Morning Report: Blowout housing starts number

Vital Statistics:

 

Last Change
S&P futures 3315 -7.25
Oil (WTI) 57.83 -0.74
10 year government bond yield 1.79%
30 year fixed rate mortgage 3.88%

 

Stocks are lower this morning as US investors return from a 3 day weekend. Bonds and MBS are flat.

 

Housing starts hit a 13 year high, rising to a seasonally-adjusted annual rate of 1.6 million. This is up 17% from November and 41% above a year ago. The caveat: the uncertainty around this number is pretty high, so it might get revised downward next month. That said, we have heard from the builders that they are seeing high traffic and no seasonal slowdown. Housing has been the missing link from the post-crisis recovery, and there clearly is unsatisfied demand. If this is the year we finally see homebuilding begin to meet demand, then current GDP estimates for 2020 are way too low. Note Larry Kudlow just laid a marker: GDP growth will hit 3% this year. Compare this to the current estimates of 1.2% – 2%.

 

housing starts

 

It should be a relatively quiet week, although Davos is going on, which means lots of CNBC interviews in the snow. The theme seems to be environmental this year. We don’t have much in economic data (nothing market-moving at least) and no Fed-Speak. We will get some housing data, with the FHFA House Price index and NAR’s existing home sales report tomorrow.

 

Job openings fell to 6.8 million in November, according to the JOLTS survey. While this is below the 7 million openings we have become accustomed to, it is still quite elevated and speaks to a robust labor market. The quits rate remained at 2.3%. Job openings fell in manufacturing, which is probably related to Boeing’s 737 woes.

 

US home sales prices rose 6.9% in December, according to Redfin. Falling interest rates have boosted home affordability, which is translating into higher prices

 

Redfin price chart

Morning Report: December jobs come in hotter than expected.

Vital Statistics:

 

Last Change
S&P futures 3239 3.25
Oil (WTI) 61.57 -1.04
10 year government bond yield 1.82%
30 year fixed rate mortgage 3.88%

 

Stocks are slightly higher this morning despite an Iranian rocket attack last night. Bonds traded as high as 1.7% overnight before falling back to more or less unchanged levels.

 

The ADP jobs report came in stronger than expected, at 202,000. November’s weak reading was also revised upward. Note nonfarm payrolls are expected to come in at 164,000 on Friday, so there may be some upside.

 

Mortgage applications were largely unchanged during the holiday period, with the composite index falling 1.5%. Refis fell by 8% while purchases increased by 5%. “Mortgage rates dropped last week, as investors sought safety in U.S. Treasury securities as a result of the events in the Middle East, with the 30-year fixed mortgage rate declining to its lowest level (3.91 percent) since early October,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Despite lower rates, refinance volume decreased these last two weeks, and we expect that it will slowly trail off in the first half of 2020 as long as mortgage rates remain in this same narrow range. Homeowners would need to see a sharp drop in rates to reinvigorate the refinance wave seen in 2019.”

 

While the ISM manufacturing index was weak in December, the non-manufacturing index definitely was not. One quote from a builder: “Weather and the holiday season have had an impact on residential new construction sales and production. While demand is outstripping supply in the housing market, business is down due to global trade insecurity causing affordability, labor and cost pressures.” (Construction). Given the weakness in lumber prices, I am not sure how trade is affecting construction. If anything, the issue is labor.

 

Speaking of homebuilding, Lennar reported 4th quarter earnings that surpassed analyst expectations. Rick Beckwitt, Chief Executive Officer of Lennar, said, “During the fourth quarter, the basic underlying housing market fundamentals of low unemployment, higher wages and low inventory levels remained favorable. Against this backdrop, our homebuilding gross margin in the fourth quarter was 21.5%, while our focus on making our homebuilding platform more efficient resulted in an SG&A percentage of 7.6%, an all-time, fourth quarter low. In addition, our financial services business performed extremely well with fourth quarter earnings of $81.2 million, an all-time, quarterly high.” Revenues increased 9% as deliveries rose 13% and average selling prices fell 3% (as Lennar focuses more on the entry-level market where the demand is strongest).

