Initial Jobless Claims – The Daily Tearsheet

Morning Report: Initial Jobless Claims spike

Vital Statistics:

	Last	Change
S&P futures	2463	-4.4
Oil (WTI)	23.84	-0.69
10 year government bond yield		0.81%
30 year fixed rate mortgage		3.44%

Stocks are flattish as volatility begins to receded. Bonds and MBS are down. The Fed should be buying another $50 billion of MBS today.

Initial Jobless Claims jumped eleven-fold to 3.3 million last week. In a period where it seems like everything is considered “unprecedented,” this one is too.

The third revision to fourth quarter GDP was unchanged at 2.1%. Estimates for second quarter GDP at this point are all across the board, but down double digits is certainly a possibility.

The Senate passed the stimulus bill yesterday and the House is trying to pass it without being in session. AOC is supposedly granstanding on this and wants to bring everyone back.

Good explainer on what is happening in the mortgage REIT sector. Essentially, the non-agency REITs are the big buyers of non-QM paper, and they are getting margin calls. While much of this non-QM paper is probably money good, it doesn’t matter. Also, servicers are getting slammed as well. Suffice it to say the buyers of non-QM paper, assuming they make it through this whole thing, are probably going to have a much lower appetite going forward. The non-QM market is probably going to be on hold for a long time. Annaly and AGNC are doing the best in this market, although even they are not immune.

The House’s stimulus bill included language for a Fed servicing advance line to be extended to servicers who go along with the program and let people defer mortgage payments during the crisis. The big Ginnie servicers are going to need the help.

The government is considering taking equity stakes in the airlines as part of a bailout package.

Redfin is seeing a 27% decrease in traffic due to the Coronavirus, but it is still flat on a YOY basis. Remote tours are becoming more popular. Note that all of the ibuyers (Zillow, OpenDoor and Redfin) have all suspended buying.

Morning Report: Initial Jobless Claims break 200,000

Initial Jobless Claims broke 200k, falling to 199k last week. This is the lowest level since the 1960s. For all of those fretting over a possible economic slowdown, we aren’t seeing any evidence of that in the initial jobless claims numbers. These numbers are impressive enough in of themselves, however if you correct for population growth, we are in pretty much uncharted territory.

The Index of Leading Economic Indicators fell 0.1% in December, according to the Conference Board. This follows a 0.2% increase in November. “The US LEI declined slightly in December and the recent moderation in the LEI suggests that the US economic
growth rate may slow down this year,” said Ataman Ozyildirim, Director of Economic Research at The Conference Board. “While the effects of the government shutdown are not yet reflected here, the LEI suggests that the economy could decelerate towards 2 percent growth by the end of 2019.”

Adjustable rate mortgage are making a comeback, at least according to the latest Ellie Mae Origination Insight Report. ARMs accounted for 9.2% of all originations in December, up from 8.8% in November. Purchases accounted for 71% of all originations, and other indicators like FICO, DTIs, and cycle times were largely unchanged.

Dueling bills to re-open government failed in the Senate yesterday. Talks have resumed between the parties to find a compromise everyone can live with.

The Fed is contemplating an earlier end to the tapering process than the market has been anticipating. The Fed’s balance sheet pre-crisis was about $800 billion. It peaked around $4.5 trillion and has fallen to something like $4.1 trillion since they began letting some of the portfolio run off (i.e letting bonds mature and not re-investing the proceeds). The market thought the Fed would likely return to pre-crisis levels, however the consensus is that probably won’t happen as it could create issues with banking reserves. What does that mean for the mortgage industry? At least for the moment it means that there will be more incremental demand for TBAs from the Fed, which will mean lower rates, at least at the margin.

Housing reform may be a front-burner issue again, as lawmakers pledge to do something with Fan and Fred.

Morning Report: Consumer inflation remains under control

Vital Statistics:

	Last	Change
S&P futures	2898	9.5
Eurostoxx index	378.25	1.14
Oil (WTI)	69.66	0.71
10 year government bond yield		2.95%
30 year fixed rate mortgage		4.64%

Stocks are higher this morning on positive trade comments out of China. Bonds and MBS are up.

