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: Surprisingly strong GDP report

Vital Statistics:

 

Last Change
S&P futures 2939 -3.25
Eurostoxx index 390.26 -0.72
Oil (WTI) 63.11 -0.18
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.23%

 

Stocks are flattish as we end the month of April. Bonds and MBS are flat.

 

We have a decent amount of data this week, along with a Fed meeting. The biggest news will be the jobs report on Friday, although we will get income / spending data and the ISM.

 

Q1 GDP came in at a much higher than expected 3.2% versus the 2.3% growth that was expected. Even better, the inflation rate came in much lower than expected, which should mean the Fed is out of the way. The 10 year bond yield traded below 2.5% for the first time in 2 months, despite having the strongest Q1 growth in 4 years. Note that consumption didn’t drive the increase in growth (it only came in at 1.2%) – the growth was driven by exports  – which at a minimum should end the talking point that Trump’s trade wars are alienating our trading partners.

 

GDP

 

The immediate market reaction was subdued. The 10 year bond yield drifted lower, stocks were flat, and the Fed Funds futures didn’t change all that much – still predicting a 1/3 chance of no moves this year and a 2/3 chance of a rate cut.

 

In terms of the individual components, the trade numbers were affected by both an increase in exports (3.7%) and a drop in imports (-3.7%). Durable goods consumption fell 5.3%, which is probably related. Residential continues to be a persistent weak spot (-2.8%), and a bit of a head-scratcher given the sheer lack of inventory. Increased investment was driven by an increase in intellectual property (8.6%), which offset a decrease in building (-0.8%).

 

Housing’s contribution to GDP has been shrinking since the late 80s. The financial crisis caused it to fall from about 18% to 15%, and in the past decade it has been more or less stuck there. It looks like housing is again beginning to decline as a percent of GDP, and it is now below 15%. If housing can get back to at least normalcy, that should provide a good bump for GDP growth.

 

housing GDP

 

Personal Incomes rose 0.1% in March, which was below expectations. Consumption surprised to the upside. Inflation remains tame, with the headline PCE number up .1% MOM / 1.5% YOY and the core up 0.2% / 1.6% YOY.

 

New FHFA Director Mark Calabria has an ambitious agenda for housing reform, including solving problems with servicing, fixing the QM patch, and eventually releasing the GSEs from conservatorship. He is emphatic that he does not want to see the mortgage market return to the pre-2008 days.

Morning Report: Home price appreciation is slowing

Vital Statistics:

 

Last Change
S&P futures 2910.5 -2
Eurostoxx index 389.7 -0.8
Oil (WTI) 65.66 1.29
10 year government bond yield 2.59%
30 year fixed rate mortgage 4.34%

 

Stocks are flattish this morning as we await earnings from some of the FAANG heavyweights. Bonds and MBS are flat as well.

 

Existing home sales fell 4.9% in March to a seasonally adjusted annualized level of 5.21 million. A decrease was expected since February’s numbers were stronger than expected. On a year-over-year basis, sales are down 5.4%. The median home price rose 3.8% to $254,400, and it looks like home price appreciation is slowing down here as well. Inventory remains the problem, with 1.68 million homes for sale, representing a 3.9 month supply. A balanced market would be closer to 2.6 million homes for sale. In addition, we have a glut at the luxury price points and a shortage at the entry-level price points. Days on market increased YOY to 36 from 30. First time homebuyers represented a third of all transactions. Historically that number has been closer to 40%.

 

Home prices rose 0.3% MOM in February and are up 4.9% YOY, according to the FHFA House Price Index. Note the difference in price appreciation versus the NAR numbers (+4.9% versus +3.8%) – this reflects the fact that the FHFA index excludes jumbos, which is where there real slowdown is being seen, especially in high tax states.  Take a look at the YOY price appreciation comparison regionally and check out the difference between this time last year in home price appreciation on the West Coast.

