Brent Nyitray

Morning Report: Refinance index falls to an 18 year low

Vital Statistics:

	Last	Change
S&P futures	2857	-2.75
Eurostoxx index	389.8	-0.69
Oil (WTI)	68.41	-0.76
10 Year Government Bond Yield		2.99%
30 Year fixed rate mortgage		4.58%

Stocks are flattish this morning on no real news. Bonds and MBS are down.

Mortgage applications fell 3% last week as purchases fell 2% and refis fell 5%. Activity overall has fallen to a 19 month low. The refi index has is at an 18 year low.

Mortgage credit availability increased in July, although it tightened for government loans. The MBA’s MCAI increased 1.7%, which is a post-crisis high, but nowhere near what it was during the bubble years. “Credit availability continued to expand, driven by an increase in conventional credit supply. More than half of the programs added were for jumbo loans, pushing the jumbo index to its fourth straight increase, and to its highest level since we started collecting these data. There was also continued growth in the conforming non-jumbo space, which reached its highest level since October 2013,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. Note that some observers think the MCAI understates how loose credit is, when you look at things like LTV and credit scores.

Separately, US banks eased lending standards for business loans. The report noted increased demand for business loans, and decreased demand for commercial real estate loans. As mortgage lending dries up, banks are competing more for small business loans, although increased liquidity in the secondary market for these loans also helped.

Elon Musk proposed the largest LolBO ever on Twitter yesterday, saying he was thinking of taking Tesla private at $420 a share. He claims he has funding secured, which is quite the statement. Even in this market, raising $71 billion isn’t the easiest thing in the world, especially for a negative cashflow company trading with an EV / EBITDA in the 150s. Perhaps the price should have tipped people off that this was a joke, but apparently it isn’t.

The NAHB conducted a survey of potential homebuyers, and only 14% are planning to buy a home in the next year. That number was 24% in the fourth quarter of 2017. Of those planning to buy a home, 61% are first time buyers, of which 71% are Millennials. Most are noting that the number of homes for sale with the desired features and price point are smaller than they were 3 months ago.

Morning Report: Home Prices increase 6.8%

Vital Statistics:

	Last	Change
S&P futures	2856	6
Eurostoxx index	391.01	2.35
Oil (WTI)	69.62	0.61
10 Year Government Bond Yield		2.96%
30 Year fixed rate mortgage		4.58%

Stocks are higher this morning on no real news. Bonds and MBS are flat.

There were 6.7 million open jobs in June, according to BLS. The all-important quits rate was unchanged at 2.3%. The quits rate is a leading indicator for wage growth and is a stat the Fed follows closely. The quits rate was highest in the South and Midwest, and lowest in the Northeast. If you look at industry groups, one group stands out with a quits rate that is going nowhere. Financial Services.

Home Prices rose 0.7% MOM in June, according to CoreLogic. They are up 6.8% YOY and forecast to rise another 5% over the coming year. Rising mortgage rates and home prices are affecting sales in the high cost markets. They also surveyed renters and found that affordability is the biggest reason why they aren’t interested in buying a home. For older renters, affordability isn’t the biggest issue – probably convenience is – although a jump in bankruptcy filings in the senior citizen demo is on the rise. We are seeing large pockets of overvaluation on the coasts, but the interior of the country is undervalued.

Freddie Mac is trying a new program to enhance rental affordability: providing low-interest loans to developers who promise to cap rental inflation. This is certainly a less intrusive way to deal with the affordable housing problem. The West Coast is finding that affordable housing mandates are pushing developers to scrap projects entirely and local governments are being pushed to override zoning restrictions. Freddie’s program is a way to incentivize the private sector into doing something: “Maybe there’s a way we can help change incentives,” said David Brickman, an executive vice president at Freddie Mac and head of its multifamily division. “We can provide an economic basis for private, profit-oriented developers to pursue a strategy where they didn’t raise rents by quite as much. You’re taking some of the opportunity to hit a home run off the table but arguably making it more likely you can hit a single or a double.”

Washington is hoping to address the affordable housing crisis by allowing tax credits for low-income renters who spend more than 30% of their income on rent. Cory Booker’s plan also looks to ease some of the regulatory burden in building new housing as well as introduce a new savings plan for renters.

What is it with tech companies who have a competitive edge wanting to diversify into hyper-competitive low-margin businesses? The latest is Zillow, which has decided it is time to get into the mortgage business. Wall Street panned the move, sending the stock down 20%. Part of the decline was due to lousy earnings, but still….

