Category: Uncategorized

Morning Report: 10 year pushing towards 3%

Vital Statistics:

Last Change
S&P futures 2675 3.9
Eurostoxx index 381.41 0
Oil (WTI) 67.33 -1.07
10 Year Government Bond Yield 2.97%
30 Year fixed rate mortgage 4.51%

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

US Treasury Secretary Steve Mnuchin signaled that the US is ready to discuss a truce in the trade war with China. He characterized his mood as “cautiously optimistic” and said he won’t make a commitment on timing. Beijing welcomed the announcement. Separately, Mnuchin also discussed easing sanctions on Rusal which sent aluminum prices back down.

Existing home sales rose on a month-over-month basis in March, but are down on an annual basis according to NAR. Lawrence Yun, NAR chief economist, says closings in March eked forward despite challenging market conditions in most of the country. “Robust gains last month in the Northeast and Midwest – a reversal from the weather-impacted declines seen in February – helped overall sales activity rise to its strongest pace since last November at 5.72 million,” said Yun. “The unwelcoming news is that while the healthy economy is generating sustained interest in buying a home this spring, sales are lagging year ago levels because supply is woefully low and home prices keep climbing above what some would-be buyers can afford.”

The median home price was $250,400, up 5.8% YOY. Inventory is down over 7% YOY to 1.67 million units, which represents a 3.6 month supply at current sales levels. A historically balanced market would be 6.5 month’s worth. Properties stayed on market for an average of 30 days, which is down almost a week YOY. The first time homebuyer accounted for 30% of sales, and all-cash sales were 20% of transactions.

Commodity price inflation has pushed the 10 year yield to 3%. Many technical analysts consider that to be confirmation that the 3 decade bull run in bonds is over. The one caveat is that the sell-off is being driven by rising commodity prices which tends to be temporary, especially if it doesn’t translate into wage growth. You can see the pop in yields post-election below. Hard to believe we were sub 1.8% in late October 2016.

This week will have some important data to the bond market, with GDP and the employment cost index on Friday. We will also get a slew of housing data with existing home sales, new home sales, and Case-Shiller.

The Street estimate for Q1 GDP is 2%. Generally speaking, the estimates from the banks are lower than the estimates from the regional Federal Reserve banks.

Economic activity moderated in March, according to the Chicago Fed National Activity Index. Production and employment indicators fell. February’s reading was unusually strong, however. The CFNAI is a meta-index of 85 different economic indices, and can be volatile. It isn’t a market-mover.

A paper suggests that the ratings agencies largely got it right with the bubble-era RMBS. The AAA tranches (even subprime) were largely money good, and the study pours cold water on the popular narrative that inflated ratings on RMBS caused the financial crisis.

The big banks are rushing to launch websites and apps for mortgages as volume contracts. Bank of America, Wells Fargo, and JP Morgan have either launched or plan to launch mortgage banking tech products in response to Rocket Mortgage from Quicken. The company claims that 98% of its customers in the first quarter (some $20 billion in origination) accessed Rocket at some point in the application process. That is an astounding number, though I wonder if that includes push notifications that the borrower didn’t necessarily respond to or interact with.

Speaking of tech, HUD is looking into allegations of housing discrimination by Facebook. Facebook uses big data to allow advertisers to slice and dice the demographics any way they want to target their specific market. What if advertisers decide to target some demographics and not others? That is considered non-problematic for things like consumer products, but housing could be a different story.

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Morning Report: Wells Fargo gets a $1 billion fine

Vital Statistics:

Last Change
S&P futures 2691.25 -1.75
Eurostoxx index 381.41 -0.54
Oil (WTI) 67.9 -0.39
10 Year Government Bond Yield 2.92%
30 Year fixed rate mortgage 4.45%

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

The Index of Leading Economic Indicators took a step back in March, following unusually strong readings in January and February. Employment-related indicators drove the decline, however weather could have played a part. “The LEI points to robust economic growth throughout 2018,” said Ataman Ozyildirim, director of business cycles and growth research at the Conference Board. “While the Federal Reserve is on track to continue raising its benchmark rate for the rest of the year, the recent weakness in residential construction and stock prices—important leading indicators—should be monitored closely.”

