Morning Report: Home price appreciation is decelerating

Vital Statistics:

 

Last Change
S&P futures 2896 12.5
Oil (WTI) 54.15 0.54
10 year government bond yield 1.52%
30 year fixed rate mortgage 3.82%

 

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

 

Home prices rose 3% YOY and were flat MOM according to the Case-Shiller Home Price Index. “The southwest (Phoenix and Las Vegas) remains the regional leader in home price gains, followed by the southeast (Tampa and Charlotte). With three of the bottom five cities (Seattle, San Francisco, and San Diego), much of the west coast is challenged to sustain YOY gains. For the second month in a row, however, only Seattle experienced outright decline with YOY price change of -1.3%. The U.S. National Home Price NSA Index YOY price change in June 2019 of 3.1% is exactly half of what it was in June 2018. While housing has clearly cooled off from 2018, home price gains in most cities remain positive in low single digits. Therefore, it is likely that current rates of change will generally be sustained barring an economic downturn.”

 

Meanwhile, houses with conforming loans rose 5% on a YOY basis, according to the FHFA House Price Index. The previously hot markets on the West Coast are cooling, although if you focus on homes at the lower price points, they are still up YOY. Note that many of these indices are looking at data that is a couple of months old. Prices aren’t yet taking into account the big recent drop in rates.

 

FHFA regional

 

The Trump Administration is set to release its plan on dealing with Fannie and Fred just after Labor Day. The government is eager to shrink its involvement in the mortgage industry and the concern is that asking the GSEs to hold bank-like capital levels will raise costs for homebuyers. The government is likely to reduce the GSE’s footprint by limiting the types of loans they can purchase – especially second homes and cash-out refinances. Another issue is the explicit government guarantee for MBS issued by Fannie and Fred, which will require Congressional involvement. “The report is likely going to have a lot of language about embracing congressional reform and reducing the GSE footprint, which most market participants support. But if the real intent is to end conservatorship administratively, then the MBS market will react very negatively,” said Michael Bright, chief executive of the Structured Finance Association. What that means is that if the Administration privatizes the GSEs without maintaining the government backstop, then MBS prices will fall, and that will raise mortgage rates at the margin.

 

 

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Morning Report: Incomes and spending rise

Vital Statistics:

 

Last Change
S&P futures 3004 -17.5
Oil (WTI) 57.21 0.34
10 year government bond yield 2.06%
30 year fixed rate mortgage 4.07%

 

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are flat.

 

The FOMC begins its 2 day meeting today. The decision is expected to come out at 2:00 pm tomorrow afternoon.

 

Personal consumption and personal incomes came in as expected, with consumption rising 0.3% and personal incomes rising 0.4%. The core PCE inflation index (which is the Fed’s preferred measure of inflation) rose 0.2% month-over-month and 1.6% YOY, which was slightly lower than expectations. Finally, disposable personal income rose 0.4%, while the savings rate was 8.1%. Overall, this report won’t move the needle with respect to the Fed’s thinking about the economy. The economy is moving along, and inflation remains below the Fed’s target rate.

 

You can see how much the savings rate has increased since the bubble days. Remember when the business press was wringing its hands over the drop in the savings rate?

 

savings rate

 

Home Prices rose 0.2% MOM and 3.4% YOY according to the Case-Shiller home price index. YOY home price appreciation has been decelerating for some time as higher interest rates and higher home prices begin to bite. Erstwhile market darling Seattle reported a YOY decline of 1.2%, while the gainers were Las Vegas, Phoenix and Tampa.

 

Bloomberg has an interesting chart of the global real estate and looks at home prices versus rents and incomes. It shows Canada and New Zealand as the most vulnerable markets. It doesn’t show China, which has a huge bubble and probably doesn’t fit on the diagram. Scandinavia also has a bubble issue as well. For those that admire the Scandinavian economies, remember that whenever a country appears to have have “cracked the code” economically (like the US in the 20s, Japan in the 80s, etc) it usually has a real estate bubble lurking in the background.