Morning Report: Tough times in mortgage banking

Vital Statistics:

	Last	Change
S&P futures	2840	0.75
Eurostoxx index	388.33	-0.84
Oil (WTI)	69.29	0.8
10 Year Government Bond Yield		2.95%
30 Year fixed rate mortgage		4.58%

Stocks are flat this morning on no real news. Bonds and MBS are flat as well.

The week after the jobs report is invariably data-light and this week is no exception. We will get inflation data on Thursday and Friday and JOLTS data tomorrow and that is about it.

Everyone knows that 2018 has been an awful year for mortgage banking. How bad is it? Check out the graph below courtesy of Garrett Macauley:

The one thing that jumped out at me (aside from the -8 basis points this year) is how little the industry made during the bubble years. Is it as simple as saying the mortgage business lives and dies on the refinance business and even in great purchase markets (like 04-06) mortgage banking is a marginal activity at best?

If you are tired of hearing predictions of an inverted yield curve, check this out. Jamie Dimon thinks the 10 year bond yield should be 4% right now, and is saying that 5% is a possibility. “I think rates should be 4 percent today,” Dimon said from the gala, according to Bloomberg News. “You better be prepared to deal with rates 5 percent or higher – it’s a higher probability than most people think.” While it is impossible to rule that forecast out, take a look at the chart below: Interest rate cycles are long and during periods of low inflation they just don’t move around all that dramatically. It took rates 20 years (1946 – 1966) to go from 2% to 5%. What was inflation in 1966? 5%. With the core CPI sitting at 2%, a 5 handle on inflation seems pretty unlikely. Not saying it is impossible – lots of differences between the mid 20th century and today – but….

Chinese buying has been supporting prices in some big West Coast markets, and it is drying up. While trade war concerns are probably playing a role, we are seeing declines in other global real estate markets, like London and Vancouver. This is a signal that the issue is probably internal to China, which has a real estate bubble of its own. The government has issued regulations limiting the purchase of foreign property, and seems worried about the currency. If the Chinese real estate bubble bursts, expect to see more selling in West Coast markets because that will be the only way for Chinese investors to raise cash.

Morning Report: Decent jobs report

Vital Statistics:

	Last	Change
S&P futures	2829.25	1.5
Eurostoxx index	386.66	-3.19
Oil (WTI)	37.32	-0.34
10 Year Government Bond Yield		2.97%
30 Year fixed rate mortgage		4.57%

Stocks are higher this morning on fears of an escalation in the trade war. Bonds and MBS are up small as markets continue to digest moves from the Bank of England and the Fed.

The Fed maintained current policy and didn’t reveal anything new in the statement. Bonds yawned at the decision. Trade was not mentioned in the statement. The Fed Fund futures are now sitting at a 94% chance of a Sep hike and a 70% chance of a Sep and Dec hike.

The jobs report was decent – payrolls disappointed but the revisions in May and June more than made up for it. Jobs report data dump:

Payrolls up 157,000 (Street was looking for 190,000)
Prior two month revision + 57,000
Labor force participation rate 62.9%
Unemployment rate 3.9%
Average hourly earnings up .3% MOM / 2.7% YOY (in line with expectations)

The employment population ratio ticked up to 60.4%. While this number has been steadily rising, the labor force participation ratio remains stuck just below the 70% level.

Initial Jobless Claims were flat last week at 218,000, while announced job cuts fell to 27,122.

Wells will pay a $2 billion penalty for misrepresentations on loans made during the bubble years. This is after they paid a $1 billion penalty for auto loan issues.

The Atlanta’s Fed’s GDP tracker is now looking for 5% growth in Q3. This model tends to give volatile results early in the quarter, but that is a pretty amazing number. Seems like every business in the US is firing on all cylinders except for mortgage banking.

The Trump Administration is looking into the idea of indexing capital gains to inflation. This idea has been around for decades, and it is based on the idea that asset prices will rise over time, some of which is due to simple inflation. If prices overall rise 5%, and your house value increases 5% as well, are you really better off? You probably aren’t, and yet you are paying taxes as if you are. It gets brutal in places like California, where if you move, the equity you built just gets rolled into buying an even more expensive home than the one you left. The tax bill makes that a difficult trade. The Admin is looking to see if they can make the change directly in the tax code, bypassing Congress. So far, it seems like the idea has little traction in Congress. Democrats will be uniformly opposed and Republicans don’t seem all that anxious to get whacked in the press for something that nobody seems to be asking for in the first place.

Speaking of politics, we are in opposite world, where the Koch brothers are cozying up with Democrats and Richard Trumka of the AFL-CIO is supporting Trump’s trade war. What does this mean? It means some investors are moving to cash ahead of midterm elections.

