Morning Report: Existing Home Sales fall

Vital Statistics:

Last Change
S&P futures 2856 -5.75
Eurostoxx index 383.91 -0.25
Oil (WTI) 67.32 0.89
10 Year Government Bond Yield 2.82%
30 Year fixed rate mortgage 4.58%

Stocks are modestly lower this morning after Paul Manafort was found guilty and Michael Cohen copped a plea. Bonds and MBS are flat.

Paul Manafort was found guilty of fraud and tax charges and there was a mistrial on the other charges. Nothing was found on the Russian front. Ex Trump lawyer Michael Cohen pled guilty to FEC violations, which relates to the Stormy Daniels case. Whether this ends up getting legs remains to be seen. FWIW, the markets are saying it is no big deal.

We will get the FOMC minutes today at 2:00 pm. Given the lack of liquidity in the markets, we could see some market movement in what should otherwise be a non-event.

Mortgage applications rose for the first time in 6 weeks as purchases rose 3% and refis rose 6%. Overall they rose 4.2%. Mortgage rates were unchanged, so that is a surprising jump in refi activity. Given that the index is sitting at lows not seen since the turn of the century, it doesn’t take much of a bump in activity to move the index.

Existing home sales fell again for the fourth month in a row. They fell 0.7% on a MOM basis and are down 1.5% on a YOY basis. This is the fifth straight month of YOY declines. It looks like much of the decline was attributable to weakness in the Northeast. The median house price rose 4.5% to 269,600.  Current estimates of median income are around 61,500, so that puts the median house to median income ratio around 4.4x. While other measures of housing affordability remain decent, this one is flashing red for valuations overall. The MP / MI ratio ignores interest rates, which are the biggest determinant of affordability, but over time house prices correlate with incomes, and it wouldn’t be a surprise to see home prices begin to take a breather.

Median House Price to Median Income Ratio

Fed Chairman Jerome Powell assured Senator Tim Scott that the Fed remains independent despite the jawboning from Trump. Powell said in a radio interview: “We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently, and we don’t … take political considerations into account,” Powell told the radio show. “I would add though that no one in the administration has said anything to me that really gives me concern on this front.” Separately, Dallas Fed Chairman Robert Kaplan said that the Fed only needs to hike 3 or 4 more times to get to neutral.

Morning Report: Inventory continues to fall, albeit at a slower pace

Vital Statistics:

Last Change
S&P futures 2862 4
Eurostoxx index 384.93 1.7
Oil (WTI) 67.47 1.04
10 Year Government Bond Yield 2.83%
30 Year fixed rate mortgage 4.58%

Stocks are higher this morning as earnings season winds down. Bonds and MBS are down.

Same store sales rose 4.7% last week, which is indicative of a strong back-to-school shopping season. BTS is a good predictor of the holiday shopping season, which would support strong GDP growth for the rest of the year. Consumption is about 70% of US GDP. Current projections are looking at north of 3% growth for the year.

The Fed Funds futures are now handicapping a 96% chance of a Sep hike and a 63% chance of a Sep and Dec hike. Meanwhile, the yield curve continues to flatten.

Trump made some comments about Fed Chairman Jerome Powell at a fundraiser, saying that he expected him to be a “cheap money guy” and didn’t expect him to raise interest rates. He also tweeted that he is “getting no help” from the Fed. While publicly discussing monetary policy is not a normal thing for the President to do, wishing rates were lower is. The only politicians who want higher rates are the ones not in power. He also called the Europeans and the Chinese currency manipulators. Under any other President this would be big, but the dollar and the bond market largely ignored it. It  shows that markets are largely dismissing “Donald being Donald” communiques from the WH.

