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.

Morning Report: Jobs day

Vital Statistics:

 

Last Change
S&P futures 2900 23.1
Oil (WTI) 24.27 0.29
10 year government bond yield 0.66%
30 year fixed rate mortgage 3.36%

 

Stocks are higher this morning after the jobs report. Bonds and MBS are up.

 

Jobs report data dump:

  • Nonfarm payrolls down 20.5 million
  • Unemployment rate 14.7%
  • Labor force participation rate 60.2%
  • Average hourly earnings up 4.7% MOM / 7.4% YOY

The report was not as bad as feared. One stat jumped out at me, which is how the COVID Crisis has disproportionately affected lower wage earners. Average hourly earnings increased almost 5%, simply due to hourly workers getting laid off, which means the higher wage people who are able to work from home pull the average up. Average hourly earnings increased to $30.01 an hour in April from $28.67 an hour in March.

 

That stat may also explain why the stock market doesn’t seem to care all that much about COVID any more. The people who are most affected are the least likely to hold stocks and vice versa. I am hoping however that the stock market, being a forward-looking indicator, is looking over the valley and signalling that this whole thing is on the downside. If so, then we could see a V-shaped recovery as well. FWIW, I don’t think American have the appetite to shelter in place past Memorial Day, regardless of what the health professionals say.

 

Fannie Mae’s Home Purchase Sentiment Index plunged in April, which isn’t surprising given the jobs report. “The HPSI experienced another unprecedented decline in April, falling to its lowest level since November 2011,” said Doug Duncan, Senior Vice President and Chief Economist. “The 17.8-point decrease reflected consumers’ deepening concerns about both their incomes and the housing market. Attitudes about whether it’s a good time to sell a home fell most sharply, dropping an additional 23 points this month. Individuals’ heightened uncertainty about job security, as registered in the survey over the last two months, is likely weighing on prospective homebuyers, who may be more wary of the substantial, long-term financial commitment of a mortgage. On average, consumers expect home prices to fall 2 percent over the next 12 months, the lowest expected growth rate in survey history. While consumers did grow more pessimistic in April about whether it’s a good time to buy a home, low mortgage rates remain a driver of purchase optimism. We expect that the much steeper decline in selling sentiment relative to buying sentiment will soften downward pressure on home prices.”

 

Speaking of homebuying, Redfin is resuming iBuying, and Zillow Offers isn’t far behind.

Morning Report: Mortgage Credit Tightens

Vital Statistics:

 

Last Change
S&P futures 2876 43.1
Oil (WTI) 26.27 2.29
10 year government bond yield 0.69%
30 year fixed rate mortgage 3.36%

 

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

 

Initial Jobless Claims fell to 3.2 million, taking the COVID total of job losses to 33.4 million.

 

Challenger, Gray and Christmas reported 671,000 job cuts were announced last month.

 

Productivity fell 2.5% in the first quarter, which was better than the expectations of a 5.5% drop. While next quarter will be the big test, it certainly looks like businesses are figuring out a way to work around COVID restrictions.

 

I was listening to Fannie Mae’s Q1 conference call, and their baseline scenario for forbearance is 15%. Their baseline scenario is a second half recovery, with overall negative GDP growth for 2020 and massive growth in 2021.

 

Mortgage Credit Availability fell to a 6 year low in April according to the MBA. “The abrupt weakening of the economy and job market – and the uncertainty in the outlook – drove credit availability down in April for the second consecutive month,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The overall index fell to its lowest level since December 2014, and the sub-indexes pointed to tightened credit supply for all loan types. The decline was largely driven by lenders dropping many low credit score and high-LTV programs, as well as further reduction in jumbo and non-QM products.”

To be honest, I was expecting worse. Given the issues with forbearance and cash-outs, it probably will get worse.

 

MCAI

 

Treasury is celebrating the sequel to Top Gun by reviving the 20 year bond, last seen when aviator glasses, leather jackets, and Val Kilmer having a career.

