Morning Report: Dueling bills to end the shutdown

Vital Statistics:

 

Last Change
S&P futures 2643.25 4.75
Eurostoxx index 356.16 1.08
Oil (WTI) 52.37 -0.25
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.62%

 

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

 

Dueling bills to end the shutdown will be voted on in the Senate today, with neither one having much chance of passing. The point of holding these votes is to hopefully create some avenue for compromise. Separately, Trump will postpone the State of the Union address until after the shutdown is over.

 

The government estimates that first quarter GDP could be flat if the government shutdown lasts for the whole quarter. There is always some seasonal noise that depresses Q1 GDP relative to the rest of the year, and the added effects of the shutdown would exacerbate that.

 

House prices rose 0.4% in November, according to the FHFA House Price Index. On a YOY basis, they were up 5.8%. Take a look at the chart below – you can see how much the hot markets out West have cooled down.  That said, the FHFA index is holding up better than indices like CoreLogic or Case-Shiller. This is because the index focuses on conforming loans only, which makes it a starter-home heavy index and that is where the demand is.

 

fhfa regional

 

There has been another major leak of financial data, this time affecting mortgage and loan data from Citi, HSBC, Wells, Capital One, and HUD. The data contained names, social security numbers, and bank account numbers. Much of the data was quite old, dating back to the bubble years.

 

 

Morning report: Dallas home prices and the lagging Northeast.

Vital Statistics:

 

Last Change
S&P futures 2692.5 6
Eurostoxx index 358.13 0.76
Oil (WTI) 51.75 0.19
10 year government bond yield 3.06%
30 year fixed rate mortgage 4.89%

 

Stocks are higher this morning on as we await a speech from Jerome Powell. Bonds and MBS are flat.

 

Same store sales increased 7.7% last week according to Redbook. This would indicate that Black Friday was strong.

 

Consumer confidence from its multi-decade peak in October, driven by fears of of an economic slowdown. It is funny – the index asks people about their current state and then asks about their expectations for the future. The current state is at almost record highs while the future state is lower. This was the opposite for most of the Obama administration – the current state numbers were lousy, but people were optimistic for the future. Historically, consumer confidence was kind of an inverse gasoline price index, but the media is so heavily invested in talking down the “Orange Man Bad” economy that CNN damn near has an “impending recession” countdown monitor ticking in the lower right hand corner of the screen.

 

House prices rose 6.3% in the third quarter, according to the FHFA index. Prices were strongest in the Pacific Northwest / Mountain states. Prices were weakest in the Dakotas, Alaska, Louisiana, and Connecticut.

 

The Case-Shiller Home Price Index was flat MOM, and up 5.1% YOY. “Home prices plus data on house sales and construction confirm the slowdown in housing,” says David
M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices.  “Sales of both new and existing single family homes peaked one year ago in November 2017. Sales of existing homes are down 9.3% from that peak. Housing starts are down 8.7% from November of last year. The National Association of Home Builders sentiment index dropped seven points to 60, its lowest level in two years. One factor contributing to the weaker housing market is the recent increase in mortgage rates. Currently the national average for a 30-year fixed rate loan is 4.9%, a full percentage
point higher than a year ago.”

 

Freddie Mac is out with their housing forecast for the next couple of years. Their view is that the market will adjust to the big slowdown we saw in 2018 and resume modest growth. That said, they see originations down slightly in 2019 and 2020, largely driven by a continued uptick in interest rates, but the worst of the decline is behind us. Purchases activity will increase, however the refi business will continue to decline. Interestingly, they see housing starts continue to lag historical levels despite the pent-up demand.

 

freddie outlook

 

The new 2019 conforming limits are out, and the new limit for SFR is 484,350, a 6.9% increase from 2018. Hi bal limits for SFR is 726,525. The multi-unit limits also increased by the same percentage.

 

Yesterday, I mentioned an article in the Wall Street Journal about the Dallas home market and how it is the “canary in the coal mine” for the US real estate market. Builders are beginning to have to offer discounts / amenities in order to attract buyers, who are becoming more cautious following a rise in real estate markets. The Dallas market is interesting because Texas is more restrictive in terms of cash-out refinances. Take a look at the charts below. Dallas is the grey line. You can see they largely missed out a lot of the torrid growth during the bust years, but prices held up during the bust (they barely fell). However, take a look at the chart on the right, which shows the relative performance of several MSAs following the quarter when the US in general bottomed (late 2011). Dallas has well outperformed the US, and their appreciation is comparable to Silicon Valley. The Dallas market does indeed look toppy, and probably has more in common with the high flyers than the rest of the US. The median house price to income ratio is Dallas is 6, versus 4.4 for the rest of the US. Note as well how poorly the NYC metro area is doing. Fairfield County, CT (Stamford / Bridgeport), North Jersey (Newark) and Westchester (NYC area) are all just barely off the bottom. They have barely participated in the rebound seen in the rest of the country.

