Morning Report: 2019 housing forecasts are similar to 2018

Vital Statistics:

 

Last Change
S&P futures 2901.75 -8.75
Eurostoxx index 390.46 0.87
Oil (WTI) 65.29 1.29
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.27%

 

Stocks are lower this morning as investors return from the long weekend. Bonds and MBS are flat.

 

There isn’t much in the way of market-moving data this week, although we will get some housing data with existing home sales, the FHFA House Price Index, and New Home Sales.

 

President Trump plans on ending the practice of allowing waivers for countries that import oil from Iran. Oil is up over a buck this morning on the news. China, India, and Turkey are Iran’s biggest customers.

 

The economy looks like it exited the first quarter with a pickup in growth, according to the Chicago Fed National Activity Index. The first quarter has been weak for the past several years, and it looks like that pattern repeated this year. Employment-related indicators drove the improvement in the index.

 

Fannie Mae is forecasting 2.2% GDP for 2019. On one hand, Fannie Mae expects to see growth impacted by the fading effects of the 2018 tax cuts and slowing corporate capital expenditures. On the other hand, they are forecasting a pickup in housing. Falling interest rates have been a pleasant surprise, and refinance activity is expected to be a bit higher than previously forecast. That said, prepayment burnout is pretty high at this point, and home price appreciation is probably going to drive refi activity more than interest rates.

 

“On housing, the recent dip in mortgage rates to their lowest level in over a year – combined with wage gains and home price deceleration – supports our contention that home sales will stabilize in 2019,” Duncan continued. “The greatest impediment to both sales and affordability continues to be on the supply side, as new inventory, particularly among existing homes, is being met quickly by strong demand – as evidenced by the already thin months’ supply hitting a new one-year low.”

 

Grant Thornton believes that a shortage of entry-level homes will be a constraint on the housing industry this year. “The escalating costs of materials have triggered production cuts; recent tariffs on imported materials, like lumber from Canada, have also pushed up costs at the same time that labor shortages have intensified,” Swonk wrote in her report. “The cheap labor – immigrants – that once made new housing affordable has all but disappeared.” They expect the median home price to rise 3.5% this year, compared to 4.8% in 2018. Existing home sales are expected to be unchanged at 5.9 million.

Morning Report: Goldilocks jobs report

Vital Statistics:

 

Last Change
S&P futures 2891 6.75
Eurostoxx index 387.8 -1
Oil (WTI) 62.72 0.26
10 year government bond yield 2.54%
30 year fixed rate mortgage 4.20%

 

Stocks are higher this morning after the payroll number. Bonds and MBS are down small.

 

Jobs report data dump:

 

  • Nonfarm payrolls up 196,000 (expectation 180,000)
  • Average hourly earnings up 0.1% MOM / 3.2% YOY (expectation 0.3% / 3.4%)
  • Labor force particpation rate 63%
  • Unemployment rate 3.8%

 

Overall, it was a bit of a Goldilocks jobs report: enough strength to quell fears of a slowdown, but tame enough wage growth to keep the Fed from tightening more. January and February’s payroll numbers were revised upward by 14,000.

 

Trump will nominate Herman Cain for the Federal Reserve Board. While many find the idea of nominating a pizza chain executive strange, he did run the Kansas City Fed so he does have monetary policy experience. Certainly with Steve Moore and Herman Cain, there will be a different voice from the predominantly academic / salt water view on things.

 

The Senate confirmed Mark Calabria to run FHFA.

Morning Report: Lowest initial jobless claims since the 1960s.

