CoreLogic – The Daily Tearsheet

Morning Report: Overseas yields hit a record low

Vital Statistics:

	Last	Change
S&P futures	2759.6	9.65
Oil (WTI)	52.61	-0.84
10 year government bond yield		2.11%
30 year fixed rate mortgage		4.13%

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

We are seeing lots of articles tying trade to rate cuts. IMO, I think the business press and politicians overestimate the effects of trade sometimes, but there is no doubt that there is a sea change in opinion. The markets are pricing in a 96% chance of a rate cut this year. Only 1 month ago, they were pricing in a 53% chance of no movement at all. Compare the forecast now versus May 3. Amazing how much sentiment has changed. The central tendency is now for 2 rate cuts (although the markets expect the Fed to hold steady at the June meeting in a couple of weeks).

Is trade the driver of the change in sentiment? It plays a part, no doubt. But, the yield curve inversion has more to do with general economic malaise especially in Europe. The German Bund (Germany’s 10 year bond) has hit a record low yield of -21 basis points. This is a big deal, and is the real culprit behind the drop in US Treasury rates. Relative value trading (in other words managers selling Bunds which pay nothing for Treasuries which pay something) is pulling US rates lower, which has inverted the yield curve. An inverted yield curve occurs when short term rates (like the 1 month T-bill) are higher than long term rates like the 10 year. The 1 month T-bill pays 2.35% while the 10 year pays 2.11%. Historically, an inverted yield curve has been a recessionary indicator, but that probably isn’t what is going on right now. I certainly don’t think the Fed imagines a recession is imminent or even a decent possibility – we will get an idea however when they release their economic projections at the June FOMC meeting. That said, the markets see two rate cuts this year, and the dot plot will be an interesting view. Strange to think that the Fed tightened to fight nonexistent inflation and will ease to fight a nonexistent recession, but here we are….

Home prices rose 1% MOM and 3.6% YOY in April, according to CoreLogic. They do see home price appreciation picking back up over the next year, and are forecasting a 4.7% increase over the next year.

Morning Report: Housing cycles and bond markets.

Vital Statistics:

	Last	Change
S&P futures	2815	-4
Eurostoxx index	377.4	1.8
Oil (WTI)	58.12	-0.14
10 year government bond yield		2.63%
30 year fixed rate mortgage		4.28%

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

Initial Jobless Claims fell slightly to 224k last week.

Durable Goods orders increased 0.4% in February, driven by an increase in commercial jet orders. Ex-transportation, they were down 0.1%. Core capital goods increased 0.8% as companies continue to plow capital back into expansion opportunities. Much of the increase in capital expenditures was in machinery, which is a positive sign for manufacturing. Still, economists are cautious on Q1 GDP, with many forecasting sub 1% growth for the quarter.

Construction spending rose 1.3% MOM and is up 0.3% YOY. Residential construction was down on a MOM and YOY basis. Housing continues to punch below its weight. Since construction is seasonally affected, January numbers tend to be a bit more volatile and have less meaning than summer numbers.

The MBA released its paper on CFPB 2.0, where they list out their recommendations for the CFPB. Much of what they say is similar to what Mick Mulvaney and Kathy Kraninger have been doing – increasing transparency regarding rulemaking and giving more guidance on what is legal and illegal. The Obama / Cordray CFPB was purposefully vague in promulgating rules, which makes life easier for regulators but makes it harder for industry participants. Regulation by enforcement was the MO of the Cordray CFPB, which ended with the new Administration, and the MBA agrees.

Specific to the mortgage business, the MBA recommends that the CFPB allow loan officers to cut their compensation in response to competitive dynamics, to extend the “GSE patch” which means loans that are GSE / government eligible are automatically considered to be QM compliant, to allow mortgage companies to pass on error costs to loan officers, and to raise the cap on points and fees.

CoreLogic looks at home price appreciation and the economic cycle. The punch line: While the current expansion is just short of a record length, and home price appreciation is declining, it doesn’t necessarily mean that house prices are in for a decline. In fact, housing typically weathers recessions quite well. I could caveat that the chart below only looks at a bond bull market. The 1978 – 1982 timespan of the misery index and inflation marked the bottom of the Great Bond Bear Market that lasted from the mid 1950s to the early 80s. The Great Bond Bull Market that began in the early 80s ended a few years ago, and while a bear market probably hasn’t begun yet the tailwind of interest rates falling from 17% to 0% isn’t going to be around this time. Finally, there are a few massive supports for the real estate market: rising wages, low inventory, and demographics. It is hard to imagine another 2008 happening if the economy peters out.

Morning Report: CoreLogic sees 2019 product mix as 75% purchase / 25% refi

Vital Statistics:

	Last	Change
S&P futures	2605	-8
Eurostoxx index	349.68	-0.7
Oil (WTI)	51.56	-0.75
10 year government bond yield		2.72%
30 year fixed rate mortgage		4.48%

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

The NAHB Housing Market Index rebounded slightly in January, but it is still way lower than the index peak in December 2017. The recent drop in rates is helping, but affordability issues and input costs are still dogging the homebuilding industry. Lennar and KB Home still reported decent numbers, and we have yet to see builders having to offer large incentives to move inventory. The supply / demand imbalance is still solidly in favor of the builders, but affordability issues are contributing to a decline in foot traffic.

