Morning Report: Big jump in building permits

Vital Statistics:

 

Last Change
S&P futures 3128 6.25
Oil (WTI) 56.29 -0.74
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.94%

 

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

 

Housing starts came in a little light, at 1.31 million but the big news was the permits number, which rose to 1.46 million. This is up almost 15% compared to October 2018 and is the highest print since the bubble years. The action was in the Northeast and the South. Completions were up big as well, coming in at 1.26 million, which is up double digits compared to last month and a year ago.

 

building permits

 

The MBA reported that applications for new home purchases increased by 9% from September and by 31.5% from a year ago. “The new home sales market continues to be strong and was reinforced by October’s increase in applications for new home purchases,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “At an annual pace of 791,000 units, our estimate of new sales has reached its highest level since the inception of our survey in 2012. Home builder sentiment remains close to 18-month highs, and housing starts and permits have increased for four straight months. These are promising signs for the housing market, as the rise in new and existing housing supply has led to slower home-price growth and improving affordability.”

 

While a couple data points don’t necessarily indicate a trend yet, we might finally start seeing new home construction begin to meet the pent-up demand out there. And if this is finally happening, GDP forecasts are probably too low.

 

The Home Despot reported disappointing third quarter earnings and lowered FY 2019 guidance. Comp store sales were up, but tariffs are taking a bite out of earnings. The stock is down 5% pre-open.

 

Home prices rose 5.4% in October, according to Redfin. “Low mortgage rates are propping up homebuyer demand and juicing prices, said Redfin chief economist Daryl Fairweather. “However, home sales have been slow to grow since there are so few homes for sale and not many new listings hitting the market, especially affordable ones. The market is split: It’s a seller’s market for moderately priced homes, but a buyer’s market for pricier homes.” 

 

 

Morning Report: High frequency traders and mortgage rates

Vital Statistics:

 

Last Change
S&P futures 2907 -16.5
Oil (WTI) 53.33 -1.74
10 year government bond yield 1.50%
30 year fixed rate mortgage 3.78%

 

Stocks are lower this morning on trade issues. Bonds and MBS are flat.

 

The holiday-shortened week ahead looks to be relatively quiet, with the exception of a spate of Fed-speak on Wednesday and the jobs report on Friday. The September Fed Funds futures are pricing in a 100% chance of another 25 basis point cut, and the Fed seems to be in market-following mode, so the data should take a backseat.

 

Manufacturing activity slipped in August, according to the ISM Manufacturing Survey, which came in at 49.1, well below expectations. This was the first contraction in the manufacturing sector since mid-2016. The level for the ISM typically corresponds with 1.8% GDP growth.

 

Separately, construction spending rose 0.1%, which was lower as well, however the previous month’s drop was revised upward from -1.3% to -.7%.

 

Home prices rose .5% MOM / 3.6% YOY in July, according to CoreLogic. Home price appreciation slowed in 2018 as rates rose. That effect will reverse over the next year, and Corelogic expects annual home price appreciation rates to settle in around 5%. Tight supply, especially amongst starter homes will support prices, as well as a robust labor market and a move out of urban areas to the suburbs. About 37% of the US housing stock in the top 100 MSAs is overvalued. This metric is based on wage growth and housing supply.

 

Hurricane Dorian is expected to miss direct landfall, however it is slow-moving and dumping a lot of rain. Coastal areas will be at risk of flooding as the storm parallels the Eastern Seaboard this week.

 

The WSJ has an interesting article this morning about thinning liquidity in the markets. Late summer is often characterized by thinning liquidity, which means fewer active investors are trading, which causes exaggerated market movements when a big buyer or seller wants to execute an order. They mention what has been going on in the Treasury market:

Some analysts point to high-frequency traders. They have dominated the government-bond market, making up a big chunk of trading activity compared with slower counterparts, according to JPMorgan analysts. These traders withdrew last month, the firm said, suggesting that they amplified turbulence. Investors said liquidity worries are even more pronounced in riskier corporate bonds.

“As you go further down the credit spectrum, it starts to get a bit more volatile,” said Gautam Khanna, a fixed-income portfolio manager at Insight Investment. “Liquidity is definitely thinner in this market than it has been.”

This might help explain why mortgage rates have lagged the move in Treasuries. In essence, high frequency traders help establish a liquid market, where it is easier for large investors such as banks, sovereign wealth funds, pension funds, etc to trade large positions. When these high frequency traders withdraw, bid / ask spreads widen, and volatility increases. Here is the issue: MBS investors hate volatility because it makes their portfolios hard to hedge, and adds uncertainty about prepayment speeds. This causes them to be more conservative with respect to the prices they are willing to pay for mortgage backed securities, which flows through to mortgage rates falling less than the move in Treasuries would predict. Below is a chart of 10 year Treasury futures volatility. You can see the spike in the index beginning in August, which corresponds with the dramatic drop in rates, and the exit of high frequency traders from the market.

 

treasury futures volatility

 

 

Morning Report: Existing home sales disappoint, but some internals are better

Vital Statistics:

 

Last Change
S&P futures 2999 -8.5
Oil (WTI) 56.94 0.14
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.06%

 

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are flat.

 

Today is a big day for earnings, with numbers coming out for Ford, Boeing, Caterpillar, Facebook, and Tesla.

 

House prices rose 0.1% in May, according to the FHFA House Price Index. They were up 5% on a YOY basis. Home price appreciation has been decelerating across the board, but it is most pronounced in the Pacific and Mountain regions.

 

FHFA regional

 

Mortgage Applications fell by 2% last week as purchases and refis fell by the same amount. This was despite a 4 basis point drop in rates.

