Morning Report: New home purchase applications surge

Vital Statistics:

 

Last Change
S&P futures 3396 -11.25
Oil (WTI) 51.06 -0.95
10 year government bond yield 1.55%
30 year fixed rate mortgage 3.69%

 

Stocks are lower this morning after Apple warned that revenues will be light in Q1 based on Coronavirus issues. Bonds and MBS are up.

 

We have a lot of housing data this week, with the NAHB Housing Market Index, housing starts, and existing home sales. We also quite a bit of Fed-speak, but not much in the way of market-moving data.

 

New home purchase applications started off the year strong, rising 40% from December and 35% from a year ago. “New home applications and sales activity surged in January. This was a continuation of the end of 2019, which saw strong residential construction and increased purchase applications activity,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Even with some global and domestic economic uncertainty, builders have ramped up production in recent months to meet increased homebuyer demand.” Strength in homebuilding may turn out to be the economic surprise of 2020.

 

Democratic hopeful Michael Bloomberg proposes tightening the regulatory grip on the financial industry, by imposing a 10 basis point financial transaction tax, merging Fannie and Freddie, banning payday lenders. and ending the use of mandatory arbitration. This is interesting since he was critical of Obama-era financial regulation when he was Mayor of NY.

 

Top fintech names which are changing the housing market.

Morning Report: Fed Nominee Judy Shelton probably is done.

Vital Statistics:

 

Last Change
S&P futures 3384 6.25
Oil (WTI) 52.06 0.65
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.68%

 

Stocks are higher this morning after some strong earnings reports out of the tech sector. Bonds and MBS are flat.

 

Retail Sales came in at 0.3% as expected.

 

It looks like Judy Shelton may not make it through the nomination process as the business press gangs up on her and a couple Republicans voice concerns. The issue with Shelton is that she hasn’t rejected the gold standard and she casts doubt that the conventional wisdom of central banking is correct. This may be unfortunate, as global central banks are prone to groupthink. Given the strength of the US economy (strongest labor market in 50 years) why would the Fed be increasing its balance sheet? I wouldn’t be surprises to see her withdraw her name over the long President’s Day weekend.

 

Inflows to bond funds could hit $1 trillion again in 2020. Investment dollars are flowing to high grade corporate bonds and Treasuries. This wall of money will keep a ceiling on bond yields, and should continue this process of rates slowly grinding lower throughout the year. Good news for the mortgage banking business.

 

The homeownership rate increased to 65.1% in Q4, the highest in six years. The millennial cohort rate increased by 1.1% to 37.6%. Note that the rental vacancy rate at 6.4% is the lowest in 34 years.

 

Fannie Mae reported net income of $14.2 billion in 2019. Under an agreement with Treasury, Fannie will be allowed to keep it as they build up their capital to eventually go for sale.

Morning Report: Two Fed nominees head to the Hill.

Vital Statistics:

 

Last Change
S&P futures 3362 -17.25
Oil (WTI) 51.26 0.05
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.68%

 

Stocks are lower this morning on coronavirus fears. Bonds and MBS are up small.

 

Consumer prices rose 0.1% MOM and 2.5% YOY in January, according to the CPI. Ex-food and energy, they rose 0.2% MOM and 2.3% YOY. The Fed doesn’t really pay too close of attention to the CPI, preferring the Personal Consumption Expenditures data. Regardless, inflation is not at a level to trigger any sort of rate hike.

 

Initial Jobless Claims came in at 205,000. The labor market continues to roll along.

 

The percentage of homes that sold above list price fell to a 3 year low in 2019, according to Zillow. On average, 19.5% of homes sold above list in 2019, while 21.5% did in 2018. This seems counter-intuitive given the supply / demand imbalance overall – NAR has existing home supply at roughly 3 months’ worth, well below 6.5 months, which is considered a balanced market. So what is going on? The real estate market is seasonal, and many people try and move during the summer months, which means home prices are negotiated in the late winter / spring. Early 2019 was marked by a continuing Fed tightening regime – we had multiple rate hikes in 2018 as the Fed wanted to get off the zero bound. This raised mortgage rates, which crimped affordability. The Fed only started easing in July, by which time the lion’s share of transactions are over. By the time mortgage rates fell meaningfully, 2019 was already in the books. 2020 should be a lot better, and judging by some of the comments from the builders, the spring selling season started early this year.