CoreLogic estimates that refinances will account for only 25% of all mortgage origination in 2019, the lowest in 25 years. Rate / Term refis will become even less important, as prepayment burnout has taken hold at these levels. The opportunities will be largest in cash-out, where homeowners can refinance high interest rate credit card debt, and in product swapping, where FHA borrowers with sufficient home equity will be able to refinance into a product with no MI.

The Fed’s Beige Book noted that growth is slowing, but is still decent. The language in the report changed from growth being “solid” or “strong” “moderate to modest.” Many companies noted that input prices are rising, but they are unable to pass those increases on to customers. While residential real estate is rising in price, commercial and industrial real estate is not.

More problems for real estate prices at the high end. Greenwich CT prices continue to fall, which is about luxury real estate prices as much as it is about the changing nature of the financial industry. Note however that prices have fallen 7.3% in San Jose. Apple is reducing hiring due to weaker than expected iPhone sales, and the fizz is pretty much out of the social media craze.

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: 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.

Morning Report: Almost a third of all MSAs are overvalued

Vital Statistics:

	Last	Change
S&P futures	2771	-0.75
Eurostoxx index	383.16	-1.13
Oil (WTI)	65.91	0.84
10 Year Government Bond Yield		2.93%
30 Year fixed rate mortgage		4.57%

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

Initial Jobless Claims fell by 3,000 to 218,000, while the Index of Leading Economic Indicators increased by 0.2%, below expectations. This index is predicting that growth will moderate in the coming months. Note that Goldman has taken its Q2 GDP estimate up to 4%, which is a torrid pace.

Mortgage Applications rose 5.1% last week as purchases rose 4% and refis rose 6%. Mortgage rates were more or less unchanged for the week.

Existing Home Sales fell 0.4% last month to a seasonally adjusted annual rate of 5.43 million. Existing Home Sales are down 3% on a YOY basis, making this the third consecutive month with a YOY decline. The median house price hit a record, rising 4.9% to $264,800. While restricted supply has been an ongoing issue, the market is beginning to feel the pinch of rising rates and prices. The first time homebuyer accounted for 31%, which is a decrease and well below the historical norm of 40%. At current run rates, we have about 4.1 month’s worth of inventory. Some realtors noted that potential sellers are pulling their homes off the market for fear they won’t find a replacement. We need a dramatic increase in home construction to fix the issue and so far we are seeing modest increases.

Speaking of home price increases, the FHFA reported that prices rose 0.1% MOM in April and are up 6.4% YOY. Since the FHFA index ignores jumbo and non-QM, this is prime first-time homebuyer territory. Home price appreciation is beginning to converge as the laggards like the Mid-Atlantic (which covers NY and NJ) are picking up steam. The dispersion a year ago was huge.

CoreLogic estimates that a third of all MSAs are now overvalued. The last time we hit this level was early 2003, just before the bubble hit its stride. It is natural to ask if we are in another bubble, and IMO the answer is “no.” The term “bubble” gets thrown around so much that it has lost its meaning. The necessary conditions for a bubble (magical thinking on the part of buyers and the financial sector) just aren’t there. China has a bubble. Norway has a bubble. The US does not.

The US coastal and Rocky Mountain areas have the most overvalued residential real estate, but aside from that it is still cheap / fairly valued elsewhere. Either the overvalued MSAs will start building more homes, or the employers in those MSAs will begin to move more operations to cheaper areas. You can see that already with Amazon.com de-emphasizing Seattle. Some MSAs become to cheap to ignore (the Rust Belt, for instance) and others become so expensive that companies cannot attract entry-level talent anymore. For a hotshot MIT data scientist, working at Google or Facebook sounds very cool, but if you can’t afford an apartment are you really going to be willing to work there?

Foreclosure starts fell in May to 44.900, which is a 17 year low. The foreclosure rate of 0.59% is the lowest in 15 years. At the current rate of decline, the foreclosure inventory is set to hit pre-recession levels later this year. The Northeast still has a foreclosure backlog to deal with, but the rest of the country has moved on.

HUD is asking for public input into its disparate impact rules, which were dealt a blow at SCOTUS. Disparate impact is a highly controversial legal theory that says a company is guilty of discimination even if they didn’t intend to discriminate – if the numbers don’t match the population the lender is guilty, no questions asked. That theory was dealt a blow with a 2015 ruling that said the plaintiff must be able to point to specific policies of the lender that explain the disparate impact. HUD is now looking to tweak the language to conform to this ruling.

Incoming CFPB nominee Kathy Kraninger is getting some static from Democrats due to her position at DHS. They are asking questions about her role in the zero tolerance policy and child separations. Elizabeth Warren is putting a hold on her nomination until she answers these questions. That may not be a disappointment to the Administration however. The gameplan may be to slow-walk a new CFPB nominee in order to keep current Acting CFPB Chairman Mick Mulvaney at the helm of the agency.

