|10 Year Government Bond Yield||2.99%|
|30 Year fixed rate mortgage||4.56%|
Stocks are up this morning on strong earnings by Caterpillar. Bonds and MBS are down.
New Home Sales rose 4% MOM and 8.8% YOY to an annualized pace of 694,000 in March. The median sales price was$337,200 and the inventory of 301,000 represented about 5 month’s worth. The number was well above Street estimates, however the confidence interval for this estimate is invariably wide.
Consumer Confidence improved to 128.8 in April as tax cuts have pushed sentiment to post-recession highs.
Home price appreciation is accelerating, with the Case-Shiller Home Price index up 6.8% YOY. We saw double-digit annual increases in San Francisco, Seattle, and Las Vegas.
The FHFA House Price Index reported a bigger increase – 7.2% YOY. The FHFA index only covers conventional loans, so it is a narrower index than Case – Shiller. The increases ranged from 4.8% in the Middle Atlantic to 10.3% in the Pacific.
What is the issue with the lack of home construction? Lack of labor. The construction industry has about 250,000 unfilled jobs right now, according to the NAHB. At the peak of the bubble, there were about 5 million people in construction; today that number is closer to 3.8 million. Many of these workers found employment in other industries (especially energy extraction) and aren’t about to go back. Immigration restrictions are another headache, as the government estimates that 13% of the construction workforce is working illegally. Finally, the opiod epidemic is particularly problematic in an industry where people are likely to be injured on the job and in pain generally. Ultimately, wages will have to increase to the point to lure a new generation of construction workers out of their climate controlled offices.
Round numbers always bring out the strategists, and as the 10 year sits close to the 3% level, we are seeing pieces discussing the asset allocation implications. Since the financial crisis, the earnings yield on the S&P 500 has been higher than the 10 year, although the premium is at the lowest level since 2010. One strategist thinks the 1950s are a good analogy for investors, where interest rates gradually rose as the memories of the Great Depression faded and the economy was strong. As an aside, Jim Grant discusses how the big retail investor trade in the 1950s was the leveraged curve flattener, where people would borrow short term money to invest in long-term Treasuries. That trade worked until the bond market crashed in the late 50s and a lot of people got carried out.
Is demand falling for houses? According to Redfin’s Housing Demand Index it is. “Abnormally late winter weather and an early Easter likely delayed homeowners planning to list their homes for sale in March,” said Redfin chief economist Nela Richardson. “While inventory levels are still not nearly high enough to meet strong buyer demand, we do expect new listings to pick up in April and May.”
The House has introduced legislation to end regulation by enforcement by the CFPB. HR 5534 would require the CFPB to provide guidance on its regulations and to establish a framework for monetary penalties.