Vital Statistics:

 

Last Change
S&P futures 2878 -0.75
Eurostoxx index 387.8 -1
Oil (WTI) 62.72 0.26
10 year government bond yield 2.50%
30 year fixed rate mortgage 4.20%

 

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

 

Mortgage Applications increased 18.6% last week as rates fell. The purchase index rose 3% while the refi index rose 39%. The refi share increased to 47% of total applications.  “There was a tremendous surge in overall applications activity, as mortgage rates fell for the fourth week in a row – with rates for some loan types reaching their lowest levels since January 2018. Refinance borrowers with larger loan balances continue to benefit, as we saw another sizeable increase in the average refinance loan size to $438,900 – a new survey record,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “We had expected factors such as the ongoing strong job market and favorable demographics to help lift purchase activity this year, and the further decline in rates is providing another tailwind. Purchase applications were almost 10 percent higher than a year ago.” Separately, Black Knight said that last week’s drop in rates increased the refinanceable mortgage pool by 50%.

 

The ISM non-manufacturing index slipped in March, although it is still quite strong. One of the comments from the report mentioned residential construction: “While we have a slowed down in residential service and install [area], we are still experiencing strength in the new commercial construction area.” (Construction) Another: “April is when our real busy season begins and it has arrived early this year, demand is quite strong.” (Real Estate, Rental & Leasing). Others mentioned that the labor market remains tight“Labor is tight and in short supply.” (Accommodation & Food Services)

 

Initial Jobless Claims fell to 202,000 last week, so despite the weak ADP print, the labor market still looks strong. For those keeping score at home, this was the lowest print in 50 years. To put that in perspective, the last time we had that few initial jobless claims, the population was 33% lower and we had a military draft.

 

Home prices are falling in the markets that led the way off the bottom. MSAs like the Bay Area, Nashville, Austin, and Florida are experiencing declines as listings surge. On the other hand, the lagging markets are finally having their day. Unloved markets like Milwaukee WI and Rochester NY are experiencing double digit increases.

Morning Report: Disappointing ADP print

Vital Statistics:

 

Last Change
S&P futures 2883 13.25
Eurostoxx index 384.71 1.04
Oil (WTI) 62.04 0.65
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.17%

 

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

 

ADP reported that the private sector created 129,000 jobs in March. Education and health reported the biggest increase, while the financial sector and the construction sector cut jobs. The Street is looking for 170,000 new jobs in Friday’s employment situation report. The Street will look at the payroll number, but the more important one is the average hourly earnings number. The Street is forecasting a 0.3% MOM and 3.4% YOY gain.

 

Construction spending rose 1% in January, and is up 1% on an annual basis. Residential construction rose 1% on a MOM basis, but is down 3.6% YOY. Construction spending was probably affected at least somewhat by the partial government shutdown at the end of last year / beginning of this year.

 

The manufacturing sector continues to do well, with the ISM Manufacturing Index hitting 55.3 in March. New Orders, Production, and Employment were the drivers of the increase. I found this comment interesting: “Business remains very strong amid rumors of a slowdown, but forecasts do not indicate this. Electronics are at tight capacity from manufacturers, with no [change] in the near future.” (Transportation Equipment) The transportation sector touches most parts of the economy, so it has always been the equivalent of the canary in a coal mine. But overall, this report isn’t showing any signs of economic weakness.

 

Durable Goods orders however did show some weakness. Durable Goods orders fell 1.6% in February, however they were up slightly when you strip out the volatile transportation sector. Core Capital Goods (a proxy for business capital expenditures) fell slightly. January’s numbers were revised upward, so the report isn’t as bad as it initially appears.

 

Ron Wyden wants your unrealized capital gains to be taxed every year. This is more or less an Overton Window widening exercise and has a less than zero percent chance of gaining mainstream Democratic support, let alone Republican support. He would also increase the capital gains tax to 37%. It would be like the government assessing you every year on the increase Zillow reports for your home and sending you a bill for 37% of it. The final plan will probably exempt your primary residence, but still – it would force you to sell investments you may not want to sell in order to pay the tax.

 

Further, in the political space, Elizabeth Warren is taking a victory lap after Wells Fargo CEO Tim Sloan’s retirement. She is pushing for laws to make it easier for the government to prosecute corporate executives who don’t have firsthand knowledge of crimes their subordinates are doing.

