Morning Report: Existing home sales fall

Vital Statistics:

 

Last Change
S&P futures 2641 9.75
Eurostoxx index 356.16 1.08
Oil (WTI) 52.77 -1.03
10 year government bond yield 2.76%
30 year fixed rate mortgage 4.48%

 

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

 

Mortgage applications fell 2.7% last week as purchases fell 2% and refis fell 5%. This was a bit of a give-back after a torrid start to the year. Rates were more or less unchanged, and the unadjusted purchase index was close to a 9 year high. Still, it is encouraging to see activity picking up ahead of the Spring Selling Season, which is just around the corner.

 

Existing Home Sales fell 6.4% in December according to NAR. The seasonally adjusted annual number comes out to 5 million, which is down 10% YOY. The median house price rose 3% to $253,600 and inventory fell to 1.55 million units, down from 1.74 million in November. At current rates, it represents a 3.6 month supply, which is an increase from 3.2 month’s worth in November. Days on market increased to 46 days, up from 42 in November and 40 a year ago. While the 30 year fixed rate mortgage fell from 4.87% in November to 4.64% in December, these sales would represent transactions done under a higher interest rate regime – the drop in rates will probably be reflected in January data. There is still quite the mismatch between what is available for sale – largely luxury properties – and what is needed, which is entry-level housing. The first time homebuyer still represents about 32% of all sales – historically that number has been closer to 40%. The Northeast and the Midwest experienced the biggest drops in sales.

 

The Senate will vote on a plan to open government – wall funding in exchange for temporary protection for Dreamers. The Democrats have declared this a non-starter, but we’ll see how close this comes to passing. The Democrats have their own bill in the Senate which doesn’t include wall funding and is also unlikely to pass. The big question concerns what Trump will actually sign.

 

Non-traditional mortgages are making a comeback, after a long slumber. Originations for these types of products – bank statement loans and the like – increased 24% in 2018, however their share of the total mortgage market is still extremely small, around 3%. Investor demand for these products is picking up as well – securitizations quadrupled last year to $12 billion. While these loans are a far cry from the neg-am NINJA loans of the bubble years, regulators and affordable housing advocates are fretting over these loans.

 

New home sales fell 16% in 4 of the largest markets to close out the year, according to Redfin. Higher mortgage rates and tax issues are depressing sales in some of the pricier markets. Look for homebuilders to face a squeeze as well as rising input prices and slower price growth depress margins. Builders may have to concentrate on building lots of lower-priced entry level units, which is exactly where the demand is.

 

new home sales redfin

Morning Report: The Fed raises rates

Vital Statistics:

 

Last Change
S&P futures 2511 6.5
Eurostoxx index 339.04 -2.44
Oil (WTI) 47.96 1.72
10 year government bond yield 2.77%
30 year fixed rate mortgage 4.60%

 

Stocks are higher this morning after the Fed hiked rates. Bonds and MBS are flat.

 

As expected, the Fed hiked rates 25 basis points yesterday. The vote was unanimous, and the statement was pretty bland. The forecasts were tweaked slightly, but nothing major. The biggest change was in the dot plot, which basically removed one tightening from 2019’s forecast. The left plot is September, while the right one is December. Note that the dispersion has decreased as well.

FOMC dot plot

 

Bonds took the tightening favorably, while stocks used it as an excuse to sell off. The initial head fake in the bond market was intense, with 2.86% printing before falling below 2.80 and eventually to 2.76%. MBS spreads widened considerably before settling in. The press conference was uneventful, with Powell dodging questions about Trump and the Central Bank’s independence while stressing that the economy is extremely strong right now and it made sense to raise rates. He also said that the Fed Funds rate is now at the lower end of the neutral range and the Fed has no intentions of deviating from its pace of balance sheet reduction.

 

Existing home sales rose 1.9% in November, for a second straight month. Lawrence Yun, NAR’s chief economist, says two consecutive months of increases is a welcomed sign for the market. “The market conditions in November were mixed, with good signs of stabilizing home sales compared to recent months, though down significantly from one year ago. Rising inventory is clearly taming home price appreciation.” The median home price rose 4.2% to $257,700, while inventory fell to 1.74 million. This represents a 3.9 month supply, which is well below what would be considered an equilibrium market. “A marked shift is occurring in the West region, with much lower sales and very soft price growth,” says Yun. “It is also the West region where consumers have expressed the weakest sentiment about home buying, largely due to lack of affordable housing inventory.” I wonder if Chinese money is exiting the area as their economy slows and you start seeing credit issues there. Finally, days on market rose to 42 and the first time homebuyer accounted for 33% of sales.

