Morning Report: Housing starts disappoint again

Vital Statistics:

Last Change
S&P futures 2705 -3.5
Eurostoxx index 393.19 0.82
Oil (WTI) 70.93 -0.38
10 Year Government Bond Yield 3.06%
30 Year fixed rate mortgage 4.65%

Stocks are lower this morning after North Korea pushed back on the proposal to end their nuke program. Bonds and MBS are higher after the the 10 year decisively pushed through the 3% level yesterday.

The 10 year hit 3.10% yesterday on no real news. If the inflation numbers aren’t all that bad, why are rates increasing? Supply. The government will need to issue about $650 billion in Treasuries this year compared to $420 billion last year. Note that one of the downsides of protectionism will be seen here – when the US buys imports from China, they usually take Treasuries in return. Less trade means less demand for paper.

Rising rates may present problems for active money managers. The average tenure is 8 years, so this is the first tightening cycle they have ever seen. For the past decade, cash and short term debt have not been any sort of competition for stocks and long term bonds. Note that the 1 year Treasury finally passed the dividend yield on the S&P 500. Stocks and bonds are going to see money managers allocate more to short term debt.

Despite rising rates, financial conditions continue to ease. The Chicago Fed National Financial Conditions Index is back to pre-crisis levels. Note that doesn’t necessarily mean we are set up for another Great Recession – the index can stay at these levels for a long time, and we don’t have a residential real estate bubble. That said, this index can be one of those canaries in a coal mine for investors – at least selling when it goes from negative to positive.

NFCI

Mortgage Applications fell 2.7% last week as purchases fell 2% and refis fell 4%. The refi index is at the lowest level in almost 10 years, and the refi share of mortgage origination is at 36%. The typical conforming rate fell a basis point to 4.76%.

April Housing starts came in at 1.29 million, down 4% MOM but up 11% YOY. The Street was looking for 1.32 million. Building Permits 1.35 million which was right in line with estimates. Multi-family was the weak spot. Note that March’s numbers were unusually strong (relative to recent history), so April was a bit of a give-back.

Industrial production rose 0.7% last month while manufacturing production rose 0.5%. Capacity Utilization rose to 78%.

New York State is suing HUD to force them to continue to use the Obama-era standard of enforcing AFFH. HUD delayed the rule after numerous local governments were unable to implement policies in time.  Andrew Cuomo’s statement: “As a former HUD Secretary, it is unconscionable to me that the agency entrusted to protect against housing discrimination is abdicating its responsibility, and New York will not stand by and allow the federal government to undo decades of progress in housing rights,” Cuomo said in a statement. “The right to rent or buy housing free from discrimination is fundamental under the law, and we must do everything in our power to protect those rights and fight segregation in our communities.”  Of course overt housing discrimination hasn’t existed for half a century, but that isn’t what this is about.  The issue is zoning ordinances and multi-fam construction. Expect to see more of this sort of thing in blue states as the housing shortage gets worse.

Morning Report: Housing starts still below demand

Vital Statistics:

Last Change
S&P futures 2698 16.25
Eurostoxx index 379.67 1.95
Oil (WTI) 66.26 0.05
10 Year Government Bond Yield 2.83%
30 Year fixed rate mortgage 4.44%

Stocks are higher this morning as China relaxes ownership restrictions on domestic manufacturers. Bonds and MBS are flat.

We have a lot of Fed-speak today, especially in the morning. Separately, Trump announced two Fed nominees: Richard Clarida of Columbia, to be the Vice Chairman of the Fed and Michelle Bowman, previously a bank executive from Kansas. For all of his criticism of the Fed while on the campaign trail, Trump has nominated pretty much middle-of-the-fairway people to the Board.

Housing starts came in at 1.32 million, better than expectations but still well below what is needed to meet demand. Building Permits came in at 1.35 million. Single family starts fell, while multi rose. Most of the increase was in the Midwest.

Industrial Production rose 0.5% last month, while manufacturing production rose 0.1%. Capacity Utilization increased to 78%. So far we aren’t seeing any tariff effects in the numbers.

Bank of America announced earnings yesterday, and lumped mortgage banking income into the miscellaneous “all other income” category. What an ignominious end to Countrywide. Bank earnings season continues.

Independent mortgage bankers saw profit per loan get cut in half last year as refis dried up and the business got more competitive. Refis fell from 36% of all origination volume to 25%.

Zillow crunched the numbers and looked at the typical homebuyer in 2017. The typical buyer is 40 years old, making 87k. Millennials make up 42% of the cohort. They typically spend about 4.3 months finding a home. Interestingly, despite the size of the investment, most homebuyers only contacted 1 lender. Here is what is important to homebuyers when thinking about a lender:

lender characteristics

The median home was sold in 81 days, and that includes the closing process. This means the typical home was on the market for only 1 month. This is 8 days faster than 2016.

The National Low Income Housing Coalition has a new report showing how acute the housing shortage is at the low end. Only 35 affordable and available rental homes exist for every 100 extremely low income renter households. Rising home prices and mortgage rates are reducing affordability, however interest rates are still extremely low historically. In the early 80s, a the first year’s mortgage payment consisted of 99% interest, 1% principal.

The IMF forecasts that global growth will hit 3.9% this year, the fastest since 2011, driven by emerging Europe, and the US.