Morning Report: Purchase applications are the highest in over a decade

Vital Statistics:

 

Last Change
S&P futures 3282 -5.25
Oil (WTI) 58.13 0.04
10 year government bond yield 1.79%
30 year fixed rate mortgage 3.87%

 

Stocks are lower this morning as China and the US sign a Phase I deal on trade. Bonds and MBS are up.

 

Note we will have some Fed-speak later this morning.

 

Trump characterized his Phase I deal with China as a “big, beautiful monster” and encouraged farmers to buy bigger tractors. China is agreeing to purchase an additional $200 billion of US goods over the next two years, which represents about half of the US trade deficit. Energy, agricultural, and industrial exports are all set to increase, while the US will cancel new tariffs on cellphones and laptops. Some other tariffs will be reduced while others will remain in place.

 

Mortgage applications increased 30% last week as purchases rose 16% and refis rose 43%. This was the first week after the holidays, so there is probably are some weird adjustments playing out. Rates fell 4 basis points to 3.87%. Most notably, purchase activity increased 8% from a year ago and is at the highest level since October 2009.  A few homebuilders specifically mentioned on their earnings calls that they are seeing no season slowdown this year. At any rate, the Spring selling season is just around the corner. Note that while we are at a 10 year high on the purchase index, we are still well below bubble levels

 

MBA purchase index

 

Inflation at the wholesale level remains below the Fed’s target, with the headline producer price index up 0.1% MOM and 1.3% YOY. Ex-food and energy, it rose 0.1% and 1.1%. While the producer price index is not the preferred inflation index for the Fed, it confirms we are still not seeing much in the way of inflationary pressures.

 

 

Morning Report: Iranians protest the government

Vital Statistics:

 

Last Change
S&P futures 3277 12.25
Oil (WTI) 59.13 0.04
10 year government bond yield 1.85%
30 year fixed rate mortgage 3.88%

 

Stocks are higher this morning as we anticipate a phase 1 trade deal with China this week. Bonds and MBS are flat.

 

Earnings season kicks off this week with the major banks all reporting. JP Morgan, Wells, and Citi all report tomorrow. We will get inflation data, retail sales and housing starts this week as well. With the Fed on hold for the moment (and probably through the election), economic data will become less of a market-mover unless it is way out the expected range. Neel Kashkari thinks the next move for the Fed could be a rate cut. “If I were to guess the next rate move, my guess (on) the balance of risks, is that it will be down and not up.” The Fed funds futures agree, handicapping a better-than-50% chance that rates will get cut this year.

 

fed funds futures

 

Iran admitted shooting down an airliner by mistake over the weekend, which has shifted the focus from the US killing a military leader. It looks like there are major protests in Tehran right now. So far, we are not seeing any big effects in the oil market, although North America uses a different benchmark than the rest of the world.

 

HousingWire lays out some predictions for 2020. One big one refers to recruiting. As of 11/24, originators could officially move from a bank to a non-bank or another state and keep originating mortgages while they wait for the new license. This will almost certainly make recruiting for non-banks easier.

 

Mortgage credit availability decreased in December by 3.5%, according to the MBA. “Credit availability fell in December after three months of expansion, driven by drops in both conventional and government supply,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Perhaps most noteworthy was a 6 percent drop in government credit supply because of changes to the Veterans Administration loan program, which eliminated loan limits for certain borrowers as of Jan 1, 2020. This likely prompted many investors to remove VA programs in high cost counties from their offerings. There was also a reduction in streamline refinance programs, as slightly higher rates slowed the refinance market at the end of 2019.”

Morning Report: December jobs come in hotter than expected.

Vital Statistics:

 

Last Change
S&P futures 3239 3.25
Oil (WTI) 61.57 -1.04
10 year government bond yield 1.82%
30 year fixed rate mortgage 3.88%

 

Stocks are slightly higher this morning despite an Iranian rocket attack last night. Bonds traded as high as 1.7% overnight before falling back to more or less unchanged levels.

 

The ADP jobs report came in stronger than expected, at 202,000. November’s weak reading was also revised upward. Note nonfarm payrolls are expected to come in at 164,000 on Friday, so there may be some upside.

 

Mortgage applications were largely unchanged during the holiday period, with the composite index falling 1.5%. Refis fell by 8% while purchases increased by 5%. “Mortgage rates dropped last week, as investors sought safety in U.S. Treasury securities as a result of the events in the Middle East, with the 30-year fixed mortgage rate declining to its lowest level (3.91 percent) since early October,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Despite lower rates, refinance volume decreased these last two weeks, and we expect that it will slowly trail off in the first half of 2020 as long as mortgage rates remain in this same narrow range. Homeowners would need to see a sharp drop in rates to reinvigorate the refinance wave seen in 2019.”

