MBS RECAP: No Easy Answers Today; Still Anyone’s Game

Bonds were weaker earlier in the trading session but rallied back mid-morning before coasting mostly sideways into the close.  Bond bulls were frustrated by the inability to break the floor at 1.27-1.28% in 10yr yields.  Bond bears were frustrated by the clear unwillingness to explore new highs compared to yesterday.  In other words, it was an “inside day” with lower highs and higher lows, and part of a 2-day consolidation following the highest yields in 11+ months.  Such consolidations can be preludes to big bounces OR renewed selling pressure.  There weren’t any major clues in today’s session about which side is going to win.  

Econ Data / Events

  • Fed MBS Buying 10am, 1130am, 1pm

  • Jobless Claims 861 vs 765 f’cast, 848k prev

  • Import Prices 1.4 vs 1.0 f’cast, 1.0 prev

  • Export Prices 2.5 vs 0.7 f’cast 1.3 prev

  • Housing Starts 1.58m vs 1.658m f’cast, 1.68m prev

  • Building Permits 1.881m vs 1.687m f’cast, 1.704 prev

Market Movement Recap

08:41 AM

Treasuries started stronger in Asia as trading picked back up after Lunar New Year holiday closures.  Yields have been rising modestly since then and stocks have been sliding.  8:30am econ data passed without fanfare leaving 10yr yields 1.5bps higher at 1.297 and UMBS 2.0 coupons nearly an eighth lower.

10:57 AM

Bouncing back in the other direction now after AM weakness took yields to highs by 10:15am.  MBS had been down nearly a quarter of a point, but have bounced back by an eighth (down only an eighth now).  

02:54 PM

Friendly bounce continued, more so for MBS than Treasuries, but both are near unchanged levels currently.  Stocks recovered a bit as well, so we can continue to watch the “accommodation” trade (i.e. stocks and bond yields moving in opposite directions as the market reacts to changes in Fed policy potential.  This is far from the only game in town, but it could be a factor).

04:31 PM

Slight weakness heading into the after hours close, but not enough to make a case for any new momentum.  The takeaway remains equivocal with a clear rejection of the stronger levels, but no threatening move back to the weaker levels.  


MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

MBS

UMBS 2.0

101-30 : -0-03

Treasuries

10 YR

1.2970 : -0.0020

Pricing as of 2/18/21 4:41PMEST

Today’s Reprice Alerts and Updates

11:00AM  :  Reprice Risk Fading as Bonds Bounce

10:19AM  :  ALERT ISSUED: Negative Reprice Risk Increasing For Some Lenders

8:40AM  :  Little-Changed at Slightly Weaker Levels After Data


Economic Calendar

Time Event Period Actual Forecast Prior
Thursday, Feb 18
8:30 Export prices mm (%) Jan 2.5 0.7 1.1
8:30 Import prices mm (%) Jan 1.4 1.0 0.9
8:30 Building permits: number (ml) Jan 1.881 1.678 1.704
8:30 Housing starts number mm (ml) Jan 1.580 1.658 1.669
8:30 Philly Fed Business Index * Feb 23.1 20.0 26.5
8:30 Build permits: change mm (%) Jan 10.4 4.2
8:30 House starts mm: change (%) Jan -6.0 5.8
8:30 Jobless Claims (k) w/e 861 765 793
Friday, Feb 19
9:45 PMI-Composite (source:Markit) * Feb 58.7
10:00 Exist. home sales % chg (%)* Jan -1.5 0.7
10:00 Existing home sales (ml)* Jan 6.61 6.76

Source: mortgagenewsdaily.com

Time to Wake Up To The New Mortgage Rate Reality

There’s no precedent for the winning streak enjoyed by mortgage rates in the 2nd half of 2020. We’ve never seen so many new record lows in the same year, and we never spent as much time at those lows (not even close). All of the above makes it easy to get lulled into a false sense of low-rate security, but it’s time to wake up.

Actually, the alarm has been going off for a while now.  Previous posts pointed out the disconnect between the bond market and mortgage rates on multiple occasions in 2020.  Near the end of the year, we warned against complacency in no unspecific terms.

