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: Housing is coming back

Vital Statistics:

 

Last Change
S&P futures 3003.75 4.25
Oil (WTI) 58.37 -0.94
10 year government bond yield 1.78%
30 year fixed rate mortgage 4.00%

 

Stocks are flattish as we await the FOMC decision at 2:00 pm EST today. Bonds and MBS are up.

 

Housing starts increased 12.3% MOM and 6.6% YOY to a seasonally adjusted annual rate of 1.36 million. This is the highest in 12 years. July was revised upward as well. Building Permits rose 7.7% MOM and 12% YOY to 1.4 million, which is close to historical levels (non-population adjusted). This data seems to comport with the MBA’s 30% rise in purchase activity. Permit activity increased the most in the Northeast, while falling in the Midwest.

 

housing starts

 

Mortgage applications were flat last week despite a huge back up in rates. There was also an adjustment for Labor Day, so that will affect the numbers. Purchases rose 6%, while refis fell 4%. The average rate on a 30 year fixed rose 19 basis points to 4.01%, and government loans increased share.

 

CFPB Chair Kathy Kraninger believes her job security is unconstitutional and supports a Supreme Court review of a case pending before the 9th Circuit. Essentially, Dodd-Frank made the head of the CFPB basically untouchable – the President can only fire “for cause” and not at the discretion of the White House. “From the Bureau’s earliest days, many have used the uncertainty regarding this provision’s constitutionality to challenge legal actions taken by the Bureau in pursuit of our mission,” Kraninger wrote to staff. “Litigation over this question has caused significant delays to some of our enforcement and regulatory actions. I believe this dynamic will not change until the constitutional question is resolved either by Congress or the Supreme Court.” Given that the case is currently in front of the liberal 9th Circuit (aka the Nutty Ninth) the current structure will almost certainly be upheld and it will go to SCOTUS.

 

Some inside-baseball stuff: Despite the bet that the Fed will cut rates to a range of 175-200 basis points today, the Fed had to intervene yesterday to prevent the Fed Funds rate from breaching the top of the current 200-225 basis point range. The cause was a shortage of dollars in the money markets ahead of Q3 interim tax payments and a big Treasury bond issue. This caused overnight repo rates to surge to 500 basis points on Monday, and the punch line is that this problem might push the Fed to increase the size of its balance sheet, which means more QE. This stems from a change in how the Fed mechanically manages the Fed Funds rate in the immediate aftermath of the financial crisis. How will it affect mortgage markets? Not directly, however issues with financing / hedging and rate volatility will negatively impact mortgage rates, at least at the margin.

 

repo rates

Morning Report: Housing starts disappoint

Vital Statistics:

 

Last Change
S&P futures 3009 0.35
Oil (WTI) 59.54 -0.07
10 year government bond yield 2.09%
30 year fixed rate mortgage 4.12%

 

Stocks are flat as bank earnings continue to come in. Bonds and MBS are up.

 

Another month, another disappointing housing starts number. Starts fell from an annualized pace of 1.3 million to 1.22 million in June, according to Census. Building permits were a mixed bag, falling to 1.25 million, however May’s numbers were revised upwards. Both starts and permits were below street expectations.

 

Despite the disappointing housing starts number, builder confidence rose one point to 65 in July. Demand remains strong, however labor shortages, few buildable lots and rising construction costs are making it difficult to build at the lower price points, where the demand is particularly acute.

 

Mortgage applications fell 1.1% last week as purchases fell by 3.8% and refis rose 1.5%. Rates increased, with the 30 year fixed rate mortgage rising by 8 basis points to 4.12%.  “Mortgage rates increased across the board, with the 30-year fixed rate mortgage rising to its highest level in a month to 4.12 percent, which is still below this year’s average of 4.45 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Coming out of the July 4 holiday, applications were lower overall, with purchase activity slipping almost 4 percent. Refinance applications increased, with activity reaching its highest level in a month, driven mainly by FHA refinance applications. Historically, government refinance activity lags slightly in response to rate changes.”

 

Bank of America reported strong earnings this morning. Mortgage origination volume was up 56% YOY to $18.2 billion.  Separately, Quicken announced they originated $32 billion in the second quarter.

 

Second quarter growth in China fell to 6.2%, the lowest level in 27 years. The implications for this will revolve primarily around inflation and Fed policy. The Chinese economy has a real estate bubble of epic proportions, and once that bursts it will have ramifications in the urban high-end market, but it will also be felt in lower inflation numbers. China will probably try and export its way out of the slowdown, although tariffs will make it difficult. That said, a slowdown in emerging Asia and Europe will usher in even lower interest rates.