 

While the ISM manufacturing index was weak in December, the non-manufacturing index definitely was not. One quote from a builder: “Weather and the holiday season have had an impact on residential new construction sales and production. While demand is outstripping supply in the housing market, business is down due to global trade insecurity causing affordability, labor and cost pressures.” (Construction). Given the weakness in lumber prices, I am not sure how trade is affecting construction. If anything, the issue is labor.

 

Speaking of homebuilding, Lennar reported 4th quarter earnings that surpassed analyst expectations. Rick Beckwitt, Chief Executive Officer of Lennar, said, “During the fourth quarter, the basic underlying housing market fundamentals of low unemployment, higher wages and low inventory levels remained favorable. Against this backdrop, our homebuilding gross margin in the fourth quarter was 21.5%, while our focus on making our homebuilding platform more efficient resulted in an SG&A percentage of 7.6%, an all-time, fourth quarter low. In addition, our financial services business performed extremely well with fourth quarter earnings of $81.2 million, an all-time, quarterly high.” Revenues increased 9% as deliveries rose 13% and average selling prices fell 3% (as Lennar focuses more on the entry-level market where the demand is strongest).

Morning Report: Some predictions for 2020

Vital Statistics:

 

Last Change
S&P futures 3242 -1.25
Oil (WTI) 62.87 -0.74
10 year government bond yield 1.80%
30 year fixed rate mortgage 3.88%

 

Stocks are flattish this morning as Iranian tensions ease. Bonds and MBS are flat as well.

 

The trade deficit fell to a 3 year low as imports fell and exports rose. The Trump Administration has said that a Phase 1 deal with China will be signed at the White House on January 15. Separately, the Senate is expected to vote on the new USMCA (the replacement for NAFTA) this month.

 

The Bernank is suggesting that the Fed not rule out the use of negative interest rates. “The Fed should also consider maintaining constructive ambiguity about the future use of negative short-term rates, both because situations could arise in which negative short-term rates would provide useful policy space; and because entirely ruling out negative short rates, by creating an effective floor for long-term rates as well, could limit the Fed’s future ability to reduce longer-term rates by QE or other means.” He also supported the Fed’s current “makeup” policy where the Fed will allow inflation to run above its intended target for an extended period to “make up” for the past decade where it had run below its target.

 

Interesting new model for home ownership. Fleq is a Los Angeles based startup that buys homes on behalf of a buyer and rents it back them while offering them the chance to buy it from Fleq bit by bit. It is different than the “rent-to-own” model. The buyer (really a tenant) will pay market rent, which is then reduced as the tenant buys more of the property. If the tenant has 5% equity, they 5% of all taxes and maintenance costs. They also get to treat the property as if they own it, meaning they can paint it how they want, etc. I guess it makes sense for someone who falls in love with a house but can’t get a mortgage at the moment. It allows them to move into the home without having to get a mortgage and lets them repair their credit / income / whatever and then go the traditional mortgage route. Don’t know how much interest there will be in this, but it is a novel concept.

 

Some predictions for the 2020 housing market. “In 2020, more home-building activity and consequent growth in supply should tame down home price gains,” said Lawrence Yun, the NAR’s chief economist. “That’s a healthy development for potential home buyers. Southern cities should once again do better than most other markets.”. Another: “Real estate fundamentals remain entangled in a lattice of continuing demand, tight supply and disciplined financial underwriting,” said George Ratiu, senior economist at Realtor.com. “Accordingly, 2020 will prove to be the most challenging year for buyers, not because of what they can afford but rather what they can find.” Punch line: rates will stay around 3.8%, and existing home sales will fall as fewer properties will be available for sale. Of course, that assumes builders will remain cautious. The NAHB expects single family starts to grow 4% to 920,000, which is still below the number we need to keep up with population and obsolescence. The chart below shows population-adjusted starts by decade:

 

starts by population

 

 

Morning Report: Wages increasing especially at the low end

Vital Statistics:

 

Last Change
S&P futures 3242 4.25
Oil (WTI) 62.17 0.44
10 year government bond yield 1.94%
30 year fixed rate mortgage 3.94%

 

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

 

The upcoming week should be relatively quiet with New Year’s right in the middle of the week. Tomorrow, the bond market will close at 2:00 pm as well. The jobs report looks like it will be postponed until next week as well.