Following the Georgia senate election, we’ve been tracking a surge in bond market volatility based on the expectation that it would increasingly spill over to the mortgage rate world. 

(Read More: 1/8/21: Have We Seen The End of Record Low Rates?)  

As of this week, that spillover arrived in grand fashion with many lenders quoting rates that are as much as three eighths of a point higher than they were last week.  That means if you were looking at something in the 2.75% neighborhood on Friday, it could be 3.125% today.  What gives?

Again, the upward pressure is nothing new.  Treasury yields have been telling the story since August and mortgage rates have finally used up enough of their cushion that they’ve been forced to follow the broader trends. 

20210219 nl8.png

Why have things been so abrupt?  Using up “the cushion” is one thing, but that alone doesn’t force rates to go higher.  For that, we need “broader bond market volatility.”  In other words, Treasury yields need to be spiking. 

As it turns out, that’s been one of their favorite things to do in 2021.  If it seems abrupt, that has a lot to do with bonds coiling in a conservative pattern heading into the Georgia senate election, and unleashing chaos thereafter.

20210219 nl5.png

The election is old news now though.  It simply got the ball of volatility rolling.  Most recently, plummeting covid case counts, improved vaccine distribution, stronger economic reports, and progress on fiscal stimulus reinvigorated the volatility.  This week, 10yr yields broke up and out of their prevailing “trend channel” (the parallel lines seen below). 

20210219 nl3.png

There’s no magic rule that says Treasuries have to stay inside those red lines, but this sort of breakout can be a cue for traders to intensify selling pressure.  In other words, that upper line was a trigger for yields to move even higher.

“But wait… I thought the Fed said it was keeping rates low for YEARS.  What happened to that?”

The Fed sets the Fed Funds Rates… NOT mortgage rates.  The Fed Funds Rate is a super short-term rate (“overnight,” in fact).  10yr Treasuries, on the other hand, last 10 years.  The average 30yr fixed mortgage lasts between 5 and 10 years depending on the market conditions.  Investors place different premiums on rates with different terms.  Simply put, the Fed Funds Rate is indeed still at rock bottom, but longer-term rates are not.

20210219 nl6.png

This isn’t anything new or different, for what it’s worth.  The Fed Funds Rate has always ebbed and flowed in relation to longer term rates.

20210219 nl7.png

“But wait… I heard that mortgage rates are still really low and that they only went up a tiny amount this week!”

Well, that depends on your perspective.  Is 3.125% still really low for the average 30yr fixed mortgage rate?  Yes!  That was the all-time low before covid.  But is it much higher relative to the past few weeks and months?  Here too, it depends on your perspective, so let’s leave it at this: rates rose more this week than on any other week in the past 11 months.

If you’ve heard that rates only rose slightly, it may have to do with headlines quoting Freddie Mac’s weekly survey.  While that survey is accurate over time, it doesn’t capture short-term volatility.  It also tends to stop measuring most of any given week’s volatility on Monday, and Monday was a holiday!  As such, it’s lagging the reality on the street.  

20210219 nl4.png

On the economic data front, Retail Sales (this week’s biggest report) rose at the 4th fastest pace since records began in the early 90s.  In general, stronger economic data puts upward pressure on rates.

20210219 nl1.png

In terms of housing-specific data, this week brought an update on residential construction numbers.  They’re still stellar.  

20210219 nl2.png

Whereas Housing Starts are subject to weather-related delays and other potential roadblocks, building permits are a bit more free-flowing, and they just set another long-term high.

20210219 nl10.png

Source: mortgagenewsdaily.com

Homebuilders preparing for big 2021, data suggests

Overall housing starts in January totaled 1.58 million units, a decline of 6% from December, according to the latest statistics from the U.S. Census Bureau. But there’s reason for optimism from homebuilders – a huge spike in building permits.

“Despite a modest month-over-over decline, single-family housing starts are up 17.5% from one year ago,” said Odeta Kushi, deputy chief economist at title insurance firm First American. “Single-family permits, a leading indicator of future starts, are up nearly 30% from one year ago. It’s still not enough to significantly narrow the gap between supply and demand, but it’s a step in the right direction.”