Morning Report: Strong ADP number

Vital Statistics:

	Last	Change
S&P futures	2818	1.75
Eurostoxx index	389.71	-1.9
Oil (WTI)	67.7	-1.06
10 Year Government Bond Yield		2.99%
30 Year fixed rate mortgage		4.62%

Stocks are higher this morning after good earnings from Apple. Bonds and MBS are down.

Japanese government bonds got shellacked overnight, with yields rising 8 basis points, which is causing reverberations throughout global bond markets. 8 basis points is a lot in one day regardless, but when rates were only 5 bps to begin with, it is quite the move.

Donald Trump threatened more tariffs with China. We seem to be going back and forth between detente and escalation.

The FOMC announcement is scheduled to be released at 2:00 pm EST. No changes in rates are expected, however the action will be in the statement and the interpretations for a December hike. While Trump’s criticism of the Fed’s rate hikes was unfortunate, things have been testier between the Central Bank and the Executive branch in the past. LBJ shoved William (take away the punch bowl just as the party is getting going) McChesney up against the wall in the Oval Office.

Mortgage Applications fell 2.6% last week as purchases fell 3% and refis fell 2%. We saw a 7 basis point increase in conforming rates to 4.84%. The government share of mortgages increased.

The private sector added 219,000 jobs in July, according to the latest ADP report. The Street is looking for 190,000 in Friday’s report, but as always, the bond market will be looking more at average hourly earnings than the headline payroll number. Construction added 17,000 jobs, while business services added 47,000 and healthcare added 49,000.

Manufacturing decelerated slightly in July, but continued to its torrid pace. As expected, much of the talk is about steel tariffs and when those costs will get passed on to consumers. Labor is becoming a bottleneck as well – it is causing capacity constraints.

Construction spending fell 1.1% in June (which missed estimates) and is up 6.5% on a YOY basis. Resi construction was down on a MOM basis, but increased 8.7% on an annual basis.

Morning Report: Personal incomes and spending rise

Vital Statistics:

	Last	Change
S&P futures	2811	7.75
Eurostoxx index	391.64	0.72
Oil (WTI)	69.72	-0.41
10 Year Government Bond Yield		2.95%
30 Year fixed rate mortgage		4.62%

Stocks are higher as earnings continue to come in. Bonds and MBS are up on news that the Bank of Japan will continue to hold down rates.

Personal spending and personal income rose 0.4% in June, according to BEA. Inflation remains under control with the PCE price index up 2.2% YOY and the core rate up 1.9%. The income and spending numbers were in line with expectations, and the inflation numbers were a touch below. Good news for the bond market as we start the FOMC meeting. Separately, another strong number out of the Chicago PMI.

The employment cost index rose 2.9% in the second quarter with wages and salaries increasing 2.9%. Benefit costs increased 2.9%.

Punch line: wages and salaries up 2.9%, inflation up 2.2% – we are seeing real wage growth despite all the stories in the press that wages are stagnant.

Home prices rose 6.4% in May according to the Case-Shiller home price index. San Francisco, Seattle and Las Vegas all reported double-digit gains. All MSAs are beginning to correlate a little tighter, with the spread between fastest and smallest falling to 10 percentage points, which is much smaller than the 25 ppts we saw during the bust years and the 20 ppt average since 2001. My guess is that this is a function of the improving job market in the Midwest and working through the last of the foreclosure inventory in the Northeast.

Mission creep out of the GSEs? Some Republican congressmen are calling foul as Fannie and Fred started a pilot program where they buy low downpayment loans and pair them with MI from Arch. Many in Congress would like to see Fannie and Freddie reduce their footprint in the mortgage market, not increase it. The FHFA has justified this move as necessary to perform their affordable housing mission. This will be a constant partisan battle, between Republicans who are alarmed by the fact that the US taxpayer bears the majority of the credit risk in the US mortgage markets and Democrats who are alarmed by the lack of affordable housing.

Young people are shunning construction jobs. The share of younger (under 24) workers in the construction industry has fallen 30% since the bubble days. The number of workers in the industry has fallen as well – from 11.7 million in 2006 to 10.2 million 10 years later. The typical construction job stays open for 39 days nationally, and many builders are hiring ex-cons to meet demand. The obvious answer would be for builders to raise pay to attract people, but what do you do if you are in the starter home business? Between higher wages and regulatory costs, your starter home might be unaffordable to people with the starter income. Note the industry has promised to train 50,000 workers over the next 5 years, but this is a drop in the bucket.