Morning Report: Number of job openings equals number of unemployed

Vital Statistics:

	Last	Change
S&P futures	2747	1.75
Eurostoxx index	388.56	0.45
Oil (WTI)	64.56	-0.19
10 Year Government Bond Yield		2.91%
30 Year fixed rate mortgage		4.54%

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

Job openings continue to creep upward, hitting 6.7 million in April, which is just about the number of unemployed people in the country. Job openings increased in manufacturing, but fell in finance. The quits rate was flat MOM at 2.3% and is up about 20 bps since last year. The quits rate is a strong predictor of wage inflation, as it measures people leaving jobs to take new, higher paying ones. Below is a chart of the quits rate versus wage growth. Wage inflation is a bit more volatile, but the correlation is pretty tight.

The ISM non-manufacturing index rose in May to 58.6. The current level historically corresponds to a GDP growth rate of around 3.5%. Tariffs are weighing on many sectors however.

The House Financial Services Committee will hold a hearing tomorrow to discuss transparency and accountability at the CFPB. This hearing is the result of a memo from Mick Mulvaney, which recommended that the CFPB be subject to Congressional appropriation, that major rules be passed by legislation, that there be an independent Inspector General, and recommended that the agency report to the President.

Home prices rose 1.2% in April, according to CoreLogic. On a YOY basis, they are up 6.9%. They expect home price appreciation to moderate over the next year and increase about 5%. Much of the country’s real estate is becoming overvalued, according to CoreLogic’s model – in fact, over half. The valuation metric is based on incomes, which is why an expensive market like San Francisco may appear fairly valued, while areas on the Gulf Coast may seem overvalued.

The first time homebuyer accounted for almost half the Freddie Mac purchase market, the highest since 2012, when Freddie first started tracking this statistic. The Bloomberg headline is terrible – the first time homebuyer does not account for almost half of mortgages. 40% are refis and the first time homebuyer is about 32% of existing home sales.

Over the past 2 years, about 4.4 million jobs have been added in the US. How many houses have been built? 2.4 million. Great illustration of just how acute the housing shortage is.

Morning Report: REO-to-Rental trade earned 9% over the past 5 years

Vital Statistics:

	Last	Change
S&P futures	2718.5	-4.5
Eurostoxx index	394.21	1
Oil (WTI)	72.15	0.66
10 Year Government Bond Yield		3.10%
30 Year fixed rate mortgage		4.65%

Stocks are lower this morning on bad earnings from Cisco. Bonds and MBS are down small.

The US and China will enter trade talks over the next couple of days. Both sides have signaled willing to make some compromises, so this could potentially be good for interest rates.

Initial Jobless Claims came in at 222k last week, while the Philly Fed improved to 34.4 which is a strong reading. The Index of Leading Economic Indicators rose a respectable 0.4%.

One of the reasons why starter homes have been so tough to find has been the REO-to-rental trade, where professional investors scooped up REO properties early in the crisis and rented them out. CoreLogic crunched the numbers and it turns out the trade made about 9% per year for the past 5 years. Impressive return in an environment of financial repression. Most of the return came from home price appreciation however, so if prices begin to level out, some of these professional investors will turn sellers. This is especially true if they had these properties in funds with a life. As short term interest rates rise, the low single-digit rental return will have more competition.

While longer-term bonds can be used as a proxy to estimate future inflation, Treasury Inflation Protected Securities represent a direct measure of inflationary expectations. The Fed invariably mentions TIPS in their meeting minutes. The breakeven rate of inflation has hit a 4 year high in this market at 2.2%. This means that an investor would need 2.2% in the consumer price index to be indifferent between buying Treasuries and TIPS, which pay a return equal to the interest imputed in the bond plus the consumer price index.

2/3 of the mortgage originated in April were purchase loans, according to Ellie Mae’s Origination Insight Report. Fewer loans in the pipeline is speeding up processing times, as the average time to close fell to 41 days. The average FICO score ticked up to 723.

CSFB thinks 3.5% on the 10 year will be the level to trigger a stock market exodus, although rates could stall out somewhere south of that for a while.

The hits just keep coming for Wells. The WSJ reports they added or changed information for some business customers during an anti-money laundering audit. Wells states that it was an internal matter only: “This matter involves documents used for internal purposes. No customers were negatively impacted, no data left the company, and no products or services were sold as a result.” This is only going to increase the voices in DC calling for the bank to be broken up. It already is not allowed to increase its balance sheet. At some point, it might make sense for Wells to spin off Wachovia and its securities unit.

GoBankingRates calculated what you can get for $300k in every state. The best value? West Virginia, where $300k will get you 3,347 square feet. Worst? Washington DC, which gets you 581 square feet.

The CFPB recently issued new rules to fix the TRID “black hole” issue.

CFPB Interim Chairman Mick Mulvaney reiterated his commitment to tame the CFPB by ending regulation by enforcement at NAR’s Legislative Trade Meeting and Expo. Student loan debt was also discussed, and while the CFPB doesn’t have a magic wand to make the debt go away they will continue to ensure that students understand the risks they are taking and also will go after predatory student loan collection practices.