 

FHFA regional

 

Herman Cain has withdrawn his name from consideration to the Fed. A handful of Republican senators expressed reservations about his nomination, which was probably enough to make his actual confirmation unlikely. The top Democrat in the U.S. Senate, Chuck Schumer, said Cain’s “failure to garner adequate support should not be used as a pathway by Senate Republicans to approve Stephen Moore, who is equally unqualified, and perhaps more political.”

 

The Trump Administration is taking a look at downpayment assistance programs – generally government programs that help borrowers put together their 3.5% down payment for a FHA loan. As you would expect, borrowers who need help scraping together 3.5% are riskier, and indeed the default rates on these mortgages are double those of a traditional FHA mortgage (and FHA DQs are much higher than conventional DQs). HUD promulgated new guidance for downpayment assistance programs last week tightening documentation rules. Ballard Spahr summarizes the new guidance here.

Morning Report: Rebound in refinances this year

Vital Statistics:

 

Last Change
S&P futures 2917.25 5.85
Eurostoxx index 388.92 -0.35
Oil (WTI) 64.39 0.34
10 year government bond yield 2.61%
30 year fixed rate mortgage 4.32%

 

Stocks are higher this morning as bank earnings continue to come in. Bonds and MBS are down on stronger-than-expected data out of China.

 

Mortgage Applications fell 3.5% last week as purchases rose 1% and refis fell 8%. “Mortgage applications decreased over the week, driven by a decline in refinances,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “With mortgage rates up for the second week in a row, it’s no surprise that refinancings slid 8 percent and average loan sizes dropped back closer to normal levels.” The average mortgage rate rose 4 basis points to 4.44%. The refinance index has rebounded smartly over the past several months, but we are nowhere near the levels of the 2015 refi boom, let alone the 2011-2012 boom.

 

refi index

 

Builder optimism inched up as the the NAHB / Wells Fargo Housing Market index rose 1 point to 63. As has been the case throughout the recovery, the West led the pack, with the Midwest and Northeast picking up the rear. “Builders report solid demand for new single-family homes but they are also grappling with affordability concerns stemming from a chronic shortage of construction workers and buildable lots,” said NAHB Chairman Greg Ugalde.

 

Industrial Production slipped 0.1% in March, while manufacturing production was flat. Capacity Utilization dropped .2% to 68.8%. This was generally a disappointing report, however orders for business equipment and capital expenditures bounced back after a deep decline in February. Over the past several years, the first quarter has been weak, and it looks like this year is more of the same.

 

New FHFA Chairman Mark Calabria said he takes the role with a “great sense of urgency” with regard to reforming Fannie Mae and Freddie Mac. He was confirmed as FHFA Chairman last week on a straight party line vote. “The mortgage market was at the center of the last crisis, as it has been for many past financial crises,” Federal Housing Finance Agency Director Mark Calabria said Monday in his first official remarks as head of the agency. “I believe the foundations of our current mortgage finance system remain vulnerable.”

Morning Report: Weak housing starts number

Vital Statistics:

 

Last Change
S&P futures 2821.25 14.5
Eurostoxx index 376.34 2.01
Oil (WTI) 59.65 0.83
10 year government bond yield 2.45%
30 year fixed rate mortgage 4.08%

 

Stocks are higher this morning on overseas strength. Bonds and MBS are up.

 

Lots of housing data to chew through. Let’s start with existing home sales, which increased 11.8%, according to NAR. While this month-over-month print of 5.51 million sounds impressive, we are still down on a YOY basis. Lower rates are helping, and we are beginning this season with a little more inventory to work with. We had 1.63 existing homes for sale, which represents a 3.6 month supply. A balanced market needs something like 6 months. Prices are still rising – the median house price rose by 3.6% – but the rate of appreciation has slowed. The median home price came in at $249,500, and that puts the median house price to median income ratio just over 4. Historically that is a high number, but lower interest rates help the affordability issue. The first time homebuyer represented 32% of home sales, an increase from last year but still below the historical average of around 40%.