 

Note that despite all the talk about real estate bubbles in the US, we are actually on the cheap side, as is Japan.

 

global real estate

 

The US vacancy rate was 6.8% for rental properties and 1.5% for homeowner housing in the second quarter of 2019. The homeownership vacancy rate of 1.5% is the lowest since 1981, and illustrates the supply issue that is only going to get worse as homebuilding fails to keep up with household formation.

 

 

Morning Report: Fed Day

Vital Statistics:

 

Last Change
S&P futures 2648.75 6
Eurostoxx index 357.92 0.9
Oil (WTI) 53.82 0.51
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.59%

 

Stocks are higher after good numbers out of Apple. Bonds and MBS are flat.

 

The FOMC announcement is scheduled for 2:00 pm EST. Nobody expects the Fed to make any changes to the Fed Funds target rate, but there is talk that the Fed might announce an early end to balance sheet reduction. Note there will be a press conference after the announcement – apparently Powell will hold one after every meeting, unlike Janet Yellen who only held them after the Mar, Jun, Sep and Dec meetings.

 

Pulte reported fourth quarter numbers that disappointed the Street, but the 11% drop in orders is what got everyone’s attention. Gross margins also fell. The company said that traffic decreased YOY in October and November, but rebounded in December. That said, the company said there is less certainty about demand heading into this spring selling season than the industry has experienced in recent years. The stock was down about 6% early in Wed trading.

 

Home price appreciation continues to slow, according to the Case-Shiller Home Price Index. Prices rose 5.2% YOY, down from 5.3% the prior month. “Home prices are still rising, but more slowly than in recent months,” says David M. Blitzer, Managing
Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The pace of price increases are being dampened by declining sales of existing homes and weaker affordability. Sales peaked in November 2017 and drifted down through 2018. Affordability reflects higher prices and increased mortgage rates through much of last year. Following a shift in Fed policy in December, mortgage rates backed off to about 4.45% from 4.95%. Housing market conditions are mixed while analysts’ comments express concerns that housing is weakening and could affect the broader economy. Current low inventories of homes for sale – about a four-month supply – are supporting home prices. New home construction trends, like sales of existing homes, peaked in late 2017 and are flat to down since then. Stable 2% inflation, continued employment growth, and rising wages are all favorable. Measures of consumer debt and debt service do not
suggest any immediate problems.”

 

The Trump Admin poured cold water on the notion that they would release Fannie and Fred from government control without Congressional involvement. Earlier in January Joseph Otting, head of the FHFA said:  “The Treasury and White House viewpoint is that the [FHFA] director and the secretary of Treasury have tremendous authority and that they would act, I think, independent of legislation if they thought it was the right thing to do.” This was taken as bullish for the stocks, sending Fannie Mae up from about $1.00 at the end of 2018 to close to $3.00. Since housing finance reform is going to be politically difficult, investors have been betting that the government would be more likely just to recapitalize and release the GSEs.

 

Freddie Mac’s survey is out for 2019. They anticipate one more Fed Funds rate hike, and think mortgage rates will average around 4.7% and GDP growth will slow to 2.5% in 2019 and 1.8% in 2020. They anticipate a slight uptick in housing starts, to 1.3 million per year, which is still well below the historical 1.5 million level. Home price appreciation is set to decelerate as well, to 4.1%. Mortgage originations are expected to finish 2018 at $1.6 trillion and increase to $17 trillion next year.

 

Home prices are falling in Silicon Valley – the first YOY declines since 2012. In San Jose, prices fell 8%, although they are so high – the median price is almost a million – that they are probably still overvalued by a wide margin. What is driving this? Believe it or not, the stock market. Many buyers rely on stock compensation to make the downpayment, and with the FAANG stocks having sold off, that is getting harder to do. Second, high house prices have made people reluctant to move there – after all a high salary is not as enticing if you end up giving it all back in rent or mortgage payments.