A total of 1.881 million residential building permits were issued last month to homebuilders, roughly 1.2% above December’s tally but more than 22% greater than were issued a year ago.

Interestingly, the overall decrease in housing starts last month was driven by single-family starts, which decreased by 12.2% from the prior month, while multi-family starts increased by 17.1% from last month. A seasonal dip was to be expected, experts said, but the widespread distribution of a COVID-19 vaccine should give the economy – and the housing industry – a shot in the arm in 2021.

Doug Duncan, Fannie Mae’s senior vice president and chief economist, said the vaccine combined with President Joseph Biden’s $1.9 trillion fiscal stimulus will drive consumer interest in locking-in historically low mortgage rates, thus driving the amount of home sales upward.


Making housing more affordable by bridging the affordable supply gap

In the last few years, the number of existing single-family homes for sale has decreased. But home prices have increased. To make homeownership a possibility for everyone, there needs to be a higher supply of affordable homes.

Presented by: Fannie Mae

“We assume that the proposed fiscal stimulus of around $1.9 trillion will be passed in mid-March, and that growth will accelerate sharply beginning in the second quarter,” Duncan said. “If 2020 was the year of the virus, then 2021 will more than likely be the year of the vaccine. Whether the vaccines are effective, including with the new virus strains, and how broadly and timely they can be distributed remain key questions.”

Economists are wary, Duncan said, of a potential boom-or-bust scenario for the housing industry in the new year: the combination of rising interest rates from record-low levels, a high national debt, and the risk of rising inflation.

“Very strong growth in the second half of 2021 could push inflation, and thereby rates, up significantly in 2022, thus invoking a Fed response of tightening and a significant deceleration later in 2022,” Duncan said. “This is not our base case scenario, but we see it as a significant risk moving forward.”

Added John Pataky, TIAA Bank executive vice president: “With rates creeping up and homebuilding still partially restricted by the pandemic, the housing market’s next phase of growth may be much more of a grind.”

Privately-owned housing starts in January hit an adjusted rate of 1.336 million, down 2.3% from December but up 2.4% from January 2020.

Single-family authorizations in January were at 1.269 million, up 3.8% from December.

January housing starts increased in the Northeast (+2.3%), but decreased in the Midwest (-12.3%), the West (-11.4%), and the South (-2.5%).

Where homebuilders go from here is of great interest to industry experts: Construction rates are expected to climb in the opening quarter of 2021 and possibly into the summer thanks to high-lumber prices and low land inventory, but the demand for homes is expected to remain high thanks to low interest rates and the hope of President Joseph Biden’s $15,000 first-time homebuyer tax credit.

“Lumber now costs more than double what it did this time last year – a fact that that has reportedly caused some builders to stop some projects mid-way,” said Matthew Speakman, Zillow economist. “Land and labor shortages also continue to hinder the ability to take on new projects.”

Still, Speakman noted, homebuilders’ earned some benefit of the doubt with the way they handled hurdles in 2020.

“Home construction was a source of strength in the U.S. economy in 2020, as builders strove to keep up with robust demand for housing and put up homes at the strongest pace in a decade and a half,” he said.  

Source: housingwire.com

Luxe Estate on Larry Ellison’s Island of Lanai Available for $8.8M

On the tiny Hawaiian island of Lanai, population 3,100, there are no traffic lights. It does have high-end luxury resorts, and one very high-profile resident, who happens to own most of the island. 

The billionaire Larry Ellison is the majority owner of the smallest inhabited island of Hawaii, and he recently announced that he’s making Lanai his full-time home.

He already owns around 98 percent of the property on the island, but an estate neighboring one of the homes he owns has surfaced on the market.

It’s now available for $8.8 million. The listing initially appeared in July 2020, but Ellison’s announcement has sparked renewed interest in the pricey property on this slower-paced piece of Hawaii.

Lanai’s pineapple past

Before it became an exotic getaway, the island’s industry was pineapples. When the pineapple operation dried up, Robert Murdock, the CEO of Dole, the agricultural multinational, began developing the island as a high-end vacation destination.

He added two Four Seasons hotels, and many of the island’s residents shifted from working in the pineapple business and took hospitality-related jobs, according to the listing agent with the estate for sale, Mary Anne Fitch with Hawaii Life.

“The island evolved from a pineapple plantation to a very private, highly prestigious vacation spot, once the Four Seasons were completed,” she says.

Lanai vista
Lanai vista

realtor.com

In 2012, Ellison bought the two hotels from Murdock, as well as the land holdings, for a reported $300 million.

The co-founder of Oracle has since updated the hotels, and added improvements to the island, such as some farming operations, with an eye toward turning the island into a sustainable mecca.

The island has beautiful beaches, a Jack Nicklaus-designed golf course, and dining and resort amenities in the high-end hotels.

“The very low density of the island and the proximity to the Four Seasons amenities is a draw for many people,” Fitch says of the serene escape.

To spend time on Lanai, you can book a stay at one of the resorts. Alternatively, you could buy property—like say, this multimillion-dollar home. However, don’t expect to find an Airbnb. Vacation rentals based in residential homes are banned on the island, according to Fitch. 

Rarely available estate

If you’d like to join Ellison and set up permanent residence on Lanai, there isn’t much to choose from. He owns most of the properties. Only 13 listings are available at present, and several of those are unbuilt lots.

At the top end of the market, though, estates for sale are hard to come by, and this is the only home on the market in Manele, an exclusive and secluded area of the island, Fitch notes. It’s available fully furnished.

The seller “spent years and years developing the property. It’s his pride and joy. It’s very custom-built to his style,” Fitch says.

A businessman from Hawaii, he has decided to sell because he now has plans to travel the world by boat.

An added bonus: To build anew on the tiny island is an arduous undertaking, which requires building permits and a construction process that can lead to a three-to-four year saga, Fitch notes.

Any buyers of this property need only pack their bags and prepare to do nothing more than relax.

On 1.2 gated acres, the place is perched above Hulopoe Bay. The eco-friendly, solar-paneled home was built in 2005. Measuring almost 5,000 square feet, it boasts disappearing walls of glass that allow for a seamless indoor-outdoor transition.

The property includes covered verandas, a separate pool, spa, and poolhouse, and is minutes away by golf cart to the beach or to the nearby Four Seasons Resort Lanai.

The four-bedroom, five-bathroom spread includes a large living area that opens completely to the outdoors, as well as a dining room and a large kitchen.

The pool area is set apart from the house and feels like a separate resort, according to Fitch. It includes a rain shower and large sauna. An adjacent, covered entertaining area can handle large parties or family dinners.

Pathways around the estate can be accessed by the two golf carts included in the purchase, or you can explore the lush gardens and tropical flowers on foot. For aquatic activities, pile into a golf cart and head to the beach for swimming or snorkeling, minutes away.

A 40-foot fishing boat available for purchase with the home comes with one of the limited number of slips at the Manele Harbor, where Ellison’s yacht is often moored.

Fitch describes the 140-square-mile island as “its own world,” with a unique allure.

“The island—they go, and it draws them in,” she says.

Source: realtor.com

New-Home Construction Surges to Post-Great Recession High in October, Driven by Rise in Single-Family Starts

The numbers: U.S. builders started construction on homes at a seasonally-adjusted annual rate of 1.53 million in October, representing a 4.9% increase from the previous month’s figure, the U.S. Census Bureau reported Wednesday.

Permitting for new homes occurred at a seasonally-adjusted annual rate of 1.545 million in October, unchanged from September.

Economists polled by MarketWatch had expected housing starts to occur at a pace of 1.49 million and building permits to come in at a pace of 1.57 million.

What happened: The upsurge in housing starts was driven by a 6.4% rise in single-family starts, as multifamily construction activity dipped once again, this time by 3.2%.

All regions except the Northeast experienced an increase in housing starts despite rising coronavirus cases across many parts of the country, led by the 12.9% increase in the South. Permitting rose slightly in the South, West and Midwest, but fell markedly in the Northeast.

