Mortgage Credit News by Louis S Barnes - April 9, 2021

Interest rates have stabilized, a relief if likely temporary. So begin here with asking why the sudden steadiness, then a little economic data and Covid, and then housing -- in particular to provide counters to housing misinformation, and to praise a good idea.
Data. The economic pattern continues to be exceptionally strong. The ISM, the old association of purchasing managers conducts two surveys at the end of each month, one on manufacturing, now a minor component of the US economy, the other on the service sector, perhaps 70% of the economy. The results for March in non-manufacturing were the strongest in the 23-year history of the survey.
Rates. Despite economic strength, long-term rates did not move, which suggests some length to a temporary pause. The 10-year T-note has held since March 12 between 1.61% and 1.74%, purchase mortgages just under 3.50%.
Literal-minded people accept and trust the Fed’s assertion that it will be patient. None of those people work in bonds (for long). Rates have stopped rising for these reasons, in no particular order: 1) Because rates rose so fast and far, 2) because they rose far enough to crimp the refi hose, cutting off that source of new MBS bond supply, 3) new geopolitical risk (Russian troops massing on the Ukraine border), and 4) because at rates only a little above these, say 2.00%, a lot of money would pull the plug on risky investments in favor of bonds. A plug-pulling like that tends to feed on itself as risk assets implode (the Credit Suisse $4.7 billion disaster has fed that thought), and those who missed 2.00% two years ago would hurry not to miss the new boat.
Covid. Roughly 34% of the US has now received at least one dose of vaccine. But case incidence and hospitalizations are rising, meaning the other two-thirds are working overtime: don’t care, do care but at work or at home can’t maintain distance, the unlucky, and kids. We have to needle another one-third of us to see material diminution in Covid, probably detectable within the next month but slower than all have hoped. Disturbing: rapidly falling rates of new vaccination in the two most successful nations (UK and Israel, chart below).
Housing misinformation. The Wall Street Journal’s hostility to housing has placed it far ahead of other media in the race for bad stories. There are competent exceptions at that paper, but other media compensate with juicy “Did ya hear this!” from the water cooler, real analysis hard to find.
One thread going all the way back to 2008: the inventory of homes for sale is crimped because investors are snapping up homes, in particular big investors like hedge and pension funds.
We have in the US a certain number of homes, two-thirds occupied by owners, the rest rented. Whether they are rented or occupied by owners has nothing to do with the supply of housing relative to population and demand, as tenants often become owners and vice-versa. Minor exception: the “second home.”
If you buy a home, occupy it and then move out to another one and rent the first, there is no effect on net supply. If you owned a home, were foreclosed upon and moved to a rental, and an investor bought the foreclosure and rented it, no effect on net supply. Those two events cause a change in net supply only if household density changes: if after foreclosure you moved in with your Mom (increased net supply), or sold and moved and simultaneously a kid became independent and rented her own place (supply contracted).
The purchase of a second home in theory reduces supply, but to be mortgaged a second home must be an hour’s drive from your primary, tends to be in a resort or seasonal, and you can’t use rent to qualify for a loan. Muddy water: second homes are still often rented at least part of the year, and often were a second home for the prior owner who sold to you, hence no change in net supply.
From national big-city media, you’d think the whole nation is buying a second home to get away from city-Covid. Not. People who see themselves as ordinary do not like being labeled “rich,” but a second home is for the well-heeled. A buyer has to come up with a substantial down payment and carry a substantial additional mortgage. It is a real but small market, and I’ve seen no data on increased market share.
The focus on big and rich investor-buyers got weight in the WSJ from a real estate consultant who said “You now have permanent capital competing with a young couple trying to buy a house. That’s going to make U.S. housing permanently more expensive.”
This assertion is anti-economic balderdash. Are we to believe that investors don’t care for tenants and intend to leave the properties vacant? If rented, no matter by whom, and new construction, that’s an add to supply.
Or should we believe that big-money investors think that overpaying is a good idea, routine analysis of rental income be damned? Thus distorting the price structure for everyone else? Generally, big-money investors do not become big-money by overpaying, and if they do overpay will not stay big-money for long and will soon be sellers. No matter what, no net change in housing supply or effect on price.
Civilians do get auction fever, rarely big money -- but even with the fever, auction bidders must have the wherewithal to play, and to sustain auction conditions requires large numbers of the infected. Of course, auctions can overheat and prices fall from fever peaks, but the big falls result from overbuilding in response to overdone auction prices. Where in this nation do you see overbuilding of single-family homes?
Housing is in short supply because of metro success, the IT fire burning bright, and the exhaustion of metro land for new single-family building sites.
A good idea! Biden in a partially baked proposal wants to offer $5 billion in bribes to cities which will relax zoning. And the infrastructure plan includes a $213 billion boost for affordable housing. Good. Adds to supply. But the affordable proponents are working to snatch defeat from victory by focusing on an end to single-family zoning by adding density to existing neighborhoods. I have watched that collision play out in dear old Boulder for 45 years, the result is poor progress toward the City target, 10% of the housing stock affordable to median-income households. NIMBY is bipartisan and strong.
Of course offer bribes, but change the target. Every municipality in the nation which has developable land wants commercial development because it is rich in tax revenue. Even truly hot-market towns have inventories of empty land which they will not allow for housing. Perhaps the best opportunity for new-age supply, townhouses and condos: rezoning under-utilized commercial.
Ideal sites: the shopping centers we could shoot a canon through and not hit anything, retail overbuilt and gutted by Amazon; and the junky flex-warehouses having a good moment as heaven for dope growers.
The land is in plain sight, and supply.

The 10-year T-note has stopped for the moment, and not coincidentally at the strong support set in 2019. Caution... break that support going upward, and there is no significant support until 2.25%:

The terrific Oxford site tracking global vaccination https://ourworldindata.org/covid-vaccinations. Pick and mix nations and regions as you wish. Good news, bad news: note flattening of vaccination rate in the two most successful nations, Israel and UK. In the UK, possibly more a supply issue than behavioral resistance.

There is no arguing with good data, this from Colorado. This chart is hospital admissions, the best of all markers: indifferent to the rate of testing, although possibly rising because of more severe illness among the young from Covid variants. Whatever: despite rapid vaccination progress and warmer weather moving us outdoors, incidence is rising. Most likely: relaxed/exhausted mask-distance discipline. Rising, but returning toward 100/day in a state of almost 6 million is not an ultra-scary surge.

Colorado again: weekly deaths are falling, not rising with hospitalization and case incidence: