Mortgage Credit News by Louis S Barnes - February 26, 2021

Here in the age of e-exaggeration, begin with the hysterics, and then some common-sense centrism -- in the economy, rates, the Fed, Covid, and especially the housing puzzle.
Yank off the band-aid: a strong 80% purchase file with no points prices near 3.25%, and a refi about 3.50%, both up at least another quarter-percent in the last week.
The 10-year T-note is the mortgage driver, which bottomed at 0.55% last August, and by the first week of January had risen in steady and orderly fashion to 0.92%. Then in one week to 1.21%, holding until two weeks ago, now lurching back and forth across 1.50%.
The move since the new year has the Fed’s fingerprints all over it. Messy ones.
Economy news. There is some justification for the rate burst in the data, but not nearly enough. Orders for durable goods in January were in a normal range, a good indicator that most larger businesses are okay. Year-over-year core inflation rose a hair, but only to 1.5%. Home sales were shaky in December, but because nothing to sell (much more on that below). January personal income jumped 10%, but we know from experience that a great deal of that money will wash right through to savings or debt paydown.
Nobody outside the Dem left and the unaccountable support by Yellen and Powell wants this $1.9 trillion spasm stimulus, and nobody at all in the bond market.
Diseases. Exactly opposite of medics’ predictions for a double-whammy flu-and-Covid fall-winter, instead mask and distance all but eliminated flu. The CDC, nationally: last year, 188 pediatric deaths from flu; this past season, one. In Colorado last year at this time, a cumulative 2,430 flu hospitalizations; this year twenty-three. New Colorado Covid cases, state population pushing six million, peaked in Nov-Dec at 4,000/day. Now 800. Up a hair now (by @200) exactly two weeks after several days of near-zero cold wave.
One of two phrases new to me this week: “pathogen porn,” referring to the flood of ill-founded scare stories, especially about Covid mutations. Medics tend to feed the stories with the best of intentions, trying to keep us scared into mask and distance.
The Fed. A calm prescript to a screed: mortgage rates have risen to the same level as the prior all-time lows in 2012 and 2016, hardly a catastrophe. The only segment badly hurt: mortgage banks attempting to go public based on Covid-bloated earnings. We have also refied a ton of people who didn’t much need the benefit, but stimulus is stimulus, and over for now. Which leads to the first of Alice’s impossible things this week: the Fed is still buying $40 billion/month of MBS net of refis, and new-lock refi volume this week collapsed altogether, so why the new crash in the rate-wreck?
It is possible that duration adjustments (don’t ask) will wash out, and rates will fall back as much as a quarter-percent, back to the outer edge of refi demand.
Every other thought is unkind to the Fed. First of all, its silence during the bond crater since Jan 1 says that it likes the crash. Prior to Alan Greenspan (and he was grudging) the Fed was silent at all times, wanting never to disturb signals from markets by influencing markets. However, as bond markets grew vastly the Fed had to drop little hints when the market had lost its marbles, either up or down. The corrective could not be simpler: a second tier official would leak to the top Fed analyst (in the old days, David Jones of Aubrey Lanston) a laconic sentence, “Recently the bond market has not reflected Fed policy.”
Rate level aside, the Fed has a duty to orderly markets. This week, crickets.
Why would the Fed like this wreckage? At some point it will have to announce tapering of QE. The last two times (2013 and 2016) the announcement blew up long-term rates by a percentage point, right quick. This time the blow-up is only half that, but only drunks, teenagers, and old folks get confused about the brake and the gas pedal, which is which, or try both at the same time.
I’ve tried a conspiracy theory and been hooted at by pros. Still... Fed traders can pre-taper QE while buying $120 billion in bonds/mo by bidding less aggressively, and let rates rise to a self-sustaining level, then no market or economic shock to the ultimate taper announcement. Collateral benefit: the Fed would get market signals not jiggered by its own actions or words. Maybe. Maybe even a good idea, if ham-handed execution. Another benefit to the Fed: the rate jump de-bubbled both housing and stocks.