 

That was quick: After a big open on Friday, Lyft is now trading below its IPO price. The big gains seem to be reaped pre-IPO anymore, when the company is revalued at each funding round. By the time it hits the IPO phase, it is priced for perfection. Remember, Blue Apron, which went public at $10 a share during the summer of 2017? It is now a drill bit.

 

 

Morning Report: Final estimate for fourth quarter GDP

Vital Statistics:

 

Last Change
S&P futures 2811.75 1.25
Eurostoxx index 375.78 -1.45
Oil (WTI) 59.49 -0.45
10 year government bond yield 2.38%
30 year fixed rate mortgage 4.08%

 

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

 

Fourth quarter GDP was revised downward to 2.2% in the third and final estimate. Inflation came in at 1.5%. This is more ammo for the Fed to possibly cut rates this year.

 

GDP

 

Initial Jobless Claims came in at 211k last week. Despite the slowdown in economic activity, employers are hanging on to their workers. Speaking of labor, McDonalds will no longer lobby against minimum wage hikes. It probably is safe for McDonalds – their franchisees bear the brunt of labor costs not corporate. At any rate, I’m not sure that Republicans really need a lobbyist to tell them to oppose minimum wage hikes, but companies seem more interested in placating the social justice mob these days than delivering shareholder returns.

 

Facebook has been charged with housing discrimination based on algorithms that target housing-related ads. “Facebook is discriminating against people based upon who they are and where they live,” HUD Secretary Ben Carson said in a statement announcing the charges of violating the Fair Housing Act. “Using a computer to limit a person’s housing choices can be just as discriminatory as slamming a door in someone’s face.”

 

The White House has released a memorandum on housing reform. There were no discernible policy changes in it – the government would like to decrease the GSE’s footprint in the mortgage market while maintain the 30 year fixed rate mortgage and affordable housing goals. They did mention the goal of getting more banks doing FHA loans, although the capital treatment of servicing rights probably makes that tough. Fannie Mae stock liked the release, rallying 9%.

 

The Washington Post has run something like 4 anti Steven Moore editorials in the past few days. The economics establishment really doesn’t like the nomination. Don’t forget one thing, though. While it is generally not a good thing when politicians criticize monetary policy (and Trump / Moore were pretty outspoken about it), the action in the Fed Funds futures and the change in the dot plot shows they were right.

Morning Report: Weak housing starts number

Vital Statistics:

 

Last Change
S&P futures 2821.25 14.5
Eurostoxx index 376.34 2.01
Oil (WTI) 59.65 0.83
10 year government bond yield 2.45%
30 year fixed rate mortgage 4.08%

 

Stocks are higher this morning on overseas strength. Bonds and MBS are up.

 

Lots of housing data to chew through. Let’s start with existing home sales, which increased 11.8%, according to NAR. While this month-over-month print of 5.51 million sounds impressive, we are still down on a YOY basis. Lower rates are helping, and we are beginning this season with a little more inventory to work with. We had 1.63 existing homes for sale, which represents a 3.6 month supply. A balanced market needs something like 6 months. Prices are still rising – the median house price rose by 3.6% – but the rate of appreciation has slowed. The median home price came in at $249,500, and that puts the median house price to median income ratio just over 4. Historically that is a high number, but lower interest rates help the affordability issue. The first time homebuyer represented 32% of home sales, an increase from last year but still below the historical average of around 40%.

 

Housing starts fell 8.7% to 1.16 million, a disappointing number. We saw a huge decrease in single family construction – from an annualized pace of 970k to 805k. Last February, the number was 900k so this is a big drop. One note of caution – the margin for error on these numbers is huge (around 17%), so there is a good chance this gets revised upward in subsequent releases. Building permits were a little better – falling only 2% to 1.3 million. Housing construction has largely been absent from this recovery, and could provide a huge boost to the economy if it ever gets back to normalcy (around 1.5 million units a year).

