Morning Report: Productivity revised downward

Vital Statistics:

Last Change
S&P futures 2755.25 3.75
Eurostoxx index 386.61 -0.28
Oil (WTI) 65.11 -41
10 Year Government Bond Yield 2.95%
30 Year fixed rate mortgage 4.54%

Stocks are higher this morning as trade negotiations continue with China. Bonds and MBS are down.

Italian bond yields are higher this morning, but so far the market seems to have concluded that this will not snowball into a larger European problem. That said, continuing issues in Italy will provide at least a marginal bid for Treasuries.

Mortgage applications rose 4% last week as purchases and refis rose the same amount. Grazie.

Nonfarm productivity was revised downward to 0.4% from 0.7% in the second estimate for first quarter productivity. Output increased 2.7% and hours worked increased 2.3%. Unit Labor Costs were revised upward from 2.8% to 2.9%. Compensation increased 3.3% and productivity increased 0.4%. Since productivity increases drive standard of living improvements and wage gains, this somewhat explains the anemic wage growth we have been seeing. These numbers are going to concern the Fed a little, given that it might increase inflationary pressures, at least at the margin. Productivity is notoriously hard to measure however, so it carries with it a lot of uncertainty. The theme of the US post-crisis has been low productivity.

productivity

Freedom mortgage was penalized for serial VA refinancings. As part of their punishment, they are no longer allowed to issue mortgages into multi-issuer pools, which will severely reduce the number of potential investors for their paper. This is a temporary restriction, and they could be out of the doghouse as soon as next year. A couple of other lenders – Sun West and NewDay also were penalized.

Wells has sold its branches in the Rust Belt to Flagstar Bank. They will continue their presence in mortgage lending, commercial and wealth management however.

The FTC and DOJ held a hearing on the potential competition issues between the Zillow and Redfin online real estate duopoly. It also covered in more general terms the effects of companies like Zillow and Redfin on the brokerage model in general. Will technology end the need for a realtor? Perhaps for the experienced and professional buyer, but probably not for everyone else. Fees could be affected though.

Steve Mnuchin urged President Trump to exempt Canada from steel and aluminum tariffs. While tariffs are in general counterproductive, it is important to remember the US has much lower tariffs than our trading partners.

tariffs

The media discovers FHA lending. And no, FHA lending is not the same as the no-no loans of the subprime days.

Morning Report: No, we are not in another housing bubble

Vital Statistics:

Last Change
S&P futures 2716 10
Eurostoxx index 387.8 4.74
Oil (WTI) 66.4 -0.63
10 Year Government Bond Yield 2.92%
30 Year fixed rate mortgage 4.48%

Stocks are higher after a Goldilocks employment report. Bonds and MBS are down.

Jobs report data dump:

  • Payrolls up 223,000 (expectation was 190,000)
  • Unemployment down to 3.8%
  • Labor force participation rate 62.7% (a drop)
  • Average hourly earnings up 0.3% / 2.7%

The Street was looking for wage growth of 0.2% MOM, but the annual number was in line with expectations. The wage growth print shouldn’t move the needle as far as the Fed is concerned. The employment – population ratio increased a tad as the population increased by 183k and the number of employed increased by 293k. We saw another good jump in construction jobs. Bottom line, a good report for equity markets, and a push for the bond market.

In merger news, Citizens Bank is acquiring Franklin American Mortgage. This deal should vault Citizens into a top-15 mortgage lender, bulk up its servicing portfolio and diversify its origination mix.

Italy has found a solution to its political crisis with a new coalition government that will be installed on Friday. Treasury yields should probably be higher, however tough trade talk out of the Trump Administration is keeping them lower. Even the International Steelworkers is against new tariffs, and if you can’t even get the unions on your side it says a lot…

Hard to believe it is here already, but the hurricane season is just beginning. CoreLogic estimates that 7 million homes are at risk in what NOAA expects to be a normal or above normal season. Note the National Flood Insurance program is set to expire right in the middle of the season.

Construction spending increased in April, according to the Census Bureau. Residential construction rose 4.4% MOM and 9.7% YOY.

Manufacturing accelerated in May, according to the ISM report. Employment expanded sharply. New order and production also grew.

As usual, the ISM report showed employers having difficulty finding qualified labor. Labor shortages are a theme these days, but you aren’t seeing the growth in wages you would expect. I wonder if part of the issue is application tracking systems, which seize on keywords and therefore have to be gamed somewhat. How many applicants are unaware of this or are simply bad at it? And if so, how many qualified workers are being screened out and never get presented before a set of eyes? I suspect ATS are good for companies in bad times, when there are a surfeit of applicants, but work against them when the labor pool is tighter.

An interesting editorial in the Wall Street Journal today about the credit box and the possibility of another housing bubble. The authors point to the way home prices have outstripped income growth and posits that a widening credit box (i.e. new 3% down loans from Freddie) are contributing. The authors suggest that underwriters tighten standards, and the government tighten loan parameters to prevent another foreclosure crisis when the market turns.

With regard to home price appreciation, is it due to widening credit standards, or is it due to restricted supply? In other words, is it a housing start problem or a MCAI (mortgage credit availability index) problem? The chart below is of the MBA’s Mortgage Credit Availability Index, which shows a loosening of standards since the bottom, but also demonstrates we are nowhere near the standards that existed during the bubble (and pre-bubble days).

MCAI long term

FHA and the GSEs are stepping in on low downpayment loans because there is a complete and utter void in the private market. Prior to the crisis, FHA was a sleepy backwater of the mortgage market, targeted toward low income first time homebuyers. Afterward, its share grew because it was the only game in town. Let’s not conflate FHA mortgages with neg-am pick a pay loans of the bubble years. IMO the issue is a lack of supply (heck the appreciation is the highest in places like San Francisco, where the median price is double the limit on a FHA loan). Housing starts around 2 million for the next several years is what will be needed to cool off home price appreciation (along with the REO-to-rental types ringing the register on their portfolios).

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.