The big picture: The housing starts report follows yesterday’s release of the November home builder confidence index from the National Association of Home Builders. The index inched higher for the fourth consecutive month, demonstrating the upbeat outlook in the construction industry.

Indeed, virtually every home builder is seeing rising sales as Americans look to leave urban areas for larger homes in the suburbs only to find very few existing homes up for sale.

But builders naturally face roadblocks as they attempt to ramp up the pace of production. There’s only so much skilled labor to go around, and the availability of buildable lots and supplies also puts constraints on the speed with which they can construct new homes.

Of course, home-building firms aren’t necessarily complaining about this. “Those operating in many other sectors of the economy would love to have such problems,” noted Joshua Shapiro, chief U.S. economist at financial consulting firm Maria Fiorini Ramirez.

What they’re saying: “Demand has been boosted by record-low mortgage rates and a sudden shift in preferences toward larger homes with more space outside the core of major cities. And, there simply has not been enough resale supply to meet this demand,” Robert Kavcic, senior economist at BMO Capital Markets, wrote in a research note.

“Home builders are walking a tightrope between increasing costs of labor, materials and land, and eager buyers seeking larger homes in suburban neighborhoods. While they are well-positioned to meet the needs of buyers in these neighborhoods, the volume of new construction still lags the number of buyers,” said George Ratiu, senior economist at Realtor.com.

Source: realtor.com

New-Home Construction Activity Soars to Highest Level in Over a Decade, as Builders Rush To Produce Single-Family Homes

The numbers: U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.67 million in December, representing a 5.8% increase from the previous month’s figure, the U.S. Census Bureau reported Thursday.

Permitting for new homes occurred at a seasonally-adjusted annual rate of 1.71 million, up 4.5% from November.

Compared with December 2019, housing starts were up 5%, while permits were up 17%. It was the highest level housing starts and building permits have reached since 2006.

Both figures came in above analysts’ expectations, reflecting growth in the single-family sector. Economists polled by MarketWatch had expected housing starts to occur at a pace of 1.56 million and building permits to come in at a pace of 1.61 million.

What happened: Growth in the single-family sector drove the rise in both housing starts and building permits. On a monthly basis, single-family starts were up 12%, while single-family permits were up 7.8%. Comparatively, new construction on multifamily buildings fell 15.2% between November and December, while multifamily permits for buildings with five or more units slipped 2%. Permits for duplexes, triplexes and quadplexes dropped 11.5%.

On a regional basis, all parts of the country saw permitting activity increase except for the Northeast, where it fell some 7.2%. Though even in the Northeast, single-family permits were up on a monthly basis.

Similarly, the Northeast was the only region to see a decline in housing starts — both overall and for the single-family sector. The Midwest experienced the largest growth in housing starts, with a 32% increase.

The big picture: Demand among buyers might be cooling in the face of high home prices and a lack of inventory, but it still remains elevated compared to last year. That gives builders “strong incentive to keep building,” said Danielle Hale, chief economist for Realtor.com.

Overall, housing starts for 2020 were up nearly 12% from 2019, in spite of the slowdown this past spring sparked by the pandemic. Builders’ optimism might be waning slightly in the face of slowing foot traffic from buyers and rising costs associated with purchasing land and materials. But the underlying need for new homes is still there, which should keep the building sector busy for some time to come.

What they’re saying: “New mortgage applications are also rising again, perhaps to get ahead of higher interest rates. Despite slow population growth, residential construction remains well-supported by (so far) record-low mortgage rates, record-lean resale listings, and the migration of teleworkers to the suburbs,” Michael Gregory, deputy chief economist at BMO Capital Markets, wrote in a research note.

“Housing starts have recovered and were at their strongest pace in more than 14 years. Amazing, considering the COVID-related downturn in the spring. There aren’t enough homes in this country to go around, and we need a long-lasting surge of construction to meet demand,” said Holden Lewis, home and mortgage expert at personal-finance website NerdWallet.

Source: realtor.com