Morning Report: No, we are not in another housing bubble

Vital Statistics:

Last Change
S&P futures 2716 10
Eurostoxx index 387.8 4.74
Oil (WTI) 66.4 -0.63
10 Year Government Bond Yield 2.92%
30 Year fixed rate mortgage 4.48%

Stocks are higher after a Goldilocks employment report. Bonds and MBS are down.

Jobs report data dump:

  • Payrolls up 223,000 (expectation was 190,000)
  • Unemployment down to 3.8%
  • Labor force participation rate 62.7% (a drop)
  • Average hourly earnings up 0.3% / 2.7%

The Street was looking for wage growth of 0.2% MOM, but the annual number was in line with expectations. The wage growth print shouldn’t move the needle as far as the Fed is concerned. The employment – population ratio increased a tad as the population increased by 183k and the number of employed increased by 293k. We saw another good jump in construction jobs. Bottom line, a good report for equity markets, and a push for the bond market.

In merger news, Citizens Bank is acquiring Franklin American Mortgage. This deal should vault Citizens into a top-15 mortgage lender, bulk up its servicing portfolio and diversify its origination mix.

Italy has found a solution to its political crisis with a new coalition government that will be installed on Friday. Treasury yields should probably be higher, however tough trade talk out of the Trump Administration is keeping them lower. Even the International Steelworkers is against new tariffs, and if you can’t even get the unions on your side it says a lot…

Hard to believe it is here already, but the hurricane season is just beginning. CoreLogic estimates that 7 million homes are at risk in what NOAA expects to be a normal or above normal season. Note the National Flood Insurance program is set to expire right in the middle of the season.

Construction spending increased in April, according to the Census Bureau. Residential construction rose 4.4% MOM and 9.7% YOY.

Manufacturing accelerated in May, according to the ISM report. Employment expanded sharply. New order and production also grew.

As usual, the ISM report showed employers having difficulty finding qualified labor. Labor shortages are a theme these days, but you aren’t seeing the growth in wages you would expect. I wonder if part of the issue is application tracking systems, which seize on keywords and therefore have to be gamed somewhat. How many applicants are unaware of this or are simply bad at it? And if so, how many qualified workers are being screened out and never get presented before a set of eyes? I suspect ATS are good for companies in bad times, when there are a surfeit of applicants, but work against them when the labor pool is tighter.

An interesting editorial in the Wall Street Journal today about the credit box and the possibility of another housing bubble. The authors point to the way home prices have outstripped income growth and posits that a widening credit box (i.e. new 3% down loans from Freddie) are contributing. The authors suggest that underwriters tighten standards, and the government tighten loan parameters to prevent another foreclosure crisis when the market turns.

With regard to home price appreciation, is it due to widening credit standards, or is it due to restricted supply? In other words, is it a housing start problem or a MCAI (mortgage credit availability index) problem? The chart below is of the MBA’s Mortgage Credit Availability Index, which shows a loosening of standards since the bottom, but also demonstrates we are nowhere near the standards that existed during the bubble (and pre-bubble days).

MCAI long term

FHA and the GSEs are stepping in on low downpayment loans because there is a complete and utter void in the private market. Prior to the crisis, FHA was a sleepy backwater of the mortgage market, targeted toward low income first time homebuyers. Afterward, its share grew because it was the only game in town. Let’s not conflate FHA mortgages with neg-am pick a pay loans of the bubble years. IMO the issue is a lack of supply (heck the appreciation is the highest in places like San Francisco, where the median price is double the limit on a FHA loan). Housing starts around 2 million for the next several years is what will be needed to cool off home price appreciation (along with the REO-to-rental types ringing the register on their portfolios).

Author: Brent Nyitray

Why do you need new bands? Everyone knows rock attained perfection in 1974. It's a scientific fact. - Homer Simpson

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