Morning Report: Fed Day

Vital Statistics:

 

Last Change
S&P futures 2648.75 6
Eurostoxx index 357.92 0.9
Oil (WTI) 53.82 0.51
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.59%

 

Stocks are higher after good numbers out of Apple. Bonds and MBS are flat.

 

The FOMC announcement is scheduled for 2:00 pm EST. Nobody expects the Fed to make any changes to the Fed Funds target rate, but there is talk that the Fed might announce an early end to balance sheet reduction. Note there will be a press conference after the announcement – apparently Powell will hold one after every meeting, unlike Janet Yellen who only held them after the Mar, Jun, Sep and Dec meetings.

 

Pulte reported fourth quarter numbers that disappointed the Street, but the 11% drop in orders is what got everyone’s attention. Gross margins also fell. The company said that traffic decreased YOY in October and November, but rebounded in December. That said, the company said there is less certainty about demand heading into this spring selling season than the industry has experienced in recent years. The stock was down about 6% early in Wed trading.

 

Home price appreciation continues to slow, according to the Case-Shiller Home Price Index. Prices rose 5.2% YOY, down from 5.3% the prior month. “Home prices are still rising, but more slowly than in recent months,” says David M. Blitzer, Managing
Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The pace of price increases are being dampened by declining sales of existing homes and weaker affordability. Sales peaked in November 2017 and drifted down through 2018. Affordability reflects higher prices and increased mortgage rates through much of last year. Following a shift in Fed policy in December, mortgage rates backed off to about 4.45% from 4.95%. Housing market conditions are mixed while analysts’ comments express concerns that housing is weakening and could affect the broader economy. Current low inventories of homes for sale – about a four-month supply – are supporting home prices. New home construction trends, like sales of existing homes, peaked in late 2017 and are flat to down since then. Stable 2% inflation, continued employment growth, and rising wages are all favorable. Measures of consumer debt and debt service do not
suggest any immediate problems.”

 

The Trump Admin poured cold water on the notion that they would release Fannie and Fred from government control without Congressional involvement. Earlier in January Joseph Otting, head of the FHFA said:  “The Treasury and White House viewpoint is that the [FHFA] director and the secretary of Treasury have tremendous authority and that they would act, I think, independent of legislation if they thought it was the right thing to do.” This was taken as bullish for the stocks, sending Fannie Mae up from about $1.00 at the end of 2018 to close to $3.00. Since housing finance reform is going to be politically difficult, investors have been betting that the government would be more likely just to recapitalize and release the GSEs.

 

Freddie Mac’s survey is out for 2019. They anticipate one more Fed Funds rate hike, and think mortgage rates will average around 4.7% and GDP growth will slow to 2.5% in 2019 and 1.8% in 2020. They anticipate a slight uptick in housing starts, to 1.3 million per year, which is still well below the historical 1.5 million level. Home price appreciation is set to decelerate as well, to 4.1%. Mortgage originations are expected to finish 2018 at $1.6 trillion and increase to $17 trillion next year.

 

Home prices are falling in Silicon Valley – the first YOY declines since 2012. In San Jose, prices fell 8%, although they are so high – the median price is almost a million – that they are probably still overvalued by a wide margin. What is driving this? Believe it or not, the stock market. Many buyers rely on stock compensation to make the downpayment, and with the FAANG stocks having sold off, that is getting harder to do. Second, high house prices have made people reluctant to move there – after all a high salary is not as enticing if you end up giving it all back in rent or mortgage payments.

Morning Report: Ginnie is increasing scrutiny of non-bank lenders

Vital Statistics:

 

Last Change
S&P futures 2642 0
Eurostoxx index 357.3 2.93
Oil (WTI) 52.35 0.36
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.62%

 

Stocks are flat as we begin the FOMC meeting. Bonds and MBS are up small.

 

Despite the end of the shutdown, we will have to wait for economic data. Two big reports this week – GDP and personal incomes – have been delayed.

 

Economic activity picked up in December, according to the Chicago Fed National Activity Index. Production-related indicators and employment drove the increase. Note that the CFNAI is a meta-index of a number of announced economic indices, and the government shutdown has decreased the amount of data going into the index. We’ll see the same effect next month as well, so the index won’t be as accurate as it usually is. Regardless, the CFNAI is an amalgamation of previously released data, so it doesn’t move markets.

