Housing Starts – The Daily Tearsheet

Morning Report: Housing starts jump

Vital Statistics:

	Last	Change
S&P futures	3384	6.6
Oil (WTI)	42.24	0.52
10 year government bond yield		0.68%
30 year fixed rate mortgage		2.93%

Stocks are higher this morning on strong numbers out of WalMart and the Home Despot. Bonds and MBS are up small.

It looks like we are getting bipartisan push-back against the 50 basis point adverse market fee. Trump criticized the fee, and we have a chorus of Democrats opposed to it as well. It seems like no one is actually supporting this move. This is as just about every industry group lines up against it as well.

Housing starts increased to a seasonally-adjusted annual rate of 1.5 million in July, which is a 23% increase from a year ago. Building permits came in at 1.5 million as well, which is a 9% increase from last year. Certainly the COVID-related pause is over, and we are approaching the highs of earlier this year.

housing starts

Mortgage delinquencies increased to 8.2% in the second quarter, compared to 4.4% in the first quarter and 4.5% a year ago.

The COVID-19 pandemic’s effects on some homeowners’ ability to make their mortgage payments could not be more apparent,” said Marina Walsh, MBA Vice President of Industry Analysis. “The nearly 4 percentage point jump in the delinquency rate was the biggest quarterly rise in the history of MBA’s survey. The second quarter results also mark the highest overall delinquency rate in nine years, and a survey-high delinquency rate for FHA loans.

The conventional delinquency rate rose to 6.7% while the FHA delinquency rate rose to 15.7%, the highest rate since the survey began in the late 70s. DQs spiked in NY, NJ, FL, NV, and HI.

The number of loans in forbearance decreased to 7.2% last week, according to the MBA. Interesting data point on non-QM: big NQM investor MFA Financial said that roughly a third of its non-QM portfolio was in forbearance (though many were still paying). Ginnie remains a rough spot, with 9.5% in forbearance, and that doesn’t include the Ginnie loans which have been bought out of pools.

Morning Report: Bonds down on Italian fears

Vital Statistics:

	Last	Change
S&P futures	2393	-92.4
Oil (WTI)	24.51	-2.39
10 year government bond yield		1.08%
30 year fixed rate mortgage		3.44%

Stocks are down big this morning as we continue the volatile markets. Bonds are getting slammed, where the US Treasury is following the carnage in Europe.

Volatility begets volatility, and that is what we are seeing. Oil is now at a 17 year low. The ironic thing is that gasoline prices will be ridiculously low for the summer driving season, but there will be nowhere to go. European bonds are selling off due to fears that the Italian economy is going to be so bad that they will need a bailout from Germany. The German Bund has picked up 50 basis points in yield, going from -78 basis points on Friday to -28 today. The US Treasury is being pulled along for the ride.

Washington is putting together a panoply of measures to try and support the economy while everyone hunkers down at home. It looks like the government is going to give everyone $1,000 in a couple of weeks to get people through this tough time. Multiple industries will probably get some sort of help, with hospitality and airlines at the front of the line. As oil falls, the frackers will be soon behind, and I suspect the mall REITs will be next. Companies are suspending stock buybacks left and right, which may explain some of the sogginess in the stock market.

Homebuilder sentiment fell in March to 72, which is still strong. I have heard that construction activity has been suspended in the Bay Area, and I saw that Loan Depot has ceased accepting loans from all of the counties surrounding San Francisco.

Housing starts came in at 1.6 million again in February. Building Permits were 1.45 million. February was probably too early to be affected by Coronavirus, so March will be a better tell.

Mortgage applications fell 8% last week as purchases fell 1% and refis fell 10%. Between margin calls and a lack of investor appetite for refis, mortgage rates backed up last week. Don’t forget that mortgage backed security investors detest volatility in the bond market. It makes hedging their portfolios more expensive, and the prepay option (which an MBS investor is short) more valuable.

Despite the moves by the Fed in the markets, the mortgage REITs continue to get slammed. I suspect this is a “shoot first, ask questions later” mentality on the part of investors, but some of these stocks are looking crazy cheap, trading at half of book value and some with dividend yields of 20% + (one of which declared its normal dividend yesterday) Watch the REITs, because their appetite for paper flows through to mortgage rates.

Morning Report: Housing starts jump

Vital Statistics:

	Last	Change
S&P futures	3376	6.25
Oil (WTI)	52.86	0.95
10 year government bond yield		1.58%
30 year fixed rate mortgage		3.69%

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

Mortgage applications fell 6.4% last week as purchases fell 3% and refinances fell 8%.

Housing starts rose 21% on a YOY basis to 1.57 million, according to the Census Bureau. Building Permits were up 18% YOY to 1.55 million. Housing may turn out to be the economic surprise of 2020, and if that is the case, GDP estimates are way too low. Check out the chart below, and note the highlighted jump in starts over the past two months. Remember we are just going to back to historical averages, which doesn’t take into account population growth.

Speaking of homebuilding, the NAHB Housing Market Index slipped from record levels but is still historically very strong. Separately, Tri Pointe reported that orders grew 52%. Interestingly, they hiked their stock buyback. If the housing market is really that strong, why not invest in the business as opposed to buying back stock?