Morning Report: Some predictions for 2020

Vital Statistics:

 

Last Change
S&P futures 3242 -1.25
Oil (WTI) 62.87 -0.74
10 year government bond yield 1.80%
30 year fixed rate mortgage 3.88%

 

Stocks are flattish this morning as Iranian tensions ease. Bonds and MBS are flat as well.

 

The trade deficit fell to a 3 year low as imports fell and exports rose. The Trump Administration has said that a Phase 1 deal with China will be signed at the White House on January 15. Separately, the Senate is expected to vote on the new USMCA (the replacement for NAFTA) this month.

 

The Bernank is suggesting that the Fed not rule out the use of negative interest rates. “The Fed should also consider maintaining constructive ambiguity about the future use of negative short-term rates, both because situations could arise in which negative short-term rates would provide useful policy space; and because entirely ruling out negative short rates, by creating an effective floor for long-term rates as well, could limit the Fed’s future ability to reduce longer-term rates by QE or other means.” He also supported the Fed’s current “makeup” policy where the Fed will allow inflation to run above its intended target for an extended period to “make up” for the past decade where it had run below its target.

 

Interesting new model for home ownership. Fleq is a Los Angeles based startup that buys homes on behalf of a buyer and rents it back them while offering them the chance to buy it from Fleq bit by bit. It is different than the “rent-to-own” model. The buyer (really a tenant) will pay market rent, which is then reduced as the tenant buys more of the property. If the tenant has 5% equity, they 5% of all taxes and maintenance costs. They also get to treat the property as if they own it, meaning they can paint it how they want, etc. I guess it makes sense for someone who falls in love with a house but can’t get a mortgage at the moment. It allows them to move into the home without having to get a mortgage and lets them repair their credit / income / whatever and then go the traditional mortgage route. Don’t know how much interest there will be in this, but it is a novel concept.

 

Some predictions for the 2020 housing market. “In 2020, more home-building activity and consequent growth in supply should tame down home price gains,” said Lawrence Yun, the NAR’s chief economist. “That’s a healthy development for potential home buyers. Southern cities should once again do better than most other markets.”. Another: “Real estate fundamentals remain entangled in a lattice of continuing demand, tight supply and disciplined financial underwriting,” said George Ratiu, senior economist at Realtor.com. “Accordingly, 2020 will prove to be the most challenging year for buyers, not because of what they can afford but rather what they can find.” Punch line: rates will stay around 3.8%, and existing home sales will fall as fewer properties will be available for sale. Of course, that assumes builders will remain cautious. The NAHB expects single family starts to grow 4% to 920,000, which is still below the number we need to keep up with population and obsolescence. The chart below shows population-adjusted starts by decade:

 

starts by population

 

 

Morning Report: Wages increasing especially at the low end

Vital Statistics:

 

Last Change
S&P futures 3242 4.25
Oil (WTI) 62.17 0.44
10 year government bond yield 1.94%
30 year fixed rate mortgage 3.94%

 

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

 

The upcoming week should be relatively quiet with New Year’s right in the middle of the week. Tomorrow, the bond market will close at 2:00 pm as well. The jobs report looks like it will be postponed until next week as well.

 

The USMCA (aka NAFTA 2.0) should help ease the housing shortage in the US by allowing more imports of building materials at cheaper prices. “The U.S. residential construction and remodeling industries rely on tens of billions of dollars in building materials sourced from Mexico and Canada annually because America cannot produce enough steel, aluminum and other materials and equipment to meet the needs of the domestic housing industry,” NAHB said in a statement. FWIW, I don’t know that building materials are the issue – lumber prices are down 33% from the peak in 2018 – but I guess every little bit helps. The biggest constraint is labor and land. And those are more about immigration policy and zoning.

 

lumber

 

Wages are increasing, which reflects a tighter labor market. According to the NY Fed, the average wage rose to a record high of $69,181 in November. Further, wages are rising 4.5% for the bottom 25% and only rising 2.9% for the top 25%. So, definitely good news for the first time homebuyer, who is likely younger and lower paid.