NYC MSAs

Morning Report: Home price appreciation is slowing.

Vital Statistics:

Last Change
S&P futures 2929.5 4
Eurostoxx index 383.66 1.52
Oil (WTI) 72.54 0.46
10 Year Government Bond Yield 3.09%
30 Year fixed rate mortgage 4.86%

Stocks are higher as the Fed begins their 2 day meeting. Bonds and MBS are down small.

Home prices rose 0.2% MOM  / 6.4% YOY according to the Case Shiller House Price Index. Prices are appreciating at a slower rate than last year (the second derivative has flipped to negative) and we are seeing less dispersion between geographic areas. The yellow highlighted portion of the graph shows the derivative flipping. The convergence is happening at both extremes – the red-hot Western markets are cooling a little, and some of the laggards in the Northeast and Midwest are picking up a little.

FHFA cumulative

Separately, the Case-Shiller HPI reported that prices rose 0.1% MOM / 5.9% YOY. The index showed the same slowdown that FHFA reported, although Las Vegas and Seattle are still super-strong.

JP Morgan is out with an aggressive call this morning: The Fed will raise rates every quarter through June 2019, taking the Fed Funds rate up to 3.0%. FWIW, the Fed funds futures are predicting only a 6% probability of that forecast, which would have to include an off-meeting hike or a 50 basis point hike at one of the meetings to play out. IMO, the Fed would need to see inflation accelerate meaningfully from here to do that, but the dot plot forecast tomorrow will tell a better picture.

The jump in the 10 year over the past month is setting up for a “buy the rumor, sell the fact” situation if the FOMC statement and dot plots are not sufficiently hawkish. In other words, if the statement is hawkish, the move up in rates has kind of already been made. And if it is dovish, we should see a retracement back down in rates.

Regardless of the increase in rates, the consumer remains ebullient, with the Consumer Confidence index increased in August and is sitting close to an 18 year high. Retailers are noticing as well, as same store sales rose 5.8%. This is despite a run up in gasoline prices. Q4 GDP should be well-supported by strong consumption numbers. It is surprising to see the jump in oil prices have pretty much no effect on confidence or spending. It could be an indication of rising wages.

Fascinating statistic: It can cost $750,000 to build a unit of affordable housing in California. Obviously it is hard to come up with a business model that supports it at those sort of pricing levels.

Morning Report: No surprises in the FOMC minutes

Vital Statistics:

Last Change
S&P futures 2858 -2.75
Eurostoxx index 384.09 0.07
Oil (WTI) 67.46 -0.4
10 Year Government Bond Yield 2.81%
30 Year fixed rate mortgage 4.58%

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

The FOMC minutes didn’t offer anything too surprising. Most participants said it would be appropriate to raise rates soon, which wasn’t a surprise – the Fed Funds futures have a Sep hike as pretty much a sure thing. They worried about how trade could be a downside risk to the economy, especially if it affects business sentiment, investment and employment. They mentioned that in the “not too distant future” monetary policy will no longer be viewed as accomodative. This statement seems to hint that rate hikes should wind up next year, provided inflation remains around these levels. Note that the head of the Dallas Fed suggested that the tightening cycle might be done once we get 75 – 100 basis points higher on the Fed Funds rate.  Bonds didn’t react to the minutes at all, and the Fed Funds futures didn’t budge either.

There wasn’t much talk about reducing the size of the balance sheet, which is more or less on autopilot right now. As the yield curve flattens, you would think the Fed would consider getting more aggressive on the balance sheet unwind. Maybe not on the mortgage backed securities side, but on the Treasury side. If credit is still widely available and the demand is there, why not? If the ducks are quacking, feed ’em.

Central Bankers are meeting in Jackson Hole today. There usually isn’t much in the way of market-moving statements out of these things, but just be aware.

Initial Jobless Claims fell to 210,000 last week. We are bumping around levels not seen since 1969. When you consider the fact that the US population was only 200 MM back then (compared to 325 MM today), it is even more impressive. It certainly has economists scratching their heads.

Home prices rose 0.2% in June and 1.1% for the second quarter, according to the FHFA House Price Index. The second quarter’s pace was the slowest increase in 4 years, which shows that higher interest rates are beginning to have an effect on prices. Prices did rise in all 50 states and 99 out of 100 MSAs. 5 states (NV, ID, DC, UT, and WA) had double digit increases. The Las Vegas MSA had the biggest increase – almost 19%. The laggards were CT, AK, ND, LA, and WV.