The European Central bank left rates unchanged, which is helping bonds rally.

Inflation at the consumer level came in weaker than expected, with the Consumer Price Index rising 0.2% MOM and 2.7% YOY. Both numbers were 10 basis points below Street estimates. Ex-food and energy, they were up 0.1% / 2.2%, which pretty close to the Fed’s target. Falling health care costs, which make up about 10% of the index, helped offset increasing housing costs.

Increased housing costs are fueling a rise in home improvement activity. Both The Home Despot and Lowes are surging following results. Consumer Comfort rose for the first time in 5 weeks. Despite the run over the last month, the index is at highs not seen since 2000 (as are most of the consumer confidence / sentiment indices).

Initial Jobless Claims fell to 204,000, which is another 50 year record. When you take into account population growth, the number becomes even more dramatic:

Hurricane Florence has been downgraded to a Category 2 hurricane, but it is still expected to pack a wallop and dump a lot of rain. The hurricane is expected to dump 20-30 inches of rain over the area, which means flooding issues well inland. Servicers should expect to see an uptick in DQs going into the end of the year. Note that fewer households have flood insurance this time around. “Residents of these states are materially less prepared than they were in the past to deal with the financial consequences associated with major flooding events,” said Robert Hartwig, a risk-management and insurance professor at the University of South Carolina’s Darla Moore School of Business.

Ex-US Treasury Secretary Jack Lew is getting into the mortgage business, joining the advisory board of Blend, which is a consumer finance start-up that handles online mortgage applications for the GSEs and some of the larger banks.

Doug Kass made the great observation about the business media and the 10th anniversary of the financial crisis, recalling Mickey Mantle’s observation: “I didn’t know how easy the game of baseball was until I entered the broadcasting booth.”

HUD Secretary Ben Carson plans on doing more to remove zoning impediments to multifamily construction, though his approach will be different than the Obama Adminstration’s. He plans on using Community Development Block Grant funds to encourage changes in zoning. The Obama admin sued localities directly, with the most prominent case being Westchester County in New York. Westchester County ended up being able to fend off HUD for the most part, which kind of shows the futility of that exercise. Westchester should have been a lay-up. Separately, the House is looking at regulatory costs and multifamily construction, which supposedly account for 30% of the cost of multi fam homebuilding according to NAHB.

Morning Report: REO-to-Rental trade earned 9% over the past 5 years

Vital Statistics:

	Last	Change
S&P futures	2718.5	-4.5
Eurostoxx index	394.21	1
Oil (WTI)	72.15	0.66
10 Year Government Bond Yield		3.10%
30 Year fixed rate mortgage		4.65%

Stocks are lower this morning on bad earnings from Cisco. Bonds and MBS are down small.

The US and China will enter trade talks over the next couple of days. Both sides have signaled willing to make some compromises, so this could potentially be good for interest rates.

Initial Jobless Claims came in at 222k last week, while the Philly Fed improved to 34.4 which is a strong reading. The Index of Leading Economic Indicators rose a respectable 0.4%.

One of the reasons why starter homes have been so tough to find has been the REO-to-rental trade, where professional investors scooped up REO properties early in the crisis and rented them out. CoreLogic crunched the numbers and it turns out the trade made about 9% per year for the past 5 years. Impressive return in an environment of financial repression. Most of the return came from home price appreciation however, so if prices begin to level out, some of these professional investors will turn sellers. This is especially true if they had these properties in funds with a life. As short term interest rates rise, the low single-digit rental return will have more competition.

While longer-term bonds can be used as a proxy to estimate future inflation, Treasury Inflation Protected Securities represent a direct measure of inflationary expectations. The Fed invariably mentions TIPS in their meeting minutes. The breakeven rate of inflation has hit a 4 year high in this market at 2.2%. This means that an investor would need 2.2% in the consumer price index to be indifferent between buying Treasuries and TIPS, which pay a return equal to the interest imputed in the bond plus the consumer price index.

2/3 of the mortgage originated in April were purchase loans, according to Ellie Mae’s Origination Insight Report. Fewer loans in the pipeline is speeding up processing times, as the average time to close fell to 41 days. The average FICO score ticked up to 723.

