Mortgage-Backed Securities Activity Heading into 2021

Mortgage-backed securities saw little activity at the close of 2020. However, the end of 2020 was an eventful one for the economy. With the potential rebound and vaccinations rolling out, the holiday season saw positive signs. Meanwhile, the United States housing market continued to grow.

However, more uncertainty is on the horizon. There are questions concerning the vaccine rollout, elections, and inflation. Ultimately, it is shaping up to be a unique economic year for the United States.

Housing Momentum Continues with Steadily Low-Interest Rates

The last couple of weeks of December typically exhibit exceptionally light trading volume. Besides, investors display limited reaction to economic news around this time of year. This year was no exception.

Rising coronavirus cases slowed economic activity in consumer spending. However, one sector is white-hot: Housing.

The housing sector saw high sales numbers to close out 2020. In November, existing home sales were 26% higher than a year ago. These are near the absolute best levels since 2006.

Concurrently, the median existing home price rose 15% compared to a year prior. This new statistic is also close to record levels.

Mortgage-Backed Securities Activity See Rise in Applications

Weekly data from the Mortgage Bankers Association (MBA) showcased record-low mortgage rates. According to their latest figures, mortgage applications for home purchases soared 22% compared to the previous year. After all, this is despite the pandemic-fueled obstacles.

Mortgage-backed securities activity heavily influences refinancing applications. As a result, refinancing applications ascended a massive 89% higher than this time in 2019.

Lack of Inventory Remains an Issue for Housing Market & Mortgage-Backed Securities Activity

The lack of housing inventory continues to pose a threat. It remains one of the few obstacles to an even more amazing performance. Inventory levels were down 22% from a year ago. This statistic bars even stronger home sales activity.

The disparity between homebuyers and homes for sale could mean rising home prices that have already risen 6.7% from the same time frames in 2018 and 2019 and median home prices also are continuing to rise.

Nationally, the number of homes for sale is at a mere 2.5-month supply. Correspondingly, this is well below the 6.0-month supply mark. Generally, six months is considered a healthy balance between home buyers and home sellers.

However, there is encouraging housing news.

In November, single-family housing starts were 22% higher than a year ago. This is the best level since 2007.

Late 2020 Job Gains Fall Short of Expectations

The United States’ economic rebound continues. However, 2020 was a rough year for jobs. In March and April, the United States economy faced unprecedented job losses. These job losses were widely caused by the partial economic shutdown.

Despite the ongoing rebound, job growth fell short of expectations.

The economy gained 245,000 jobs in November. This is below the consensus forecast of 450,000. In terms of specific industries, the transportation, professional services, and health care industries appear to show strength.

To date, the United States economy has now recovered more than half of the 22 million jobs lost in March and April.

Unemployment Rate Continues to Drop Affecting Mortgage-Backed Securities Activity

In more optimistic news from the report, the unemployment rate fell to 6.7% down from 6.9%. This result matches expectations.

Also, average hourly earnings rose 0.3% in October. Average hourly earnings are an indicator of wage growth. The resulting increase is above the original consensus for an increase of 0.1%. In addition, it is also an impressive 4.4% higher than a year ago.

In December, the unemployment rate remained the same at 6.7% while nearly 140,000 jobs were cut during the tail end of the holiday season. Some of the job cuts were offset by the seasonal hiring spree. Many companies hire additional labor to support their busiest sales days of the year.

According to the Department of Labor, most of this job loss occurred in leisure and hospitality. Both leisure and hospitality are viewed as two of the hardest-hit sectors of the economy. The impact is yet again attributed to the COVID-19 pandemic. Combined, both industries are down nearly 3.9 million jobs since February.

But leisure and hospitality were not the sole industries impacted by the coronavirus pandemic. Large job cuts also occurred in private education.

Another significant economic report released this week, the national manufacturing index from the Institute of Supply Management (ISM), was in line with expectations.

In November, the national manufacturing index came in at 57.5. This is the sixth straight month of readings above 50. Reviewing this reading, the manufacturing sector is expanding.

Many consumers have dedicated less money towards travel and leisure activities due to the pandemic. Instead, consumers buy more goods, boosting manufacturing activity.

Reduced Economic Activity from Pandemic Results in Low Inflation

According to the Consumer Price Index (CPI), reduced economic activity kept mortgage-backed securities prices high and rates low. Economic analysts follow the monthly inflation report for information on price changes concerning goods and services. Throughout the coronavirus pandemic, economic activity declined. This led to an inflation decline, which, in turn, led to low mortgage rates.

In November, the core Personal Consumption Expenditures (PCE) price index rose just 1.6% higher than a year ago. That said, this number is down from an annual rate of increase above 2.0% in the months prior to the pandemic.

The European Central Bank (ECB) meeting produced no surprises and caused little reaction. As expected, the European Central Bank did not change rates. In an effort to support economic growth, the ECB expanded its massive bond purchase program by an additional 500 billion euros ($605 billion). Officials said that bond-buying will continue until “the coronavirus phase is over.”