FHFA by state

Heidi Heitkamp, a moderate Democrat from North Dakota says she will not support Kathy Kraninger to run the CFPB. She said she was inclined to vote yes, however she is concerned about Kraninger’s experience in consumer protection and also felt she “lacked empathy” for consumers and didn’t believe in the Bureau’s mission. Heitkamp has been supportive of regulatory relief, which means she was a gettable vote. Kraninger’s nomination looks largely to fall along partisan lines now.

New Home Sales fell 1.7% MOM to 627,000, which was below the Street estimate of 649,000. It is up 12.8% on a YOY basis however. The new home inventory situation is getting more balanced, with 5.9 month’s worth of supply. As always, the question is whether that inventory represents the oversupplied luxury market or the undersupplied starter market.

Morning Report: Construction employment increases

Vital Statistics:

Last Change
S&P futures 2820.75 8.75
Eurostoxx index 388.15 3.27
Oil (WTI) 68.28 0.39
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.56%

Stocks are higher this morning after China instituted measures to stimulate the economy. Bonds and MBS are flat.

Bonds sold off hard (yields rose) in response to news out of Japan that their central bank would adjust their interest rate target for the 10 year bond. The Japanese Central bank targets 0% for the yield on their 10 year, and some market participants believe it would be about 30 basis points if it was allowed to float freely. Japanese yields rose the most in 2 years, dragging Euro yields and US yields with them. Remember this whenever you read these articles in the press about the slope of the yield curve and the forecast for a recession. The yield curve is so manipulated by central banks globally that it is hard to draw any conclusions from prices.

Manufacturing activity increased in July, according the Markit Flash PMI, but we are seeing price pressures – in fact pricing pressures were the highest on record (going back to 2009). Input prices (fuel, staff and metals) drove the increase, although the root cause is mainly tariff-driven. Meanwhile, the Richmond Fed Manufacturing Survey was flat but solidly expansionary.

Foreclosure starts fell to 43,500 in June, which is the lowest number in 17 years. Active foreclosures fell below 300,000 for the first time in 12 years. Total delinquencies edged up, but are down on a YOY basis. The foreclosure crisis is about wrapped up, although the judicial states (especially NY and NJ) still have inventory to clear.

House prices rose 0.2% MOM and 6.4% YOY according to the FHFA House Price Index. Prices are still rising at an unsustainable pace in the West and Mountain regions, although the West Coast is decelerating. The Middle Atlantic (which includes NY and NJ) is bringing up the rear.

FHFA regional

The West and the South lead the country in job gains and increases in construction employment. The states where construction employment is increasing the fastest? AZ and MI. AZ fits in with the rest of its neighbors, while MI stands out compared to neighbors like OH and IN. There are a few states decreasing construction employment – OK, SC, and NJ.

construction employment map

Morning Report: 10 trades below 3% of dovish FOMC minutes

Vital Statistic:

Last Change
S&P futures 2726 -4
Eurostoxx index 392.54 -0.07
Oil (WTI) 71 -0.84
10 Year Government Bond Yield 2.98%
30 Year fixed rate mortgage 4.61%

Stocks are lower after Trump threatened more tariffs on autos. Bonds and MBS are up on the dovish FOMC minutes.

Initial Jobless Claims ticked up to 234,000 last week.

Existing home sales fell 2.5% in April, according to NAR. Sales fell to an annualized pace of 5.46 million, down from 5.6 million in March, which was also the Street estimate. Lawrence Yun, NAR chief economist, says this spring’s staggeringly low inventory levels caused existing sales to slump in April. “The root cause of the underperforming sales activity in much of the country so far this year continues to be the utter lack of available listings on the market to meet the strong demand for buying a home,” he said. “Realtors® say the healthy economy and job market are keeping buyers in the market for now even as they face rising mortgage rates. However, inventory shortages are even worse than in recent years, and home prices keep climbing above what many home shoppers are able to afford.”

Other tidbits from the report: the median home price increased 5.3% to $257,900, inventory of 1.8 million homes represents a 4 month supply, days on market fell to 26 days, and the first time homebuyer was 33% of all transactions.

US house prices rose 1.7% in the first quarter, according to the FHFA House Price Index. On a YOY basis, they were up almost 7%. The West Coast continued to lead the pack with high single-digit growth rates, and the Middle Atlantic showed an acceleration of growth. Over the past 5 years, the Middle Atlantic (NY, NJ, PA) has been the slowest appreciating region, growing just over half the rate of the West Coast.

