Morning Report: Fed day

Vital Statistics:

 

Last Change
S&P futures 2925 -0.25
Oil (WTI) 53.85 -0.35
10 year government bond yield 2.09%
30 year fixed rate mortgage 4.15%

 

Stocks are flat as we head into the FOMC decision, which is set for 2:00 pm. Bonds and MBS are down.

 

The disconnect between the current market forecast and the last Fed dot plot are so stark that we are probably set up for some volatility in bonds after the announcement. Be careful locking around then.

 

Donald Trump looked at ways to possibly remove Fed Head Jerome Powell. While the law protects the independence of the Central Bank, Fed Chairmen have been removed before. Jimmy Carter removed G. William Miller in the late 70s after something like 11 months on the job, and kicked him upstairs to Treasury. Note the President was unhappy with the ECB and their signals of new stimulus – it strengthened the dollar against the euro and that is a negative for US exporters.

 

Mortgage Applications fell 4% last week as purchases and refis fell by 4%. Rates rose by 2 basis points to 4.14%. “After seeing a six-week streak, mortgage rates for 30-year loans increased slightly, which led to a pullback in overall refinance activity,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Borrowers were sensitive to rising rates, but the refinance share of applications was still at its highest level since January 2018, and refinance activity was at its second-highest level this year. Government refinances actually increased last week, led by a 17 percent in VA refinance applications, while conventional refinance applications decreased 7 percent.” The refi index has rebounded to the highest level in almost 3 years:

 

MBA refinance index

 

New Jersey has tightened the requirements for nonbank servicers.

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Morning Report: Housing starts fall

Vital Statistics:

 

Last Change
S&P futures 2910 13.25
Oil (WTI) 51.78 -0.15
10 year government bond yield 2.03%
30 year fixed rate mortgage 4.15%

 

Stocks are higher as we begin the 2 day FOMC meeting. Bonds and MBS are up smartly on statements out of the ECB.

 

US rates are pushing towards 2% this morning after ECB President Mario Draghi signaled that the central bank could roll out further stimulus if inflation fails to materialize. The German Bund yields -32 basis points this morning (a record low), and US interest rates will have a hard time rising in this sort of environment. Simply put, bond investors will rotate out of bonds paying nothing into bonds paying something, even if they have to bear currency risk. It is preferable to locking in a sure loss by holding Bunds.

 

Housing starts fell to 1.24 million units in May, which was below expectations, but the prior two months were revised upward. Starts were down on a month-over-month and a year-over-year basis. Building Permits cam in at 1.29 million, which was more or less flat MOM and YOY.

 

Homebuilder sentiment slipped in June, primarily due to weakness in the Northeast and the West. That said, the index is solidly in the mid-60s, which is an overall strong level. Home prices have become stretched relative to incomes, but falling interest rates are offsetting that slightly. Rising costs for land and labor are making starter homes unaffordable for many first time homebuyers.

 

30 day delinquencies fell by 0.3% in March to a rate of 4.0%. Delinquencies are still being driven by hurricane-related issues. The foreclosure rate fell from 0.6% in March 2018 to 0.4% in March of 2019. Separately, ATTOM reported that there were 56,152 foreclosure filings in May, up 1% YOY, but down 22% from a year ago. Completed foreclosures were down 50%. The states with the highest foreclosure inventory are New Jersey, Florida, Delaware, Illinois.

 

 

 

 

Morning Report: Fed Funds forecasts and mortgage rates.

Vital Statistics:

 

Last Change
S&P futures 2895.75 0.75
Oil (WTI) 51.89 -0.62
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.12%

 

Stocks are flat this morning as we enter Fed week. Bonds and MBS are flat as well.

 

The big event this week will be the FOMC meeting which starts Tuesday. Given the disconnect between the market’s perception of the road ahead and the Fed’s prior forecast, something has to give. FWIW, the market is now assigning a 20% chance they will ease by 25 basis points at this meeting. By the December meeting, the market is forecasting the FOMC will cut rates either 2 or 3 times!

 

fed funds futures dec 19

 

Compare that to the March 2019 dot plot, which showed most members of the FOMC thought rates would be unchanged for the year and about 1/4 of the members wanted to see a rate hike:

 

dot plot Mar 2019

If the Fed Funds futures are correct and we are looking at a 1.5% Fed Funds rate, where will mortgage rates go? If history is any guide, probably nowhere. The last time the Fed Funds rate was around 1.5% (late Dec 2017), the 30 year fixed rate mortgage (according to the MBA) was in the low 4% range, in other words, right about here.  Long term rates have already priced in the move. MBA 30 year FRM chart:

 

MBA mortgage rate

 

Quicken Loans settled with the DOJ over false claims allegations regarding FHA origination going back to 2015. The case was dismissed and Quicken settled for $32.5 million with no admission of guilt. Quicken fought the case the entire way, and eventually narrowed it down to a tiny fraction of what the Obama Administration wanted. Quicken Vice Chairman Bill Emerson said: “I think the current HUD administration realized how faulty the previous administration’s tactics were, and frankly, as we’ve said before, we viewed them as extortionist tactics and we just could not go along with that,” Emerson said. “We know we didn’t do anything wrong and so we continued to fight, and if that somehow caused the new administration to evaluate it differently, then great.”