Fed Response to Inflation Scare

With additional financial aid coming to Americans in early 2021, the risk for faster inflation is higher than it has been in ten years. But experts do not expect the Federal Reserve to tighten any policies for 2021, even if inflation quickly rises.

Upcoming vaccinations and built-up demand could spark a year of spending in 2021, but inflation could still rise above the Federal Reserve’s 2% target. The Fed’s reaction to inflation numbers will be influenced by many numbers including the unemployment rate.

Future of Inflation & Mortgage-Backed Securities Activity Heading into 2021

Investors and market experts across the country must keep inflation in mind as the economy begins to pick up into 2021. With the potential end of the pandemic on the horizon, many industries—especially those hit hard by the pandemic and COVID regulation—may be forced to raise prices, in turn, this could drive inflation above the Fed’s 2%, as we mentioned above.

As inflation rises, many experts are questioning if it will continue to rise, if it is just a shorter burst, and when policymakers might have to step in to regulate it.

Holiday Shopping Season Beats Low Expectations

The total retail sales during 2020’s holiday shopping season—a time of year many businesses rely on—beat the low expectations set by market experts with sales growing 3% vs. the forecasted 2.4%. Sales totals were elevated by extraordinarily strong online numbers which were 49% higher than in 2019.

This is certainly a result of the pandemic with many people choosing not to do their shopping at brick-and-mortar locations. This also explains the record number of gift card purchases which has helped many businesses stay afloat and was a pleasant surprise as another result of people finding a different way to spend to avoid large crowds and in-person shopping.

The top-performing categories were furnishings and home improvement, two sections of retail that have been outperforming the entirety of the pandemic. The lowest-performing categories, both falling nearly 20%, were apparel and luxury. Department stores also fell short of expectations, dropping 10% during the holiday season with a small digital shopping growth of 3%.

Vaccine Distribution Progress

The vaccine distribution effort continues across the country as many have begun receiving their doses, specifically those working the frontlines and those most at risk. Many experts, both medical and financial, have recently revealed their concern about the rate of the rollout, fearing that the slow rate of distribution could stretch the process out too long, hurting the markets by prolonging COVID regulations which have harmed business.

Experts predict that the vaccine must be fully distributed before next winter—where a seasonal uptick could produce another surge of cases—leaving 9 months for mass vaccination.

A change in power in the White House could see a shift in vaccine rollout strategy as President-Elect Joe Biden has reportedly planned to release all doses rather than the Trump Administration’s strategy of holding some back for second doses in order to ensure those who get one also get the other on time.

This means more people will get the first shot but could increase wait times for the second dose which both Pfizer and Moderna say are necessary for the effectiveness of the vaccine. There are questions as to how this would affect the total time it takes for everyone to get the vaccine.

Mass Vaccination and Its Impact on the Economy in 2021

Experts agree that vaccinations could be the key to the economy’s revival in 2021. With many people holding off on large purchases throughout last year, the return of safe in-person shopping and a steadier economic climate could mean a wave of spending that could jumpstart the economy.

But investors are wary of a slow start to 2021 with COVID cases spiking, a large shift in power in Washington, and additional COVID restrictions in large cities across the country. Predictions of a three-month economic flatline could mean a bleak start to the new year. But, with vaccinations due to ramp up later into the Spring, there is reason to hope that the pending economic upswing could happen at the beginning or middle of Summer.

The pending stimulus package spurs the predicted spending increase. Any money saved from the lack of travel and dining activity should also share a negative correlation with consumer spending. With consumer spending making up 70% of economic activity, this surge could power the economy into more growth.

Federal Reserve Statement on Pandemic and 2021

In a late 2020 statement, the US Federal Reserve certified its commitment to using its full range of powers and tools to support the growth of the economy into the new year by promoting employment and price stability. The Fed stated that the road to recovery depends heavily on the status of the virus and how long full vaccination takes. As for their plan, the Fed detailed its current goals and stance on the current inflation numbers, as well as the outlook for the near future:

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well-anchored at 2 percent.

The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

Looking Ahead to 2021

The United States is in the middle of what politicians have called a ‘dark winter’ economically which has had job loss, COVID cases, COVID deaths, and more factors that are causing concerns for the health of the market in early 2021. With vaccine distribution concerns and a slowdown in spending post-holidays, the near-term future of 2021 can seem bleak, though an eventual turnaround is expected.

Morgan Stanley’s estimated a ‘V’ shaped economic recovery that has already begun entering a ‘self-sustaining phase’—this could be a good indicator that it is only a matter of time (and vaccinations) until the economy skips upward.

Maybe the biggest question mark going into 2021 is the Federal Reserve’s response to inflation which could quickly rise. Will they act, or will they believe that it is only a short spell caused by a sudden burst of spending post-COVID?

Investors will monitor vaccine progress in early 2021, similar to the end of 2020. Vaccination has the potential to ignite economic rebound through a consumer spending surge. Investors will also watch the impact on mortgage-backed securities activity, the housing market, and the stock market.

The world looks to use 2021 as a springboard into a bright economic future. It should be an interesting year for mortgage-backed securities activity.

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