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.”

 

 

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: NAR predicts 750,000 new homes in 2020

Vital Statistics:

 

Last Change
S&P futures 3078 -12.25
Oil (WTI) 56.72 -0.54
10 year government bond yield 1.95%
30 year fixed rate mortgage 4.04%

 

Stocks are lower this morning on overseas weakness. The bond market is closed for Veteran’s Day.

 

The upcoming week doesn’t have much in the way of data, with the exception of CPI and PPI. Given that the Fed is in a holding patters, these numbers shouldn’t have much of an effect on the bond market unless they are way out of line with expectations. Donald Trump will speak to the NY Economic Club on Tuesday, and investors will be looking for information regarding progress on trade with China. Jerome Powell will speak to Congress on Wednesday and Thursday. And while it will probably not be market-moving, the House will televise impeachment hearings on Wednesday and Friday. So far the markets have ignored the whole kerfuffle.  Unless the Democrats drop something earth-shattering it probably will remain a sideshow. Given the silo-ization of information sources, it will probably turn out that only the converted will be watching the sermon. The consensus seems to be that the House will impeach and the Senate will not convict, with the voting falling strictly down party lines.

 

NAR is predicting that new home sales will jump 11% in 2020 to 750,000 units, the highest since 2007. Existing home sales should increase to 5.56 million units. Median existing home prices are expected to rise in the low 4% range, while new home prices should fall as builders focus on starter homes. While 750,000 may be a large number compared to recent history, it is only at historical averages, which doesn’t really take into account the increasing population.

 

new home sales

 

Consumer credit growth decelerated in September, according to the Fed. Credit card debt fell, although non-revolving debt credit flows dropped as well. The Fed’s Senior Loan Officer Opinion Survey noted that lenders may be tightening standards, which explains the drop in credit card debt.  Note the collateralized loan obligations have been hit recently, which is a potential warning on credit.

 

The early estimates for Q4 GDP are rolling in, and they range anywhere from 0.7% to 2.1%. The Fed estimates are on the low side (surprising since they just cut rates 3 times) and Goldman is out with the 2.1% call. Q4 GDP is going to be all about consumer spending, and so far the consumer confidence numbers are holding up well.

 

 

Morning Report: Decent jobs report

Vital Statistics:

 

Last Change
S&P futures 3049 13.25
Oil (WTI) 54.82 0.64
10 year government bond yield 1.71%
30 year fixed rate mortgage 3.92%

 

Stocks are higher after a decent jobs report. Bonds and MBS are up small.

 

Jobs report data dump:

  • Payrolls up 128,000 versus 90,000 expected
  • Unemployment rate 6.3%
  • Manufacturing payrolls – 36,000
  • Labor force participation rate 63.3%
  • Average hourly earnings up 0.2% MOM / 3.0% YOY

Overall a pretty decent report. Payrolls were depressed by the GM strike (about 46,000 workers), however the labor force participation rate ticked up and the employment-population ratio was flat at 61%. The two month revision was up 95,000 as well – September payrolls were revised upward by 44,000 and the August number was revised upward by 51,000. So, if you add back the GM strikers, and take into account the revisions, August’s number becomes 219,000, September becomes 180,000, and October becomes 174,000. Certainly nothing that would indicate any sort of major slowdown in the US economy.

 

Pennymac reported good numbers last night, with originations increasing to $35 billion in the last quarter. This was up 44% from Q2 and almost double last year. As expected, they took a hit on MSR valuations as rates fell, but they got a lot of that back on their hedges. Good times abound in origination business.

 

TRI Pointe reported numbers that beat the street, however revenues declined, as did average sales prices. That said, margins are increasing which is good news for the building sector. The S&P Homebuilder ETF (XHB) is up 54% so far this year.

Morning Report: New Home inventory is declining.

Vital Statistics:

 

Last Change
S&P futures 3005 0.25
Oil (WTI) 56.21 0.04
10 year government bond yield 1.77%
30 year fixed rate mortgage 4.03%

 

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

 

New Home Sales came in at 701,000, a hair above consensus and in line with the previous few months. The number was up 15.5% on an annual basis. There was 321,000 homes for sale at the end of September, which represents a 5.5 month supply. The inventory of homes for sale has been consistently declining, however the median sales price was down 8% MOM and 9% YOY. This appears to have been driven by a fall in the number of homes sold at the higher price points, but could be a sign of builders discounting as well. Note that the homebuilders have been on a tear this year, with the homebuilder ETF right at all time highs.

 

XHB

 

The new mortgage backed securities containing high LTV VA cashouts made their trading debut yesterday, and as expected they traded well back of normal Ginnies. Remember that GNMA made 90 LTV cashout VAs ineligible for regular delivery into Ginnie I and Ginnie II mortgage backed securities in response to investor complaints about fast prepayment speeds. These loans had to go into custom pools and the bid for these securities in the market reflected the higher risk. They traded anywhere from 2 to 4 points below commensurate Ginnie MBS. For example, the 4% coupon traded 120 ticks (or 3.75 points) behind. In other words, the 4% custom pools traded at 100, versus the 4% December Ginnies which traded at 103.75, which means that giving a borrower par pricing is going to be almost impossible.

 

Amazon.com disappointed the street with its holiday forecast. They anticipate $80 – $86 billion in revenue, which lagged the street estimate of $87 billion plus. This may just be Amazon-specific, but the economy has been held up by consumer spending and wage growth. If the spending aspect is declining, it means a weak Q4. The stock is down 7% pre-open.

 

 

Morning Report: Holiday sales looking strong

Vital Statistics:

 

Last Change
S&P futures 2945 -6.25
Oil (WTI) 53.63 0.84
10 year government bond yield 1.54%
30 year fixed rate mortgage 3.84%

 

Stocks are slightly lower on trade concerns and weak European data. Bonds and MBS are flat.

 

The upcoming week should be relatively quiet, with only inflation data and a slew of Fed-speak. Since increasing inflation is no longer front and center of the Fed’s concerns, the CPI and PPI should be non-events. We will also get the minutes from the September FOMC meeting on Wednesday.

 

Interesting stat on how long it takes to build a home in different geographic areas. The Mid-Atlantic region (which contains red-tape heavyweights like NY and NJ) is the longest at 10.5 months. The West Coast is right up there as well, at 9.9 months. The Southeast has the shortest timeline at 6.6 months.

 

new construction times

 

IPOs have been a treacherous investment over the past few years, as the venture capitalists and early entry investors have been reaping the rewards, at least for some of the biggest names (Uber, Lyft, Slack). We Work recently pulled its IPO as investors balked at the corporate governance issues and cash burn. While not all IPOs have been disasters, historically they have popped about 20% on the first day of trading. Not any more.

 

The National Retail Federation sees holiday sales at 3.8% – 4.2%, citing trade concerns over holiday spending. This is the low side of the holiday forecasts, which are coming in closer to 5%. The last 5 years have been around 3.7%, so the forecast is for something between “above average” and “great.” Since consumption is about 70% of the economy, we could be looking at better GDP numbers heading into the end of the year, which would put pressure on the Fed to slow down their pace of rate cuts.