Morning Report: Homeownership rate ticks up

Vital Statistics:

	Last	Change
S&P futures	2817.75	0
Eurostoxx index	391.62	-0.46
Oil (WTI)	69.98	1.29
10 Year Government Bond Yield		2.98%
30 Year fixed rate mortgage		4.58%

Stocks are flat this morning on no real news. Bonds and MBS are down.

Global bonds are under pressure this morning on fears that the Bank of Japan may make some changes to its monetary policy. While these sorts of things don’t impact the US directly, global sovereign bonds tend to trade as a group and US yields will be influenced by them.

We have a lot of important numbers this week, with personal incomes / personal spending on Tuesday and the jobs report on Friday. We also have the FOMC meeting on Tuesday and Wednesday. No changes in policy are expected, however the language of the statement will be in focus as always.

Earnings season continues, with announcements from Freddie Mac, Annaly, Pennymac, and MFA.

FHFA Director Mel Watt was accused of sexual harassment. His term expires at the end of the year, but he will probably be shown the door regardless.

The homeownership rate increased to 64.4% from 64.3% in the second quarter, according to the Census Bureau. This is a 4 year high. Interesting, the geographic dispersion is quite large, ranging from 59.7% in the West to 68.3% in the Midwest. Affordability matters, but that is a big divergence. We also saw a marked increase in younger homeowners, with the under-35 age cohort increasing from 35.3% to 36.5%. Rental vacancy rates fell from 7% to 6.8% while homeowner vacancy rates were flat at 1.5%. The overall homeownership rate is below the long term average, however the increase that started in 1994 and ended with the top of the housing bubble was probably artificial.

Pending home sales rose 0.9% in June, according to NAR. While this is a nice uptick from May, contract signings are still down 2.5% on a YOY basis. It looks like we are seeing an uptick in inventory in some of the MSAs with the biggest inventory issues: Seattle, San Jose, and Portland. With the lion’s share of 2018 in the books already, NAR is projecting a decline in existing home sales for 2018 of 1% and an increase in the median home price of 5%.

Morning Report: Blowout GDP number

Vital Statistics:

	Last	Change
S&P futures	2842	2
Eurostoxx index	391.88	1.35
Oil (WTI)	69.55	-0.1
10 Year Government Bond Yield		2.95%
30 Year fixed rate mortgage		4.62%

Stocks are up this morning after blowout earnings from Amazon and a strong GDP report. Bonds and MBS are up.

Second quarter GDP came in at 4.1%, a big jump from the first quarter, and the highest print in 4 years. Q1 was revised upward to 2.2% from 2.0%. The inflation numbers were good as well. Q2 inflation came in at 1.8% which was a decrease from the 2.5% pace in Q1. Ex-food and energy, prices increased 2%. Consumption increased 4%, while investment increased 2.1%. Capital Expenditures increased strongly, while residential construction fell. Inventories fell, which dismisses the talking point that Q2 was artificially boosted by inventory build ahead of a trade war.

Note that international trade was a big boost to GDP numbers. While economists talk about trade wars negatively affecting growth, remember that GDP includes the net trade balance. So if imports fall in response to tariffs, that will actually increase GDP. Does that mean you can goose growth via trade spats? No, but trade wars that reduce the trade deficit will bump up the GDP numbers, which is largely an accounting question.

In the wake of the GDP report, the Fed funds futures are predicting a 90% chance of a Sep hike and a 68% chance of a Sep and Dec hike.

Freddie Mac reported that delinquencies fell in June and they are back to pre-hurricane levels.

Foreign demand for US residential property fell in 21% Q1, according to NAR. Foreign buyers accounted for 8% of existing home sales, a drop from 10% in the previous period. While a drop in foreign buying will help alleviate the supply / demand imbalance in the US resi market, new construction is really needed to square the circle, and judging by the GDP numbers, that still isn’t happening.

Morning Report: Durable Goods Orders increase

Vital Statistics;

	Last	Change
S&P futures	2836.5	-4.75
Eurostoxx index	388.69	1.55
Oil (WTI)	69.2	-0.1
10 Year Government Bond Yield		2.96%
30 Year fixed rate mortgage		4.62%

Stocks are lower after fAANG leader Facebook reported a slowdown in revenues. The stock is under severe pressure this morning, having traded down 24% last night. Bonds and MBS are flat.

As expected, the ECB kept rates unchanged and reiterated their plan to end QE this year. German Bunds are down in Europe, which is pulling US rates higher as well.

Durable goods orders rose 1%, which was lower than expected. Capital Goods orders rose 0.6%, which is better than expected. May numbers were revised upward as well. Capital Goods Orders are a proxy for business capital expenditures and it looks like we are breaching the $68 billion level where we have historically stalled out.