 

Ed Demarco discusses the ways that private capital can be drawn back into the mortgage market. First, the CFPB’s ATR and QM rules need to change to bring down the allowable DTI ratios on Fannie and Freddie loans to that of the rest of the market. This is known as the QM patch, which basically says that any loans that meet F&F criteria meet the ability to repay test. The problem is that the QM laws specify a max DTI ratio of 43% and the GSEs allow up to 50%. This gives Fan and Fred a huge advantage over other lenders. The second issue revolves around the SEC and refining the data definitions in the registration rules. Third, Fan and Fred have all sorts of mortgage performance data that is unavailable to the broader market, and leveling the playing field would mean allowing other participants to see that data. Note however that DeMarco is only looking at the issue from the standpoint of originators. Buyers of private label securities have other issues that are still unresolved, especially when the issuer of the bonds also retains servicing. There is a conflict of interest issue that must be resolved as well. I discussed this about a year ago in Housing Wire.

 

Profitability improved for independent mortgage bankers in the fist quarter of 2019. Average revenue per loan came in at $9584, while average cost per loan was $9,299, or a net gain of $285 per loan, compared to a loss of $200 a loan in the fourth quarter. It looks like mortgage bankers reported a loss in the first quarter of 2018 as well.

Morning Report: Overseas yields hit a record low

Vital Statistics:

 

Last Change
S&P futures 2759.6 9.65
Oil (WTI) 52.61 -0.84
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.13%

 

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

 

We are seeing lots of articles tying trade to rate cuts. IMO, I think the business press and politicians overestimate the effects of trade sometimes, but there is no doubt that there is a sea change in opinion. The markets are pricing in a 96% chance of a rate cut this year. Only 1 month ago, they were pricing in a 53% chance of no movement at all. Compare the forecast now versus May 3. Amazing how much sentiment has changed. The central tendency is now for 2 rate cuts (although the markets expect the Fed to hold steady at the June meeting in a couple of weeks).

 

fed funds futures

 

Is trade the driver of the change in sentiment? It plays a part, no doubt. But, the yield curve inversion has more to do with general economic malaise especially in Europe. The  German Bund (Germany’s 10 year bond) has hit a record low yield of -21 basis points. This is a big deal, and is the real culprit behind the drop in US Treasury rates. Relative value trading (in other words managers selling Bunds which pay nothing for Treasuries which pay something) is pulling US rates lower, which has inverted the yield curve. An inverted yield curve occurs when short term rates (like the 1 month T-bill) are higher than long term rates like the 10 year. The 1 month T-bill pays 2.35% while the 10 year pays 2.11%. Historically, an inverted yield curve has been a recessionary indicator, but that probably isn’t what is going on right now. I certainly don’t think the Fed imagines a recession is imminent or even a decent possibility – we will get an idea however when they release their economic projections at the June FOMC meeting.  That said, the markets see two rate cuts this year, and the dot plot will be an interesting view.  Strange to think that the Fed tightened to fight nonexistent inflation and will ease to fight a nonexistent recession, but here we are….

 

Home prices rose 1% MOM and 3.6% YOY in April, according to CoreLogic. They do see home price appreciation picking back up over the next year, and are forecasting a 4.7% increase over the next year.

Morning Report: Rates continue to move lower

Vital Statistics:

 

Last Change
S&P futures 2746 -5
Oil (WTI) 54.23 0.76
10 year government bond yield 2.12%
30 year fixed rate mortgage 4.18%

 

Stocks are lower as trade fears dominate the market’s mood. Bonds and MBS are up (yields down). The 10 year hit 2.07% in the overnight session.

 

On the open, it is looking like mortgage backed securities are lagging the move in Treasuries. Prepayment speed worries are behind it. It may take a couple of days for mortgage rates to catch up.

 

The upcoming week will have a slew of important economic data, with construction spending, the ISM numbers and the jobs report on Friday. Productivity and costs will be another key number, although the Fed is more worried about a slowdown than an acceleration of inflation. After that, the Fed goes into their quiet period ahead of the FOMC meeting in two weeks.

 

Housing affordability is at its strongest in about a year, according to Black Knight Financial. The annual rate of housing inflation fell below the 25 year average of home price appreciation for the first time since 2012. 22% of median income was required to purchase the average house, which is will below the historical average of around 25%. Most of that has to do with lower interest rates, but slowing home price appreciation and rising incomes have been the drivers there.