 

Jerome Powell’s Humprey-Hawkins testimony was largely uneventful, and today two of Trump’s Fed nominees head to the Senate for testimony. One of the nominees – Christopher Waller – is uncontroversial and should have no issues. The other one – Judy Shelton – has raised some eyebrows. Shelton has been critical of the Fed’s large balance sheet and its policy of paying interest on reserves. The policy of paying interest on excess reserves restricts credit needlessly, as she characterizes it as “paying banks to do nothing.” She is quite dovish and there are questions over whether she supports the gold standard, which is akin to pitching the idea of bloodletting to the AMA.

 

While we generally take for granted the idea that the Fed will maintain a larger balance sheet, this chart really puts into perspective how much things have changed. Pre-crisis the Fed had roughly $800 billion in assets. Now it is around $4.3 trillion. Has equity gone up 5x? um, no.

 

Fed assets

 

Credit rating agency Fitch is cautioning the CFPB from removing debt-to-income as a measure of a borrower’s ability to pay. The CFPB is considering using a measure like the difference between the borrower’s rate and the normal “market” rate, however Fitch thinks it is incomplete:

“Spread to APOR is a good measure of default risk. However, many factors can affect the price of a loan, some of which may have little to do with the borrower’s repayment capacity; these include liquidity, market movements, or attributes that present a low risk of loss to the lender, for example, a low loan-to-value. Aggressive lending programs could result in borrowers having a low APR but a high DTI and LTV where they cannot afford the loan but the risk of loss to the lender is low.”

 

Morning Report: Q4 delinquencies fall to a 40 year low

Vital Statistics:

 

Last Change
S&P futures 3371 13.25
Oil (WTI) 51.06 1.12
10 year government bond yield 1.62%
30 year fixed rate mortgage 3.67%

 

Stocks are higher this morning after China expressed optimism on economic growth. Bonds and MBS are down small.

 

Jerome Powell continues his Humphrey-Hawkins testimony today. Here were his prepared remarks from yesterday. There was really nothing new in them – the economy is growing moderately, but due to concerns about global growth the Fed cut rates.

 

Mortgage Applications rose 1.1% last week as purchases decreased 6% and refis increased 5%. “The mortgage market continues to be active in early 2020, as applications increased for the third straight week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Rates also rose, but still remained close to their lowest levels since October 2016. The refinance index climbed to its highest level since June 2013, and refinance loan sizes also increased as a result of an active jumbo lending market.”

 

Mortgage delinquency rates in the fourth quarter fell to the lowest in 40 years, according to the MBA. The delinquency rate for one-to-four unit properties fell to a seasonally adjusted rate of 3.77% of all loans outstanding, which was down 20 bps from Q3 and 29 bps from a year ago. “The mortgage delinquency rate in the final three months of 2019 fell to its lowest level since the current survey series began in 1979,” said Marina Walsh, MBA Vice President of Industry Analysis. “Mortgage delinquencies track closely to the U.S. unemployment rate, and with unemployment at historic lows, it’s no surprise to see so many households paying their mortgage on time.”

 

Job openings fell in December, according to the JOLTS report. The quits rate (which tends to lead wage growth) was unchanged.

Morning Report: Goldman sees the unemployment rate falling to 3.25% this year

Vital Statistics:

 

Last Change
S&P futures 3362 9.25
Oil (WTI) 50.51 0.72
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.66%

 

Stocks are higher this morning as China begins to restart industrial production. Bonds and MBS are down.

 

Jerome Powell goes to the Hill today for his semi-annual Humphrey Hawkins testimony. The Fed is closely monitoring the Coronavirus issue with respect to global growth. With this being an election year, the questioning will probably be more focused on political posturing (what would you do about income inequality? what would you do about affordable housing?) than anything else. I doubt there will be anything market-moving in the testimony, but you never know.

 

Small Business started the year off strong, according to the NFIB Small Business Optimism Index. “2020 is off to an explosive start for the small business economy, with owners expecting increased sales, earnings, and higher wages for employees,” said NFIB Chief Economist William Dunkelberg. “Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses.” Labor continues to be an issue: “Finding qualified labor continues to eclipse taxes or regulations as a top business problem. Small business owners will likely continue offering improved compensation to attract and retain qualified workers in this highly competitive labor market,” Dunkelberg concluded. “Compensation levels will hold firm unless the economy weakens substantially as owners do not want to lose the workers that they already have.”

 

Speaking of the labor market, Goldman Sachs Chief Economist Jan Hatzius sees the unemployment rate falling to 3.25% this year. That would be the lowest since 1953. But first, the Boeing and Coronavirus issues need to recede into the rear-view mirror.

