V-Shaped Recovery In Housing Starts/Permits To Build (1-unit Starts Up 8.52% In September)

The housing starts numbers for September were released this morning and point to a V-shaped recovery for housing markets. 1 unit starts were up 8.52% and permits to build were up 7.8%.

This is a V-shaped recovery for single family housing.

Unfortunately, there is no V-shaped recovery in 5+ unit multifamily housing.

But the overall economy is showing a distinct v-shaped recovery, according to The Atlanta Fed GDPNow forecast model.

Lenders Tighten Standards On Credit Cards To Beyond Financial Crisis Peaks

To quote Dean Martin, “Ain’t That A Kick In The Head.” Let ’em have it!

Net % of Domestic Respondents Tightening Standards on Consumer Credit Card Loans just rose to a level higher than that of the financial crisis.

Odd since US home prices are rising through the stratosphere and mortgage rates are at an all-time low. Essentially, homeowners will equity in their homes may have to turn to cash-out refis in lieu of using credit cards.

Yes, cash-out refis (white line) have grown as consumer credit tightens (yellow line).

Like the sailor said, quote, ain’t that a hole in the boat?

All Quiet On The Wall Street Front? US Bond Volatility Jumps, Stock Volatility Calm, Gold Vol Calm, US Dollar Swap Forward Rate Calm

With about two weeks to go until the U.S. election, volatility gauges for stocks and bonds are on different paths. The Cboe Volatility Index — known as the equity market’s “fear gauge” — has been relatively subdued this month in contrast to the ICE BofA MOVE Index, the Treasury market’s equivalent measure.

JP Morgan’s Global Credit Volatility premium index has soared since June while gold’s 3m implied volatility is calm.

The Quadratic Interest Rate Volatility and Inflation Hedge ETF has leveled-out after rising from the Covid outbreak.

The US Dollar Swap forward rate has crashed with Covid and has laid flat ever since.

(A vanilla interest rate swap is an agreement between two counterparties to exchange cashflows (fixed vs floating) in the same currency. This agreement is often used by counterparties to change their fixed cashflows to floating or vice versa. The payments are made during the life of the swap in the frequency that is pre-established by the counterparties.)

US Public Debt Now Exceeds Economic Output, US Budget Gap Triples to Record $3.1 Trillion on Virus Relief (M2 Velocity Crashes To All-time Low)

This is a nightmare. A nightmare on Constitution Avenue.

(Bloomberg) — The U.S. budget deficit more than tripled to a record $3.1 trillion in the latest fiscal year on the government’s massive spending aimed at softening the blow from the coronavirus pandemic.

The increase brought the deficit as a share of gross domestic product to 16% in the year ending in September, the largest since 1945, a Treasury Department report showed Friday. At the end of the financial crisis in 2009, the ratio was close to 10% before slowly narrowing through 2015.

Investors have handed the government ultra-low borrowing costs to finance the spending, resulting in a 9% drop in federal interest payments during the year. But the national debt is now bigger than the size of the economy, and it could be almost double GDP by 2050 as an aging population places more demands on Social Security and Medicare, according to the Congressional Budget Office.

The risk is that in the long term, rising debt could end up sparking inflation and repelling investors if the market becomes too saturated. Federal Reserve Chair Jerome Powell and other officials say eventually the debt trajectory will need to be addressed, but now isn’t the time to worry because unemployment remains high and the pandemic has crushed many businesses, warranting further support for the economy.

While the central bank cut the benchmark interest rate to near zero in March and expects to keep borrowing costs very low likely for years to come, lawmakers remain deadlocked over additional fiscal aid ahead of the Nov. 3 election.

The report showed federal spending jumped 47.3% to $6.55 trillion in fiscal 2020, driven by increased outlays for unemployment compensation and small businesses that were approved by President Donald Trump and Congress. Government revenue declined 1.2% as receipts from individual and corporate income taxes fell.


Underscoring the massive fiscal relief efforts this year, the Treasury’s report showed $275 billion in outlays for federal additional unemployment compensation that included the now-expired $600 supplemental weekly jobless payments. Spending for state unemployment benefits totaled nearly $196 billion in the fiscal year.

Spending on national defense went from the second-largest outlay in fiscal 2019 to fifth in 2020 as pandemic-induced spending resulted in larger spending for income security, health and Medicare.

As Congress and the Administration continue the spending splurge, what are the odds that spending (and borrowing) will decline after Covid recedes? Especially with declining money velocity and exploding public debt.

The Return Of CDOs And The Decline In CMBX In Face Of Covid (Goldman Sach’s Abacus CDO Revisited)

Does this sound familiar? (The Big Short)

(Bloomberg) — Cerberus Capital Management is selling debt that packages commercial mortgage-backed securities rated at the cusp of speculative-grade into top-rated securities, a practice employed by collateralized debt obligations (CDOs) that contributed to the global financial crisis.