Morning Report: Retail sales strong

Vital Statistics:

 

Last Change
S&P futures 2432.5 -38.5
Eurostoxx index 331.96 -3.2
Oil (WTI) 45.4 -0.32
10 year government bond yield 2.77%
30 year fixed rate mortgage 4.60%

 

Stocks are lower this morning after yesterday’s furious rally. Bonds and MBS are up.

 

Was there any particular catalyst for yesterday’s move in stocks? Not really. Markets don’t go up in a straight line, and they don’t go down in a straight line either. Bonds sold off heavily, but you didn’t see as much action in TBAs. They were down, but not like the 10 year. TBAs have been lagging the move in the bond markets anyway.

 

Home prices rose 5.5% in October, matching the move we saw in September. The usual suspects saw the biggest increases: Las Vegas, and San Francisco. Phoenix is now showing strength as well. Affordability remains the most pressing issue: “Home prices in most parts of the U.S. rose in October from September and from a year earlier,” says
David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The combination of higher mortgage rates and higher home prices rising faster than incomes and wages means fewer people can afford to buy a house. Fixed rate 30-year mortgages are currently 4.75%, up from 4% one year earlier. Home prices are up 54%, or 40% excluding inflation, since they bottomed in 2012. Reduced affordability is slowing sales of both new and existing single family homes. Sales peaked in November 2017 and have drifted down since then.”

 

Retail sales were the strongest in 13 years for last week, with same store sales up 7.8%. Since consumption is 70% of the economy, I wouldn’t be surprised to see some strategists bumping up their Q4 GDP estimates.

 

Note that due to the government shutdown, the Commerce Department won’t be releasing economic numbers. We won’t be able to get tax transcripts out of the IRS, but FHFA should be running normally, so you should be able to get case numbers for FHA loans, and Ginnie Mae securitization markets should function normally.

 

The Trump Administration expressed confidence in Jerome Powell, and said that he is safe. There is a precedent for the President showing Fed Chairmen the door – Jimmy Carter dumped G. William Miller after a year on the job, though he kicked him upstairs to Treasury and nominated Paul Volcker.

Morning report: Dallas home prices and the lagging Northeast.

Vital Statistics:

 

Last Change
S&P futures 2692.5 6
Eurostoxx index 358.13 0.76
Oil (WTI) 51.75 0.19
10 year government bond yield 3.06%
30 year fixed rate mortgage 4.89%

 

Stocks are higher this morning on as we await a speech from Jerome Powell. Bonds and MBS are flat.

 

Same store sales increased 7.7% last week according to Redbook. This would indicate that Black Friday was strong.

 

Consumer confidence from its multi-decade peak in October, driven by fears of of an economic slowdown. It is funny – the index asks people about their current state and then asks about their expectations for the future. The current state is at almost record highs while the future state is lower. This was the opposite for most of the Obama administration – the current state numbers were lousy, but people were optimistic for the future. Historically, consumer confidence was kind of an inverse gasoline price index, but the media is so heavily invested in talking down the “Orange Man Bad” economy that CNN damn near has an “impending recession” countdown monitor ticking in the lower right hand corner of the screen.

 

House prices rose 6.3% in the third quarter, according to the FHFA index. Prices were strongest in the Pacific Northwest / Mountain states. Prices were weakest in the Dakotas, Alaska, Louisiana, and Connecticut.

 

The Case-Shiller Home Price Index was flat MOM, and up 5.1% YOY. “Home prices plus data on house sales and construction confirm the slowdown in housing,” says David
M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices.  “Sales of both new and existing single family homes peaked one year ago in November 2017. Sales of existing homes are down 9.3% from that peak. Housing starts are down 8.7% from November of last year. The National Association of Home Builders sentiment index dropped seven points to 60, its lowest level in two years. One factor contributing to the weaker housing market is the recent increase in mortgage rates. Currently the national average for a 30-year fixed rate loan is 4.9%, a full percentage
point higher than a year ago.”

