Morning Report: New Home Sales rise

Vital Statistics:

 

Last Change
S&P futures 3212 -15.1
Oil (WTI) 41.34 -0.22
10 year government bond yield 0.59%
30 year fixed rate mortgage 3.02%

 

Stocks are lower this morning on weakness in overseas markets. Bonds and MBS are flat.

 

New Home Sales rose to a seasonally-adjusted annual rate of 776k, an increase of 14% from March and 7% from a year ago. Despite the big increase, we are still way below historical levels, which are insufficient to keep up with population growth and incremental demand.

 

new home sales

 

The index of leading economic indicators improved in June, but still exhibited weakness for the economy overall.

“The June increase in the LEI reflects improvements brought about by the incremental reopening of the economy, with labor market conditions and stock prices in particular contributing positively,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “However, broader financial conditions and the consumers’ outlook on business conditions still point to a weak economic outlook. Together with a resurgence of new COVID-19 cases across much of the nation, the LEI suggests that the US economy will remain in recession territory in the near term.”

Wells Fargo supposedly put people into forbearance who were merely interested in getting information about it. This prevents borrowers from refinancing their mortgages. Apparently, it is hard for borrowers to get out of forbearance, even if they want to. Note that Elizabeth Warren is on the shortlist for Joe Biden VP candidates, which means the financial sector will get plenty of vitriol out of DC heading into the election. Wells has already cut its dividend 80%, and may have to suspend it in order to keep the politicians and activists happy.

 

Home asking prices are up 13% from last year, according to Redfin. The ratio of sales price to asking price hit a record of 99% in early July, while the number with a price drop hit an all-time low at 34.4%. Not only that, the late summer slowdown doesn’t look like it is going to happen either: “The housing market usually slows down in July and August when people take time off for vacations,” said Washington, D.C. area Redfin agent Kris Paolini. “This year though, a lot of vacations have been cancelled, and buyers who had previously given up their search are being lured back by low mortgage rates. The market has stayed hot through the summer and it doesn’t look like we’ll see the typical slowdown in August, either.” If schools are closed this fall, the whole seasonal dynamic of moving kind of disappears.

asking prices

Morning Report: Home Prices Rise

Vital Statistics:

 

Last Change
S&P futures 3235 -5.1
Oil (WTI) 42.34 1.22
10 year government bond yield 0.59%
30 year fixed rate mortgage 3.02%

 

Stocks are flattish as earnings continue to come in. Bonds and MBS are up after the Trump Administration took steps to close the Chinese Consulate in Houston.

 

Mortgage Applications rose 4% last week as purchases rose 2% and refis rose 5%. “Mortgage applications increased last week despite mixed results from the various rates tracked in MBA’s survey. The average 30-year fixed rate mortgage rose slightly to 3.20 percent, but some creditworthy borrowers are being offered rates even below 3 percent. As a result, these low rates drove a 5 percent weekly gain in refinances and a robust 122 percent increase from a year ago,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “There continues to be strong homebuyer demand this summer, as home shoppers have returned to the market in many states. Purchase activity increased again last week and was up 19 percent compared to last year – the ninth straight week of year-over-year increases.”

 

Home prices fell 0.3% MOM, but are still up 4.9% YOY, according to the FHFA House Price Index. “U.S. house prices posted a small decrease in May compared to April but remained 4.9 percent higher than a year ago,” according to Dr. Lynn Fisher, Deputy Director of the Division of Research and Statistics at FHFA. “The May HPI results are based on contracts for sale signed in late March and throughout April, which was a period when many states announced stay-at-home orders. The number of transactions powering the FHFA HPI in May was down by just over 30 percent compared to a year ago, reflecting the early effects of COVID-19 shutdowns. Based on the rebound in mortgage applications for home purchases and pending home sales in May, we expect the number of transactions increased somewhat in June.”

 

The number of Americans considering a new home purchase has been relatively unaffected by COVID, at least according to numbers by the NAHB. I guess there is a push-pull effect going on. On one hand, COVID and the riots are pushing renters out of the cities, but on the other hand, economic uncertainty is making potential buyers more cautious.

 

Chris Waller and Judy Shelton were approved by the Senate Banking Committee to join the Federal Reserve Board. Judy Shelton has expressed support for the gold standard, and has questioned whether bank deposits should be insured. These thoughtcrimes make her toxic for Democrats. The two now go to the Senate for a full vote.

 

Note we will have the FOMC meeting next week, where further stimulus measures will be discussed. The credit tightening in the mortgage market will almost certainly be an issue, although I don’t know what the Fed can do about that since it is being driven by the CARES Act, not necessarily financial markets.

Morning Report: Median home prices rise

Vital Statistics:

 

Last Change
S&P futures 3216 2.1
Oil (WTI) 40.34 -0.22
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.02%

 

Stocks are flattish as we head into the heart of earnings season. Bonds and MBS are flat as well.

 

Aside from earnings, we should have a quiet week on the data front, with only new home sales on Friday. There will be no Fed-speak ahead of the FOMC meeting next week.

 

Quicken disclosed that it earned between $3.35 and $3.55 billion in the second quarter, according to its updated prospectus.

 

The US median home price rose 3% in June, according to Redfin. “The market has remained very competitive even as we’re getting towards the late summer months when things usually begin to cool off,“ said Redfin Detroit agent Tony Orlando. “We saw a spike in homebuying immediately after real estate reopened in May, and ever since then we’ve been busy. At this point, homebuyers are assuming that they’ll have to pay a lot more for a home than they initially expected due to all the competition. Today’s record-low mortgage rates help with that some, but the upfront costs are still a tough pill to swallow.”

 

Redfin median price

 

 

Morning Report: Delinquencies spike in April

Vital Statistics:

 

Last Change
S&P futures 3200 -19.1
Oil (WTI) 40.74 -0.41
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.02%

 

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

 

Initial Jobless claims came in at 1.3 million. It is surprising to see so many claims given the state of re-opening, however it seems like many small businesses are still closing down as a result of the COVID shutdown. There is talk of additional stimulus out of Washington, along with the end of the additional $600 a week for the unemployed.

 

Retail Sales increased 7.5% in June, well above the 5.2% forecast. The control group, which excludes gas, autos, and building products rose 5.7%. This is overall good news for the economy as consumption is the biggest driver.

 

Overall delinquencies rose to 6.1% in April, according to CoreLogic. The hardest hit states were the NYC area: NY, NJ, CT, as well as the deep south states of LA and MS. You can see how fast the DQ rate spiked in the chart below:

30 day DQ

 

Single family authorizations fell 10% in June, according to BuildFax, although activity might be stabilizing as builders learn to work within the restrictions of COVID. Certainly the demand is there, as first time homebuyers try and escape the cities. Note we will get housing starts and building permits tomorrow.

 

 

Morning Report: More bank earnings

Vital Statistics:

 

Last Change
S&P futures 3229 45.1
Oil (WTI) 40.84 0.61
10 year government bond yield 0.65%
30 year fixed rate mortgage 3.02%

 

Stocks are higher this morning on promising results from a COVID vaccine study. Bonds and MBS are down.

 

US Industrial Production rose 5.4% in June, while manufacturing production rose 7.2%. Capacity Utilization increased to 68.6%.

 

Mortgage Applications rose 5.1% last week as purchases decreased 6% and refis rose 12%. “Mortgage rates continued their downward trend, with the 30-year fixed rate falling 7 basis points to 3.19 percent – another record low in MBA’s survey and 63 basis points lower than the recent high in late March,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The drop in rates led to a jump in refinance activity to the highest level in a month, with refinance loan balances also climbing to a high last seen in March. Despite the decrease in purchase apps, they are still up 15% YOY.

 

Despite the great performance for the mortgage business in Q2, Chase’s origination volume was down on a sequential basis, from $28.1 billion in the first quarter to $24.2 billion in the second. Given the seasonality of the business this is a surprising result. Originations were more or less flat YOY. The servicing portfolio also fell, from $738 billion to $684 billion. JP Morgan also added another $8.9 billion to loan loss reserves, increasing them to $34.3 billion.