 

According to Sentier Research, the median income in March of 2019 was $64,016. NAR has the median home price at $267,300. This puts the median house price to median income ratio at just under 4.2x. This is still elevated compared to historical numbers, but low interest rates offset the high multiple.

 

Affordability issues are driving a new business model for builders in some high-cost areas: build to rent. Toll Brothers is going to spend something like $60 million in a joint venture to build rental properties. “Renting by choice” is one of the new consumer trends, and it may not be going anywhere. The plan is to stick rental properties in planned communities that are more or less identical to neighboring properties. Why would people choose to rent? If they are worried about another housing bubble, they shouldn’t. That isn’t going to happen again for a long, long time. If they believe they need a 20% down payment, then the industry has an education job to do. If they are doing it because they want the freedom to move easily, that will probably change once they have kids.

 

Construction spending was flat in April, according to the Census Bureau. Residential was down 0.6% MOM and 11.2% YOY.

Morning Report: Home price appreciation is flattening

Vital Statistics:

 

Last Change
S&P futures 2826 -5
Oil (WTI) 58.98 0.35
10 year government bond yield 2.29%
30 year fixed rate mortgage 4.41%

 

Stocks are flattish as investors return from the long Memorial Day weekend. Bonds and MBS are flat.

 

Mortgage REITs like Annaly and American Capital Agency are increasing the size of their mortgage books. Over the past year, mortgage REITs have increased their exposure by 28%. The agency REITs generally stay fully invested in a portfolio of Fannie Mae and Freddie Mac MBS and adjust duration exposure and leverage as different pockets of value develop in the MBS market. Mortgage REITs are an important source of financing for the residential real estate market, and are stepping up as the Fed reduces its exposure. What does this increase in exposure tell us? That these REITs are betting on interest rate stability over the near term. If you own a large leveraged portfolio of mortgage bonds, you want rates to move as little as possible to maximize your returns.

 

Home prices rose 3.7% in March according to the Case-Shiller Home Price Index. This is a decline from the 3.9% increase reported in February. Real estate prices probably rose too far too fast especially out West and now we are seeing a leveling-off. Prices in Los Angeles, San Diego, Seattle, and San Francisco were up only about 1%. Meanwhile, prices are falling in Manhattan, to the tune of 5.2%.

 

The FHFA House Price Index rose 5.2% in March, which shows that there is still decent demand at the lower price points. The FHFA index only considers houses with conforming mortgages, which means it excludes the jumbo market and that is where the slowdown is occurring.

 

One of the worst this-time-is-different hot takes on the real estate market was the Millennials want to live in walkable, urban areas one. There were lots of approving news stories and analysis pieces about environmentally conscious Millennials who take mass transit and live in dense urban environments.  Was this some sort of social movement or nothing more than a transient phenomenon based on circumstances? It is looking more like the latter. The Brookings Institution notes that the suburbs are now growing, while cities are losing residents. As Millennials start having kids, it turns out they want the same thing every generation wanted before them: a yard and good schools. New York City lost 39,000 residents last year, and we are seeing the same thing in expensive West Coast cities. One of the most cited impediments to more homebuilding has been the lack of buildable lots. I wonder if this was due to builders focusing on urban areas. If the exurbs are coming back, that issue should disappear.

Morning Report: Housing starts still weak

Vital Statistics:

 

Last Change
S&P futures 2865.5 10
Oil (WTI) 62.69 0.66
10 year government bond yield 2.38%
30 year fixed rate mortgage 4.17%

 

Stocks are higher this morning as the market continues its rebound. Bonds and MBS are flat.

 

Housing starts rose 5.7% MOM to 1.23 million in April, which is down about 2.5% from a year ago. March was revised upward to 1.17 million. Building Permits rose to 1.3 million, up a touch from March, but down 6% YOY. We saw an increase in activity in the historically lagging areas – the Midwest and the Northeast. You would have thought that increasing home prices would drive more construction, but so far there is no evidence of that. Costs are increasing, especially labor costs. Tariffs are also being blamed, but lumber prices are down over 50% from a year ago.

 

lumber

 

Despite the slow and steady pace of new homebuilding, builder confidence did improve markedly in April, according to the NAHB Housing Market Index. “Builders are busy catching up after a wet winter, and many characterize sales as solid, driven by improved demand and ongoing low overall supply,” said NAHB Chairman Greg Ugalde. “However, affordability challenges persist and remain a big impediment to stronger sales.” “Mortgage rates are hovering just above 4% following a challenging fourth quarter of 2018 when they peaked near 5%. This lower interest rate environment, along with ongoing job growth and rising wages, is contributing to a gradual improvement in the marketplace,” said NAHB Chief Economist Robert Dietz.  “At the same time, builders continue to deal with ongoing labor and lot shortages and rising material costs that are holding back supply and harming affordability.”

 

Initial Jobless Claims rose to 220,000 last week. The labor market continues to be strong.