 

Existing Home Sales fell 1.7% in June, according to NAR. “Home sales are running at a pace similar to 2015 levels – even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country,” said Lawrence Yun, NAR’s chief economist. Yun says the nation is in the midst of a housing shortage and much more inventory is needed. “Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices,” he said.

 

Inventory was 1.93 million units, which represents a 4.4 month supply. Historically a balanced market had 6 – 6.5 months’ worth of supply. As Yun notes above, there is a big mismatch in inventory, with a complete dearth of properties at the low / mid price points. McMansions abound, however. Despite these issues, the first time homebuyer accounted for 35% of sales in June, which is approaching the historical norm of 40%. The first time homebuyer had been largely MIA for most of the post-crisis timeframe, accounting for 30% of sales (or even less). On the flip side, investors (represented by all cash sales) fell to 10%. With home price appreciation leveling out, we may start to see some funds who raised capital for the REO-to-Rental trade in the aftermath of the crisis ring the register and sell some of these properties as the funds wind down. Certainly cap rates are not what they were 10 years ago.

 

The median home price reached an all-time high of 285,700. Sentier Research has the median income at $63,400 as of May 2019. This puts the median house price to median income rate at just about 4.5x. Historically this is a very high number, however it is important to note that interest rates will influence this number. If you look at other metrics besides incomes and prices, homes are not that expensive on a historical basis.

 

 

Morning Report: New Home Sales disappoint

Vital Statistics:

 

Last Change
S&P futures 2955 4.5
Oil (WTI) 57.89 -0.03
10 year government bond yield 2.01%
30 year fixed rate mortgage 4.03%

 

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

 

Fed Chairman Jerome Powell is scheduled to speak at 1:00 pm. These are generally not market-moving events, however given the expectations gulf between the Fed and the markets, it is possible that something could spook investors.

 

Home prices rose 3.5% in April, according to the Case-Shiller Home Price Index. This is down from a 3.7% annual gain in the prior month. “Home price gains continued in a trend of broad-based moderation,” says Philip Murphy, Managing Director and Global Head of Index Governance at S&P Dow Jones Indices. “Year-over-year price gains
remain positive in most cities, though at diminishing rates of change. Seattle is a notable exception, where the YOY change has decreased from 13.1% in April 2018 to 0.0% in April 2019.

Mortgage rates are driving the deceleration in home price appreciation. That said, these are April numbers, which correspond with a 10 year bond yield about 50 basis points higher than today. It will be interesting to see if home price appreciation starts picking up.

 

Compare the Case-Shiller numbers to the FHFA House Price Index. In April, home prices rose 5.2% according to that index. The FHFA index ignores cash transactions and jumbos, so it is more weighted towards starter homes. It shows that there is still plenty of strength at the lower price points. Note as well the deceleration in the previously hot markets, especially Left Coast.

 

FHFA regional

 

New Home sales fell to an annualized pace of 680,000 in May, according to Census. This is down 7.8% MOM and 3.7% YOY. New Home Sales is a notoriously volatile number, with a wide margin for error, but it looks like builders are still sitting on their hands.

 

Bernie Sanders promises to forgive student loan debt paid for with a transaction tax. He expects the tax to raise $2.4 trillion. No details on the tax are available, but it will make mortgages more expensive as it would probably increase hedging costs. Also, it will never raise that kind of money since the immediate effect will be to kill high frequency trading, which is more than half the volume on the US stock exchanges. Many of these high frequency traders are liquidity providers who have automated the role of the specialist and market maker of yesteryear. The net effect will be widen bid-ask spreads and increase the market reaction to orders.

Morning Report: Overseas yields hit a record low

Vital Statistics:

 

Last Change
S&P futures 2759.6 9.65
Oil (WTI) 52.61 -0.84
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.13%

 

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

 

We are seeing lots of articles tying trade to rate cuts. IMO, I think the business press and politicians overestimate the effects of trade sometimes, but there is no doubt that there is a sea change in opinion. The markets are pricing in a 96% chance of a rate cut this year. Only 1 month ago, they were pricing in a 53% chance of no movement at all. Compare the forecast now versus May 3. Amazing how much sentiment has changed. The central tendency is now for 2 rate cuts (although the markets expect the Fed to hold steady at the June meeting in a couple of weeks).

 

fed funds futures

 

Is trade the driver of the change in sentiment? It plays a part, no doubt. But, the yield curve inversion has more to do with general economic malaise especially in Europe. The  German Bund (Germany’s 10 year bond) has hit a record low yield of -21 basis points. This is a big deal, and is the real culprit behind the drop in US Treasury rates. Relative value trading (in other words managers selling Bunds which pay nothing for Treasuries which pay something) is pulling US rates lower, which has inverted the yield curve. An inverted yield curve occurs when short term rates (like the 1 month T-bill) are higher than long term rates like the 10 year. The 1 month T-bill pays 2.35% while the 10 year pays 2.11%. Historically, an inverted yield curve has been a recessionary indicator, but that probably isn’t what is going on right now. I certainly don’t think the Fed imagines a recession is imminent or even a decent possibility – we will get an idea however when they release their economic projections at the June FOMC meeting.  That said, the markets see two rate cuts this year, and the dot plot will be an interesting view.  Strange to think that the Fed tightened to fight nonexistent inflation and will ease to fight a nonexistent recession, but here we are….

 

Home prices rose 1% MOM and 3.6% YOY in April, according to CoreLogic. They do see home price appreciation picking back up over the next year, and are forecasting a 4.7% increase over the next year.

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.

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.