 

Ex-Fed Head Narayana Kochlerakota thinks the Fed should consider easing at the next meeting. His argument is that the Fed has been falling short in maintaining inflation at its 2% target and that notwithstanding the latest unemployment data we are still not at full employment. He is looking at the percentage of prime age people (age 25-54) who are currently employed. We are just south of 80%, and were closer to 82% during the late 90s. Given that the number of prime age people in the US is roughly 100MM, then we have about 2 million more jobs to create in order to get to back to where we want to be. Interestingly, he not only advocates maintaining the current balance sheet, he thinks it should increase about 4% a year to grow in lockstep with the economy.

 

employment population ratio

 

Guess what has been one of the best performing assets so far this year (almost tripled in under a month). If you guessed the GSEs, you would be correct. The market is betting that shareholders won’t get wiped out when / if housing reform happens this year. Check out this chart of Fannie Mae:

 

fnma chart

 

Ginnie Mae is stepping up oversight of its partners, particularly non-bank lenders, telling some that they must improve some financial metrics before they will be granted more commitment authority, which is the ability to securitize FHA and VA loans. The government is concerned that non-bank lenders have replaced a lot of the traditional banks in servicing government loans. Indeed, they have – nonbanks now service 61% of government loans, up from 34% at the end of 2014. FHA was largely a backwater of the mortgage market pre-crisis, however post crisis, it has picked up the load that subprime left. Servicers for government loans have a lot more liquidity demands than servicers for GSE loans – and in a downturn the advances liability could take out undercapitalized mortgage bankers. VA lenders can face what is called no-bid risk, which can be a disaster for many servicers without a line of credit to cover advances and loan buyouts.

Morning Report: Is tapering behind the sell-off?

Vital Statistics:

 

Last Change
S&P futures 2651 -12
Eurostoxx index 356.08 -1.82
Oil (WTI) 52.76 -0.93
10 year government bond yield 2.76%
30 year fixed rate mortgage 4.62%

 

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

 

We have a temporary reprieve of the government shutdown, with agencies to -re-open until Feb 15. This will allow Congress more time to work on some sort of deal on border security. Trump is willing to shut down the government again, or use emergency powers to secure funding. Note that Trump said over the weekend he is skeptical that Congress will come up with anything he would be willing to sign.

 

With the government shutdown over, we should start getting economic data again. We will have a big week for data, with GDP on Wednesday and the jobs report on Friday. Not sure what is going to happen with the missed data from the shutdown.

 

The FOMC meets Tuesday and Wednesday, however no change in the Fed Funds rate is expected. Jerome Powell will hold a press conference after the meeting, which is unusual for January meeting. The Fed Funds futures are pricing in only a 1% chance of a hike, so the press conference will be about something else – probably balance sheet runoff and the idea that the Fed’s balance sheet will probably end up closer to current levels than it will be to pre-crisis levels.

 

Note there has been some criticism that the Fed’s balance sheet reduction is behind the sell-off in the market. They believe that the Fed’s reduction in Treasury purchases, combined with higher borrowing amounts is causing rates to rise and that is spooking investors. The idea is that government borrowing is crowding out other investments by soaking up all of that excess liquidity in the market. The Fed isn’t buying that argument: “It’s hard to fathom the [Fed] balance sheet is having some dramatic effect,” Minneapolis Fed President Neel Kashkari said in a Jan. 17 interview. FWIW, if Fed buying was the catalyst for the sell-off, we should be seeing a steepening of the yield curve (in other words higher long term rates). In fact, we are seeing the opposite. IMO, the biggest reason for the sell off has been the re-introduction of money market instruments to the investment menu. For the past 10 years, they have paid nothing and therefore money market investors have been forced to invest in stocks and longer term bonds. Now that short term rates are rising again that money is returning to its natural home, which means some selling in the stock and bond markets as the trade is unwound.

 

D.R. Horton reported fourth quarter net income increased 52% YOY, although that was partially driven by a tax charge in Q4 last year. Orders were up 3% in units and flat on a dollar basis. Donald Horton, Chairman of the Board said: “Sales prices for both new and existing homes have increased across most of our markets over the past several years, which coupled with rising interest rates has impacted affordability and resulted in some moderation of demand for homes, particularly at higher price points. However, we continue to see good demand and a limited supply of homes at affordable prices across our markets, and economic fundamentals and financing availability remain solid. We are pleased with our product offerings and positioning for the upcoming spring selling season, and we will adjust to future changes in market conditions as necessary.”

Morning Report: What does 2019 look like if the Fed is out of the way?

Vital Statistics:

 

Last Change
S&P futures 2510 24
Eurostoxx index 337.45 1.25
Oil (WTI) 46.4 1.01
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.60%

 

Stocks are higher as close the books on 2018. Bonds and MBS are down small.

 

Today should be relatively quiet as we have an early close in the bond market and no economic data to speak of. Economic data has been delayed due to the government shutdown, but so far it looks like BLS is still working so we should get the jobs report on Friday.