 

housing starts

 

More evidence that home price appreciation is slowing: the Case-Shiller home price index rose 4.3% in January, the slowest pace since 2015. In general, 2018 was a year to forget for the mortgage industry as rates rose 100 basis points. They have now given back most of those gains, so perhaps 2019 will be a bit brighter, although if you have been counting on MSR unrealized gains to paper over weakness in lending, the Q1 mark is going to be harsh.

 

The economy seems to be slowing, according to the Chicago Fed National Activity Index. It edged downward to -.29 in February, and the 3 month moving average is negative as well. The CFNAI is a meta-index of 85 different economic indicators, of which many are leading as well as lagging. While it is too early to start declaring 2019 a slow-growth year, the first quarter is looking weak.

 

The FHA is backing away from a 2016 decision to loosen credit – it is now tightening standards and flagging more loans as “high risk.” The biggest effect will be for the first time homebuyer, and FHA estimates that 40,000 loans or so might be affected. At the heart of the issue is a 2016 decision to no longer require a manual underwrite for FHA loans with FICOs below 620 and DTIs above 43. FHA was largely a backwater pre-crisis, and most of these types of loans were subprime. As the subprime market disappeared, FHA stepped in to fill the void. Home Ready and Home Possible have emerged as low downpayment competitors, and FHA has suffered from negative selection bias. While FHA permits very low credit scores, most lenders don’t go as low as FHA permits in the first place.

 

Trump nominates free-marketer Steven Moore to the Federal Reserve Board and Paul Krugman isn’t taking it well. For a little economics inside-baseball, this resembles the Spacely Sprockets / Cogswell Cogs rivalry in the economics profession. Since most of the free-market caucus comes from the University of Chicago, they are called “fresh water economists” and Krugman comes from Ivy / Coastal academia (Princeton) so his school is called “salt water” economists. In terms of ideological bent, the fresh water economists are much more non-interventionist than the salt water economists, who support direct government intervention in the markets and economy. Steven Moore is a true believer in the free market approach, and to be honest, most of the Fed and academia are not. A little diversity of opinion is not a bad thing….

 

 

Morning Report: Job openings, and the Fed.

Vital Statistics:

 

Last Change
S&P futures 2833.5 3
Eurostoxx index 381.78 0.68
Oil (WTI) 48.46 -0.14
10 year government bond yield 2.60%
30 year fixed rate mortgage 4.27%

 

Stocks are higher this morning on overseas strength. Bonds and MBS are up.

 

The big event this week will be the FOMC meeting on Tuesday and Wednesday. No changes are expected in interest rates, and the Street will be focused primarily on the dot plot and whether it is catching up with what the Fed Funds futures are saying. The December 2018 dot plot predicted that the end of 2019 Fed Funds rate would be in the 2.75% – 3% range, in other words two more rate hikes in 2019. A Reuters poll of economists forecasts 1 more hike this year. On the other hand, the markets are predicting a Fed Funds rate in the 2.25% – 2.5% range – in other words no change. To be fair, there has been a major change in market sentiment since December, but one of the two (the experts or the markets) has clearly got it wrong. In December, only 2 out of the 17 forecasts expected the Fed to not hike this year, and nobody was looking for a rate cut. The futures on the other hand are handicapping a 75% chance of no hike and about a 25% chance of a rate cut. This is a massive expectations gap.

 

Other than the FOMC meeting, there isn’t much in the way of important economic data. We will get leading economic indicators on Thursday, and existing home sales on Friday.

 

There were 7.58 million job openings at the end of January, which is close to the record set back in November. The 2018 data series was also revised upward, with about 353,000 additional job openings on average. The quits rate was 2.3%, which is where it has been for most of 2013 after that series was revised. The quits rate describes the number of people who are leaving their current job to get another, so it tends to lead increases in wage growth.

 

job openings

 

The housing industry is driven at least partially by new home construction, and there is a noted labor shortage in that sector. The problem is most acute in skilled trades, like electricians and plumbers, but unskilled supply is still an issue. The job opening rate for construction was 3.9% last month, as opposed to 3.3% a year ago. The quits rate edged up for the sector as well, rising to 2.5%.