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.



Morning Report: Pending home sales rebound in May

Vital Statistics:


Last Change
S&P futures 3012 3.1
Oil (WTI) 38.64 0.19
10 year government bond yield 0.65%
30 year fixed rate mortgage 3.16%


Stocks are flattish a the US gets more cases of COVID. Bonds and MBS are flat.


We have a short week, with the markets closed on Friday and SIFMA recommending an early close on Thursday. We will get the FOMC minutes and the jobs report, which could be market-moving.


Freddie Mac reported that delinquencies hit a 2 year high, rising to 0.81% in May from 0.64% in April.


Demand for affordable homes is outpacing the demand for more expensive ones. According to Redfin, affordable home prices rose 5.5%, while luxury homes rose 2%. “Spending so much time at home during quarantine has made a lot of people realize that it might be time to stop renting a cramped apartment in the city and time to start owning their first single-family home,” said Pam Henderson, a Redfin agent in Dallas. “With mortgage rates at record lows and remote work on the rise, some renters are having an epiphany: They could buy a lower-priced home in the suburbs for close to what they’re paying in rent.”


Pending home sales rose 44% in May as the real estate market rebounded. “This has been a spectacular recovery for contract signings, and goes to show the resiliency of American consumers and their evergreen desire for homeownership,” said Lawrence Yun, NAR’s chief economist. “This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery. More listings are continuously appearing as the economy reopens, helping with inventory choices,” Yun said. “Still, more home construction is needed to counter the persistent underproduction of homes over the past decade.”

Morning Report: The economy grew in May

Vital Statistics:


Last Change
S&P futures 30y7 14.1
Oil (WTI) 39.54 -0.39
10 year government bond yield 0.68%
30 year fixed rate mortgage 3.16%


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


We don’t have much in the way of market-moving data this week, however we will get some real estate data.


The economy rebounded substantially in May, according to the Chicago Fed National Activity Index. Given what I have heard from earnings calls etc, it sounds like the recession will have ended sometime in early May. I wonder if we are going to see the Q2 GDP estimates begin to get revised upwards.


Lennar mentioned something interesting on its conference call. We have known about the labor shortages in construction for a while. I guess the homebuilding industry took advantage of the shutdown and began a program to train displaced restaurant and retail workers in construction. Smart move, and if it alleviates the labor shortage we are looking at a long boom in housing construction.


Redfin is seeing a housing recovery in the May data as well. “Although the housing market was still mostly stalled in May, it’s worth noting that homes under contract to be sold jumped 33% between April and May after two consecutive months of decline,” said Redfin lead economist Taylor Marr. “This is a key leading indicator for home sales in June and July. New listings of homes for sale have also likely passed their bottom, but are still about 20% below February’s level, so there’s still a ways to go before the housing market has recouped the lost activity of the past few months during the shutdowns.”


Existing home sales fell 9.7% in May, according to NAR. “Sales completed in May reflect contract signings in March and April – during the strictest times of the pandemic lockdown and hence the cyclical low point,” said Lawrence Yun, NAR’s chief economist. “Home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.” Note that Lennar reported June orders were up 20% YOY.


Another sign the global economy is healing. Commodity prices are up big over the past 2 months. Remember when oil was negative? Front-month WTI is pushing $40 a barrel.

Morning Report: Quicken files for an IPO

Vital Statistics:


Last Change
S&P futures 3066 64.1
Oil (WTI) 36.64 -0.39
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.19%


Stocks are rebounding after yesterday’s bloodbath.  Bonds and MBS are down small.


CNBC reported that Quicken Loans is planning an IPO. I guess the S4 was filed confidentially, so we can’t tell much about the company’s financials. The company said that it originated $52 billion in the first quarter. Certainly the timing for a sale is right, with what looks to be a record period for refinances as far as they eye can see. reports that the summer house shopping season is in full swing, with prices up about 5%. “The big surprise of the housing market is that prices have remained quite resilient,” says Senior Economist George Ratiu. He doesn’t expect prices to drop over the next few months. “The summer housing market will be better than expected, but far off the normal pace.” The inventory situation is even worse than before – listings are down 25% from a year ago. That said, it is a bifurcated market, with multiple offers for lower priced homes, and little demand for higher priced ones. “For most people it will be a competitive buying market,” says Lawrence Yun, chief economist of the National Association of Realtors®. “For lower-priced and medium-priced homes, multiple offers will be fairly common. On the luxury end, some price reduction will be required because there’s plentiful inventory.”