The YOY declines in inventory that have bedeviled the industry are beginning to moderate, at least according to Redfin. Inventory was down 5.8% in July, which is lower than the double-digit decreases we had been seeing. The median sales price rose 5.3%. Homes went under contract in 35 days, which is 3 days faster than a year ago. Activity is slowing in some of the hotter markets however, especially Washington DC. The inventory issue won’t be fixed until we get housing starts back to some semblance of normalcy, which means a few years of 2MM units before returning to historical averages of around 1.5MM.

inventory

Toll Brothers reported strong numbers this morning, which has sent the stock up 11%. Revenues were up 27% and deliveries were up 18%. Backlog rose 22% in dollars and 13% in units. They also bought back about $137 million worth of stock, which accounts for about 70% of earnings. Robert I. Toll, executive chairman, stated: “We believe there is room for continued growth in the new home market in the coming years. Household formations have been increasing and in many regions the aging housing stock may not satisfy the lifestyles of today’s buyers. Yet new home production has not kept pace with the growth in population and households. On the single-family side, housing starts, other than during the anemic years of this recovery, are at their lowest level since 1970. In addition, existing home values have increased, providing potential move-up and empty nester customers with more equity that they can put toward a new home purchase. We believe these two groups, along with the growing number of millennials starting to buy homes, are all sources of potential new demand in the coming years.”

I find it interesting that he talks about the low level of housing starts, while at the same time spending 70% of Toll’s net income on buybacks. Certainly the actions don’t seem to match the words.

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.

Corelogic median payment

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: Donald Trump, The Fed, and housing affordability

Vital Statistics:

Last Change
S&P futures 2801 -3.75
Eurostoxx index 385.19 -1
Oil (WTI) 69.83 0.37
10 Year Government Bond Yield 2.85%
30 Year fixed rate mortgage 4.50%

Stocks are lower after the Trump Administration threatened more tariffs on Chinese goods. Bonds and MBS are down.

Donald Trump jawboned the Fed a little yesterday, saying he was “not thrilled” with interest rate hikes.  “I am not happy about it. But at the same time I’m letting them (the Fed) do what they feel is best.” For all the histrionics in the business press, this was pretty mild stuff. As a general rule, presidents respect the independence of the Federal Reserve and don’t criticize policy all that much. Obama never criticized the Fed’s monetary policy but of course he never had to deal with a tightening, so there wasn’t much to complain about. Alan Greenspan was considered “The Maestro” by the business press, so both Clinton and GWB gave him a wide berth. That said, Richard Nixon criticized the Fed, and Jimmy Carter installed a political hack (G William Miller – who was a complete disaster) to run the bank, so it isn’t like political meddling is unheard of. FWIW, the correlation between rising bond yields and criticism of the Fed is about 1, so expect more as we move from a secular bull market in bonds to a secular bear market.

Trump has doubled down by tweeting about the Fed and the dollar this morning: “China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field….The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really? Farmers have been on a downward trend for 15 years. The price of soybeans has fallen 50% since 5 years before the Election. A big reason is bad (terrible) Trade Deals with other countries. They put on massive Tariffs and Barriers. Canada charges 275% on Dairy. Farmers will WIN!”

These comments are smacking the dollar this morning, which is pushing up the 10 year yield. The comments have made no changed to the Fed funds futures, which are still predicting an 85% of a 25 basis point hike in September and a 58% chance of another hike in December.

Note Russia is dumping Treasuries. Most of its position has been liquidated. This was in response to sanctions imposed earlier this year.

Housing affordability has been falling as rates and prices rise. The most affordable places in the US are the Northeast and the Midwest. The Midwest is the most affordable despite having the highest regional mortgage rates. There is a surprising amount of variation between mortgage rates in different parts of the country – a range of 25 basis points. The Northeast has high prices (but low rates) and the Midwest has low prices (but high rates). Affordability is back to 2009 levels.

mortgage rates regional

At least one commentator thinks housing has peaked for this cycle. As a general rule, housing construction is an early cycle phenomenon – in other words it generally leads the economy out of a recession. Since this expansion is very long in the tooth, it would follow that housing might have peaked. The problem with that theory is that housing didn’t show up in the early recovery – it kept falling well after the recession ended. FWIW, between the shortage we currently have and the fact that building margins are still healthy indicates housing has room to run.

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.