The offering bundles so-called interest-only slices of CMBS rated the lowest tier of investment grade into $300 million of bonds with preliminary ratings of AAA by DBRS Morningstar, the senior portion of a $390 million transaction. Some market observers are concerned that these strips might eventually be subject to losses.

“This is a CDO,” said Jen Ripper, an investment specialist at Penn Mutual Asset Management in Horsham, Pennsylvania. “There could be a real risk of some principal loss at the BBB- level, which most of these interest-only tranches are ‘stripped’ off of.”

The deal comes at a time when the CMBS market is in crisis, a victim of shutdowns stemming from the coronavirus pandemic that have battered revenues for malls, hotels and other commercial properties that back the debt. But the challenges also mean that hedge funds are looking for opportunities to profit amid the fallout.

The transaction is being referred to as a “resecuritization” in deal documents seen by Bloomberg. Those marketing materials say it is structured so that cash flows are “protected from both prepayments and losses.”

The deal is backed by about 9,300 mortgages, 27.6% of which are office, 25% retail and 15.5% hotel, while the rest is a mix of other commercial real estate sectors, initial marketing materials show. The short duration of the product — the AAA slice matures in just 2.2 years — and the top shelf rating could attract yield-hungry investors.

“I’m sure the ratings are what’s driving the demand,” said Jason Callan, head of structured assets at Columbia Threadneedle Investments.

CMBS interest-only strips are linked to the performance of corresponding bonds with the same ratings that pay both principal and interest. They represent securities backed by the excess interest generated from a pool of commercial mortgages.

A representative from DBRS Morningstar said that the ratings are still pending and that no presale report was available yet. A representative for Cerberus didn’t immediately provide a comment.

The deal is being arranged by Deutsche Bank AG, JPMorgan Chase & Co., and Wells Fargo & Co. Representatives for JPMorgan and Deutsche Bank declined to comment while a press officer for Wells Fargo didn’t immediately provide a comment.

Here is an example of Goldman Sach’s ABACUS CDO to refresh your memory. And read the following instead of listening to Selena Gomez and Richard Thaler explain synthetic CDOs.

Abacus 2007-AC1 is paid off. Here is the A1 tranche.

But if we fast forward to today in the commercial real estate space, office space is the worst performing property type in the mid-Atlantic region.

The CMBX 12 synthetic price fell to 58 in late March, but since rebounded to 79.86.

You can see the impact of Covid on CMBX prices in the following chart.

Here we are again, back in the CDO-era of the 2000s.


A Farewell To ARMs: The Adjustable-Rate Mortgage Share Dwindles To 2% In Latest Mortgage Bankers Association Report)

Back in 2011, former HUD and Freddie Mac Chief Economist Michael Lea wrote an article entitled “Do We Need the 30-Year Fixed-Rate Mortgage?” We argued that plain vanilla ARMs (without teaser rates and other tricked-up products during the housing bubble) offered consumers advantages over fixed-rate mortgages (FRMs).

The answer to that question has just been answered: adjustable rate mortgages as a percentage of all mortgages has fallen to its lowest level since financial crisis and The Great Recession.

The reason? First, consumers flock towards FRMs when mortgage rates decline. In part, thanks to The Federal Reserve’s interest rate policies (as shown below).

Lea and I argued that there are certain advantages to ARMs for consumers (see paper at link), such as a lower mortgage rate on average.

Also, empirically mortgage rates on average fall negating the “fear factor” of mortgage rates rising on an ARM reset.

The latest mortgage applications volumes from the Mortgage Bankers Association shows that the ARM% has dwindled to 2%.

5/1 ARM rates (purple) are currently higher than fixed mortgages rates. The 15-year mortgage rate is the lowest.

Yes, it is A Farewell To ARMs, but not as Ernest Hemingway envisioned.

US Core Inflation Clocks In At … 1.7% YoY And Real Avg Weekly Earnings At 4.1% YoY, Rent Inflation Falls To 2.5% YoY (Taylor Rule Suggests Fed Funds Target Rate Of -0.51%)

Well, the Consumer Price Index less food and energy remain near the same level, 1.7133% YoY and is leading the Core PCE growth of 1.5934% YoY.

US Real Average Weekly Earnings YoY checked it at 4.1% YoY.

US CPI Urban Consumers Owners Equivalent Rent of Residences YoY fell to 2.5% YoY despite massive Fed intervention.

The Rudebusch variation of the Taylor Rule suggests that the Fed Funds Target rate should be at -0.51%.

On a side note, the US Dollar rose and gold got clubbed downwards.