Morning Report: Home price appreciation accelerates in September

Vital Statistics:

 

Last Change
S&P futures 3134 1.25
Oil (WTI) 58.39 0.24
10 year government bond yield 1.74%
30 year fixed rate mortgage 3.93%

 

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

 

Jerome Powell spoke last night and said that the Fed cut rates this year as the economy wasn’t as strong as anticipated. He reiterated that the Fed won’t be making any moves unless things change “materially” in the US economy: “Monetary policy is now well positioned to support a strong labor market and return inflation decisively to our symmetric 2 percent objective. If the outlook changes materially, policy will change as well. At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.”

 

Home prices rose 1.1% in the third quarter, according to the FHFA House Price Index. They are up 4.9% on a YOY basis. They added an interactive map, so you can drill down to MSA-level home price appreciation. Separately, the Case-Shiller home price index rose 3.2% on an annual basis in September.

 

Mortgage delinquency rates fell in October, according to Black Knight’s First Look. The Deep South still has the highest delinquency rates, while the West Coast and Mountain states have the lowest levels. Prepay speeds are up 134% on a YOY basis.

 

Redfin makes its predictions for the 2020 housing market.

  • a return of bidding wars
  • 30 year fixed rate mortgage stabilizes at 3.8%
  • home prices will rise in the Southeast as people get priced out of the cities

Morning Report: Goldman sees a break in the clouds

Vital Statistics:

 

Last Change
S&P futures 3109 5.25
Oil (WTI) 58.39 0.24
10 year government bond yield 1.76%
30 year fixed rate mortgage 3.93%

 

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

 

Existing home sales rose 1.9% in October, better than expected. Lawrence Yun, NAR’s chief economist, said this sales increase is encouraging and he expects added growth in the coming months. “Historically-low interest rates, continuing job expansion, higher weekly earnings and low mortgage rates are undoubtedly contributing to these higher numbers,” said Yun. “We will likely continue to see sales climb as long as potential buyers are presented with an adequate supply of inventory.” The recent increase in building permits is seen as a positive sign for the sector. Inventory remains tight, however at only a 3.9 month supply. Note that D.R. Horton just reported a 9% increase in units sold, so we are seeing more supply come on to the market.

 

The index of leading economic indictators fell 0.1% in October, driven by weakness in manufacturing. This points to slowing growth ahead.

 

Despite the LEI numbers, Goldman is predicting a “break in the clouds” for the economy going forward. They anticipate a 30 basis point pickup in global growth next year to 3.4%, and for the US economy to grow at a 2.3% pace. “We expect the global growth slowdown that began in early 2018 to end soon, in response to easier financial conditions and an end to the trade escalation,” the forecast said. “Although much could still go wrong, the news on trade policy – both US-China and issues related to Brexit – has gotten better in recent weeks.” They anticipate the 10 year bond yield will rebound to 2.25%.

Morning Report: Experts talk about 2020 forecasts

Vital Statistics:

 

Last Change
S&P futures 3116 -1.25
Oil (WTI) 57.29 -0.24
10 year government bond yield 1.82%
30 year fixed rate mortgage 4.00%

 

Stocks are flattish this morning as violence continues in Hong Kong. Bonds and MBS are flat as well.

 

Optimism for a trade deal with China waxes and wanes, and we had some conflicting reports this weekend. CNBC said that the government was disappointed in Trump’s reluctance to roll back tariffs, while the Chinese state media company said Beijing and Washington had constructive talks over the weekend.

 

The upcoming week has some real-estate related data with housing starts and existing home sales, but nothing much market moving. We will get the FOMC minutes on Wednesday, but the sense in the market is that the Fed is on hold for a while, and probably through the election.

