Morning Report: Fed Nominee Judy Shelton probably is done.

Vital Statistics:

 

Last Change
S&P futures 3384 6.25
Oil (WTI) 52.06 0.65
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.68%

 

Stocks are higher this morning after some strong earnings reports out of the tech sector. Bonds and MBS are flat.

 

Retail Sales came in at 0.3% as expected.

 

It looks like Judy Shelton may not make it through the nomination process as the business press gangs up on her and a couple Republicans voice concerns. The issue with Shelton is that she hasn’t rejected the gold standard and she casts doubt that the conventional wisdom of central banking is correct. This may be unfortunate, as global central banks are prone to groupthink. Given the strength of the US economy (strongest labor market in 50 years) why would the Fed be increasing its balance sheet? I wouldn’t be surprises to see her withdraw her name over the long President’s Day weekend.

 

Inflows to bond funds could hit $1 trillion again in 2020. Investment dollars are flowing to high grade corporate bonds and Treasuries. This wall of money will keep a ceiling on bond yields, and should continue this process of rates slowly grinding lower throughout the year. Good news for the mortgage banking business.

 

The homeownership rate increased to 65.1% in Q4, the highest in six years. The millennial cohort rate increased by 1.1% to 37.6%. Note that the rental vacancy rate at 6.4% is the lowest in 34 years.

 

Fannie Mae reported net income of $14.2 billion in 2019. Under an agreement with Treasury, Fannie will be allowed to keep it as they build up their capital to eventually go for sale.

Morning Report: Rates falling on global growth fears

Vital Statistics:

 

Last Change
S&P futures 3243 19.25
Oil (WTI) 51.58 0.02
10 year government bond yield 1.54%
30 year fixed rate mortgage 3.65%

 

Stocks are higher despite Chinese markets getting hammered on Coronavirus. Bonds and MBS are down small.

 

We saw a big jump downward in rates last week, both here and in Europe. The Coronavirus is triggering the “flight to safety” trade, which means investors sell risky assets like stocks to buy less risky assets like Treasuries. So far, we aren’t seeing major moves in the Fed funds futures, but this situation is still developing.

 

Stocks this week will probably be driven by developments in China more than the usual catalysts (earnings and economic data). We are in the heart of earnings season right now, with heavyweights like Google reporting tonight. Not much in terms of Fed speak this week, however we do have some important economic data with the jobs report on Friday.

 

Black Knight Financial estimates there are 9 million refinanceable mortgages in the market right now. By their numbers, 9.4 million borrowers could save an average lf $272 a month if they were to refinance, assuming 30 year mortgage, 20% equity and a 720 FICO. That adds up to $2.6 billion per month, the highest potential savings in 20 years.

 

Wells estimates that if Coronavirus takes a big bite out of global growth, we could be looking at low 1%s in the 10 year. They also think each 1% sell-off in the S&P 500 translates into about 4 basis points lower in the 10 year yield.

 

The homeownership rate ticked up in the fourth quarter to 64.8%, the highest level in the second quarter of 2014. I don’t know if we will get back to the peak levels we saw in 2005-2006 given that the financial conditions that spawned it aren’t present any more.

homeownership rate

Morning Report: New Home Sales flat but trend is steadily upward

Vital Statistics:

 

Last Change
S&P futures 3259 20.25
Oil (WTI) 53.38 0.22
10 year government bond yield 1.62%
30 year fixed rate mortgage 3.71%

 

Stocks are up this morning as the tape exhibits a risk-on feel. Bonds and MBS are down small.

 

The FOMC meeting begins today. No changes in rates are expected, but market participants will be watching for changes in the interest on overnight reserves and changes in the Fed’s balance sheet.

 

Durable goods orders rose 2.4%, which was better than expected although the volatile transportation sector accounted for the growth. Ex-transportation they fell 0.1%. Capital expenditures continue to disappoint, falling 0.9%.

 

Home prices rose 0.5% MOM and 2.6% YOY according to the Case-Shiller home price index.

 

New home sales were roughly flat with November, but are up 23% on a year-over-year basis. For the year, new home sales came in at 681,000, up 10% from 2018. As you can see from the chart below, we are back towards historical norms, but given the increase in population, that isn’t enough.

 

new home sales

 

Homebuilder D.R. Horton reported Q1 earnings that impressed the Street, with earnings up 53% and revenues up 14%. Orders were up 19% in units and 22% in dollar volume. The cancellation rate fell to 20% from 24%. The stock was up 2% in what was otherwise a putrid tape.