 

The Senate passed a stopgap spending measure which would fund the government through February. No word on whether the House will go along, but it certainly looks like any sort of shutdown over the holiday period isn’t going to happen.

 

 

Morning Report: Existing home sales disappoint again

Vital Statistics:

 

Last Change
S&P futures 2777.25 9.25
Eurostoxx index 362.75 1.51
Oil (WTI) 69.26 0.14
10 year government bond yield 3.20%
30 year fixed rate mortgage 4.93%

 

Stocks are higher this morning after Chinese and Italian markets rallied on benign political comments. Bonds and MBS are flat.

 

Existing home sales fell 3.4% in September, according to NAR. Pretty much every part of the country saw a decline. Rising rates are affecting affordability and this is dampening sales. That said, the median home price did still rise 4.2% to 258k. Inventory improved a hair, increasing to 4.4 months’ worth from 4.2 months worth in August. Lawrence Yun, NAR chief economist, says rising interest rates have led to a decline in sales across all regions of the country. “This is the lowest existing home sales level since November 2015,” he said. “A decade’s high mortgage rates are preventing consumers from making quick decisions on home purchases. All the while, affordable home listings remain low, continuing to spur underperforming sales activity across the country.” Days on market rose to 32 days, and the first time homebuyer accounted for 32% of sales. Historically that number has been closer to 40%.

 

Refis dipped to 29% of all originations in September, according to the Ellie Mae Origination Insight report. As rates rise, you are seeing an increase in ARM origination, which rose to 7.2%. Credit quality also ticked up, with the average FICO rising to 727.

 

Bank of America is teaming up with the Neighborhood Assistance Corporation of America (NACA) to offer no-downpayment, no MI, below market rate mortgage loans to people with bad credit. BOA has promised to allocate $10 billion in mortgage credit to the program. The only requirements are the home has to be owner-occupied, and the borrower has to go through a counseling process where they learn about budgeting and getting the required documents in. The company is betting that borrowers will act like they have skin in the game, even if they don’t have any equity in the home. So far, no foreclosures in the past 6 years (which corresponds to the bottom of the real estate market. Not sure why Bank of America is hot to lend money at below market rates to uninsured low FICO borrowers without a down payment, but I suspect they are doing it for the PR or to keep the fair lending types off their back.

 

With the bankruptcy of Sears, and the latest housing starts data, it is interesting to look back on the company’s involvement in homebuilding. Yes, you could order a house via the Sears catalog. The heyday of the movement was the early 20th century – between 1908 and 1940, Sears sold about 75,000 kit homes. Prices were anywhere from $1,200 to $5,000 for 10 room quasi-mansions.

Morning Report: Existing home sales flat

Vital Statistics:

Last Change
S&P futures 2926 11.5
Eurostoxx index 382.7 2.72
Oil (WTI) 71.58 0.46
10 year government bond yield 3.09%
30 year fixed rate mortgage 4.86%

Stocks are higher this morning after China agreed to cut some tariffs. Bonds and MBS are getting slammed.

Bond yields are up 27 basis points over the past month. Not sure what is driving that (at least nothing specific), but it is a worldwide phenomenon. Bunds and JGBs have also been selling off, though not as dramatically. The Fed funds futures have become more hawkish over the same period, raising the probability of a Dec hike from 63% to 87%. This has certainly stopped the flood of hand-wringing stories in the business press about the flattening yield curve.

Initial Jobless Claims hit a 50 year low, and are within striking distance of the 200,000 level. Meanwhile, the Index of Leading Economic Indicators took a step back in August, rising 0.4% after July’s torrid 0.6% growth. Still strong numbers, however.

Consumer comfort rose to a 17 year high, according to the Bloomberg Consumer Comfort Index (highest since Jan 2001).

One reason why consumption has been strong is growing home equity, which rose almost a trillion YOY in the second quarter. This is an increase of 12.3%. The number of homes with negative equity fell by half a million to 2.2 million, or about 4.3% of all mortgaged homes. On average, the typical homeowner saw a $16,200 increase in housing wealth. Only 3 states: North Dakota, Connecticut, and Louisiana saw declines.

Existing home sales remained flat in August, according to NAR.  Lawrence Yun, NAR chief economist, says the decline in existing home sales appears to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.” The median house price was $264,800, up 4.6% YOY. Inventory is still tight, at 4.1 month’s worth, and days on market ticked up slightly to 29 days. First time homebuyers accounted for 31% of sales. Historically, that number has been closer to 40%.