 

The Fed said the US financial system “appears resilient” in its semiannual report on financial stability. “The current combination of very low credit spreads and high levels of indebtedness among risky nonfinancial corporates, including through leveraged loans, merits heightened vigilance,” Fed Governor Lael Brainard said in a prepared statement. “Over the medium term, the low-for-long environment and the associated incentives to reach for yield and take on additional debt could increase financial vulnerabilities.” They were also critical of cryptocurrencies, warning they could destabilize the system if implemented without regulation and oversight. Wasn’t the whole point of cryptocurrencies to have a medium of exchange that is beyond the reach of governments?

 

Predictions for 2020:  Rates will remain low, with Fannie Mae predicting the 30 year fixed rate mortgage will end up in a tight range around 3.5% – 3.6%. Home price appreciation will re-accelerate, with home prices rising 5.6% next year versus 3.5% this year. Inventory will remain tight, however especially at the lower price points. “While historically low rates increase buying power and make it more likely for potential buyers to attain their homeownership dream, they also increase the risk of a long-run housing supply shortage, which we predict will continue through 2020 and possibly intensify,” Kushi says. “As first-time buyers lock-in these historically amazing rates and existing owners refinance—in droves in recent months, everyone will stay put and not sell. Where’s the incentive?”

Morning Report: Bonds adjust to the prospect of no more rate cuts

Vital Statistics:

 

Last Change
S&P futures 3083 7.25
Oil (WTI) 56.97 0.64
10 year government bond yield 1.84%
30 year fixed rate mortgage 3.92%

 

Stocks are higher this morning after Chinese President Xi Jinping committed to lowering tariffs and institutional transaction costs. Bonds and MBS are down.

 

The markets expect to see some sort of phase 1 trade deal with China in the coming weeks. The Wall Street Journal is reporting that China and the US are considering rolling back some tariffs. Separately, the Chinese central bank lowered rates to deal with a liquidity crunch.

 

There isn’t much data this week (as is typical after the jobs report) however we do have a lot of Fed-Speak so, we could see some movement in the bond markets as we adjust to the pause. For those keeping score at home, the December Fed Funds futures are signalling only a 5% chance of another rate cut this year. A month ago, they were handicapping a 44% chance of another cut.

 

fed funds futures

 

Home prices rose 3.5% YOY according to CoreLogic. By their models, 36% of the top 100 MSAs are overvalued (including the NYC area), while 23% were undervalued and 41% were fairly valued. Their model compares housing values to disposable incomes to come up with a valuation score. They are forecasting home price appreciation to accelerate to 5.6% over next year. Note that Realtor.com said that listing prices rose 4.3% in October to a high of 312,000.

 

Corelogic overvalued

 

About 0.6% of all originations went DQ within 6 months, according to Black Knight Financial Services. While this is much lower than the pre-bubble years, it has been steadily increasing since the housing market bottomed. The concentration is primarily in first time homebuyers. Foreclosures remain under control, at levels last seen in 2005.

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: The fed cuts rates and goes on hold.

Vital Statistics:

 

Last Change
S&P futures 3042 -5.25
Oil (WTI) 54.42 -0.64
10 year government bond yield 1.73%
30 year fixed rate mortgage 4.02%

 

Stocks are lower this morning after the Fed cut rates. Bonds and MBS are up.

 

As expected, the Fed cut rates by 25 basis points yesterday, and Jerome Powell said that “the current stance of policy is expected to remain appropriate” as long as the labor market remains strong and the economy continues to expand moderately. They also removed the language that said the Fed would “act as appropriate” to maintain the current expansion. This was the “pause” language that the markets were looking for. The vote was 8-2, with two members voting to maintain the current Fed Funds target. For some reason, the pause language put some starch in the bond market, which has sent rates lower by about 12 basis points. The December Fed Funds futures are currently handicapping a 20% chance of another 25 basis point cut. FWIW, Morgan Stanley is out with a call saying the Fed is on hold through 2020. As a general rule, the Fed tries to stay out of the picture as much as it can during an election year, so that call may end up being correct.