 

 

Morning Report: First quarter GDP falls 4.8%

Vital Statistics:

 

Last Change
S&P futures 2915 48.1
Oil (WTI) 15.71 3.29
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.43%

 

Stocks are higher this morning despite a disappointing GDP print. Bonds and MBS are up.

 

First quarter GDP fell 4.8% as the COVID lockdown depressed consumer spending, which fell 7.6%. The price index rose 1.3%, and that will be a number to watch going forward. Inflation is too much money chasing too few goods. We have managed to sidestep inflation in the past because shortages weren’t a problem. Now they are. Do you remember paying a buck a roll for TP last year? How about chicken? It averaged $3.11 a pound last year. At the local Stop and Shop it is now $3.80, and with the Tyson closures it will go higher. The black swan out of this whole thing could be a resurgence of inflation, right when that is the last thing the economy needs. 

 

The FOMC will make their announcement at 2:00 pm today. Not sure what they can say,(Information received since the Federal Open Market Committee met in March seems to indicate the economy has hit a brick wall and is sinking like an anvil….) and I can’t see it being market-moving. The mortgage industry would love to see something about a servicing advance repo line, but aside from accepting newer forms of collateral I don’t think there is much more they can do.

 

Mortgage applications fell 3.3% last week as purchases rose 12% and refis fell 7.5%. The refi market continues to tighten as investors add overlays to cash-outs. The strength in the purchase market is encouraging. Separately, the homeownership rate hit 63.5% in the first quarter, the highest since 2013. I think for many urban millennials with families, the COVID Crisis will trigger a flight to the suburbs, which should bump up the homeownership rate going forward.

 

According to a NPR poll, half of Americans have been financially affected by the Coronavirus. If that is the case, then forbearance numbers are going up.

 

Consumer confidence fell from 119 to 87, which was worse than expected.

 

 

Morning Report: Existing home sales flat YOY

Vital Statistics:

 

Last Change
S&P futures 2779 40.1
Oil (WTI) 14.11 2.59
10 year government bond yield 0.60%
30 year fixed rate mortgage 3.43%

 

Stocks are higher this morning after the Senate passed a stimulus bill to increase aid to small business, and oil rallies. Bonds and MBS are down.

 

Existing home sales fell 8.5% month over month in March, but are still up modestly on a YOY basis. “Unfortunately, we knew home sales would wane in March due to the coronavirus outbreak,” said Lawrence Yun, NAR’s chief economist. “More temporary interruptions to home sales should be expected in the next couple of months, though home prices will still likely rise.” Pricing was strong, with the median home price up 8% YOY. Inventory is still tight, down 10% YOY and is about 3.4 months worth. First time homebuyers increased to 34% of all buyers and investors fell to 13%.

 

Meanwhile, some are fretting about another housing crash. When demand outstrips supply as much as it does right now, you generally don’t see crashes. Residential real estate bubbles like we saw from 2004-2006 are rare (like once or twice a century). The conditions required for one simply aren’t in place right now.

 

Mortgage applications fell 0.3% last week as purchases rose 2% and refis fell 1%. Meanwhile, house prices rose 0.7% MOM in February and were up 5.7% YOY, according to the FHFA House Price Index.

 

JP Morgan is preparing to bring back workers in phases, according to an internal memo. Meanwhile, New York State will re-open in phases, based on how many COVID-19 cases are out there.

Morning Report: Trouble with non-agency mortgage REITs

Vital Statistics:

 

Last Change
S&P futures 2438 -89.4
Oil (WTI) 20.46 0.09
10 year government bond yield 0.60%
30 year fixed rate mortgage 3.5%

 

Stock indices are lower as we kick off the second quarter. Bonds and MBS are up small.

 

The Fed took up just 53% of the bonds offered to them yesterday. It sounds like they are backing off on their aggressive buying which was triggering margin calls throughout the industry.