 

Pending home sales dropped 0.7% in November, according to NAR. YOY, activity was down 7.7%. Lawrence Yun, NAR chief economist, said the current sales numbers don’t fully take into account other data. “The latest decline in contract signings implies more short-term pullback in the housing sector and does not yet capture the impact of recent favorable conditions of mortgage rates.” The government shutdown is not going to help things going forward, as the inability to get flood insurance will probably affect some 40,000 home sales.

 

People are looking at 2019 and largely assuming that it will be a carbon copy of 2018 with respect to the mortgage business. That is probably a safe bet, however there is one big difference: if you believe the Fed Funds futures are correct, the Fed is out of the way. For example, Freddie Mac anticipates that the 30 year fixed rate mortgage is going to be 5.1% and originations are going to increase slightly to 1.69MM. When that forecast was made (in August of 2018), people were thinking we would probably have two more hikes in 2019. I suspect that the forecasts for 2019 have yet to factor in a Fed that does nothing further.

 

Where will rates go, then? I suspect that unless the data changes markedly, they probably go nowhere. If we see a dramatic drop in GDP (say Q1 GDP drops to 1%) then rates are going lower as the yield curve will probably invert. If we see a dramatic jump in inflation (say Q1 core PCE hits 3%) then the Fed might hike again and we should see higher mortgage rates. However, the most likely bet is that they kind of meander around in the mid 4%s for the year.

 

Where will home prices go? Most forecasts assume that home price appreciation will slow this year, and that is probably a solid bet. Home prices have become largely untethered from incomes again and will probably lack much impetus to move higher unless wages get a strong boost. There is a housing shortage that needs to be addressed, but that doesn’t necessarily mean SFR construction – the needs are at the lower price points, and that means more multi-fam, not necessarily SFR. There is a glut of high priced properties as well.

 

I suspect that even if rates do move lower, there has been enough prepayment burnout to prevent any sort of meaningful refi boom. Volume is going to have to come from additional products (non-QM etc) and new construction. Volume probably won’t be as bad as 2018, but it won’t be better than 2017 either. Margin compression will probably ease up as competition decreases and marginal players exit the business.

Morning Report: The Fed raises rates

Vital Statistics:

 

Last Change
S&P futures 2511 6.5
Eurostoxx index 339.04 -2.44
Oil (WTI) 47.96 1.72
10 year government bond yield 2.77%
30 year fixed rate mortgage 4.60%

 

Stocks are higher this morning after the Fed hiked rates. Bonds and MBS are flat.

 

As expected, the Fed hiked rates 25 basis points yesterday. The vote was unanimous, and the statement was pretty bland. The forecasts were tweaked slightly, but nothing major. The biggest change was in the dot plot, which basically removed one tightening from 2019’s forecast. The left plot is September, while the right one is December. Note that the dispersion has decreased as well.

FOMC dot plot

 

Bonds took the tightening favorably, while stocks used it as an excuse to sell off. The initial head fake in the bond market was intense, with 2.86% printing before falling below 2.80 and eventually to 2.76%. MBS spreads widened considerably before settling in. The press conference was uneventful, with Powell dodging questions about Trump and the Central Bank’s independence while stressing that the economy is extremely strong right now and it made sense to raise rates. He also said that the Fed Funds rate is now at the lower end of the neutral range and the Fed has no intentions of deviating from its pace of balance sheet reduction.

 

Existing home sales rose 1.9% in November, for a second straight month. Lawrence Yun, NAR’s chief economist, says two consecutive months of increases is a welcomed sign for the market. “The market conditions in November were mixed, with good signs of stabilizing home sales compared to recent months, though down significantly from one year ago. Rising inventory is clearly taming home price appreciation.” The median home price rose 4.2% to $257,700, while inventory fell to 1.74 million. This represents a 3.9 month supply, which is well below what would be considered an equilibrium market. “A marked shift is occurring in the West region, with much lower sales and very soft price growth,” says Yun. “It is also the West region where consumers have expressed the weakest sentiment about home buying, largely due to lack of affordable housing inventory.” I wonder if Chinese money is exiting the area as their economy slows and you start seeing credit issues there. Finally, days on market rose to 42 and the first time homebuyer accounted for 33% of sales.

 

The Senate passed a stopgap spending measure which would fund the government through February. No word on whether the House will go along, but it certainly looks like any sort of shutdown over the holiday period isn’t going to happen.

 

 

Morning Report: Fed day

Vital Statistics:

 

Last Change
S&P futures 2560 22.25
Eurostoxx index 342.07 1.61
Oil (WTI) 46.54 0.3
10 year government bond yield 2.82%
30 year fixed rate mortgage 4.62%

 

Stocks are higher this morning ahead of the FOMC decision. Bonds and MBS are flat.