 

 

Morning Report: MBA urges tweaks to the CFPB

Vital Statistics:

 

Last Change
S&P futures 3199 3.25
Oil (WTI) 60.61 -0.34
10 year government bond yield 1.89%
30 year fixed rate mortgage 3.96%

 

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

 

Mortgage Applications fell by 5% last wee as purchases fell 2% and refis fell 7%. Mortgage rates were mostly unchanged, even as a potential trade deal between the U.S. and China caused rates to inch forward at the end of last week,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “With rates showing little meaningful movement, both refinance and purchase activity took a step back. As we move into the slowest time of the year for home sales, purchase application volume is declining but continues to outperform year-ago levels, when rates were much higher. Purchase activity was 10 percent higher than a year ago.”

 

Job openings ticked up to 7.3 million at the end of October, according to the BLS. Retail, financial, and durable goods manufacturing saw the biggest increases. The quits rate was stuck at 2.3%, which is odd given that the labor market is strong and wages are increasing.

 

iBuying, which means buying or selling property via platforms like Zillow, Opendoor or Offerpad accounted for 10% of all sales in several MSAs. These platforms permit the buyer and seller to bypass the traditional realtor and sell their properties directly to the company sponsoring the exchange. Does this save the seller money, since they aren’t paying realtor commissions? Not really. Zillow charges a 7.5% fee on average, which is higher than the 6% in realtor commissions a seller typically pays. That extra 1.5% is a convenience fee – you don’t have to stage the property, you get a non-contingent offer within a few days, and can sew the process up in a week or two.

 

The MBA and NAR filed amicus briefs urging the Supreme Court to maintain the CFPB, but to remove the language that says a Director can only be removed for cause. “When determining how to remedy an unconstitutional statute, courts seek to give effect to congressional intent and to avoid unnecessary disruption,” the brief said. “Striking down the entirety of the CFPA, or declaring it unconstitutional without addressing severance, would eliminate or call into question the legitimacy of the detailed, technical regulations that govern past and future real estate finance transactions, not to mention the authority of a federal agency responsible for enforcing a host of consumer protection laws. Such an outcome would immediately cause significant disruption to the American economy, overturning regulatory guideposts, upsetting settled expectations, and creating substantial uncertainty in our housing markets, all in contravention of Congress’s clearly expressed intent to promote financial stability. The Court should avoid causing such harm. Accordingly, in the event that the Court finds the for-cause removal provision unconstitutional, it should sever that provision from the statute.”

 

After yesterday’s blockbuster housing starts data, Fannie Mae took up their estimates for homebuilding in 2020. They anticipate housing starts will increase by 10% and housing will be the sector that leads the economy going forward.

Morning Report: Fannie and Freddie are interviewing investment banks

Vital Statistics:

 

Last Change
S&P futures 3138 3.25
Oil (WTI) 58.87 -0.14
10 year government bond yield 1.82%
30 year fixed rate mortgage 3.98%

 

Stocks are up as we head into the FOMC meeting. Bonds and MBS are flat.

 

The FOMC will meet today and tomorrow, with the interest rate announcement expected Wednesday at 2:00 pm. The Fed Funds futures are predicting no change in rates. That doesn’t necessarily mean the markets will ignore what is going on, as subtle changes in language can have out-sized effects on the markets. One such word is “symmetric.” The word symmetric refers to the Fed’s 2% inflation target, and how much they will tolerate inflation above that target. The Fed desperately wants to avoid the low inflation / low growth trap that evolved in Europe and Japan, and is signalling to the markets that they will allow inflation to run above 2% for an extended period of time.

 

The Fed will also be watching the overnight repurchase market, to ensure we don’t have another situation like late September where overnight rates spiked over 10%. This was due to a shortage of cash in the market. While this sort of thing doesn’t affect mortgage lending directly, it does raise the cost of borrowing for MBS investors, which can cause them to sell these securities to raise cash. That flows through to rate sheets. While the shortage caught the Fed flat-footed in September, they have been discussing the issue, so hopefully we don’t see another replay at the end of this month.

 

Fannie and Freddie are tightening the restrictions for their Home Ready and Home Possible programs. Previously, borrowers with incomes at the Area Median Income (AMI) were qualified for these 3% down programs; now they will be limited to borrowers at 80% of the AMI. This is all part of the strategy to reduce Fan and Fred’s overall risk prior to setting them free. Note that they are currently interviewing banks to handle the IPO, which will be somewhere between $150 billion and $200 billion. This would dwarf the record for the largest IPOs in history – Saudi Aramco and Alibaba – by over 6x.