Powell’s Conundrum. The Fed has announced three conditions for beginning to raise the short-term cost of money (apparently having nothing to do with long-term rates): full employment, inflation at least 2%, and forecasters expecting inflation to stay at 2% or above.
Inflation has not hit 2% sustained for 25 years. Inflation forecasters, especially market based have been mistaken the entire time. Powell gets credit for dismissing the “Phillips Curve” strategy, trying to preempt inflation by preempting employment. However, the Fed needs to discuss with clarity and rigor: how are you going to get to 2% inflation while your effort destroys the bond market, housing, and stocks? At 2% inflation the 10-year T-note should trade close to 4%, and mortgages press 6% -- and bonds will front-run your intentions, as now. Oh-by-the-way, please re-justify your 2% white whale.
Housing. The NYT this morning gave the housing shortage a try, and got it all wrong, which makes me even crankier than at the Fed. One point at a time.
1. For sale inventory is half of recent normal. What is different now than prior years? Covid. Period. With one math-market quirk: single-family homes have been in shorter supply for 30 years, except during mortgage foolishness and foreclosures. Covid froze many people, afraid to show or view a home -- a tipping point (climate-porn) to a locked market.
2. Homes are not in short supply, land is -- in every metro area. Land is the component of any home which appreciates in value. The structures cost the same everywhere, and gradually go down in value. All of America’s metro areas long ago lost the ability for more concentric outward expansion -- the maximum radius is the maximum commuting distance.
3. Why metros? That’s where IT flourishes. New term: “zoom town.” Metro areas have gone price nuts for two reasons: IT is unaffected by Covid, and the fantastic migration from the job-poor, IT-vacant countryside to housing-short metros.
4. Powell has intoned twice in the last month, “Housing has more than recovered.” And thus no longer needs super-low rates and might bubble. Tell that to Detroit and Hartford. Say it anywhere in upstate New York. Tell us again anywhere in rural America.
5. Whizbangs are certain that the Covid experience will reinforce work from home, and offices will be obsolete. Mr. Google says the word “telecommute” was first used in 1974, and if the practice were universally attractive we would know by now. We like to work in a social setting, we like to get out of the house, and 24/7 with family has its downsides. A hell of a lot of us hope by the end of 2021 never to hear “zoom” again.
6. Phonies have for two generations announced that Baby Boomers will at last give up their big homes, that most people will tire of houses and yards, that ownership is a bad idea and renting is better, that big corporations and investors are buying up all the housing (what, to keep it empty?), that low-density zoning of existing homes is the problem (it is, but good luck), and that regulation creates excessive expense (you liked 2x4 walls without insulation?).
7. When considering the opinion of a “housing analyst,” check the bio. How many weekends has the thinker spent showing houses to families who can’t make up their minds? Taken how many loan applications? As a professional, watched land become homes, and old homes deteriorate, and renew, and not?

If you’re the Fed and still worried about the economy, why would you let this happen and in silence?

The yield on the 10-year T-note shows two tapers, a FUBAR, and a new tantrum. Note that after each taper-tantrum jump the 10-year fell way back. The green FUBAR was the last ride of the Philips Curve, the really stupid effort to “normalize” the short-term cost of money, to pre-empt inflation caused by an overheated labor market, when there was no inflation and just missed a recession.

Here is the embarrassing history of the Fed’s last 25 years. Red is core inflation, green the Fed-controlled cost of money, and blue the 10-year T-note. You want to raise inflation for the long term to 2-plus, and expect the 10-year and all long-term rates to stay down?

Colorado Covid, total hospitalizations for the state. We are vaccinating like crazy, fewer vaxxers here than most places. No one knows at what level of new cases fear will wane and close-range commerce begin again. But fear and fearful habits are entrenched, and it will take a while, a lot longer than the bond market seems to expect.