 

US Bank reported earnings this morning. Earnings were down substantially on increased provisions for credit losses. The residential loan portfolio remains high quality with an average FICO of 768 and LTV of 68%. 90 day DQs were at .17% of the portfolio, which was a slight increase. Mortgage banking revenue increased 64% QOQ to $648 million due to higher volume and gain on sale revenues, which were offset by a falling servicing values.

 

Citi reported a 5% increase in revenues, but a 74% decrease in EPS due to increased provisions for credit losses. Mortgage origination increased 64% YOY to $6.4 billion. The servicing portfolio declined about 2%.

 

The rebound in housing caused Fannie Mae economists to revise upward their 2020 GDP estimate from down 5.4% to down 4.2%.

Morning Report: Forbearances fall

Vital Statistics:

 

Last Change
S&P futures 3198 23.1
Oil (WTI) 40.24 -0.31
10 year government bond yield 0.67%
30 year fixed rate mortgage 3.12%

 

Stocks are higher this morning as earnings season kicks off. Bonds and MBS are down small.

 

Earnings season officially starts tomorrow, with JP Morgan, Wells and Citi reporting second quarter earnings. Mortgage banking revenues should be top-notch, but the big question will be whether the COVID writedowns for the first quarter are sufficient to cover expected losses. A lot of attention will be paid to commercial real estate loan performance as well.

 

There will be some housing economic data this week with housing starts and the NAHB Housing Market Index. Market-moving data will be rare for the time being with the Fed firmly stuck at the zero bound for the next year or two.

 

Forbearances are falling, according to Black Knight’s Forbearance Tracker. The number of borrowers in forbearance fell by 435,000 last week to 4.1 million. This represents 7.8% of all mortgages.

 

The housing recovery is as strong as ever, as prices increased 6.2% in the week ending June 27. Bidding wars are back, inventory is light, and interest rates are at record lows. I will be extremely interested in the housing starts and building permits numbers on Friday. I could see housing as the industry that takes the lead in the economic recovery. Redfin reported that over 50% of transactions were competitive.

 

 

Morning Report: Inflation is flat

Vital Statistics:

 

Last Change
S&P futures 3138 3.1
Oil (WTI) 39.84 0.21
10 year government bond yield 0.60%
30 year fixed rate mortgage 3.12%

 

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

 

Inflation at the wholesale level remains well below the Fed’s target. The Producer Price Index fell 0.2% MOM and fell 0.8% YOY. Ex food and energy, the index was flat. Suffice it to say, the Fed is deeply concerned about this, and this opens the window for further measures to support the economy.

 

The Trump Administration is looking at another stimulus bill, which would extend unemployment benefits and permit another round of direct payments to individuals. House Democrats want something more sweeping, so we’ll see what actually gets hammered out.

 

Landlords in Manhattan are being forced to slash rent as vacancies increase. The Escape From New York has put a total of 10,000 apartments on the market, which is an 85% increase from a year ago. The official vacancy rate is 3.7%, however in some buildings it is much higher.

 

Redfin announced that over half of all transactions were competitive in June. “Bidding wars continue to be fueled by historically low mortgage rates and fewer homes up for sale than almost any time in the last two decades,” said Redfin economist Taylor Marr. “It’s like a game of musical chairs where only the best bidders get a seat. Both renters and move-up buyers who have held onto their jobs are vying for the small number of single-family homes on the market as they realize they need more space for their families.”

Morning Report: The service sector rebounded strongly in June

Vital Statistics:

 

Last Change
S&P futures 3153 -18.1
Oil (WTI) 40.44 -0.21
10 year government bond yield 0.67%
30 year fixed rate mortgage 3.12%

 

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

 

The services economy rebounded in June, according to the ISM Non-Manufacturing Survey. Production-related indicators are leading employment indicators. That said, many of the comments in the survey pointed to higher-then-expected demand and shortages. “Sales have picked up tremendously. Sporadic supply issues. Biggest concern for us is lumber shortages.” (Construction). Overall, the headline number for the index was 57, much higher than the 50 that was expected and is consistent with an economy that is growing quickly. Further evidence that the recession probably ended in early May some time.

 

CoreLogic is predicting that home prices will fall at an annual rate of 6.6% by May of 2021.

Strong home purchase demand in the first quarter of 2020, coupled with tightening supply, has helped prop up home prices through the coronavirus (COVID-19) crisis. However, the anticipated impacts of the recession are beginning to appear across the housing market. Despite new contract signings rising year over year in May, home price growth is expected to stall in June and remain that way throughout the summer. CoreLogic HPI Forecast predicts a month-over-month price decrease of 0.1% in June and a year-over-year decline of 6.6% by May 2021.

Unlike the Great Recession, the current economic downturn is not driven by the housing market, which continues to post gains in many parts of the country. While activity up until now suggests the housing market will eventually bounce back, the forecasted decline in home prices will largely be due to elevated unemployment rates. This prediction is exacerbated by the recent spike in COVID-19 cases across the country.

While this is certainly possible, the supply / demand imbalance is so stark right now, I suspect that anyone who decides to wait for lower prices will regret it. I could see weakness in the luxury end of the market, where there is more inventory. Certainly urban luxury apartments are going to experience a perfect storm of people fleeing the cities and a potential drop in foreign buyer interest due to the violence. A drop of 6.6% seems aggressive to me.

 

Zillow Offers resumes activity in 5 more markets. Zillow Offers is a program where the company will purchase a home directly from a buyer, which would allow the buyer to submit a non-contingent offer on their next home. Zillow would then make any necessary repairs, clean and stage the home for sale. I think Zillow charges around 7.5% to do this, which is probably about the cost of the realtor charges and any fix-up costs the seller would have to pay otherwise.

 

Interesting reaction to COVID-19: Potential buyers need a pre-approval letter to enter the house. “Having a pre-approval letter has long been a preferred requirement by agents when submitting an offer, but having a pre-approval letter before looking at homes given the COVID-19 environment is an absolute must,” says Cara Ameer, a real estate agent with Coldwell Banker Vanguard Realty in Ponte Vedra Beach, Fla. “Sellers and listing agents are cautious about who is coming into their homes, and they want to ensure that only those that are truly qualified are coming through their doors.”

Morning Report: Forbearances decline again

Vital Statistics:

 

Last Change
S&P futures 3173 40.1
Oil (WTI) 40.64 0.01
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.12%

 

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

 

The week after the jobs report is usually pretty data-light and the upcoming week is no exception. We do have a lot of Fed-speak, but that is it.

 

The number of borrowers in forbearance plans declined last week, according to Black Knight. The number of loans in forbearance dropped by 104k, and brings us back to levels last seen in early May. Black Knight doesn’t have a concrete reason for the decline, but it does postulate that many of the initial forbearance plans were for 90 days or so, and if you received forbearance in mid-March, it was up by mid-June. Of course, the economy is improving as well, and many people who were put out of work due to stay-at-home orders are now back on the job.

 

Luxury home prices are falling, according to Redfin. “The pandemic is playing an outsized role in the luxury market, as very expensive homes are particularly sensitive to periods of economic uncertainty,” said Redfin economist Taylor Marr. “Many luxury buyers are nervous about pouring money into an investment that may be difficult to sell if the economy takes a nosedive. By comparison, people buying starter homes they plan to live in for 10 years are less concerned with volatile financial markets as long as they have money for a down payment and can afford monthly mortgage payments. And although access to credit is loosening up now, it tightened considerably for jumbo loans, which a lot of luxury buyers use, in April and May.”

 

Tappable home equity just topped $6.5 trillion, which is a record.

“Tappable equity rose by 8% year-over-year in the first quarter of 2020 to a record high of $6.5 trillion,” said Graboske. “What’s more, with mortgage interest rates hitting record lows, 90% of homeowners with tappable equity now have first lien rates above the prevailing market average. But while Q1 2020 saw overall refinance lending climb to a 7-year high, the number of cash-out refinances, as well as the dollar value of equity withdrawn via refinance, fell for the first time since early 2019. All in, cash-outs accounted for just 42% of refinance loans in the first quarter, roughly half of what was seen at the recent high in Q4 2018 and the lowest such share since Q1 2016. Likewise, the $38.7 billion in equity withdrawn from the market via cash-out refinances was down 8% from the prior quarter. Further, rate lock data – a good indicator of lending activity – suggests the trend is likely to continue, as the cash-out share of refinance activity has continued to fall throughout the second quarter.