Producer prices rebounded in January after a soft December. The headline number rose 0.5% MOM versus expectations of 0.1%. On a YOY basis, inflation remains close to the Fed’s target rate.

The minutes from the January FOMC meeting will be released at 2:00 pm EST. They shouldn’t be market-moving, and the interest seems to be on the balance sheet side of things.

Lots of merger activity in the financial space. Asset manager Franklin Resources is buying Baltimore stalwart Legg Mason.

Lending Club, a fintech that makes personal loans, just bought a bank in order to gain access to a cheaper source of funds. “What a bank charter does for LendingClub is it allows us to take what is the leading digital loan provider online and combine it with a leading digital deposit gatherer,” Scott Sanborn, CEO of LendingClub, said Tuesday on CNBC. “It totally changes the earnings profile of this business.”

Speaking of mergers, Ally is buying CardWorks in a $2.65 billion deal. The street doesn’t like it as the stock is down 10% pre-open.

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%.

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

Morning Report: Fannie Mae gets more bullish on housing and the economy

Vital Statistics:

	Last	Change
S&P futures	3195	-3.25
Oil (WTI)	60.88	-0.04
10 year government bond yield		1.93%
30 year fixed rate mortgage		3.96%

Stocks are flat this morning on no major news. Bonds and MBS are down.

Initial Jobless Claims fell to 234k last week. The prior week had a big jump to over 250k, which really didn’t comport with other labor market data. 234,000 is still above where we were a couple weeks ago, though. As of now, assume this is just noise but it there is going to be a turnaround in the labor market, initial jobless claims is where it first shows up.

Fannie Mae has taken up their estimates for housing in 2020. Tuesday’s strong housing starts numbers, combined with what we are hearing out of the homebuilders, indicate that the US housing market will be an “engine of growth” for the economy in 2020. All of the talk about a trade-driven recession was more partisan wishful thinking than anything else. Fannie expects new home sales to increase 12% in 2020, and has taken up their forecast for GDP growth from 2% to 2.2%. “We now expect single-family housing starts and sales of new homes to increase substantially, aided by a large uptick in new construction as builders work to replenish inventories,” Duncan said. “Despite the expected increase in the pace of construction, the supply of homes for sale remains tight and strong demand for housing is continuing to drive home prices higher.”

Separately, Fannie is offering early retirement to 25% of its workforce as the company readies itself for sale. “As is common in many American companies, Freddie Mac is offering employees who meet certain age and tenure requirements a voluntary opportunity to retire early. As we prepare for our next chapter, we anticipate this will help realign our workforce to create a company attractive to outside investors as well as current and future employees,” a spokesman for Freddie Mac said in an email statement.

Shades of things to come? Sweden is ending its 5 year experiment with negative interest rates. Their central bank expects rates to remain at 0% for the next few years. Global interest rates are rising as a result, with the German 10 year Bund trading at negative 22 basis points, and the Japanese Government Bond trading at a hair under 0%.

Home prices rose 5% in November, according to Redfin. Listings fell by 5.9%, while sales increased 3%. “Given that inventory is falling quickly, we’d expect to see even stronger price growth, especially when compared to last year’s soft market,” said Redfin chief economist Daryl Fairweather. “The fact that homes are selling faster indicates that there are buyers ready to pull the trigger and take advantage of low interest rates. If lack of inventory and high demand continues, buyers who take a wait-and-see approach could face less favorable conditions in the spring season like bidding wars and faster price growth.” Note that the biggest gains were in the areas hardest hit by the real estate bust: Detroit, Camden and Bakersfield.

Morning Report: Housing starts at a 12 year high

Vital Statistics:

	Last	Change
S&P futures	3200	3.25
Oil (WTI)	60.46	0.14
10 year government bond yield		1.87%
30 year fixed rate mortgage		3.97%

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

Housing starts posted a 12 year high, coming in at 1.365 million units. Building Permits also moved up, rising 11% YOY to 1.485 million units. While 12 year highs seem like something big to cheer, in reality, we are still below our pre-bubble historical averages. Shortages of available homes are still at acute levels, however. This homebuilding cycle has a long way to run, and its positive impact on the economy could be one of the big surprises of 2020.

Builder confidence is at a 20 year high, according to the NAHB. “Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes, low mortgage rates and a strong labor market,” said NAHB Chief Economist Robert Dietz. “While we are seeing near-term positive market conditions with a 50-year low for the unemployment rate and increased wage growth, we are still underbuilding due to supply-side constraints like labor and land availability. Higher development costs are hurting affordability and dampening more robust construction growth.”

Echoing this number, Toll Brothers noted on their earnings conference call that traffic and orders were better in the November – mid December period compared to July-October. Impressive indeed, given that this is the seasonally slow period.

Industrial production surprised to the upside, rising 1.1% compared to expectations of a 0.9% increase. Manufacturing production and capacity utilization also rose.

You can get a mortgage for under 1% in many European cities. Unsurprisingly, house prices are rising as a result. According to the NY Times: “Prices jumped at least 30 percent in Frankfurt, Amsterdam, Stockholm, Madrid and other metropolitan hot spots, and are up an average of over 40 percent in Portugal, Luxembourg, Slovakia and Ireland.” Denmark has negative mortgage rates. This is bubble material, and shows how central banks are playing with fire when setting interest rates below zero.

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.

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.

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.

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.

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.”