 

 

Morning Report: Housing starts disappoint

Vital Statistics:

 

Last Change
S&P futures 2791.5 -5
Eurostoxx index 371.78 -0.4
Oil (WTI) 55.5 0.03
10 year government bond yield 2.66%
30 year fixed rate mortgage 4.35%

 

Stocks are lower this morning on overseas tensions between India and Pakistan. Bonds and MBS are flat.

 

Jerome Powell heads to Capitol Hill today for his first day of Humphrey-Hawkins testimony. While this events are ostensibly to allow Congress to question the Fed about monetary policy, they are really nothing more than a posturing exercise for politicians to hop on their respective ideological hobby-horses. Expect Democrats to focus like a laser on income inequality, too big to fail banks, and fair lending. Expect Republicans to focus on inflation worries, banking regulation, and the return of the bond vigilantes. The markets will be listening for information on balance sheet reduction and further hikes this year. This probably won’t be market-moving.

 

Housing starts fell to a seasonally-adjusted annual rate of 1.08 million, a double-digit percentage drop on both a month-over-month and annual basis. As a general rule, winter housing starts numbers can be volatile due to the weather, however this is simply an awful number. The street was looking for 1.25 million, which is still a depressed number. Remember, between 1959 and 2002, we averaged 1.5 million housing starts a year. The last time we saw that sort of building was 2006.

 

housing starts

 

The Home Despot reported fourth quarter earnings this morning, and forecasted weaker-than-expected comparable sales. Part of this is a technical aspect of their accounting conventions, but it does speak to weakness in home improvement spending.

 

Economic activity slowed in January, according to the Chicago Fed National Activity Index. Production-related indicators drove the decline. How much of this was temporary due to tariff issues / government shutdown remain to be seen. Employment remained positive.

 

More sellers are cutting prices this winter in order to move their homes, according to Redfin. 21% of home sellers are reporting a price decrease, which is a post-crisis high. “Many sellers listed their homes late last year just as rising prices and mortgage rates were starting to price out their core pool of potential buyers,” said Las Vegas Redfin agent Jennifer Brockman. “Meanwhile, some buyers are starting to think that waiting to purchase a home could pay off, especially as listing inventory continues to rise. In this new market reality, buyers may have negotiating power now that they won’t have in the spring and summer.”

 

redfin price drop

Morning Report: Fed day

Vital Statistics:

 

Last Change
S&P futures 2560 22.25
Eurostoxx index 342.07 1.61
Oil (WTI) 46.54 0.3
10 year government bond yield 2.82%
30 year fixed rate mortgage 4.62%

 

Stocks are higher this morning ahead of the FOMC decision. Bonds and MBS are flat.

 

The FOMC decision will be announced at 2:00 pm EST. While the actual decision will be important, the focus will be on the dot plot, which will feed 2019 forecasts. The Fed Funds futures have been a bit more dovish than the previous Fed forecasts, so the market will be expecting a bit of a downward shift in forecasts. The Fed will also release its forecasts for GDP, unemployment, and inflation as well. The Fed has been consistently low in its GDP estimates and consistently high in its inflation and unemployment forecasts since 2016, which is the mirror image of its pre-2016 forecasts. Powell will have a press conference after the release, so the 2:00 pm – 3:00 pm EST timeframe could see some market volatility.

 

Speaking of inflation, we are in some ways going back to the 1970s. Manufacturers (especially in food) are coming up with ways to raise prices while not “officially” raising prices, by offering new products. For example, Nabisco’s new “thin” Oreos cost almost double per ounce than traditional Oreos. We saw this in the 1970s, when potato chip bags were mainly air, and companies would keep packaging sizes (and costs) the same while reducing the amount in the package.

 

Housing starts came in at 1.26 million, a bit higher than what the Street was looking for. Building permits rose 1.33 million, which was an upside surprise as well. The increases were driven by multi-fam, which can be extremely volatile. SFR was more or less unchanged.

 

Mortgage applications fell 5.8% last week despite a big drop in rates. Purchases fell 2% while refis fell 7%. We are in the seasonally slow period, so seasonal adjustments can lead to surprising results. Perhaps the volatility in the stock market was leaving people on the sidelines, but it appears lower rates didn’t have an impact.

 

There is talk that the Senate might be able to scrape together enough votes for a short term funding bill that will take us into the new year. Trump appears to be softening his stance on the wall, so a deal is a possibility. Otherwise, we are in store for a partial shutdown, whatever that means. No word on how it will or will not affect markets / origination.