 

Black Rock’s bond strategist sees bond yields falling another 10 – 15 basis points, as uncertainty over coronavirus and the election seeps into the market. If the virus gets materially worse, and travel and business becomes curtailed, then we could be looking at 1.3% on the 10 year.

 

The CFPB has issued a statement on how it intends to police abusive behavior by lenders. The Bureau has decided that the definition of abusive behavior is too vague, and that uncertainty is having a negative effect on consumers by driving overly-cautious behavior in lenders. The money quote:

First, consistent with the priority it accords to the prevention of harm, the Bureau intends to focus on citing conduct as abusive in supervision or challenging conduct as abusive in enforcement if the Bureau concludes that the harms to consumers from the conduct outweigh its benefits to consumers. Second, the Bureau will generally avoid challenging conduct as abusive that relies on all or nearly all of the same facts that the Bureau alleges are unfair or deceptive. Where the Bureau nevertheless decides to include an alleged abusiveness violation, the Bureau intends to plead such claims in a manner designed to clearly demonstrate the nexus between the cited facts and the Bureau’s legal analysis of the claim. In its supervision activity, the Bureau similarly intends to provide more clarity as to the specific factual basis for determining that a covered person has violated the abusiveness standard. Third, the Bureau generally does not intend to seek certain types of monetary relief for abusiveness violations where the covered person was making a good-faith effort to comply with the abusiveness standard.

The MBA has more analysis of the change here.

Morning Report: Fed Week

Vital Statistics:

 

Last Change
S&P futures 3144 -6.25
Oil (WTI) 58.59 -0.64
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.98%

 

Stocks are slightly lower as we head into a Fed Week. Bonds and MBS are up.

 

There are two big events this week: the FOMC meeting on Tuesday and Wednesday and the spate of new Chinese tariffs expected to take effect at the end of the week. We will get some interesting economic data in productivity, inflation and retail sales, but with the Fed on the sidelines trade and overseas markets will be driving interest rates.

 

The Fed Funds futures are predicting no changes to interest rate policy at the meeting this week. The June 2020 futures are predicting a roughly 50/50 chance of another rate cut.

 

The average size of a first-time homebuyer’s mortgage was $231,974 for the first 3 quarters of 2018 and was up 4.2% on a YOY basis.

 

first time mortgage size

 

Interesting stat courtesy of the Harvard Joint Center for Housing Studies: annual household growth over the next 10 years is expected to be 1.2 million per year. With housing starts around the same level, we are not taking into account functional obsolescence and deterioration.

 

Is a homeowner who sells his house via iBuyers (think Zillow and Opendoor) leaving money on the table? Turns out the average discount to market value is about 1.3%. The typical fee charged an iBuyer is around 7%. So the total costs is 8.3%. Compare that to using traditional realtors and paying 6%, along with the expense of showing the home, etc. Essentially the seller is paying for convenience, which is a non-contingent offer in a week, with no showing necessary. In this case the fee is about 2.3%, which represents the additional fee of 1% the iBuyer charges along with the 1.3% market value discount.

 

Paul Volcker, the Fed Chairman who slayed the 1970s inflation dragon has passed away.

Morning Report: Blowout jobs report

Vital Statistics:

 

Last Change
S&P futures 3148 22.25
Oil (WTI) 57.99 -0.44
10 year government bond yield 1.85%
30 year fixed rate mortgage 3.94%

 

Stocks are higher after a blowout jobs report. Bonds and MBS are down.

 

Jobs report data dump:

  • Nonfarm payrolls up 266,000
  • Unemployment rate 3.5%
  • average hourly earnings up 0.2% MOM / 3.1% YOY
  • Employment-population ratio 61%
  • Labor force participation rate 63.2%

Huge surprise in payrolls given the ADP report only had 67,000. The unemployment rate of 3.5% is the lowest in 50 years. About the only blemish was the small downtick in the labor force participation rate. Note that manufacturing payrolls increased smartly.

 

What does this mean for the bond markets? Nothing since the Fed is on hold, probably through the 2020 election. It also might mean that the rate cuts of earlier this year are beginning to take effect and the drag from the 2018 tightening cycle is behind us.