As COVID started a mass tightening in credit, jumbos and cash-out refinances became unattractive to many lenders and MBS investors. Fears of rapid prepayment speeds meant that investor demand was weak. As confidence returns to the markets, cash out refis should provide a long-lasting opportunity for the industry. To put that $6.5 trillion into perspective, the MBA estimates that 2020 volume will be around $2.5 trillion. So this could have some legs.

Morning Report: Great jobs report

Vital Statistics:

 

Last Change
S&P futures 3143 40.1
Oil (WTI) 40.34 0.51
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.12%

 

Stocks are higher after the jobs report comes in better than expected. Bonds and MBS are down.

 

Jobs report data dump:

  • Nonfarm payrolls up 4.8 million.
  • Unemployment rate 11%
  • Labor force participation rate 61.5%
  • Average hourly earnings down 1.2% MOM, up 5% YOY

Overall, an extremely positive report. The Street was looking for an increase of 3 million jobs, so the payroll number was much better than expected. The labor force participation rate increased by 0.7%, but is still 1.9% below February’s level. The unemployment rate fell by 2.2 percentage points despite concerns that a statistical error had understated May’s rate. The drop is average hourly earnings was simply a reversal of previous increases as lower-paid hospitality and restaurant / retail workers return to the workforce.

 

The FOMC minutes pretty much said what everyone expected: that rates will remain low for the forseeable future, and the Fed is going to probably err on the side of caution given how intractable low inflation has been. The FOMC seems to be considering the idea of yield capping, and idea the Fed used in the 1940s to lower the government’s borrowing costs.

The second staff briefing reviewed the yield caps or targets (YCT) policies that the Federal Reserve followed during and after World War II and that the Bank of Japan and the Reserve Bank of Australia are currently employing. These three experiences illustrated different types of YCT policies: During World War II, the Federal Reserve capped yields across the curve to keep Treasury borrowing costs low and stable; since 2016, the Bank of Japan has targeted the 10-year yield to continue to provide accommodation while limiting the potential for an excessive flattening of the yield curve; and, since March 2020, the Reserve Bank of Australia has targeted the three-year yield, a target that is intended to reinforce the bank’s forward guidance for its policy rate and to influence funding rates across much of the Australian economy. The staff noted that these three experiences suggested that credible YCT policies can control government bond yields, pass through to private rates, and, in the absence of exit considerations, may not require large central bank purchases of government debt. But the staff also highlighted the potential for YCT policies to require the central bank to purchase very sizable amounts of government debt under certain circumstances—a potential that was realized in the U.S. experience in the 1940s—and the possibility that, under YCT policies, monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank.

You can cue the jokes about the government believing that interest rates (and asset prices) are too important to be determined by a mere market. While these are unprecedented times, the Fed runs the risk of staying too long at the party. Inflation is always a risk, but the bigger risk is asset bubbles fueled by ultra-low interest rates. When pension funds etc cannot earn a yield with Treasuries they will be forced to reach for yield because their future liability streams are not affected by interest rates.

I hope the Fed can stick the landing here, but the quote about the risks to the independence of the central bank is not an idle threat. It also assumes the Fed can fight the market indefinitely. That is by no means guaranteed, as we saw when George Soros broke the Bank of England. The Fed has been swelling its balance sheet without any injection of equity, which means the margin for error is becoming smaller and smaller. If the markets get a whiff of inflation, nobody is going to willingly tie up their money for 10 years at 70 basis points. The inverse of interest rates is bond prices, and it won’t take much of an increase in market rates to wipe out the Fed’s equity.

 

Escape from New York: Manhattan apartment sales the worst in 30 years, falling by 54%. Median prices fell by 18%. There were only 1147 sales in the quarter, the lowest on record. Renters are fleeing the City, and we should see an increase in rental renegotiations. While some of this is COVID-19 related, New York City seems determined to return to the 1970s.