real estate – The Daily Tearsheet

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: First quarter GDP revised downward

Vital Statistics:

	Last	Change
S&P futures	3043	5.1
Oil (WTI)	32.94	-0.69
10 year government bond yield		0.7%
30 year fixed rate mortgage		3.28%

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

Initial Jobless Claims came in at 2.1 million, about in line with expectations. At a minimum we need to see this number fall back to the six digit area to have any prayer of a recovery.

Luxury homebuilder Toll Brothers beat on the top line and the bottom line. This quarter ended on April 30, so half of the quarter was pre-COVID and half was post-COVID. Revenues fell 11% YOY, while signed contracts were down 22%. Backlog was flat YOY. CEO Doug Yearley noted that deposit activity rebounded in May and was up YOY. This is a leading indicator of housing demand.

“While net signed contracts in the first four weeks of May were down 37% year-over-year, we are very encouraged by recent deposit activity. Our deposits, which typically precede a binding sales contract by about three weeks and represent a leading indicator of current market demand, were up 13% over the past three weeks versus the same three-week period last year. Importantly, our recent deposit-to-contract conversion ratio has remained consistent with pre-Covid-19 levels. Web traffic has also steadily improved from the lows we experienced in mid-March and has returned to the same strong activity we enjoyed pre-Covid-19 in February. These early trends suggest the housing market may be more resilient than anticipated just two months ago.”

Homebuilding is an early-cycle play, so you should expect to see a turnaround in that sector first. Overall, it sounds like the builders have been pleasantly surprised at how the sector has held up during the crisis.

First quarter GDP was revised downward to -5% from -4.8% in the second estimate. Inflation continues to be tame, with the headline number up 1.3%. Ex-food and energy it rose 1.8%. In other economic news, Durable Good Orders fell 17% in April. Most of this data is pretty much irrelevant to stock prices right now. The stock market is looking over the valley.

Ex-Obama staffer Jason Furman predicts that we are about to see the best economic numbers the country has ever seen. FWIW, I agree with his sentiment. The COVID Crisis is about 3 months old. There was nothing wrong with the economy going into the crisis, and the shock to the economy should feel more like a natural disaster than a traditional bubble-driven recession. If we have passed the bottom (admittedly a big “if”) then the economy could be on fire by late summer / early fall. And speaking of “fire,” the government poured a few trillion gallons of fiscal gasoline on it.

Pending Home Sales fell 22% in April, according to NAR. “While coronavirus mitigation efforts have disrupted contract signings, the real estate industry is ‘hot’ in affordable price points with the wide prevalence of bidding wars for the limited inventory,” NAR Chief Economist Lawrence Yun said. “In the coming months, buying activity will rise as states reopen and more consumers feel comfortable about homebuying in the midst of the social distancing measures. Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded for both home sales and prices, with home sales to decline by only 11% in 2020 with the median home price projected to increase by 4%,” Yun said. “In the prior forecast, sales were expected to fall by 15% and there was no increase in home price.”

Those hoping to snap up recession-driven bargains in the real estate market may be disappointed. That said, the bargains (if any) would be in the higher priced area, not the more affordable price points. “The mix of homes that are on the market now is a little bit different,” says Ratiu. “What’s really selling at a premium are lower-priced homes. The higher-priced homes are sitting on the market longer.”

Morning Report: Home demand is back

Vital Statistics:

	Last	Change
S&P futures	2823	-23.1
Oil (WTI)	28.79	1.29
10 year government bond yield		0.60%
30 year fixed rate mortgage		3.36%

Stocks are lower this morning after a lousy retail sales number. Bonds and MBS are up.

Retail sales fell 16.4% MOM and 21.6% YOY, according to Census. Obviously these are unprecedented numbers, never seen before. Apparel, home furnishings, and electronics were down the most.

Joe Biden would support rent forgiveness if elected. In other words, if you missed rent payments due to COVID, you’ll never have to pay them back. This is just election pandering – the chance of this getting through Congress is pretty much zero. I guess it is a way to encourage the Bernie Sanders supporters to come out and vote for him on election day.

Meanwhile, the FHFA is extending its foreclosures and eviction moratorium until June 30.

Interesting data point: Home buyer demand is higher than it was pre-COVID 19. Meanwhile supply is down 25%. Big open floor plans are out, home offices are in. “Pre-COVID people wanted a beautiful open floor plan. After a few months in quarantine, buyers want quiet spaces where they can actually get away from everyone else and dedicated space for school and work.”

JP Morgan and American Homes 4 Rent are joining together to build suburban homes. FWIW, COVID-19 might be what makes the white picket fence cool again.

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: Coronavirus hits stocks and lifts bonds

Vital Statistics:

	Last	Change
S&P futures	3245	-50.25
Oil (WTI)	52.58	-1.62
10 year government bond yield		1.62%
30 year fixed rate mortgage		3.72%

Stocks are lower this morning as the Asian Coronavirus spreads. Bonds and MBS are up.

The upcoming week will have quite a bit of data – new home sales, the first pass at Q4 GDP, and personal incomes / spending. We will also have the FOMC meeting on Tuesday and Wednesday. The current consensus is that the Fed won’t make any changes in policy.

As a general rule, when you get big moves in the 10 year bond yield, it takes a while for the MBS market to catch up. This means that you can see the CNBC talking heads discussing how much lower rates are, then run a scenario and come away disappointed. We are seeing something similar this morning, where the 10 year bond is up over half a point, while the Fannie Mae 3.5s are flat. Even the Fannie 2.5s are only up 3/16. That said, this is a good opportunity to wake up your borrowers who might have missed an opportunity to refinance.

Fair Issac (the company behind the FICO score) is making changes to its credit scoring model. The change will focus more on payment history and consumer debt changes and less on overall debt such as student loans or a large mortgage. As a general rule, installment debt is less of a factor than revolving debt (i.e. credit cards).

Global real estate markets are cooling down. “Across 23 countries, an index of inflation-adjusted home prices compiled by the Federal Reserve Bank of Dallas grew 1.8% in the third quarter of 2019 from a year earlier, down from a recent peak of 4.3% in 2016, according to an Oxford Economics analysis. In 18 large economies, world-wide residential investment dropped on a year-over-year basis for four consecutive quarters through September, the longest stretch of declines since the 2008-09 crisis, according to Oxford Economics’ analysis of national accounts.” Foreign asset demand seems to be the driver, and it has become more correlated with other asset classes, particularly stocks. For the US, the effects will probably be concentrated primarily in markets like New York City and the pricey West Coast markets.

Morning Report: Bank earnings come in

Vital Statistics:

	Last	Change
S&P futures	2915	6.25
Eurostoxx index	388.92	0.82
Oil (WTI)	63.31	-0.09
10 year government bond yield		2.57%
30 year fixed rate mortgage		4.23%

Stocks are higher as bank earnings come in. Bonds and MBS are down.

Earnings season has begun, and the banks are all reporting.

Wells Fargo reported earnings that disappointed, although there was a bright spot on the mortgage origination side, where margins increased from 89 basis points to 105 basis points on “improving secondary market conditions.” That said, the bank expects Q2 margins to retrace a bit of that improvement. Originations were down 23% YOY to $33 billion, and correspondent as a percentage dropped from 63% to 55%.

JP Morgan reported that mortgage originations fell 18% in the first quarter compared to a year ago. The numbers were better than expected.

Bank of America reported better-than-expected earnings as well, and they saw a big jump in mortgage origination: $11.5 billion of first lien mortgages in the first quarter compared to $9.4 billion a year ago. In their credit card business, charge-offs are increasing a bit, which could be a warnings sign about the overall economy.

The Empire State Manufacturing Survey reported that business conditions improved modestly, however things are still “fairly subdued.” Optimism is waning, however firms continue to add workers. Inflation is declining as both prices paid and prices received fell.

Charles Evans suggested that the Fed could maintain the current level of interest rates into “late 2020.” Goldman Sachs is echoing the same sentiment. As a general rule, the Fed tries to not make any moves heading into an election for fear of appearing that they support one candidate or the other.

The Fed funds futures market is becoming a touch more hawkish, with the futures implying a 61% probability of no further moves this year and a 39% chance of a rate cut.

After waiting for better times, home sellers in Greenwich are throwing in the towel. Many sellers are fed up with selling the old-fashioned way and are auctioning off properties. How bad are things? The median home price in Greenwich fell by 17% in the fourth quarter. The luxury end was even worse, falling 19% and it appears that it is down 25% in the first quarter. After a long, long wait the market is finally beginning to clear.

Morning Report: Foreclosure starts lowest in 18 years

Vital Statistics:

	Last	Change
S&P futures	2720	4
Eurostoxx index	362.25	3.31
Oil (WTI)	54.26	-0.3
10 year government bond yield		2.70%
30 year fixed rate mortgage		4.40%

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

Donald Trump stressed bipartisanship and unity at the State of the Union address, and reiterated his demands for border wall funding but stopped short of invoking emergency powers to get one built. Predictably, the reaction to the speech fell along partisan lines.