 

Personal Incomes and spending increased 0.3% and 0.2% respectively, which was lower than August’s torrid pace. On an annual basis, incomes rose 3.8% and consumption increased 4.4%, both strong numbers and well ahead of the weaker-than-expected inflation readings. The PCE price index (which is the Fed’s preferred inflation measure) was flat in September, and up 1.3% YOY. Ex-food and energy the PCE index was flat and up 1.7% annually. Separately, the employment cost index rose 0.7% in the third quarter and was up 2.8% YOY. Note that wages increased 0.9%, which is a quite strong number.

 

The Urban Institute has panned the Administration’s plan to reduce the GSE footprint in the mortgage market. Their point is that the government guarantee for Fannie MBS is so important that it will be hard for other entities to compete, unless the guarantee fee is set higher than the credit risk dictates. They also claim that it will reduce credit and slow down the economy.

 

The overall share of GDP attributable to housing increased to 14.6% in yesterday’s GDP report. Residential fixed investment (homebuilding, remodeling, etc) increased to 3.11%, while housing services, which is mainly rent, was about 11.5% of the economy. Historically, residential fixed investment has been closer to 5% and rent has been closer to 12% – 13%. In other words, housing is still punching below its weight economically, although it may be turning around. This represents a huge potential boost to GDP once things return to normalcy.

 

housing GDP

 

 

Morning Report: Third quarter GDP comes in stronger than expected

Vital Statistics:

 

Last Change
S&P futures 3036 0.25
Oil (WTI) 55.32 -0.24
10 year government bond yield 1.84%
30 year fixed rate mortgage 4.03%

 

Stocks are flat as we await the FOMC decisions and earnings from Facebook and Apple after the bell. Bonds and MBS are flat.

 

The FOMC decision is set for 2:00 pm. The big tariff-related slowdown that has been widely predicted doesn’t seem to be materializing. This means that the language of the FOMC statement and the press conference will take on more weight and we could see some volatility in the bond market as everyone reassesses the lay of the land. Be careful locking around then.

 

The advance estimate of third quarter GDP came in better than expected, at 1.9%, versus street expectations of 1.6%. Personal consumption expenditures drove the increase, rising 2.9%, while investment fell 1.5%. Residential fixed investment broke a 6 quarter losing streak, increasing 5.1% in the quarter. Inflation remains under control, with the headline PCE number rising 1.5%, and the core rising 2.2%.

 

GDP

 

ADP estimated that payrolls increased by 125,000 in October, which was above expectations. September’s estimate was revised downward however to below 100k. Note the 125,000 number is well above the Street estimate for Friday’s jobs report, which is forecasting an increase of only 85,000.

 

Mortgage applications increased by 0.6% in the latest MBA survey. Purchases increased 2% and refis fell 1%. “The 10-year Treasury rate rose slightly last week, as markets expected more progress toward a trade deal between the U.S. and China,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates increased for the second straight week as a result, with the 30-year fixed rate climbing to 4.05 percent–the highest level since the end of July. Mortgage applications were mostly unchanged, with purchase activity rising 2 percent and refinances decreasing less than 1 percent. Purchase applications continued to run at a stronger pace than last year, finishing a robust 10 percent higher than a year ago. Considering how much lower rates are compared to the end of 2018, purchase applications should continue showing solid year-over-year gains.”

 

The MBA forecasts that 2019 will be the best year for origination since 2007, at $2.06 trillion, although they expect 2020 to slip to $1.89 trillion. Although they forecast rates will remain low, they anticipate that refis will dry up in the second half and the margin pressure that bedeviled lenders in 2018 will reappear.

 

Pending home sales rose 1.5% in September, according to NAR. “Even though home prices are rising faster than income, national buying power has increased by 6% because of better interest rates,” he [NAR Chief Economist Lawrence Yun] said. “Furthermore, we’ve seen increased foot traffic as more buyers are evidently eager searching to become homeowners.” The foot traffic comment is interesting since we should be seeing a drop-off heading into the seasonally slow period.

 

The homeownership rate ticked up to 64.8% in the third quarter. This is an increase of 70 basis points from the second quarter and an increase of 40 bps from a year ago.