 

The USMCA (aka NAFTA 2.0) should help ease the housing shortage in the US by allowing more imports of building materials at cheaper prices. “The U.S. residential construction and remodeling industries rely on tens of billions of dollars in building materials sourced from Mexico and Canada annually because America cannot produce enough steel, aluminum and other materials and equipment to meet the needs of the domestic housing industry,” NAHB said in a statement. FWIW, I don’t know that building materials are the issue – lumber prices are down 33% from the peak in 2018 – but I guess every little bit helps. The biggest constraint is labor and land. And those are more about immigration policy and zoning.

 

lumber

 

Wages are increasing, which reflects a tighter labor market. According to the NY Fed, the average wage rose to a record high of $69,181 in November. Further, wages are rising 4.5% for the bottom 25% and only rising 2.9% for the top 25%. So, definitely good news for the first time homebuyer, who is likely younger and lower paid.

 

 

Morning Report: Upbeat housing forecast from Fannie Mae

Vital Statistics:

 

Last Change
S&P futures 3252 7.25
Oil (WTI) 61.78 -0.04
10 year government bond yield 1.88%
30 year fixed rate mortgage 3.97%

 

Stocks are higher as investors are largely taking the day off. Bonds and MBS are up.

 

Mortgage applications fell by 5% last week as purchases and refis both fell by the same amount. “The 10-Year Treasury yield increased last week amid signs of stronger homebuilding activity and solid consumer spending, leading to a rise in conventional conforming and jumbo 30-year mortgage rates to just under 4 percent. With this increase, conventional refinance application volume fell 11 percent,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Refinance applications for government loans did increase, even though rates on FHA loans picked up. The change in the mix of business has kept the average refinance loan size smaller than we had seen earlier this year.” 

 

Fannie and Freddie both took up their estimates for 2020 economic growth and housing forecasts. Underpinned by a strong labor market, housing will finally take a leadership position in economic growth. “Housing appears poised to take a leading role in real GDP growth over the forecast horizon for the first time in years, further bolstering our modest-but-solid growth forecasts through 2021,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. “In our view, residential fixed investment is likely to benefit from ongoing strength in the labor markets and consumer spending, in addition to the low interest rate environment. Risks to growth have lessened of late, as a ’Phase One’ U.S.-China trade deal appears to be in place and global growth seems likely to reverse course and accelerate in 2020. With these positive economic developments in mind, we now believe that the Fed will hold interest rates steady through 2020.”

 

The actual numbers are here. They see housing starts rising to 1.315 million units, and the 30 year fixed rate mortgage falling to 3.6%. Origination volume is expected to fall slightly to $2.04 trillion from $2.15 trillion in 2019. Purchase volume is expected to increase and refis are forecasted to fall. GDP growth is expected to come in at 1.9%

Morning Report: Inventory shortages hit existing home sales

Vital Statistics:

 

Last Change
S&P futures 3233 7.25
Oil (WTI) 60.5 -0.04
10 year government bond yield 1.90%
30 year fixed rate mortgage 3.97%

 

Stocks are higher as we head into what promises to be a dull week. Bonds and MBS are flat.

 

Markets will be closed on Wednesday, and we will have an early close tomorrow. The only economic numbers will be new home sales and that is it. No Fed-speak, etc.

 

Durable Goods orders fell 2% in November, however, Boeing’s issues are probably coming into play here. Ex-defense and aircraft they rose 0.8%. Capital expenditures rose 0.1%.

 

The third and final estimate for Q3 was unchanged at 2.1%. Consumption spending was revised upward to 3.2% and inflation remained in check, rising 1.6% YOY. FWIW, Q4 GDP estimates are coming in at 1.3% – 2.1%.

 

Personal incomes rose 0.5% in November, while personal consumption rose 0.3%. The income number was much higher than the 0.3% expectation, which shows that people are getting wage increases, especially at the lower income levels.

 

Existing home sales fell 1.7% in November, according to NAR.  The median home price rose 5.4% to 271,300 largely do to constrained inventory, which sat at 3.7 months’ worth of sales. First time homebuyers accounted for 32% of sales. “The consensus was that mortgage rates may rise, but only incrementally,” Yun said. “I expect to see home price affordability improvements, too. This year we witnessed housing costs grow faster than income, but the expectation is for prices to settle at a more reasonable level in the coming year in line with average hourly wage growth of 3% on a year-over-year basis.”