 

Housing starts fell 8.7% to 1.16 million, a disappointing number. We saw a huge decrease in single family construction – from an annualized pace of 970k to 805k. Last February, the number was 900k so this is a big drop. One note of caution – the margin for error on these numbers is huge (around 17%), so there is a good chance this gets revised upward in subsequent releases. Building permits were a little better – falling only 2% to 1.3 million. Housing construction has largely been absent from this recovery, and could provide a huge boost to the economy if it ever gets back to normalcy (around 1.5 million units a year).

 

housing starts

 

More evidence that home price appreciation is slowing: the Case-Shiller home price index rose 4.3% in January, the slowest pace since 2015. In general, 2018 was a year to forget for the mortgage industry as rates rose 100 basis points. They have now given back most of those gains, so perhaps 2019 will be a bit brighter, although if you have been counting on MSR unrealized gains to paper over weakness in lending, the Q1 mark is going to be harsh.

 

The economy seems to be slowing, according to the Chicago Fed National Activity Index. It edged downward to -.29 in February, and the 3 month moving average is negative as well. The CFNAI is a meta-index of 85 different economic indicators, of which many are leading as well as lagging. While it is too early to start declaring 2019 a slow-growth year, the first quarter is looking weak.

 

The FHA is backing away from a 2016 decision to loosen credit – it is now tightening standards and flagging more loans as “high risk.” The biggest effect will be for the first time homebuyer, and FHA estimates that 40,000 loans or so might be affected. At the heart of the issue is a 2016 decision to no longer require a manual underwrite for FHA loans with FICOs below 620 and DTIs above 43. FHA was largely a backwater pre-crisis, and most of these types of loans were subprime. As the subprime market disappeared, FHA stepped in to fill the void. Home Ready and Home Possible have emerged as low downpayment competitors, and FHA has suffered from negative selection bias. While FHA permits very low credit scores, most lenders don’t go as low as FHA permits in the first place.

 

Trump nominates free-marketer Steven Moore to the Federal Reserve Board and Paul Krugman isn’t taking it well. For a little economics inside-baseball, this resembles the Spacely Sprockets / Cogswell Cogs rivalry in the economics profession. Since most of the free-market caucus comes from the University of Chicago, they are called “fresh water economists” and Krugman comes from Ivy / Coastal academia (Princeton) so his school is called “salt water” economists. In terms of ideological bent, the fresh water economists are much more non-interventionist than the salt water economists, who support direct government intervention in the markets and economy. Steven Moore is a true believer in the free market approach, and to be honest, most of the Fed and academia are not. A little diversity of opinion is not a bad thing….

 

 

Morning Report: No revelations in Humphrey Hawkins testimony

Vital Statistics:

 

Last Change
S&P futures 2785.75 -5
Eurostoxx index 372.14 -1.55
Oil (WTI) 56.64 1.06
10 year government bond yield 2.63%
30 year fixed rate mortgage 4.34%

 

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

 

Jerome Powell’s Humphrey-Hawkins testimony didn’t really reveal much in the way of new information. Here are his prepared remarks.  The Fed will be patient as it evaluates incoming data: “With our policy rate in the range of neutral, with muted inflation pressures and with some of the downside risks we’ve talked about, this is a good time to be patient and watch and wait and see how the situation evolves.” He didn’t volunteer too much information regarding balance sheet runoff other than to say the Fed is evaluating the timing. For the most part, the bond market didn’t really react much to the testimony other than to rally somewhat on his view that he doesn’t see much in the way of wage-push inflation. The message to the bond market: don’t freak out if you start seeing wage growth with a 3 handle.

 

Home prices rose 1.1% in the fourth quarter, according to the FHFA House Price Index. December was up 0.3% from November. The hot markets of 2017, especially the West Coast markets, have cooled substantially and are now experiencing appreciation more in line with the rest of the country. This chart probably understates the deceleration in the hotter markets, as the index only looks at loans with a conforming mortgage, which means it is only measuring the lower price points, which is where the strength lies. The jumbo market has been struggling.