Initial Jobless Claims rose from a 48 year low to 217,000.

The US and the EU have come to an agreement on trade, where the Europeans will import more soybeans and LNG in exchange for an easing in auto tariffs. Euro automakers are up big this morning. They still have to come to an agreement on steel and aluminum tariffs however. Still it is good news for the markets and takes some of the pressure off.

PulteGroup reported strong earnings that beat consensus estimates. Revenues increased 25% and we saw margin expansion. New orders were only up 3%, however. Despite their strong growth, Pulte sold some land and bought back a lot of stock. Given the deceleration in new orders, it raises the question if they are sensing that the market is slowing down a little. With affordable land hard to come by, selling inventory and buying back stock in lieu of investing more in the business is a cautionary sign.

Maxine Waters (who will lead the House Financial Services Committee if Democrats take the House) said that reforming the GSEs will be a priority Both liberals and conservatives would like to see the government less involved in residential real estate finance, and there is broad agreement on the model they would like to see. The problem is that there doesn’t appear to be the demand from private capital to pick up the slack, at least not yet. The private label securitization market is still a shadow of its former self and there are many governance issues that need to be solved before we see the buy side increase their appetite.

The FHFA announced that it will not make a decision about updating the credit scoring model and instead will continue to come up with new rules. Consumer advocates have complained that FICO scores are preventing some credit-worthy borrowers from accessing mortgages. Separately, Jeb Hensarling sounded like he is being considered to replace Mel Watt.

New rules intended to prevent the serial refinancing of VA IRRRLs are creating problems for some VA loans that were originated prior to the law change. These loans are not eligible for Ginnie Mae multi-issuer pools, which effectively “orphans” them. As a result, these loans are going to be illiquid and will probably trade at scratch and dent levels, exposing some originators to big losses.

Morning Report: New Home Sales fall

Vital Statistics:

	Last	Change
S&P futures	2816	-4
Eurostoxx index	387.12	-1.06
Oil (WTI)	68.52	0
10 Year Government Bond Yield		2.94%
30 Year fixed rate mortgage		4.61%

Stocks are lower this morning after lousy earnings out of the automakers. Bonds and MBS are flat.

Donald Trump tweeted contradictory statements about trade yesterday, both extolling the virtues of tariffs and also telling Europe that he is ready to end all tariffs if they are. He is also planning to use taxpayer money to help offset the negative effects of Chinese retaliatory tariffs on American farmers. This is New Deal type stuff and I have to imagine that Congress is contemplating legislation to take control of tariffs back from the Executive Branch. When tariffs were going down overall worldwide, it may have made sense to allow the President to lower them without involving the legislative branch, but the unintended consequence was that it allows the President to conduct a trade war unilaterally.

New Home Sales fell 5% on a MOM basis, but were up 2% on a YOY basis to a seasonally-adjusted annual level of 631,000. The Street was looking for something around 680,000. New Home Sales is a notoriously volatile estimate so that number could be revised upward next month. For sale inventory came in at 301,000 which represents a 5.7 month supply.

Mortgage Applications fell 0.2% last week as purchases fell 1% and refis rose 1%.

Flagstar reported earnings yesterday. EPS and revenues rose, however there are some acquisition-related effects happening (not Stearns though). Mortgage origination volume fell by 1.5% and gain on sale fell by 6 basis points. Flagstar appears to be taking share, at least judging by those numbers. Most other banks are reporting sizeable volume drops.

With home prices back above peak bubble levels, the question of affordability invariably comes up. CoreLogic crunched the numbers and it turns out that if you adjust for inflation, the median mortgage payment (P&I) on the median house is much lower than the peak years. This is being driven by the drop in rates. Of the top 10 MSAs, only San Francisco and Denver were higher than the peak. Compared to pre-bubble years (2002), they are higher.

Redfin notes that some of the least affordable MSAs are starting to see an increase in inventory. Homes for sale rose 35% in Portland, 12% in San Jose, and 24% in Seattle. Whether that inventory buildup remains enough to slow the double-digit home price appreciation in those markets remains to be seen. We are heading into the seasonally slow period, and as a general rule home prices decline in Fall and Winter. Overall, home prices rose 5.7% which is the smallest increase since late 2016. Inventory levels still declined on a YOY basis.

Chinese investors were net sellers of US commercial property in the second quarter for the first time in a decade. Pressure from Beijing is the catalyst, although China has a real estate bubble of their own to deal with. Chinese money was also behind some of the activity in the big West Coast MSAs, and it will be interesting to see if that dumps some supply on the market to balance it out.