Morning Report: New home sales surprise on the upside

Vital Statistics:

 

Last Change
S&P futures 2786.75 -4
Eurostoxx index 376.51 0.03
Oil (WTI) 56.07 0.4
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.43%

 

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

 

The economy added 183,000 jobs in February, according to the ADP Employment Survey. The Street is looking for about 180,000 additions in Friday’s employment situation report, so the ADP numbers seem to be in line.

 

Mortgage applications decreased 2.5% last week as purchases fell by 2.6% and refis fell 2%. The typical mortgage rate rose by 2 basis point to 4.67%.

 

The ISM non-manufacturing index expanded in February, which means that the services sector is picking up momentum.  The biggest issues seem to be potential trade issues, labor shortages and trucking costs.

 

New Home Sales rose by 621,000 in December. This is up 3.7% from the downward-revised November number, but down 1.5% from a year ago. For the full year, 622,000 homes were sold, which is slightly higher than the 613,000 sold in 2017. The median price was $318,000, while the average price was $377,000. The median sales price has been declining over the past year after peaking in November 2017 at $343,400. This demonstrates the shift from luxury to entry-level home construction to meet demand. This is a reversal of the early years of the crisis, when the luxury end of the market was the only part that was working.

 

Note that new home sales are about where they were during the 60s – 80s. Pretty amazing when you take into account that the US population has increased by close to 60% since 1970.

 

new home sales

 

Here is a copy of the letter that NAR, MBA, and a host of other housing advocates sent to Joseph Otting, Acting Director of the FHFA regarding GSE reform. It urges FHFA to go slow, work to maintain the 30 year fixed rate mortgage, and allow the GSE’s to act as a counter-cyclical buffer.

 

The Fed is catching up to the markets. Boston Fed President Eric Rosengren said it could be “several meetings” before the Fed gets enough clarity on the economy to make a move in interest rates. In many ways, he is acknowledging what the Fed Funds futures have been saying for a while now – that the Fed is going to wait and see how the 2018 hikes affect the economy before making any further moves. Since monetary policy generally acts with a 9 – 15 month lag, it means that the economy still hasn’t factored in the Sep and Dec hikes from last year.

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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.