CSFB thinks 3.5% on the 10 year will be the level to trigger a stock market exodus, although rates could stall out somewhere south of that for a while.

The hits just keep coming for Wells. The WSJ reports they added or changed information for some business customers during an anti-money laundering audit. Wells states that it was an internal matter only: “This matter involves documents used for internal purposes. No customers were negatively impacted, no data left the company, and no products or services were sold as a result.” This is only going to increase the voices in DC calling for the bank to be broken up. It already is not allowed to increase its balance sheet. At some point, it might make sense for Wells to spin off Wachovia and its securities unit.

GoBankingRates calculated what you can get for $300k in every state. The best value? West Virginia, where $300k will get you 3,347 square feet. Worst? Washington DC, which gets you 581 square feet.

The CFPB recently issued new rules to fix the TRID “black hole” issue.

CFPB Interim Chairman Mick Mulvaney reiterated his commitment to tame the CFPB by ending regulation by enforcement at NAR’s Legislative Trade Meeting and Expo. Student loan debt was also discussed, and while the CFPB doesn’t have a magic wand to make the debt go away they will continue to ensure that students understand the risks they are taking and also will go after predatory student loan collection practices.

Morning Report: Initial Jobless Claims lowest since 1969

Vital Statistics:

	Last	Change
S&P futures	2652.75	8.25
Eurostoxx index	382.29	2.12
Oil (WTI)	68.61	0.56
10 Year Government Bond Yield		3.00%
30 Year fixed rate mortgage		4.62%

Stocks are higher this morning on strong earnings from Facebook. Bonds and MBS are up.

The ECB maintained its current policy and made some cautious comments, which is pushing up bonds in Europe. US Treasuries are following along on the relative value trade.

The 10 year has made a pretty sizeable move over the past month or so, and mortgage rates typically lag. So don’t be surprised if mortgage rates continue to tick up, even if the 10 year finds a home at the 3% level.

The homeownership rate was flat in the first quarter at 64.2%. It is up from 63.6% a year ago however. It bottomed in the second quarter of 2016 at 62.9%.

Durable Goods Orders increased 2.6% in March, following a strong February. Ex-transportation, they were flat however and core capital goods, which is a proxy for business capital investment, fell slightly. February’s already strong numbers were revised up slightly.

Retail inventories fell 0.5% while wholesale inventories increased by the same amount.

Initial Jobless Claims fell to 209,000 last week, which is the lowest number since 1969. When you adjust for population growth, the number becomes even more dramatic:

Deutsche Bank is scaling back its US operations to focus on becoming a more Euro-centric bank. It is hard to believe, but almost 20 years ago, the bank decided to make a big foray into the US market by buying Banker’s Trust and Alex Brown.

Moody’s is worrying about the next area of opportunity in the mortgage market: cash-out refinances. As many CLTVs are approaching 75%, homeowners may choose to do a cash-out to either consolidate higher rate debt, or perhaps do home improvements. The other opportunity remains refinancing FHA loans that have accumulated enough equity to qualify for a conforming loan without MI. Finally, those who still have ARMs might find the relative attractiveness of a 30 year fixed to be a compelling switch. In an environment of rising home prices and rising interest rates, these will be the only game in town.

Homebuilders are facing rising input costs – sticks and bricks, if you will. Framing lumber prices are up 16% this year, and plywood is up 33%. Inventory is so tight that builders are able to pass these costs onto homebuyers. A tight labor market remains an issue for the industry as well. All of this points to higher home prices going forward.

For those wondering if we are indeed at the end of the credit cycle, here is WeWork’s bond offering, which came in at $700 million with bonds paying 7.875%. Borrowing money at 7.875% for 5% cap rate office space? Set that aside for the moment. They introduced a new financial concept, called “community-adjusted EBITDA,” which not only strips out interest, depreciation and amortization, and taxes, but also ignores general and administrative, marketing, and design / development costs. That has to be the first time I have ever heard this term before, and it should just be renamed EBBS – or earnings before bad stuff.