housing finance – The Daily Tearsheet

Morning Report: Strong jobs report knocks stocks

Vital Statistics:

	Last	Change
S&P futures	2982.25	-8.4
Oil (WTI)	57.45	0.2
10 year government bond yield		2.02%
30 year fixed rate mortgage		4.00%

Stocks are lower this morning after Friday’s strong jobs report stoked fears the Fed might not cut rates as much as the market expects. Bonds and MBS are up.

Jobs report data dump:

Payrolls up 224,000
Unemployment rate 3.7%
Labor force participation rate 62.9%
Employment-population rate 60.6%
Average hourly earnings up 3.1%

Overall, a strong report which should in theory argue against easing rates at the upcoming July meeting. That said, the deceleration in the labor market is being taken as a sign that the Fed needs to act, especially since inflation remains stubbornly below the Fed’s 2% target. The July Fed funds futures are pricing in a 100% chance for a cut, with a 92% chance for 25 basis points, and an 8% chance of 50 basis points.

We don’t have much in the way of economic data this week, however we do have Jerome Powell’s Humphrey-Hawkins testimony on Wednesday and Thursday. Humphrey-Hawkins testimony is usually more about posturing politicians than it is about useful insights, but with the markets on edge about a potential rate cut, we could see some volatility. Expect a lot of questions about Fed independence.

Want to get involved in the property rental business without having to actually buy a house and rent it out? Roofstock could be your answer. It allows individuals to buy into occupied rental properties and allows them to trade out of them after a 6 month lock up period. If you can’t get a bid on Roofstock’s online exchange, they will buy it back at a 7.5% discount.

Deutsche Bank is retreating back to Europe, as it cuts 18,000 jobs and exits a lot of overseas businesses. DB has been underperforming for years, and it looks like its decades-old attempt to become a player on Wall Street and in London are over. It would be cool to see them spin off Bankers Trust, Alex Brown and Sons and Morgan Grenfell, but it doesn’t look like that will happen.

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: Ginnie is increasing scrutiny of non-bank lenders

Vital Statistics:

	Last	Change
S&P futures	2642	0
Eurostoxx index	357.3	2.93
Oil (WTI)	52.35	0.36
10 year government bond yield		2.73%
30 year fixed rate mortgage		4.62%

Stocks are flat as we begin the FOMC meeting. Bonds and MBS are up small.

Despite the end of the shutdown, we will have to wait for economic data. Two big reports this week – GDP and personal incomes – have been delayed.

Economic activity picked up in December, according to the Chicago Fed National Activity Index. Production-related indicators and employment drove the increase. Note that the CFNAI is a meta-index of a number of announced economic indices, and the government shutdown has decreased the amount of data going into the index. We’ll see the same effect next month as well, so the index won’t be as accurate as it usually is. Regardless, the CFNAI is an amalgamation of previously released data, so it doesn’t move markets.

Ex-Fed Head Narayana Kochlerakota thinks the Fed should consider easing at the next meeting. His argument is that the Fed has been falling short in maintaining inflation at its 2% target and that notwithstanding the latest unemployment data we are still not at full employment. He is looking at the percentage of prime age people (age 25-54) who are currently employed. We are just south of 80%, and were closer to 82% during the late 90s. Given that the number of prime age people in the US is roughly 100MM, then we have about 2 million more jobs to create in order to get to back to where we want to be. Interestingly, he not only advocates maintaining the current balance sheet, he thinks it should increase about 4% a year to grow in lockstep with the economy.

Guess what has been one of the best performing assets so far this year (almost tripled in under a month). If you guessed the GSEs, you would be correct. The market is betting that shareholders won’t get wiped out when / if housing reform happens this year. Check out this chart of Fannie Mae:

Ginnie Mae is stepping up oversight of its partners, particularly non-bank lenders, telling some that they must improve some financial metrics before they will be granted more commitment authority, which is the ability to securitize FHA and VA loans. The government is concerned that non-bank lenders have replaced a lot of the traditional banks in servicing government loans. Indeed, they have – nonbanks now service 61% of government loans, up from 34% at the end of 2014. FHA was largely a backwater of the mortgage market pre-crisis, however post crisis, it has picked up the load that subprime left. Servicers for government loans have a lot more liquidity demands than servicers for GSE loans – and in a downturn the advances liability could take out undercapitalized mortgage bankers. VA lenders can face what is called no-bid risk, which can be a disaster for many servicers without a line of credit to cover advances and loan buyouts.