Morning Report: Housing starts jump

Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are up.

The week ahead won’t have much in the way of market-moving data, but we will have plenty of Fed-Speak, with Jerome Powell speaking on Wednesday and Thursday.

Housing starts rose to 1.63 million in May, which was way above expectations. The number was 5.2% above April, but still 12.7% below May of 2022. The Street was looking for 1.4 million, so this was an upside surprise. Both multi (5+ units) and single-family saw big increases. Building Permits rose to 1.49 million.

While this is a big uptick in starts, we still are not back to levels we saw in mid-2022.

Downtown areas are struggling to get back on their feet after COVID. Office vacancy rates are way up, and municipal bonds are beginning to waver as declining revenues make them more risky. The beneficiary of this phenomenon are the suburbs which are seeing renewed interest. Apartments under construction are at record levels, and I wonder how many are in the cities.

The improvement in construction is good news for the mortgage business, and Goldman is out there with a positive call on a couple mortgage companies: AGNC Investment and Rithm Capital. AGNC is a mortgage REIT which invests in spec pools while Rithm is New Rez, Caliber and Shellpoint.

The bull case for AGNC is based on narrowing MBS spreads, which is a function of interest rate volatility. The ICE MOVE Index, which is sort of like a VIX for bonds, is at the bottom of its tightening cycle range. The lower it goes, the more attractive MBS are against Treasuries.

Rithm has agency MBS exposure, servicing and origination. Rithm was one of the only mortgage REITs that reported an increase in book value per share over 2022.

Any decline in interest rate volatility will be driven by more certainty about the Fed. The Fed’s tightening cycle appears to be winding down, but it is interesting to see just how far behind the curve they were in 2022. I discussed this in my Substack piece: Week in Review: Plotting the Fed Funds Forecast over time. For almost all of 2022, the real Fed Funds rate (i.e. the Fed Funds rate minus inflation) was highly negative, which means that monetary policy was still highly expansionary even in the context of a tightening regime.