 

 

Morning Report: Markets fret over the FOMC minutes

Vital Statistics:

 

Last Change
S&P futures 2806 -9.75
Eurostoxx index 364.08 0.54
Oil (WTI) 68.98 -0.77
10 year government bond yield 3.22%
30 year fixed rate mortgage 4.89%

 

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

 

The minutes from the September FOMC meeting were released yesterday, and may have caused a delayed sell-off in stocks and bonds. Nothing was all that surprising in the document, although some in the business press attributed the sell-off to a surprising consensus that more tightening is needed. There was talk that rates might have to go into restrictive territory as opposed to just neutral territory. That apparently freaked out the bond market, although it didn’t really make a move until closer to the closing bell. FWIW, the dot plot envisions perhaps 2 or 3 hikes in 2019, which probably wouldn’t be characterized as “restrictive” given they just took out the term “accomodative” to characterize current policy. There was also talk about becoming more opaque, and spoon-feeding the markets a little less about what they are going to do. The economic textbooks talk about managing inflationary expectations, and part of that management means keeping markets on their toes. If the markets correctly anticipate what the Fed is going to do, their moves have less of an effect. Sort of like a monetary Heisenberg principle.

 

Regardless, the Fed was surprised to see how much economic strength there was in the economy (interestingly, they always overshot in their growth forecasts in 2008-2016, but now they are undershooting). Regardless, they are worried about the global economy, and the growth difference between the US and the Eurozone. The strength in the labor market is starting to bring out some cost-push inflation as well. Overall the minutes didn’t tell us anything we didn’t already know – growth is strong, inflationary pressures are building, trade wars are bad, and the Fed is going to keep raising rates.

 

Housing starts disappointed in September, falling 5.3% MOM to a seasonally-adjusted annual rate of 1.2 million. This number is up on a YOY basis however. Weather-related issues probably played a part in the disappointing number, however building permits were anemic as well. Most of the decline was in the volatile multi-family segment, while single family was generally up small.

 

Over 3/4 of Americans view renting as cheaper than owning, according to a survey from Freddie Mac. Blame higher home prices and mortgage rates. Note that 58% of renters don’t intend to buy a home, which is an increase from 54% earlier in the year. Rental supply is also a factor – it recently hit a 3 decade high. In the aftermath of the housing crisis, builders focused on urban rental properties targeted towards 20-something Millennials –  which has created a glut, particularly at the higher price points. In addition, we have a shortage of starter homes, as builders concentrated on the only sector that was working at the time – luxury.

 

China’s stock market is down 30% this year, in stark contrast to the rest of the world. China has always marched to its own drummer, but they have a serious real estate bubble. If that is unwinding, it will reverberate in the high end West Coast markets.

Morning Report: Housing starts jump

Vital Statistics:

Last Change
S&P futures 2908.75 -3
Eurostoxx index 378.74 0
Oil (WTI) 69.94 0.09
10 year government bond yield 3.05%
30 year fixed rate mortgage 4.78%

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

Mortgage applications increased last week despite a big uptick in rates. The overall index rose 1.6%, driven by a 4% increase in refis and a 0.3% increase in purchases. FWIW, I wonder if there is some sort of strange adjustment related to the Labor Day holiday going on. Rates hit a 7 year high, with the conforming 30 year fixed hitting 4.88%.  ARMs increased to 6.5% of all activity.

Housing starts rose to an annualized pace of 1.28 million in August, which is up over 9% on a MOM and YOY basis. Permits disappointed however, falling just under 6% on a MOM and YOY basis. Multi-fam (which is notoriously volatile) drove the decline in permits and the increase in starts. Single family permits were up about 6%. Geographically, the action was in the West and South, while the Northeast and Midwest were flat / barely up.

Housing starts will probably take a step back in the next few months as construction workers will be occupied rebuilding North Carolina.  Labor remains an issue for new home construction, but the tariff-driven spike in lumber prices is over, and futures are trading at 18 month lows.

lumber

Fannie Mae thinks growth has peaked for this cycle and that the second quarter’s torrid growth rate of 4.2% was artificially boosted by inventory build ahead of tariffs. This had the effect of borrowing growth from future quarters. In all fairness, they are probably correct – a 4.2% growth rate is so far above historical trend that it is almost by definition unsustainable. Housing continues to punch below its weight as affordability issues weigh on sentiment. Note that the number of people saying it is a good time to buy a house has hit the lowest level since the survey began 8 years ago. Blame rising rates and home price appreciation outstripping income growth.  FWIW, they are somewhat bearish on consumer spending going into the 4th quarter, which seems to defy a lot of data we are getting about retailer activity.

Insured losses form Hurricane Florence will be in the $1.7 to $4.6 billion range.