Regulators are close to fining Wells Fargo $1 billion. This stems from force-placed auto insurance and improperly charged lock extensions. An internal review found that up to 20,000 customers had their cars repossessed due to these improper insurance charges.

Donald Trump tweeted about how OPEC’s manipulation of oil prices will not be tolerated. “Looks like OPEC is at it again,” Trump said on Twitter. “Oil prices are artificially Very High! No good and will not be accepted!” OPEC fired back, claiming that oil prices reflect geopolitics and not manipulation.

Maxine Waters introduced legislation to increase scrutiny of FHA servicers. The bill aims to improve compliance with loss mitigation actions to prevent foreclosures. It will also establish a process for borrowers to register complaints and make appeals if they believe they are being treated unfairly. I am not sure what chance this has of actually becoming law, but government MSRs already trade far back of Fannie MSRs, and I can’t imagine this helps things.

Here is a new metric for measuring affordability: payment power. It basically is a metric that looks at MSAs on a granular level. it measures incomes versus available inventory and calculates how many people can afford the PITI payments for the typical home for sale. It takes into account changes in incomes (say due to an employer entering or leaving), interest rates and property taxes. Unsurprisingly, the Midwest has the best payment power levels, while the West Coast has the least.

Nice fixer-upper just went for $1.23 million in the Bay Area.

Morning Report: Don’t fret the flattening yield curve

Vital Statistics:

Last Change
S&P futures 2701.75 -8
Eurostoxx index 381.94 0.11
Oil (WTI) 69.26 0.79
10 Year Government Bond Yield 2.90%
30 Year fixed rate mortgage 4.44%

Stocks are lower as commodities surge. Bonds and MBS are down.

The US imposed sanctions on Russia’s Rusal, which has sent aluminum prices up 30% and nickel to 3 year highs. This has the potential to spill through to finished products and bump up inflation. As a general rule, commodity push inflation generally isn’t persistent. An old saw in the commodity markets: the cure for high prices is… high prices.

Initial Jobless Claims ticked up to 232,000 last week, still well below historical numbers.

Investors are starting to worry about the inverted yield curve. An inverted yield curve (where short term rates are higher than long term rates) has historically signaled a recession. The spread between the 10 year and the 2 year is around 41 basis points, which is a 10 year low. Is that what the yield curve is telling us now? I would answer this way: the yield curve is so manipulated by central banks at the moment, that the information it is putting out should be taken with a boulder of salt. We are in uncharted territory, where long term rates are no longer set purely by market forces.

Also, take a look at the chart below, where I plotted the last 4 tightening cycles. In the last 2 cycles, the yield curve inverted, by a lot. In late 2000, the yield curve inverted by 100 basis points – that would be like the Fed taking the FF rate up to 4% while the 10 year hovers around here – at 3%. I would note that the mid 90s tightening cycle didn’t cause a recession, and the late 90s and mid 00s tightening cycles didn’t result in recessions immediately – it took years before the economy entered into a recession.

The question is whether the Fed caused these recessions. It is possible, and the Fed was probably the catalyst to burst the late 90s stock market bubble and the mid 00s real estate bubbles. But these were going to burst anyway. It doesn’t really matter what the catalyst is. This time around, we don’t really have a similar bubble – we may have pockets of overvaluation, but we don’t have bubbles that the typical American is invested heavily in. Not like stock or houses. I think the Fed is happy to gradually get off the zero bound and once we are at 3% on the Fed funds rate will be content to stop. I could see the 10 year going absolutely nowhere during that time.

tightening cycles

My take is this: take the shape of the yield curve as a very weak and distorted economic signal – the labor data will tell you what is really going on, and the labor data is signalling expansion, not recession.

Don’t forget that bond rates are set in a global market, and relative value trading between sovereign bonds will play a role. The US 2 year is at a multi-decade premium to the German 2 year, and in theory, that should mean that investors sell Bunds to buy Treasuries. The reason why that isn’t happening? The US dollar, which isn’t buying the Administration’s rhetoric.

