Morning Report: New Home purchase activity up 33%

Vital Statistics:

 

Last Change
S&P futures 2995.5 -6.25
Oil (WTI) 62.07 -0.84
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning as the markets continue to digest the Saudi oil situation. Bonds and MBS are up.

 

The FOMC begins its two day meeting today. The Fed funds futures further discounted the chance of a rate cut announcement tomorrow to 63% from 73% a day earlier.

 

Industrial Production rose 0.6% in August, and manufacturing production rose 0.5%. Both estimates were well in excess of street expectations. Capacity utilization rose to 77.9%. Pretty healthy numbers, and certainly don’t demonstrate that trade wars are killing the manufacturing economy.

 

New home purchase activity was up 33% on a YOY basis in August. “New home purchase activity was robust in August, as both mortgage applications and estimated home sales increased from a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Recent increases in new residential housing permits and housing starts, lower mortgage rates, and a still-strong job market all bode well for the new home sales outlook.” This is a bullish sign for the economy, as we have underbuilt for years. New Home Sales has been in the 600k – 700k range recently, which is at levels last seen in the mid 90s.

 

new home sales

 

That said, the population has grown, so mid-90s levels doesn’t really support the demand out there. Adjusting for population, the historical average would equate to about 900k new homes sold, or about 30% higher than here.

 

FHFA Director Mark Calabria was interviewed on Bloomberg TV on the GSEs. It looks like they will hit the market to raise capital by the end of 2020. The first order of business is to end the net worth sweep, which will allow them to build capital. FHFA and Treasury haven’t settled on a number for the capital increase yet. Fannie Mae stock was up a touch on the interview.

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Morning Report: Fannie Mae surges on housing reform

Vital Statistics:

 

Last Change
S&P futures 2973.5 -5.25
Oil (WTI) 58.46 0.44
10 year government bond yield 1.64
30 year fixed rate mortgage 3.77%

 

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

 

Steve Mnuchin is scheduled to testify before the Senate Banking Committee this morning regarding housing reform and the role of Fannie and Freddie. Mark Calabria, who runs the FHFA and Ben Carson who runs HUD will also join him. Note that Fannie and Freddie surged 35% yesterday on a Compass Point piece that expressed optimism for a shareholder suit and Mnuchin said that they were closer to retaining their earnings. You might want to keep an eye on the screen this morning if you hold these stocks.

 

Fannie mae stock

 

Small Business Optimism fell in August as respondents tempered their optimism about the future. Much of this was due to the about-face at the Fed, and fears that they might know something everyone else does not. Despite the drop in expectations, the small business labor market improved, with firms hiring .19 workers on average, and many finding it difficult to hire qualified workers. Small business also increased capital spending, which indicates optimism about the future. So, despite the dip in optimism, firms are still spending like the expansion will continue. One other data point: credit availability remains a non-problem. Only 4% of small businesses reported that their borrowing needs were not met, which is more or less a historical record. So, don’t expect much additional juice from rate cuts, as there is already more than enough credit.

 

The Chinese government removed the foreign cap on investments, although this is largely a symbolic move, as the current limit presents no constraint. That said, it is hard to avoid the thought that the Chinese government is looking for some greater fools out there for their banking system to sell assets to. Despite the talk about the yuan becoming a reserve currency, the Chinese government probably won’t want to give up the amount of control required.

 

Delinquency rates continue to fall, according to CoreLogic. The 30 day delinquency rate fell 30 basis points to 4% in June. The foreclosure rate fell 10 bps to 0.4%. We did see an uptick in a few states that wasn’t natural disaster related: VT, NH, MN, and ND.

 

Corelogic delinquencies.

 

 

Morning Report: More on GSE reform

Vital Statistics:

 

Last Change
S&P futures 2990.5 9.25
Oil (WTI) 56.96 0.44
10 year government bond yield 1.59
30 year fixed rate mortgage 3.72%

 

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

 

No economic data today, and this week should be relatively data-light, with retail sales on Friday the only potential market-moving number. No Fed-speak as we are in the quiet period ahead of next week’s meeting.

 

Jerome Powell vowed to act “as appropriate” to maintain the current US expansion, which was largely taken as an admission the Fed will cut rates another quarter point at next week’s meeting. The Fed funds futures are pricing this in as a certainty, although there is disagreement within the Fed over whether it is necessary to cut rates given the strong consumer spending. He also threw cold water on political considerations affecting monetary policy. “Political factors play absolutely no role in our process, and my colleagues and I would not tolerate any attempt to include them in our decision-making or our discussions,” he said. “We are going to act as appropriate to sustain the expansion.” This was presumably in response to comments from ex-NY Fed president William Dudley to  “consider how their decisions will affect the political outcome in 2020.”

 

Interesting data point: Compass Point Analytics upped their price target for Fannie Mae stock to $7.75. which is almost 3x the current trading price of $2.71. Fannie Mae stock got hit last week on disappointment with the lack of specifics in the government’s housing reform plan.