Closing rates jumped across the board to 71.7%, according to Ellie Mae’s Origination Insight Report. Average FICOs were 724, and average LTV was 79%. Both those numbers are more or less unchanged YOY. It typically took 43 days to close a loan.

When is the best time of year to buy a home? It depends. Prices do decline however during the winter, with purchases in January and February 8.5% cheaper than the peak summer months. Even in Autumn, they fall 3%. So, don’t get too depressed about your Z-scores during the winter months. It could be just seasonality.

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: Existing home sales fall, financial stress increases in Europe

Vital Statistics:

Last Change
S&P futures 2798.25 -2
Eurostoxx index 384.88 -0.74
Oil (WTI) 68.98 0.72
10 Year Government Bond Yield 2.89%
30 Year fixed rate mortgage 4.51%

Stocks are flattish this morning as earnings continue to come in. Bond and MBS are down.

This should generally be a quiet week with regards to market-moving data, although we will get the first estimate of Q2 GDP on Friday. Aside from that, we do get some real estate data with existing home sales today and the FHFA House Price Index tomorrow.

Existing home sales fell 0.6% in June, according to NAR. They are down 2.2% on a YOY basis. Blame low inventory. Lawrence Yun, NAR chief economist, says closings inched backwards in June and fell on an annual basis for the fourth straight month. “There continues to be a mismatch since the spring between the growing level of homebuyer demand in most of the country in relation to the actual pace of home sales, which are declining,” he said. “The root cause is without a doubt the severe housing shortage that is not releasing its grip on the nation’s housing market. What is for sale in most areas is going under contract very fast and in many cases, has multiple offers. This dynamic is keeping home price growth elevated, pricing out would-be buyers and ultimately slowing sales.”

Other stats from the report:

  • median home price 276,900 (up 5.2%)
  • Inventory 1.95 MM homes (4.3 month’s worth)
  • Days on market 26 days (down from 28 last year)
  • First time buyers 31% of sales
  • All-cash transactions 22% (up from 18% last year)
  • Sales rose in the Northeast and Midwest, fell in the South and West

Manufacturing activity picked up in June, according to the Chicago Fed National Activity Index. May’s abrupt downturn appears to have been a spurious data point, and not an indication of a change in trend. Employment and production-related indicators drove the increase in the index. So far, we aren’t seeing trade issues reflected in the production indices, however there is the possibility that manufacturers are stockpiling inventory and accelerating some production ahead of sanctions which is masking the effect. That said, we would expect to see a drop in the employment indicators, which isn’t happening.

Liquidity in the bond market is starting to dry up, at least if you measure by bid/ask spreads. Dodd-Frank rules were intended to curb proprietary trading but not market-making. Markets continued to function after the law was implemented, which gave some comfort to regulators that they were on the right track. Now that QE is ending, some of the market structure problems are getting exposed. Banks are less involved in market making and we are seeing bid / ask spreads increase in many markets. This is so far largely a European problem, however an anecdote from one fund who had trouble unwinding an Italian bond position is worrisome. They had a position in Italian sovereign debt and had trouble getting bids larger than $10 million, which is a miniscule trade – especially for G7 sovereign debt. So far it hasn’t had a huge effect in the US, but this is something to watch, especially the next time we get a credit crunch. Investors may find entire swaths of the bond market go no-bid, which will include the ETFs linked to these bonds. Tight bid-ask spreads and regulations might be good news for investors and taxpayers in normal times, but they aren’t free.

Despite the issues in the Euro bond markets, stress in the financial system did decrease slightly last month, according to the St. Louis Fed. Historically we are at very low levels, however the Fed is still employing extraordinary measures to support the market, so the past isn’t really all that comparable.

financial stress index

Interesting concept for real estate investors: Now there are a couple of online platforms that allow people to bid on single-family rental properties on line. Not sure what the fee is to transact, but the company also helps connect the investor with a mortgage lender and a property manager.

CFPB nominee Kathy Kraninger took a lot of heat from Democrats on Friday regarding her role in the Trump Administration’s border family separation policies. Not sure how much OMB (her current role) has in DOJ and DHS policy making but Democrats spent a lot of time on the issue. There is a lot of concern that she doesn’t have the financial regulatory background to run the agency, however her nomination does allow the Administration to reset the clock on Mulvaney’s tenure and he gets to stay if she doesn’t get confirmed by the Senate. Either way, the CFPB is getting reined in.

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.

CoreLogic overvalued metros

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.

FHFA regional

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.