Morning Report: Personal Incomes rise more than expected

Vital Statistics:

 

Last Change
S&P futures 2989 8.25
Oil (WTI) 55.35 -1.24
10 year government bond yield 1.70%
30 year fixed rate mortgage 3.95%

 

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

 

Personal incomes rose 0.4% in August, while personal consumption rose 0.1%. Income surprised to the upside, while spending disappointed. Inflation remains within the Fed’s target, with the core PCE index rising 0.1% MOM and 1.8% YOY. The headline PCE, which includes food and energy, was flat MOM and up 1.4% YOY. Wages and salaries were up 0.6% MOM and up 4.8% YOY. Given that inflation is running below 2%, we are seeing real wage growth.

 

Durable goods orders rose as well, increasing 0.2%, while the Street was looking for a decrease of 1%. Ex-transportation they were up 0.5%, again above expectations. Business capital expenditures disappointed, however falling 0.2%.

 

Pending home sales rose 1.6% in August, according to NAR. “It is very encouraging that buyers are responding to exceptionally low interest rates,” said Lawrence Yun, NAR chief economist. “The notable sales slump in the West region over recent years appears to be over. Rising demand will reaccelerate home price appreciation in the absence of more supply.” The Western region was up 8% YOY as falling mortgage rates are improving affordability.

 

Millennials are continuing to leave the big cities, as they head to the suburbs to raise families (and also get priced out). New York City lost almost 38,000 young adults last year, which was twice the decline it had seen in the previous few years. When the Millennials were younger, urban walkable environments were all the rage and many in the industry thought this time was different. It wasn’t. The Millennial generation is getting married later and having kids later, but it seems like they are going for the same thing every generation prior to them wanted: space, good schools, etc. This is good news for the builders at the lower price points. Take a look at PulteGroup’s chart below.

 

pulte

 

The IPO market is still broken. Peloton was the most recent IPO to break price on the open. “Break Price” means to trade below the IPO price. It opened around $27 versus an IPO price of $29. This won’t help We Work’s IPO which is looking like an absolute dumpster fire as the price keeps getting cut. Historically, IPOs would trade at substantial premiums to their offering price, but those days are over. This represents the change in who pays the bills for investment banks, from the buy side to issuers.

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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: Tariff threats push the 10 year to 2.15% overnight

Vital Statistics:

 

Last Change
S&P futures 2761 -29
Oil (WTI) 55.56 -0.6
10 year government bond yield 2.16%
30 year fixed rate mortgage 4.25%

 

Stocks are lower this morning after Trump threatened Mexico with 5% tariffs over illegal immigration. Bonds and MBS are up.

 

The 10 year bond is trading at 2.16 this morning, the lowest level in almost 2 years. We are seeing some action in the TBAs as the 3% FN coupons are all trading above par. We should see more pain in the servicing space as marks have to come in. If you were hoping for a good MSR mark to paper over an aggressive cut in margins, you are about to get a double-whammy.

 

Personal Incomes rose 0.5% in April versus Street expectations of a 0.3% increase. Personal Consumption rose 0.3%, again topping estimates. March’s consumption numbers were revised upward as well. The core PCE  price index (the Fed’s preferred measure of inflation) rose 1.6% YOY, which is well below their target. For those keeping score at home, the market is now pricing in a 90% probability of a rate cut this year. with a better-than 50% chance of 2 or more!

 

fed funds futures

 

Regardless of the strength in the economy, pending home sales dropped 1.5% in April. YOY contract signings fell 2%, making this the 16 consecutive month of YOY declines. Lawrence Yun highlighted the problem: a glut of expensive homes and a shortgage of low priced homes: “Home price appreciation has been the strongest on the lower-end as inventory conditions have been consistently tight on homes priced under $250,000. Price conditions are soft on the upper-end, especially in high tax states like Connecticut, New York and Illinois.” The supply of inventory for homes priced under $250,000 stood at 3.3 months in April, and homes priced $1 million and above recorded an inventory of 8.9 months in April.”  Given that a balanced market is usually around six and a half months, you can see the extremes of 3.3 months at the low end and 8.9 months at the high end.

 

Fed Vice Chair Richard Clarida gave some support to the bond market yesterday in a speech at the Economic Club of New York. “If the incoming data were to show a persistent shortfall in inflation below our 2 percent objective or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook, then these are developments that the [Federal Open Market Committee] would take into account in assessing the appropriate stance for monetary policy…..Midway through the second quarter of 2019, the U.S. economy is in a good place…By most estimates, fiscal policy played an important role in boosting growth in 2018, and I expect that fiscal policies will continue to support growth in 2019.”

Morning Report: An anticlimactic Fed decision

Vital Statistics:

 

Last Change
S&P futures 2794 -14.75
Eurostoxx index 364.5 -2.58
Oil (WTI) 59.81 -0.86
10 year government bond yield 3.21%
30 year fixed rate mortgage 4.98%

 

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

 

As expected, the Fed made no changes to monetary policy yesterday. The language in the statement was almost identical to the September release, with some small changes regarding the deceleration in business fixed investment. Bonds didn’t have much a of reaction to the decision. The December Fed Funds futures contracts are handicapping a 76% chance of another 25 basis points next month.

 

Initial Jobless Claims ticked up slightly to 214k last week. The labor economy continues to plug along.

 

A lack of housing inventory translates into a “new normal” for home sales, which is about 1 million units less per year than the pre-bubble days – in other words, the early 2000s, before the big jump in sales driven by the bubble years. The problem is that household formation has outstripped homebuilding for over a decade, and if you correct for population growth, we are still way below what is needed.

 

home sales

 

D.R. Horton reported earnings yesterday that missed street estimates and the stock was rocked to the tune of 9%. Earnings were up 41%, but on the call, DHI CEO David Auld said the market was “choppy” and noted some “momentum slipping from the market.” D.R. Horton focuses on starter homes, so this is worrisome given that luxury is already struggling a bit. The whole sector is struggling this year, with the homebuilder ETF down 25% from its high set earlier this year.