FHFA regional

The FOMC minutes were a bit more dovish than expected – the Fed Funds futures are now handicapping a 37% chance of 4 hikes this year, down from the mid 40% yesterday. The FOMC is worried about a trade war with China depressing economic activity. On inflation, they emphasized the symmetry of the inflation goal. “Most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis.” Overall, nothing was all that new, just a re-affirmation of symmetry, meaning that the 2% target is not a ceiling.

Dallas Fed Head Robert Kaplan thinks the Fed has about 4 more hikes to go before it is at a “neutral” stance. He also discussed his views of inflation above 2%: “I want to run around 2, and if we got a little bit above it and I thought it would be short-term and not long-term, I could tolerate it”

As anyone who attended the Secondary Conference could tell you, mortgage banking is going through a rough stretch right now. Digitalization of mortgage banking has compressed margins and volumes are down. Even people that want to move are finding a dearth of inventory. What could be the catalyst to turn things around? Buy-side firms ringing the register on the REO-to-rental trade. That would bring back enough purchase activity to allow some of the smaller firms to retrench and get their costs under control. Wishing for falling rates is probably a long shot, although if the 10 year finds a level here, we could see rates come in a little, but probably not enough to bring back refis.

Refi activity is going to be concentrated in two areas: cash out to refinance credit card debt, etc, and FHA refis into conforming once the homeowner has enough equity to get under the 80% LTV threshold and avoid having to pay PMI.

While the mortgage business is going through a rough patch, quarterly profits for banks are spiking (tax reform has some effects here). The banking sector largely sat out the M&A boom that has been common throughout other industries. The US market is still about the least concentrated banking market on the planet. Is it time for some M&A? 

Morning Report: New Home Sales and prices soar

Vital Statistics:

Last Change
S&P futures 2682 10.5
Eurostoxx index 383.28 0.1
Oil (WTI) 68.68 0.01
10 Year Government Bond Yield 2.99%
30 Year fixed rate mortgage 4.56%

Stocks are up this morning on strong earnings by Caterpillar. Bonds and MBS are down.

New Home Sales rose 4% MOM and 8.8% YOY to an annualized pace of 694,000 in March. The median sales price was$337,200 and the inventory of 301,000 represented about 5 month’s worth. The number was well above Street estimates, however the confidence interval for this estimate is invariably wide.

Consumer Confidence improved to 128.8 in April as tax cuts have pushed sentiment to post-recession highs.

Home price appreciation is accelerating, with the Case-Shiller Home Price index up 6.8% YOY. We saw double-digit annual increases in San Francisco, Seattle, and Las Vegas.

The FHFA House Price Index reported a bigger increase – 7.2% YOY. The FHFA index only covers conventional loans, so it is a narrower index than Case – Shiller. The increases ranged from 4.8% in the Middle Atlantic to 10.3% in the Pacific.

FHFA House Price Index

What is the issue with the lack of home construction? Lack of labor. The construction industry has about 250,000 unfilled jobs right now, according to the NAHB. At the peak of the bubble, there were about 5 million people in construction; today that number is closer to 3.8 million. Many of these workers found employment in other industries (especially energy extraction) and aren’t about to go back. Immigration restrictions are another headache, as the government estimates that 13% of the construction workforce is working illegally. Finally, the opiod epidemic is particularly problematic in an industry where people are likely to be injured on the job and in pain generally. Ultimately, wages will have to increase to the point to lure a new generation of construction workers out of their climate controlled offices.

Round numbers always bring out the strategists, and as the 10 year sits close to the 3% level, we are seeing pieces discussing the asset allocation implications. Since the financial crisis, the earnings yield on the S&P 500 has been higher than the 10 year, although the premium is at the lowest level since 2010. One strategist thinks the 1950s are a good analogy for investors, where interest rates gradually rose as the memories of the Great Depression faded and the economy was strong. As an aside, Jim Grant discusses how the big retail investor trade in the 1950s was the leveraged curve flattener, where people would borrow short term money to invest in long-term Treasuries. That trade worked until the bond market crashed in the late 50s and a lot of people got carried out.

Is demand falling for houses? According to Redfin’s Housing Demand Index it is. “Abnormally late winter weather and an early Easter likely delayed homeowners planning to list their homes for sale in March,” said Redfin chief economist Nela Richardson. “While inventory levels are still not nearly high enough to meet strong buyer demand, we do expect new listings to pick up in April and May.”

The House has introduced legislation to end regulation by enforcement by the CFPB. HR 5534 would require the CFPB to provide guidance on its regulations and to establish a framework for monetary penalties.