 

Freddie Mac is out with their housing forecast for the next couple of years. Their view is that the market will adjust to the big slowdown we saw in 2018 and resume modest growth. That said, they see originations down slightly in 2019 and 2020, largely driven by a continued uptick in interest rates, but the worst of the decline is behind us. Purchases activity will increase, however the refi business will continue to decline. Interestingly, they see housing starts continue to lag historical levels despite the pent-up demand.

 

freddie outlook

 

The new 2019 conforming limits are out, and the new limit for SFR is 484,350, a 6.9% increase from 2018. Hi bal limits for SFR is 726,525. The multi-unit limits also increased by the same percentage.

 

Yesterday, I mentioned an article in the Wall Street Journal about the Dallas home market and how it is the “canary in the coal mine” for the US real estate market. Builders are beginning to have to offer discounts / amenities in order to attract buyers, who are becoming more cautious following a rise in real estate markets. The Dallas market is interesting because Texas is more restrictive in terms of cash-out refinances. Take a look at the charts below. Dallas is the grey line. You can see they largely missed out a lot of the torrid growth during the bust years, but prices held up during the bust (they barely fell). However, take a look at the chart on the right, which shows the relative performance of several MSAs following the quarter when the US in general bottomed (late 2011). Dallas has well outperformed the US, and their appreciation is comparable to Silicon Valley. The Dallas market does indeed look toppy, and probably has more in common with the high flyers than the rest of the US. The median house price to income ratio is Dallas is 6, versus 4.4 for the rest of the US. Note as well how poorly the NYC metro area is doing. Fairfield County, CT (Stamford / Bridgeport), North Jersey (Newark) and Westchester (NYC area) are all just barely off the bottom. They have barely participated in the rebound seen in the rest of the country.

NYC MSAs

Morning Report: Red October ends

Vital Statistics:

 

Last Change
S&P futures 2704 19.25
Eurostoxx index 361.06 5.53
Oil (WTI) 66.46 0.28
10 year government bond yield 3.14%
30 year fixed rate mortgage 4.89%

 

Stocks are recovering as we end the worst month for stocks in a while. Bonds and MBS are down.

 

Facebook reported last night and rose despite a revenue miss. GM is up 10% pre-open on blowout earnings, while GE cut its dividend to a penny. Earnings are generally good this quarter, although if you focused only on the indices you would figure they were terrible.

 

Home prices rose 5.8% in August, according to the Case-Shiller home price index. Las Vegas led the way with 14% growth. San Francisco and Seattle were the other big winners. Underneath the headline number, we are starting to see some month-over-month declines if you look at the seasonally adjusted indices. Ultimately wages need to catch up with the new reality of higher interest rates and higher home prices.

 

Despite what is going on in housing, consumer confidence remains strong, with the consumer sentiment indices just off multi-decade highs. Historically this index has reflected gasoline prices (gas prices up, consumer confidence down), but that has broken down over the past couple of years. This confidence has allowed companies to raise prices for the first time in a decade, with a laundry list of firms from consumer staples to airlines increasing prices in reaction to increased costs, particularly fuel. Some companies are not raising prices, but cutting sizes. Wages are picking up, but they are generally lagging some of these increases in the inflation indices.

 

Freddie Mac sees home sales improving in 2019 despite an uptick in mortgage rates. Originations are expected to be flat at $1.65T while home price appreciation and GDP growth are expected to moderate. The 30 year fixed rate mortgage is expected to average around 5.1% for the year, and then jump an additional 50 basis points in 2020.

 

freddie mac mortgage rates

 

Janet Yellen told a conference that the current deficit track is unsustainable, and that if she had a magic wand, she would raise taxes and cut retirement spending.

 

Part of the inflation puzzle has always been healthcare inflation, especially in prescription drugs. Amazon looks to be entering the Rx business, and CVS is piloting a free delivery subscription program. Health care is a big part of the inflation picture and perhaps these big can take a bite out of inflation via their market strength.

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.

personal income

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.