 

The Trump Administration released its 2021 budget, which cut social programs and increased defense spending. Some housing related programs were hit, such as the Housing Trust Fund and the Capital Magnet Fund, which are funded by a 4 basis point charge on Fannie and Freddie origination. The Community Development Block Grants would be eliminated. As a general rule, these proposed budgets are not meant to become law (one of Obama’s budgets received exactly zero votes) – but are more statements of priorities. It also cuts Medicare and Medicaid, which means it would get no support from Democrats.

 

 

Morning Report: The Fed is sanguine on the economy

Vital Statistics:

 

Last Change
S&P futures 3322 -3.25
Oil (WTI) 50.11 -0.32
10 year government bond yield 1.56%
30 year fixed rate mortgage 3.66%

 

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

 

The upcoming week will be date-light, however we will have a lot of Fed-speak. Jerome Powell will be delivering his semi-annual Humphrey-Hawkins testimony on Capitol Hill on Tuesday and Wednesday. In terms of economic data, we will get CPI, retail sales and industrial production this week. None of these should be market-movers. The 10 year will be driven mainly by the global risk on / risk off trade which will be led by China.

 

The Fed said that downside risks to the US economy have diminished over the past few months, although Coronavirus remains a threat. Remember, recoveries don’t die of old age – they are either murdered by the Fed or are ended by some external event. “Downside risks to the U.S. outlook seem to have receded in the latter part of the year, as the conflicts over trade policy diminished somewhat, economic growth abroad showed signs of stabilizing, and financial conditions eased. The likelihood of a recession occurring over the next year has fallen noticeably in recent months.”

 

The Atlanta Fed has Q1 growth coming in at 2.7%.

 

Mortgage credit availability dipped in January, according to the MBA. “Mortgage credit availability was mostly unchanged to start 2020, decreasing 0.2 percent in January,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Similar to December of 2019, the decline came from the reduction of low credit score, high-LTV programs. Furthermore, there continues to be movement with both adds and drops in the government program space, with the net result last month showing small growth in the government index. Although credit supply has flattened these last two years, the meaningful increase seen overall since the Great Recession has been helpful to the growing share of first-time homebuyers, as well as refinance borrowers looking to act on lower mortgage rates. Ongoing housing supply constraints in the lower-price range continues to hold prospective buyers back the most.”

 

Interesting article in American Banker: Big banks lost money on mortgages in 2018. “Large banks withstood an average loss of $4,803 for every retail mortgage originated in 2018 (compared with a net profit of $376 per loan for independent mortgage bankers). Appetite for these kinds of losses is increasing.” Why were they doing this business? It is all about the MSR. And unfortunately for holders of servicing, rates have been going down, not up which is a negative for servicing assets. As rates have fallen, banks have had to reach for yield, which generally means taking more risk. I know that 2018 data is far in the rear view mirror,  but that is an incredible number.

 

 

Morning Report: Strong jobs report

Vital Statistics:

 

Last Change
S&P futures 3340 -3.25
Oil (WTI) 50.38 -0.32
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.68%

 

Stocks are lower this morning as investors sell winners. Bonds and MBS are up.

 

Jobs report data dump:

  • Nonfarm payrolls up 225,000
  • Unemployment rate 3.6%
  • Average hourly earnings up 3.1% annually
  • Labor force participation rate 63.4%
  • Employment-population ratio 61.2%

Overall, a strong report. Certainly payrolls were way above the 158,000 expectation. Construction gained workers, which comports with what we have been hearing from the builders – that they are ramping up for 2020. Wage growth and payroll growth remain strong, and more people are entering the workforce, with the participation rate up and a rise in the employment-population ratio.

 

The NAHB notes that 63 million households are unable to afford a $250,000 home. Interesting stat from the piece: “A previous post discussed the often-cited estimate that a $1,000 increase in the price of a median-priced new home will price 158,857 U.S. households out of the market for the home.  A second post discussed the related estimate that a quarter point increase in the mortgage rate will price out 1.3 million.”

 

On the other side of the spectrum, Redfin notes that luxury home prices are rising again as interest rates fall. “Demand for luxury is improving. That’s showing up primarily in an increase in sales right now, but it’s also putting some slight upward pressure on prices,” said Redfin chief economist Daryl Fairweather. “We’re ending the year in a much better position than we started, which is a good sign for 2020. I expect price growth to return to at least 3% to 5% by spring.”