 

Despite a glut of McMansions in some areas, Toll Brothers beat estimates and forecasted a strong 2020.  The company noted demand increased throughout the year, and the recent weeks have been stronger than the prior quarter, which is encouraging given that typically you see a slowdown this time of year. Douglas C. Yearley, Jr., Toll Brothers’ chairman and chief executive officer, stated: “Fiscal 2019 ended on a strong note. Building on steady improvement in buyer demand throughout the year, our fourth quarter contracts were up 18% in units and 12% in dollars, and our contracts per-community were up 10% compared to one year ago. Through the first six weeks of fiscal 2020’s first quarter, we have seen even stronger demand than the order growth of fiscal 2019’s fourth quarter. This market improvement should positively impact gross margins over the course of fiscal 2020.”

 

Small business optimism grew in November, according to the NFIB. Recession worries faded into the background, and impeachment remains little more than a curious albeit boring sideshow, similar to the Clinton impeachment saga which had zero effect on the markets. Improving labor conditions were a big driver, with 26% of firms planning on raising compensation in the coming months – the highest in 30 years. (BTW, this is music to the Fed’s ears). It looks like the drag from the 2017-2018 rate hikes are behind us, and the headwind has turned into a tailwind courtesy of the recent rate cuts.

 

Productivity declined in the third quarter as output increased 2.3% and hours worked increased 2.5%. Unit labor costs increased by 2.5%.

Morning Report: Construction spending disappoints

Vital Statistics:

 

Last Change
S&P futures 3092 -21.25
Oil (WTI) 55.39 -0.54
10 year government bond yield 1.78%
30 year fixed rate mortgage 3.98%

 

Stocks are lower this morning on negative trade talk out of the White House. Bonds and MBS are up, following German Bund yields lower.

 

Home Prices rose 3.5% YOY in October, according to CoreLogic. “Nationally, over the past year, home prices are up 3.5% with the rate of growth accelerating from September into October,” said Frank Martell, president and CEO of CoreLogic. “We expect home prices to rise at least another 5% over the next 12 months. Interestingly, this persistent increase in home prices isn’t deterring older millennials. In fact, 25% of those surveyed anticipate purchasing a home over the next six to eight months.” CoreLogic conducted a survey with RTi Research regarding to consumer-housing sentiment and found that millennials are largely unconcerned about qualifying for a mortgage.

 

Construction spending disappointed in October, falling 0.8% on a MOM basis and rising 1.1% on an annual basis. Residential Construction fell 0.9% on a monthly basis and was up only 0.5% year-over-year. Despite the lousy number, the National Association of Realtors is optimistic that homebuilding will step up in 2020. “This housing cycle is definitely unique in the sense that it’s been a decade and we’re not back to normal in terms of home building,” said Lawrence Yun, NAR’s chief economist. “Many small-time builders are still out of the game. It was small-time builders in the aggregate that built many more homes than the big builders, and they’ve hesitated to get back in, even though it appears there is a money-making opportunity….All the factors that contribute to higher home sales like the job situation are terrific, and of course mortgage rates are critical to buying a home and those are favorable,” Yun said.” Note that construction loans increased 0.8% in the third quarter.

 

The Fed is considering raising its inflation target above its 2% target, according to the Financial Times. The idea (called the “make-up” strategy) would be to temporarily raise the target level if inflation comes in below 2% (the current target). The Fed fears deflation more than inflation, and has been utterly vexed by their inability to push inflation up to their target rate. This would be a signal to the markets that the Fed intends to keep rates lower for longer, although many members are worried about communication issues with the markets.

 

HUD has put out a request for information regarding affordable housing development, specifically which laws, regulations or administrative practices are inhibiting building. “Owning a home is an essential component of the American Dream. It is imperative that we remove regulatory barriers that prevent that dream from becoming a reality,” said HUD Secretary Ben Carson, who is also Chairman of the White House Council on Eliminating Regulatory Barriers to Affordable Housing. “Through this request, communities across the country will have the opportunity to identify roadblocks to affordable housing and work with State, Federal, and local leaders to remove them.”