Morning Report: Home price appreciation is flattening

Vital Statistics:

 

Last Change
S&P futures 2826 -5
Oil (WTI) 58.98 0.35
10 year government bond yield 2.29%
30 year fixed rate mortgage 4.41%

 

Stocks are flattish as investors return from the long Memorial Day weekend. Bonds and MBS are flat.

 

Mortgage REITs like Annaly and American Capital Agency are increasing the size of their mortgage books. Over the past year, mortgage REITs have increased their exposure by 28%. The agency REITs generally stay fully invested in a portfolio of Fannie Mae and Freddie Mac MBS and adjust duration exposure and leverage as different pockets of value develop in the MBS market. Mortgage REITs are an important source of financing for the residential real estate market, and are stepping up as the Fed reduces its exposure. What does this increase in exposure tell us? That these REITs are betting on interest rate stability over the near term. If you own a large leveraged portfolio of mortgage bonds, you want rates to move as little as possible to maximize your returns.

 

Home prices rose 3.7% in March according to the Case-Shiller Home Price Index. This is a decline from the 3.9% increase reported in February. Real estate prices probably rose too far too fast especially out West and now we are seeing a leveling-off. Prices in Los Angeles, San Diego, Seattle, and San Francisco were up only about 1%. Meanwhile, prices are falling in Manhattan, to the tune of 5.2%.

 

The FHFA House Price Index rose 5.2% in March, which shows that there is still decent demand at the lower price points. The FHFA index only considers houses with conforming mortgages, which means it excludes the jumbo market and that is where the slowdown is occurring.

 

One of the worst this-time-is-different hot takes on the real estate market was the Millennials want to live in walkable, urban areas one. There were lots of approving news stories and analysis pieces about environmentally conscious Millennials who take mass transit and live in dense urban environments.  Was this some sort of social movement or nothing more than a transient phenomenon based on circumstances? It is looking more like the latter. The Brookings Institution notes that the suburbs are now growing, while cities are losing residents. As Millennials start having kids, it turns out they want the same thing every generation wanted before them: a yard and good schools. New York City lost 39,000 residents last year, and we are seeing the same thing in expensive West Coast cities. One of the most cited impediments to more homebuilding has been the lack of buildable lots. I wonder if this was due to builders focusing on urban areas. If the exurbs are coming back, that issue should disappear.

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