Facebook wants to get into the semiconductor business. Really. First Zillow wants to get into the house flipping business and now this. I don’t understand why companies with great business models want to dilute them. Both companies have a competitive moat with a largely recession-proof business model. The semiconductor business is one of the most cutthroat, lousy businesses this side of refineries and airlines. Take a look at QCOM today.

The NAHB remodeling index dipped in March, driven by bad weather in the Northeast and the Midwest. With home affordability slipping due to higher interest rates and home prices, remodeling remains a good substitute for moving up.

Morning Report: Controversial CA housing bill dies in committee

Vital Statistics:

Last Change
S&P futures 2716.75 10
Eurostoxx index 380.83 0.06
Oil (WTI) 67.63 1.11
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.44%

Stocks are higher this morning as earnings from the financials continue to pile in. Bonds and MBS are flat.

Mortgage Applications increased 5% last week as purchases rose 6% and refis rose 4%. The refi share was 37.8%, the lowest in a decade. Purchase activity was up on a YOY basis however. Mortgage rates were generally flat as international tensions and the FOMC minutes dominated the news.

2017 was a tough year for the mortgage industry, as profits per loan were more or less cut in half, from $1,346 to $711. Revenues per loan were up, as higher loan balances driven by home price appreciation were offset by lower margins due to competitive pressures. Volumes were down 20% overall, and down 9% on a comparable basis. While revenues per loan increased, costs were up more, and productivity fell.

The IRS’s computer system crashed yesterday due to all the last minute e-filers. If you were unable to file yesterday, you are in luck – the IRS gave you an extra day to get it in without penalty.

Most consumers don’t rate shop when getting a mortgage. This is a surprise since the savings is actually pretty big: between $1,000 and $2,000 over the life of the loan when getting a single competing quote. It increases to $2,000 – $4,000 when the borrower gets 5 competing quotes. Why more don’t do that is a mystery.

An unprecedented bill (SB 827) allowing the state to overturn local zoning ordinances died in committee yesterday. California has an acute housing shortage, and affordable housing advocates had been pushing hard for a bill that would force cities to accept dense multi-family housing complexes within a half mile of rail stops. The bill’s early demise was a blow to affordable housing advocates and environmentalists, who want to reduce the need for driving.

The IMF is warning that years of 0% nominal interest rates have created risks in the financial system, with valuations of risky assets stretched and some late-stage credit cycle behavior. The subprime auto sector in the US is one case in point, and we have multiple residential real estate bubbles globally, especially in China and Canada. That said, the banking system is much more safe and capitalized now than it was 10 years ago. They warn that investors aren’t positioned for a sharp increase in inflation and interest rates over the next several years. Which is probably the right bet – if the Chinese credit and real estate bubble implodes, it will be deflationary, not inflationary.

A very NYC scene..

Morning Report: Housing starts still below demand

Vital Statistics:

Last Change
S&P futures 2698 16.25
Eurostoxx index 379.67 1.95
Oil (WTI) 66.26 0.05
10 Year Government Bond Yield 2.83%
30 Year fixed rate mortgage 4.44%

Stocks are higher this morning as China relaxes ownership restrictions on domestic manufacturers. Bonds and MBS are flat.

We have a lot of Fed-speak today, especially in the morning. Separately, Trump announced two Fed nominees: Richard Clarida of Columbia, to be the Vice Chairman of the Fed and Michelle Bowman, previously a bank executive from Kansas. For all of his criticism of the Fed while on the campaign trail, Trump has nominated pretty much middle-of-the-fairway people to the Board.

Housing starts came in at 1.32 million, better than expectations but still well below what is needed to meet demand. Building Permits came in at 1.35 million. Single family starts fell, while multi rose. Most of the increase was in the Midwest.

Industrial Production rose 0.5% last month, while manufacturing production rose 0.1%. Capacity Utilization increased to 78%. So far we aren’t seeing any tariff effects in the numbers.