 

Despite the disappointment from Fannie Mae stockholders and pref holders, the housing industry generally likes what the saw in the plan. “The reports recognize the need to better coordinate the roles of FHA and the GSEs,” Mortgage Bankers Association CEO Robert Broeksmit said. “Such coordination must preserve affordable financing options for a wide range of borrowers and reflect the vital role FHA plays in the larger housing finance system.” Talks about getting rid of the GSEs altogether seem to be over: “Both in the Obama administration and during periods of bipartisan negotiations the focus was on whiteboarding a totally new system,” said David M. Dworkin, who was a senior adviser in the Treasury Department on housing finance during the Obama and Trump administrations. “It is too hard. The current system is too embedded and the unintended consequences are too unpredictable.” The GSE affordable housing goals would also go away, to be replaced by a fee paid to HUD, who would then distribute the funds themselves. This is likely to be a non-starter with Democrats.

 

Mortgage interest deductions fell 62% last year as tax reform encouraged most people to take the standard deduction instead of itemizing.

 

 

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.

 

 

Morning Report: Wages and interest rates

Vital Statistics:

 

Last Change
S&P futures 2851 -35
Oil (WTI) 62.46 0.8
10 year government bond yield 2.43%
30 year fixed rate mortgage 4.15%

 

Stocks are lower this morning after rhetoric between the US and China hardened over the weekend. Bonds and MBS are up.

 

The rhetoric over trade intensified over the weekend, with both China and the US blaming each other for the impasse. As promised, the US hiked tariffs on $200 billion worth of Chinese goods on Friday and blamed China for reneging on its deal. In response, China said it would never surrender, and has raised tariffs on about $60 billion worth of US goods starting on June 1. FWIW, the issue with China is not so much tariff-related, it is intellectual property related.

 

This week is relatively data-light, at least as far as market-moving data is concerned. We will get housing starts and the NAHB Housing Market Index, along with a lot of Fed-speak.

 

Uber priced its IPO on Friday at $45 a share, and the stock ended up opening at $42. It never broke above the IPO price for the entire day. The record for IPOs has been downright awful and they have gone from being an almost sure thing to a greatest fool tournament. Historically, bankers would underprice IPOs by about 10% – 20%, so that investors would get a nice bump on the first day. Of course this means the company left some money on the table, but everyone was generally happy with that arrangement. Today, all the value is extracted in the pre-IPO funding rounds, so by the time it hits the public stock exchanges the companies are fully valued (if not overvalued). I have to imagine the big institutional investors are going to start turning these things down.

 

The share of 43%+ DTI loans going to Fannie and Freddie has almost doubled over the past couple of years from 15% to 30%. This is triggering more debate over the “QM patch” that allows safe harbor for loans with DTIs over 43% as long as they are GSE loans. This provision is slated to expire in 2021, but affordable housing advocates are pushing for it to be extended. Interestingly, the Urban Institute says that while default rates for 45+ DTI loans were higher prior to the crisis, that is no longer the case. Urban Institute has an agenda to push, so counterintuitive findings like that might be the result of some statistical jiggery-pokery and further examination is warranted.

 

Neel Kashkari is making the argument that rates should stay low due to income inequality. This is not necessarily a new argument – Janet Yellen said she was willing to let the labor market “run hot” for a while to wring all of the slack out of the labor market. Historically, the Fed has shied away from political footballs like income inequality, fiscal policy, etc given the fact that the Fed handles banking regulation and the Fed Funds rate – tools that aren’t suited to tackle either issue. In fact, you could make the argument that loose monetary policy increases inequality due to the fact that it pushes up asset prices. Here is another issue: if low rates increase the cost of shelter more than it helps increase wages, it could in fact be a negative for those that rent. Note that he isn’t arguing that the Fed should cut rates, but he is in favor of waiting to see if inflation returns.

 

That said, wage growth has been strong over the past couple of years as the labor market has strengthened. If you compare the yield on the 10 year bond to wage growth, historically they have correlated reasonably well. Over the past couple of years, the 10 year yield has fallen while average hourly earnings have increased. Given that labor’s share of GDP is still around historical lows, wages have to rise further to reach historical averages.

 

wage growth versus interest rates

Morning Report: Small mortgage origination has fallen

Vital Statistics:

 

Last Change
S&P futures 2867 -17
Oil (WTI) 61.91 -0.21
10 year government bond yield 2.45%
30 year fixed rate mortgage 4.17%

 

Stocks are lower as the trade-driven sell off continues. Bonds and MBS are up. Note Jerome Powell will be speaking around lunch time. Also, the long-awaited Uber IPO will price after the bell.

 

Inflation at the wholesale level increased 0.2% MOM and 2.2% YOY in April according to the Producer Price Index. Ex-food and energy, they rose 0.1% / 2.4%. We will get the consumer price index tomorrow.

 

Initial Jobless Claims came in at 228k last week.