More evidence that people are fleeing the cities: May rentals in Manhattan are down 62%. “The supply of available rental units continues to accumulate,” UrbanDigs said in its report, which looked at all five New York City boroughs, “hinting that renters will have the upper hand in negotiability when the market finally reopens.”


Mark Calabria said that the forbearance rates for the GSEs is manageable. “We’ve seen over the last few weeks those numbers start to stabilize,” Calabria said. “Within the GSE portfolio, you see as many borrowers canceling their forbearance programs as you see rolling on. I certainly over the last few months have been concerned about what the direction of the housing market would be coming out of COVID-19,” Calabria said. “I’ve been very pleasantly surprised.”

Morning Report: Loans in forbearance increases slightly

Vital Statistics:


Last Change
S&P futures 3200 -24.1
Oil (WTI) 38.94 -0.39
10 year government bond yield 0.82%
30 year fixed rate mortgage 3.32%


Stocks are lower this morning as we head into the Fed meeting. Bonds and MBS are flat.


The MBA reported that mortgage credit availability fell to a 6 year low. “Mortgage lenders in May responded accordingly to the increased risk and uncertainty in the economy,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Credit availability continued to decline, with MBA’s overall index now at its lowest level since June 2014. There was a reduction in supply across all loan types, driven by further pullback in investors’ appetites for loan programs with low credit scores and high LTVs. Credit tightening was observed at both ends of the market, with less availability of low down-payment programs designed for first-time homebuyers, as well as for conforming and non-conforming jumbo loans.” So basically low FICO FHA and jumbo, which means forbearance and securitization issues are driving the decrease.


The MBA also reported that the number of mortgages in forbearance increased slightly to 8.53%. “The overall share of loans in forbearance increased by only 7 basis points compared to the prior week,” said MBA Chief Economist Mike Fratantoni. “With the job market beginning to gradually improve, more homeowners are exiting forbearance, and we are seeing declines in forbearance volume among some servicers.”


FWIW, the Fed Funds futures are predicting a 15% chance of a 25 basis point rate hike at the June meeting. That seems to be the consensus going all the way out to March 2021. If the economy rebounds quickly the Fed will probably choose to unwind asset purchases first, so it could be a while before we see rate hikes.


The National Bureau of Economic Research says the US entered a recession in February, which seems strange given the COVID crisis didn’t start until late March and the economic numbers in February were decent. “In deciding whether to identify a recession, the committee weighs the depth of the contraction, its duration, and whether economic activity declined broadly across the economy. … The committee recognizes that the pandemic and the public health response have resulted in a downturn with different characteristics and dynamics than prior recessions,” the committee said in a statement. So in other words, it sounds like they are using some sort of qualitative assessment of the economy to come up with the idea that we entered a recession in February.


Fed funds futures

Morning Report: Fed week

Vital Statistics:


Last Change
S&P futures 3208 24.1
Oil (WTI) 38.84 0.39
10 year government bond yield 0.91%
30 year fixed rate mortgage 3.32%


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


The FOMC will meet this week, although no changes in interest rates are expected. They may give some sort of update on the various sundry financial assets they will buy, but that is about it.


The unemployment rate was probably understated in Friday’s jobs report. Apparently there was a misclassification error for people who were employed but absent from work. They should have been classified as “unemployed” but were not, which means the unemployment rate was higher than advertised. Note this doesn’t affect the payroll number, which comes from the establishment survey.


The Fed is launching its Main Street lending program, but it looks like the high minimum amount of $500k is putting some borrowers off.  It has generated some political heat as a bailout for oil and gas industries. “It is far and away the biggest challenge of any of the 11 facilities that we’ve set up,” Fed chair Jerome Powell said last month during a Princeton University webcast in which he also said the central bank is open to adjusting the program.


The FHA gave some more guidance on forbearance. Loans in forbearance are generally ineligible for FHA insurance, but the government is permitting closed loans to be insured provided the lender agrees to indemnify FHA for 20% of the loan amount if the loan goes into foreclosure. “FHA has continually been at the forefront of providing assistance and assurance for borrowers, lenders, and the mortgage market since the coronavirus pandemic began,” said Department of Housing and Urban Development Secretary Ben Carson in a statement, adding the policy change “will give borrowers, lenders, and the market peace of mind as we continue our road to economic recovery in the United States.”