 

FHFA regional

 

Mortgage Applications increased 5.3% last week as purchases rose 6% and refis rose 5%. Mortgage rates were little changed last week, but as we anticipated, homebuyers are responding favorably to this more stable rate environment,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Purchase applications for both conventional and government loans rose last week, with the government gain led by a 14 percent increase in applications for VA purchase loans.”

 

A Senate Panel voted to advance Mark Calabria to a full vote on the Senate floor. The vote was 13-12, straight along party lines. The industry applauded the appointment.

 

Both Zillow and Redfin have models to value homes – which one is more accurate? It turns out that if you look at listed homes, Redfin is the winner, with an error rate of 1.8%. However, for homes off the market, it rises to 6%. Zillow, who doesn’t break out on the market / off the market for its error estimates comes in around 4%. FWIW, appraisers consider an error range of 4% about accurate. Note though that these are median error rates. In newer subdivisions, where square footage and lot sizes are similar, the estimates will be pretty predictive of final sales prices. As the properties become more diverse the error ranges increase. Note that in MSAs like Chicago, the median error is 4%, but over 40% of all home sales are not within 5% of the final sales price.

Morning Report: Mark Calabria to testify in front of the Senate today

Vital Statistics:

 

Last Change
S&P futures 2757 7
Eurostoxx index 366.36 1.6
Oil (WTI) 54.46 0.56
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.43%

 

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

 

We have some inflation data, with the consumer price index flat MOM and up only 1.6% YOY. Ex-food and energy, the index rose 0.2% MOM and 2.2% YOY. At the wholesale level, the producer price index fell 0.1% and 2% YOY. Ex-food and energy, the index rose 0.2% MOM and 2.5% YOY. Inflation remains under control, despite rising wage pressures which is a bit of a Goldilocks scenario, especially with respect to the Fed.

 

December retail sales were disappointing, falling 1.2%. The control group, which excludes volatile sectors like autos and building materials, fell 1.7%. This data was delayed by the government shutdown – we should be getting Jan numbers tomorrow.

 

Initial Jobless Claims rose to 239,000 last week.

 

It looks like Trump is going to sign the spending deal hashed out in Congress that provides some of the money he requested for the southern wall. He will continue to look for other options to get funding as well. Whether that includes declaring a national emergency to siphon fund from DOD is anyone’s guess.

 

Mark Calabria is set to testify before the Senate today as it considers his nomination to run FHFA, the housing regulator that oversees Fannie and Freddie. Calabria is a libertarian, and has questioned the government’s role in the mortgage market – particularly the support it gives the 30 year fixed rate mortgage, which is a distinctly American product which wouldn’t exist without government subsidies. Calabria has also been critical of the whole mortgage securitization market in general, believing that banks should hold (and service) more of their loans. The vote is expected to fall along party lines, with Republicans voting in favor and Democrats voting against.

 

The 30 year fixed rate mortgage is an anomaly that doesn’t exist anywhere else in the world that I am aware of. In most other countries, mortgages are adjustable rate, and banks hold them without government backstopping the credit. In other words, the borrower bears the interest rate risk, and the bank bears the credit risk. In the US, the lender bears the interest rate risk and the taxpayer bears the credit risk. Calabria has been critical of this product, arguing that it artificially inflates housing values which is a valid criticism. Of course the 30 year fixed rate mortgage isn’t the only subsidy out there – the tax treatment of mortgage interest is another, and flood insurance is another. These programs makes housing more affordable relative to incomes, which means it will be vulnerable to shocks. Does that mean these programs cause bubbles?  Not necessarily, since we have seen housing bubbles in several countries that don’t have these supports.

 

Mortgage delinquencies continue to fall, as the 30 day DQ rate hits the lowest level in 10 years. 30 day DQs fell from 5.2% to 4.1% over the past year, while foreclosures fell from 0.6% to 0.4%. CoreLogic CEO Frank Martell said, “On a national basis, we continue to see strong loan performance. Areas that were impacted by hurricanes or wildfires in 2018 are now seeing relatively large annual gains in the share of mortgages moving into 30-day delinquency. As with previous disasters, this is to be expected and we will see the impacts dissipate over time.”