism things will be better a year from now. And because banks have trailed just about everything else in the market they’re being dragged up,” said Rick Meckler, partner at Cherry Lane Investments, in New Vernon, New Jersey.

 

Morning Report: Over 70% of the loans in forbearance don’t need the help

Vital Statistics:

 

Last Change
S&P futures 2966 37.1
Oil (WTI) 32.84 1.19
10 year government bond yield 0.71%
30 year fixed rate mortgage 3.28%

 

Stocks are higher this morning as retailer earnings are coming in better than expected. Bonds and MBS are flat.

 

The FHFA put out new guidance yesterday on forbearance and refinances. Essentially, you will will be eligible to refinance your property provided you are current with whatever repayment plan you negotiated for 3 months after exiting forbearance. “Homeowners who are in COVID-19 forbearance but continue to make their mortgage payment will not be penalized,” said Director Mark Calabria. “Today’s action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.” According to the MBA, 4.1 million borrowers are in forbearance right now and over 70% don’t need the help. That is a huge number, but i guess it is to be expected since there is no requirement to demonstrate hardship.

 

Mortgage Applications fell 2.6% last week as purchases increased 6% and refis fell 6%. “Applications for home purchases continue to recover from April’s sizable drop and have now increased for five consecutive weeks,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity – which was 35 percent below year-ago levels six weeks ago – increased across all loan types and was only 1.5 percent lower than last year. Government purchase applications, which include FHA, VA and USDA loans, are now 5 percent higher than a year ago, which is an encouraging turnaround after the weakness seen over the past two months. As states gradually reopen and both home buyer and seller activity increases, we will be closely watching to see if these positive trends continue, or if they reflect shorter-term, pent-up demand.”

 

41% of home sales had bidding wars, according to Redfin. “Demand for homes has picked back up after hitting rock bottom in April, and that uptick paired with a lack of supply is a recipe for bidding wars,” said Redfin lead economist Taylor Marr. “Homebuyers are getting back out there, searching for more space as they realize using their home as an office and school may become the norm. But sellers are still holding off on listing their homes, partially due to economic uncertainty and concerns of health risks. In some hot neighborhoods, there may only be one or two homes for sale, with multiple homebuyers vying for them.”

 

22% of builders reduced home prices to move inventory, according to the NAHB. This is much less than the housing recession of 2008, which was about 50%.

Morning Report: Inflation falls

Vital Statistics:

 

Last Change
S&P futures 2928 3.1
Oil (WTI) 25.59 0.29
10 year government bond yield 0.71%
30 year fixed rate mortgage 3.36%

 

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

 

Inflation at the consumer level fell in April, which was the biggest drop since 2008. The headline index fell 0.8% MOM and rose 0.3% YOY. This was primarily due to energy and airline flights. Ex-food and energy it fell 0.4% MOM and rose 1.4% YOY. Energy was the dominant trend, however food prices increased due to supply chain issues.

 

food prices

 

Small business optimism fell in April according to the NFIB. “The impact from this pandemic, including government stay-at-home orders and mandated non-essential business closures has had a devasting impact on the small business economy,” said NFIB Chief Economist William Dunkelberg. “Owners are starting to benefit from the PPP and EIDL small business loan programs as they try to reopen and keep employees on staff. Small business owners need more flexibility, though, in using the PPP loan to support business operations and liability protection so that all these efforts to support small businesses are not ultimately lost in costly litigation.”

 

Homebuilders are beginning to offer incentives to entice buyers. FWIW, D.R. Horton noted in its first quarter earnings that it hasn’t had to resort to price cutting. For the most part, the builders went into the crisis without a ton of inventory, so we shouldn’t see big price drops.