Bank of America announced earnings yesterday, and lumped mortgage banking income into the miscellaneous “all other income” category. What an ignominious end to Countrywide. Bank earnings season continues.

Independent mortgage bankers saw profit per loan get cut in half last year as refis dried up and the business got more competitive. Refis fell from 36% of all origination volume to 25%.

Zillow crunched the numbers and looked at the typical homebuyer in 2017. The typical buyer is 40 years old, making 87k. Millennials make up 42% of the cohort. They typically spend about 4.3 months finding a home. Interestingly, despite the size of the investment, most homebuyers only contacted 1 lender. Here is what is important to homebuyers when thinking about a lender:

lender characteristics

The median home was sold in 81 days, and that includes the closing process. This means the typical home was on the market for only 1 month. This is 8 days faster than 2016.

The National Low Income Housing Coalition has a new report showing how acute the housing shortage is at the low end. Only 35 affordable and available rental homes exist for every 100 extremely low income renter households. Rising home prices and mortgage rates are reducing affordability, however interest rates are still extremely low historically. In the early 80s, a the first year’s mortgage payment consisted of 99% interest, 1% principal.

The IMF forecasts that global growth will hit 3.9% this year, the fastest since 2011, driven by emerging Europe, and the US.

Morning Report: Zillow gets slammed after changing its business model

Vital Statistics:

Last Change
S&P futures 2672 14
Eurostoxx index 378.3 -0.91
Oil (WTI) 66.56 -0.84
10 Year Government Bond Yield 2.87%
30 Year fixed rate mortgage 4.44%

Stocks are higher despite coordinated strike in Syria over the weekend. Bonds and MBS are down.

Watch the oil markets. North Sea Brent crude is rising on tensions in the Middle East, but West Texas Intermediate (which is the main oil used in the US) is shrugging off the news. Bullish bets on Brent oil have hit record highs.

The 2 year hit 2.4%, the highest level since 2008. The flattening of the US yield curve continues.

There isn’t much in the way of market-moving data this week, although we will get a lot of Fed-speak. Probably the biggest one will be housing starts tomorrow.

Retail sales rose 0.6% in March, which was better than the Street 0.4% consensus. The control group increased by 0.4%, a touch below the 0.5% consensus estimate. Gasoline sales were up on higher prices. Revisions were lower, however.

Business activity in New York State decelerated last month according to the Empire State Manufacturing Survey. New Orders and Production slowed down somewhat, but employment remained firm and the workweek increased. Future sentiment declined to the lowest level in 2 years.

The NAHB / Wells Fargo Housing Market Index slipped last month, but builder sentiment remains strong.

Wells Fargo faces $1 billion in fines due to force-placed auto insurance and improper charges for lock extensions. The big banks have all reported strong earnings, and the tax law changes are certainly helping.

Zillow shares fell 9% on news they plan to get into the house flipping business. “We’re entering that market and think we have huge advantages because we have access to the huge audience of sellers and buyers,” Zillow CEO Spencer Rascoff said on CNBC’s “Squawk Alley.” “After testing for a year in a marketplace model, we’re ready to be an investor in our own marketplace.” Investors are understandably skeptical, as the multiple for a fintech company is much higher than one for a property company, and it puts Zillow in direct competition with the realtors who utilize the site. Investors are not wild about changing focus from an ad model with high margins and low balance sheet usage to one that is low margin and uses a lot of balance sheet. Another issue: will people trust Z-scores if the company has a financial interest in the value of real estate in a particular area?

Want to know how acute the housing shortage is in California? From 2000 – 2015, the state built 3.4 million too few homes to keep up with job, population, and income growth. That is over 2 year’s worth of current housing starts for the whole US population. Pretty astounding when you consider those years start before the housing bubble really got going. CA has always had NIMBY issues, and now there is a push to allow dense multi-family building near public transit, even if local zoning codes prohibit it. Separately, it looks like Dodd-Frank regulations did have an adverse affect on smaller banks. I wonder how much that plays into the housing shortage.

Speaking of CA housing, here is what you can get for $800,000 in San Jose. Handyman special.