 

FHFA Chairman Mark Calabria said that Fannie and Freddie may be released from conservatorship even if Congress doesn’t accomplish housing reform. He also signalled that Congress would have an “entire Congress” – i.e. at least 2 years to hash out a solution. Calabria has not said that he would end the “net worth sweep” which sends all of the GSE profits to Treasury, which has created capital shortages for the GSEs.

 

Fewer and fewer mortgages are being made in the lower price tiers, which is having an impact on entry-level borrowers.  The article blames lender focus on the jumbo space, but that probably isn’t really the driver. They look at the number of low balance mortgages (10k – 90k) being originated today versus 10 years ago. It turns out that the number of small loans is definitely lower. I think there are a few factors going on here: First, 2009 was the beginning of the big wash-out in real estate prices and the number of homes in that price range was a lot higher in 2009 than it is today. In other words, home price appreciation is the biggest driver. Second, compliance costs are simply much higher, and as the MBA has demonstrated, costs to originate have been rising relentlessly. FWIW, there is demand for low balance mortgages – the prepay speeds are much lower so investors are willing to pay up for them – but that probably doesn’t offset higher costs. Finally, it is hard to get loan officers excited about an 80k mortgage when they are only making 75 basis points on it to begin with. Given that an 80k mortgage requires as much effort as a 800k mortgage, it makes sense for loan officers to focus on larger loan balances.

 

small loans

Morning Report: The Fed maintains rates

Vital Statistics:

 

Last Change
S&P futures 2928 4
Eurostoxx index 390.26 -0.72
Oil (WTI) 62.94 -0.66
10 year government bond yield 2.53%
30 year fixed rate mortgage 4.23%

 

Stocks are up this morning after the Fed maintained rates. Bonds and MBS are down.

 

As expected, the Fed maintained the Fed Funds rate at current levels, although they did tweak the rate on overnight reserves. During the press conference, Jerome Powell pushed back against the idea that the Fed’s next move will be a cut. Rates initially fell down the 2.46% level, but overnight retraced that move and we are back at levels we saw before the meeting. The Fed was surprised by the strength in both the job market and the overall economy and the fact that inflation remains lower than they would like to see.

 

At the press conference, a number of journalists asked about the market’s forecast for another rate cut. Powell stressed that the Committee’s view is that the current level of interest rates is “appropriate” and that core inflation was running close to the Fed’s target of 2% for most of 2018. The Fed Funds futures trimmed their estimates for a 2019 rate cut, from a 2/3 chance to more 50/50.  MBS spreads are slightly wider (meaning mortgage rates are a touch higher relative to the 10 year than they were yesterday).

 

Fed fund futures dec 2019

 

Construction spending fell 0.9% MOM and 0.8% YOY in March, according to the Census Bureau. Residential construction drove the decrease, falling 1.8% MOM and 8.4% YOY. Ex-residential construction, spending was solid, but we could see a downward revision in Q1 GDP estimates due to the resi numbers.

 

Productivity rose 3.6% in the first quarter as unit labor costs fell 0.9%. Q4’s productivity number was revised upward to 1.3%. Not sure what drove the decrease in unit labor costs – wages have been rising – but the problems with measuring productivity in this economy have been noted before. Regardless, the drop in labor costs and higher output mean inflation should remain below the Fed’s 2% target.

 

Initial jobless claims rose to 230k last week.

 

Lumber prices have been falling after spiking at record levels last year. Given that this is the time of year we should see more demand, this is surprising. The driver has been weather and continued weakness in homebuilding. Lower commodity prices should increase the margins for homebuilders and hopefully incent more homebuilding. Note that the S&P homebuilder ETF is up 25% this year.

 

What would happen to mortgage rates if we release Fannie and Freddie from conservatorship? Currently, Fannie and Freddie debt is treated as sovereign debt by investors, in other words, they believe the government will stand behind the debt if the GSEs run into trouble. This lowers their cost of funds, which gets passed on to borrowers in lower mortgage rates. If Fannie and Freddie are released from conservatorship, and the government no longer backs their debt, it will increase mortgage rates overall (their debt will definitely NOT be AAA), and will probably impact their ability to do perform the affordable housing part of their mandate. It is important to remember the reason why Fannie and Freddie were privatized in the first place – it was done in the 1970s to paper over the debt being issued to fund the Vietnam war. In a way, the government was using off-balance sheet financing, similar to the special purpose vehicles banks were using in the mid 00s. If there is more than 20% outside ownership in the subsidiary, then the parent is no longer required to consolidate the subsidiary’s debt on its balance sheet. In other words, they don’t have to claim that debt on their books, even if they are guaranteeing it. This accounting sleight of hand lowered the US debt numbers in the 1970s and it was hoped that this would help fight rising inflation (obviously that did not work). It may turn out that there would not be a bid for new Fannie Mae and Freddie Mac stock without a government credit wrapper, which means that hopes for a fully privatized Fannie and Freddie might turn out to be impossible to achieve.