 

Note that the makeup of the 2020 FOMC voting members will be more dovish than 2019. Eric Rosengren and Esther George – two hawks that dissented against rate cuts – rotate off the board next year. In their place, we will be getting Neel Kahskari and Robert Kaplan. Neel Kashkari is considered one of the most dovish members of the FOMC. Will it make much of a difference? Probably not, although the bar for increasing interest rates will be adjusted upward accordingly.

 

Interesting chart: the median age of US homebuyers since 1980. It has increased from 32 to 47 over that period. Half of that increase came from the Great Recession. Much of this is explained by the muted presence of the first time homebuyer, who has been about 30% of sales as opposed to their historical 40%.

 

median age of us homebuyer

Morning Report: Jumbo loans remain much cheaper than conforming loans.

Vital Statistics:

 

Last Change
S&P futures 3120 8.25
Oil (WTI) 58.69 0.24
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.94%

 

Stocks are higher this morning on optimism for a trade deal. Bonds and MBS are down.

 

China maintained that tariffs must be cut if there is to be a phase 1 deal before new tariffs go into effect December 15. Chinese officials said the two sides remain in close communication.

 

Despite the weak ADP print yesterday, other labor market indicators look healthy. Outplacement Firm Challenger Gray and Christmas reported that announced job cuts fell 11% MOM and 13% YOY to 44,569. Tech was the biggest sector this month however retail is the leader for the year. Year-to-date, companies have announced 556,000 job cuts versus 1.2 million planned hires. Note that Challenger and Gray only looks at press releases, not actual cuts. Separately, initial jobless claims fell to 203,000 for the holiday-shortened week.

 

The service sector continued to expand, albeit at a slower rate in November, according to the ISM survey. Employment plans accelerated, while production decelerated. “Tariffs are impacting prices for a broad array of products used in the delivery of services and completion of projects for our clients. Upward pressure is impacting suppliers and their pricing to customers. We are seeing no relief from our customers, so we’re being negatively impacted by tariff-driven price increases. Numerous suppliers report looking for alternative manufacturing/supply locations outside of China, but with limited or no success so far.” (Management of Companies & Support Services)

 

The government has ended the limits on VA mortgages, which means veterans can borrow as much as their incomes and credit allow. So theoretically veterans can buy million dollar homes with no money down.

 

Mortgage credit increased in November, according to the MBA, especially in the jumbo space. “Most notably, the jumbo index climbed to yet another record high, as investors increased their willingness to purchase loans with lower credit scores and higher LTV ratios,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Additionally, the government index saw its first increase in nine months, driven by streamline refinance programs.”

 

Speaking of jumbos, the spread between 30 year conforming loans and jumbos remained negative this year, which means jumbo rates are less expensive than conforming rates. This is odd given that conforming loans are government guaranteed and jumbos are not. The spread did rise a bit this year, largely driven by staffing issues. Still, what is going on? According to CoreLogic, an “increase in GSE guarantee fee, a reduction in the GSE funding advantage, and portfolio lenders’ desire to hold jumbo loans explain much of the variation in the jumbo-conforming spread.” The issue of portfolio lenders could be translated to: banks are subsidizing jumbo loans because they are interested in the cross-selling opportunities, especially wealth management services. 

 

jumbo conforming spread.PNG

Morning Report: Home price appreciation accelerates in September

Vital Statistics:

 

Last Change
S&P futures 3134 1.25
Oil (WTI) 58.39 0.24
10 year government bond yield 1.74%
30 year fixed rate mortgage 3.93%

 

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

 

Jerome Powell spoke last night and said that the Fed cut rates this year as the economy wasn’t as strong as anticipated. He reiterated that the Fed won’t be making any moves unless things change “materially” in the US economy: “Monetary policy is now well positioned to support a strong labor market and return inflation decisively to our symmetric 2 percent objective. If the outlook changes materially, policy will change as well. At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.”

 

Home prices rose 1.1% in the third quarter, according to the FHFA House Price Index. They are up 4.9% on a YOY basis. They added an interactive map, so you can drill down to MSA-level home price appreciation. Separately, the Case-Shiller home price index rose 3.2% on an annual basis in September.

 

Mortgage delinquency rates fell in October, according to Black Knight’s First Look. The Deep South still has the highest delinquency rates, while the West Coast and Mountain states have the lowest levels. Prepay speeds are up 134% on a YOY basis.

 

Redfin makes its predictions for the 2020 housing market.

  • a return of bidding wars
  • 30 year fixed rate mortgage stabilizes at 3.8%
  • home prices will rise in the Southeast as people get priced out of the cities