If this week has told us anything it’s that the residential housing market has maintained or even exceeded the momentum it carried into July from June. While other sectors paused, or plateaued in July, the housing sector has built on those June gains. With increasing home prices and a vibrant market it could prop up consumer confidence and spending despite fading fiscal stimulus. Later this morning we get the Big Daddy of housing numbers with existing home sales for July. Existing home sales account for 90% of the residential market so it’s the key tell on the health of the market. Earlier this week housing starts and permits for July easily exceeded both expectations and the June pop so similar expectations are in store for existing home sales. Forecasts call for July sales to increase 14.6% versus June to an annualized 5.41 million sales. That compares to June which saw a pop of 20.7%, or 4.72 million units sold annually. As we mentioned, with housing being such a vibrant sector it could help to maintain consumer confidence and spending despite fiscal stimulus that looks to be fading.
We’ve been on for awhile about the Leading Economic Index and the story it is telling regarding the economy. The July report was released yesterday and beat expectations with a 1.4% reading versus 1.1% expected but trailed the June bounce of 3.0%. The stock rally and the housing market have helped keep the index above 0 on a monthly basis but what we show below is the year-over-year look at the index going back to 1970 and what a good indicator it is for calling recessions. Notice how it decidedly drops below zero either just before or at the onset of recession.
Obviously we are in a recession now but while the monthly numbers have looked better of late, the YoY figures here still show an economy still in the midst of a struggle. We’ve bounced off the lows for sure, but more work remains before we can call an all-clear. And it probably shows this is not the time to be pulling back stimulus. Just saying.
One More Headache for MBS Investors
Mortgage lenders have found a way to potentially make billions of dollars from the upheaval caused by the pandemic in the mortgage market. That profit opportunity comes at the risk of accelerating prepayments to MBS investors when prepayments are already the number one risk in the MBS market. The key to the transaction comes from an unanticipated side-effect of the CARES Act which allows homeowners affected by the pandemic to delay loan payments for as long as a year, the forbearance provision, combined with regulations governing mortgage-backed securities, particularly GNMA securities.
GNMA, a government-owned corporation, guarantees the payment of principal and interest on bonds containing mortgages insured by the Federal Housing Administration, Department of Veterans Affairs and other government agencies. GNMA rules allow banks and other lenders to buy loans out of mortgage securities at their par value when a borrower hasn’t made payments for 90 days, or more. Meanwhile those loans reside in mortgage securities where Investors value them at 5% to 10% above par. Thus, the purchases result in increased prepayments to bond holders who have to absorb the impact of a 5% to10% above par security being prepaid at par. This just increases the headache to MBS investors and will probably dent market values at the same time.
Wells Fargo has been particularly active in buying back mortgages with total purchase of $19 billion in July and August. The expectation is that these purchases will only grow as other lenders see the potential profit opportunity. So, if GNMA MBS investors see prepayment rates jump in the coming months these transactions are likely part of the prepayment story.
RV Shipments Reveal Changing Travel Taste
One of the metrics we follow on occasion to gauge changes in consumer discretionary spending is the monthly shipment of recreational vehicles. Prior to the pandemic, we used this to see if consumer consumption patterns were changing. Obviously, a new RV is a big-ticket discretionary item so shifts in shipments of RVs can tell us whether the consumer is feeling emboldened to spend or shutting the wallet. With the pandemic it also shows us the changing taste in travel for many. As the chart shows we had the predictable plunge in shipments as lockdowns hit in March and April, but notice the quick rebound in shipments to a level last seen in the halcyon days of 2018. It seems consumers, rather than face virus risk with air travel, are voting for the do-it-yourself route. It’ll be interesting to see how high shipments climb from here.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.09%||UNCH||1 Mo LIBOR||0.17%||-0.01%||FF Target Rate||0.00%-0.25%||3 Year||0.221%|
|6 Month||0.11%||UNCH||2 Mo LIBOR||0.25%||-0.01%||Prime Rate||3.25%||5 Year||0.304%|
|2 Year||0.13%||-0.03%||6 Mo LIBOR||0.30%||-0.04%||IOER||0.10%||10 Year||0.619%|
|10 Year||0.62%||-0.08%||12 Mo LIBOR||0.45%||-0.01%||SOFR||0.10%|