 

Speaking of margin calls, it looks like New Rez has a deal to sell $6.1 billion of non-agency bonds. No price was indicated, but a couple days ago New Rez cut its dividend by 90% and said that book value was down about 25% – 30% from the 12/31 mark.

 

Impac recently said it would suspend lending operations for two weeks after a whole loan investor went radio-silent about its commitment to purchase whole loans. They have let go most of their employees.

 

I can’t see how the non-QM market comes out of this as anything more than a portfolio product for banks who have the werewithall to hold the paper. While I would bet the vast majority of these non-QM loans are money good and will perform as expected, they simply aren’t suitable for repo financing. Securitize them or hold them.

 

The economy lost 27,000 jobs in March, according to the ADP jobs report. In the previous report the economy gained 183k. Small business bore the brunt of the job losses, losing 90k. The Street is expecting a -150k print for Friday’s job report. with the unemployment rate increasing from 3.5% to 3.9%. The government just passed a stimulus bill with aid to help small businesses get through this period. Many are hoping to hold on until the cavalry arrives.

 

Mortgage applications rose 15% last week as purchases fell 11% and refis rose 26%.

Morning Report: MBA asks for relief from FINRA and the SEC

Vital Statistics:

 

Last Change
S&P futures 2581 -29.4
Oil (WTI) 20.94 0.89
10 year government bond yield 0.70%
30 year fixed rate mortgage 3.38%

 

Stocks are down this morning as we wrap up Q1, which was the worse quarter for stocks since 2008. Bonds and MBS are up.

 

The Fed will buy up to $30 billion in MBS today, along with some CMBS paper. It sounds like the NY Fed heard the pleas of originators and is cognizant of the margin call issue. The MBA issued a letter to the SEC and FINRA asking them to give guidance to broker-dealers to lay off the margin calls: “MBA urgently requests that FINRA and the SEC issue guidance to the nation’s broker-dealers, making clear that margin calls on mortgage lenders’ TBA hedge positions should not be escalated to destabilizing levels,” Broeksmit said. “Absent such guidance and an immediate shift in broker-dealer practices, the U.S. housing market is in danger of large-scale disruption.”

 

Been hearing chatter that a lot of originators are imposing minimum 680 FICOs on FHA loans. Also, warehouse banks are becoming more reluctant to fund them unless there is a bid in hand for the loan. It makes sense – FHA loans have the lowest margin for safety with 3.5% down and FICO scores that are generally not good enough to qualify for Home Ready or Home Possible.

 

Goldman is forecasting a Q2 GDP drop of -34% and unemployment hitting 15%. Yikes. That said, the economy should come roaring back in the third quarter as Coronavirus issues fade. The ultimate question: Did all of these small businesses that shuttered over the past month go into hibernation or did they go away? And while the banking sector has so far withstood the impact of the credit crisis, the non-banking sector is a different story. A few non-agency mortgage REITs like Two Harbors and MITT have sold their non-agency bonds to satisfy margin calls. One certainly has to worry about the CMBS mortgage REITs as well as the plain old shopping center and mall REITs. If you are anchored with a grocery story, you might be ok. If you are anchored with a Macy’s however…

 

KB Home reported better than expected numbers on Friday, and remarked that internet traffic remains up on a YOY basis. Walk-in foot traffic is not as the company has shut down its offices. In some parts of the country construction has stopped, but in most of the US it is still proceeding. Regardless of the Coronavirus issues, it appears that the demand for homes is still there, and we might see an even tighter market in existing homes as would-be sellers take their homes off the market.

 

Home prices were up 3.9% in January, according to Case-Shiller. An economist from Capital Economics expects a 4% peak-to-trough hit in real estate pricing. It will be interesting to see if home prices take a hit as a result of the Coronavirus. As KB Home mentioned, the existing home inventory should be even tighter, and homebuilders aren’t stuck with a lot of inventory at the moment and they aren’t entertaining price cuts. That said, the NY market may be a bit heavy.