Mortgage Applications fell 2.5% last week as purchases fell 5% and refis rose 0.3%. This was a disappointment given that rates fell about 7 basis points, however the prior week had the MLK holiday adjustment so maybe there is some technical adjustment noise happening. Despite lower rates on a YOY basis, applications are down about 2% annually.

The service sector continued to grow in January, albeit at a slower pace, according to the ISM Non-Manufacturing Report. Some of this may have been government shutdown-driven. Employment rose, while new orders fell.

Foreclosure starts in 2018 decreased to 576,000, the lowest level in 18 years. Foreclosure completions were 175,000, another 18 year low. These numbers are 40% below their pre-recession averages. Higher loan quality in the aftermath of the credit crisis is a contributing factor, however the performance of refinances are better than purchases, which also is driving these numbers.

Housing reform and CFPB regulations may be headed for a conflict if what is called the “GSE patch” is not renewed when it expires in 2021. The CFPB discourages loans with debt to income ratios above 43%, but also permits GSE backed loans to fall under the QM umbrella, even though they permit DTIs up to 50%. Roughly a third of GSE loans fall in the 43-50% DTI range, which could become non-QM loans once the patch expires. The Urban Institute recommends that the GSEs replace the DTI rule with a 150 basis point cap over APOR to determine eligibility under QM.

Home prices rose 0.1% MOM and 4.7% YOY according to CoreLogic. Since house prices have been rising faster than incomes, affordability has suffered. Falling interest rates masked that issue most of the post-crisis period, but the music has stopped. CoreLogic now estimates that 33% of the housing stock in the US is now overvalued. Separately, Redfin now estimates that the West Coast is a buyer’s market.

Corelogic overvalued

Morning Report: REO-to-Rental exit time?

Vital Statistics:

	Last	Change
S&P futures	2706	1
Eurostoxx index	359.39	-0.56
Oil (WTI)	55.07	0.02
10 year government bond yield		2.70%
30 year fixed rate mortgage		4.40%

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

The upcoming week will be data-light, as is typical the first week of every month. Jerome Powell speaks on Wednesday, and that is about it. Productivity and costs on Wed could be interesting, but there just isn’t going to be much to move bonds.

The money for the government runs out on Feb 15 and we are back to a possible shutdown. Judging by the jobs report, it doesn’t appear the government shutdown had much (if any) effect on the overall economy. If we have another shutdown, we should probably see the same old situation of the inability to process VOEs for Federal employees, but that is it.

Rental prices for 1 bedroom apartments fell a couple of percent last year. Not sure about the methodology for the study, but it does comport with several other studies that show rental prices falling, at least in luxury areas. For the real estate sector, this is probably good news. One of the best post-crisis trades has been the REO-to-Rental trade, where professional investors and hedge funds purchased distressed foreclosures, fixed them up and rented them out. Cap rates in the aftermath of the crisis were high single digits, which were super attractive given the 0% interest rate environment. Tack on home price appreciation and you have a phenomenal trade. Unfortunately, phenomenal trades rarely stay that way, and between rising mortgage rates and falling rents, cap rates are getting squeezed, and it might be time for some of these investors to exit the trade. Ultimately that means we should see a lot more starter homes for sale which will alleviate the inventory problem we are currently experiencing.

Bill Gross is retiring from money management. The Bond King ruled the Great Bond Bull Market of 1982 – 2016 and is stepping out as we head into what should be a decades-long secular bear market in bonds.

Fannie and Fred will be released from Federal conservatorship subject to tight market-share restrictions under a new plan released by Senate Republicans. Fan and Fred would retain their role as mortgage guarantors, and would be subject to competition. “We must expeditiously fix our flawed housing finance system,” Crapo, an Idaho Republican, said in a statement. “My priorities are to establish stronger levels of taxpayer protection, preserve the 30-year fixed-rate mortgage, increase competition among mortgage guarantors and promote access to affordable housing.” That is a tall order and pretty much forecloses any sort of radical change of the housing finance system. If the social engineering aspect (affordable housing) and the subsidies (30 year fixed rate mortgage) will remain, we are pretty much looking at the same system we had pre-bubble. The model that seems to have gained the most traction is putting the government in the second-loss position, with PMI taking the first loss position. It would represent a bit of a step of re-introducing free market economics in what is one of the most nationalized housing finance systems on earth.