 

The FOMC decision will be announced at 2:00 pm EST. While the actual decision will be important, the focus will be on the dot plot, which will feed 2019 forecasts. The Fed Funds futures have been a bit more dovish than the previous Fed forecasts, so the market will be expecting a bit of a downward shift in forecasts. The Fed will also release its forecasts for GDP, unemployment, and inflation as well. The Fed has been consistently low in its GDP estimates and consistently high in its inflation and unemployment forecasts since 2016, which is the mirror image of its pre-2016 forecasts. Powell will have a press conference after the release, so the 2:00 pm – 3:00 pm EST timeframe could see some market volatility.

 

Speaking of inflation, we are in some ways going back to the 1970s. Manufacturers (especially in food) are coming up with ways to raise prices while not “officially” raising prices, by offering new products. For example, Nabisco’s new “thin” Oreos cost almost double per ounce than traditional Oreos. We saw this in the 1970s, when potato chip bags were mainly air, and companies would keep packaging sizes (and costs) the same while reducing the amount in the package.

 

Housing starts came in at 1.26 million, a bit higher than what the Street was looking for. Building permits rose 1.33 million, which was an upside surprise as well. The increases were driven by multi-fam, which can be extremely volatile. SFR was more or less unchanged.

 

Mortgage applications fell 5.8% last week despite a big drop in rates. Purchases fell 2% while refis fell 7%. We are in the seasonally slow period, so seasonal adjustments can lead to surprising results. Perhaps the volatility in the stock market was leaving people on the sidelines, but it appears lower rates didn’t have an impact.

 

There is talk that the Senate might be able to scrape together enough votes for a short term funding bill that will take us into the new year. Trump appears to be softening his stance on the wall, so a deal is a possibility. Otherwise, we are in store for a partial shutdown, whatever that means. No word on how it will or will not affect markets / origination.

 

 

Morning Report: Fed meeting begins.

Vital Statistics:

 

Last Change
S&P futures 2565 10
Eurostoxx index 342.92 -0.38
Oil (WTI) 48.4 -1.48
10 year government bond yield 2.84%
30 year fixed rate mortgage 4.62%

 

Stock index futures are up after yesterday’s bloodbath. Bonds and MBS are up.

 

Stocks sold off heavily yesterday as investors begin to fret about next year’s growth. Energy stocks got hammered as oil slipped below $50 a barrel, and some of the healthcare stalwarts continued their slide from last week when Obamacare was ruled unconstitutional. All of this should give the Fed an excuse to do nothing this week, but the reaction if they don’t move could be worse than if they do. FWIW, the Fed funds futures are cheating down the probability of a hike this week. We are at a 71% probability down from 80% last week. Note Donald Trump has been jawboning the Fed to take their foot off the brakes, which adds another dimension to this. The Fed is independent of politics, and if they pass on a hike this week, they run the risk of being accused of being swayed by politics.

 

Even if the Fed does increase rates tomorrow, there are ways that the sting could be taken out of it. If the dot plot moves markedly lower, that would be taken as dovish and the markets could rally. Conversely, language in the statement regarding financial markets and their forecasts could offset a hike as well. That said, the Fed wants to end its hand-holding of the markets, so they could be opaque on purpose. This meeting has the feeling of a crap shoot. The potential for surprises (and big moves in the financial markets) is much bigger at this meeting than it has been recently. Don’t forget there will be a press release after the meeting, so the potential for market movement will last for an hour after the official release. That said, the press will probably spend the whole time trying to get Powell to say something negative about Trump, so we might not hear anything interesting at all.

 

Homebuilder confidence slipped 4 points, according to the NAHB Housing Market Index. Affordability issues remain the culprit, and the confidence decreases were most prevalent in the high-income MSAs. The big West Coast / Mountain States markets have been slowing dramatically, although their high single digit / low double digit rates of appreciation were unsustainable in the first place. The withdrawal of foreign speculative money may be behind this, as it appears that China’s real estate bubble is on borrowed time and corporate defaults are on the upswing. The biggest challenge remains the lower price points, where high labor costs and regulatory costs make it difficult to keep the “affordable” in “affordable housing.”

 

Don’t forget, there is still the threat of a partial government shutdown as Democrats and Trump posture over the wall. It probably won’t affect the mortgage business – if it is a “partial” shutdown, they probably will just shut down a couple monuments in DC to make it visible, but everything else will be fine. During the last major shutdown, Ginnie Mae continued to work as normal, though the IRS did not.