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.

 

building permits

 

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: Q2 GDP comes in at 2%

Vital Statistics:

 

Last Change
S&P futures 2916 26.5
Oil (WTI) 56.17 0.34
10 year government bond yield 1.48%
30 year fixed rate mortgage 3.78%

 

Stocks are up this morning after China said it wouldn’t immediately retaliate on tariffs set to take effect this weekend. Bonds and MBS are down.

 

The second revision to Q2 GDP was unchanged at 2.0%. Consumption drove the increase in GDP as durable goods consumption was up 13% and non-durables were up 7%. Core PCE inflation was unchanged at 1.7%. Despite the chronic housing shortage, residential investment was down again for the sixth straight quarter. Investment and trade made negative contributions to the index.

 

GDP

 

Initial Jobless Claims came in at 215,000 right in line with expectations.

 

The MBA reported that net gains per loan increased to $1,675, compared to $285 in the first quarter. This was the best number since the third quarter of 2016. “With anticipated increases in prepayment activity, we saw hits to servicing profitability resulting from mortgage servicing right markdowns and amortization,” Walsh said. “Nonetheless, the profitability on the production side of the business generally outweighed servicing losses.” Average pretax production profit rose to 64 basis points, while secondary marketing income fell to 287 basis points, down from 308 in the first quarter.

 

Treasury is looking at the idea of ultra-long term government bonds, with 50 or 100 year terms. “If the conditions are right, then I would anticipate we’ll take advantage of long-term borrowing and execute on that,” Mnuchin said in the Bloomberg News interview on Wednesday.

Morning Report: Homeownership rate jumps in Q4

Vital Statistics:

 

Last Change
S&P futures 2814 6.75
Eurostoxx index 376.36 1.22
Oil (WTI) 56.49 0.7
10 year government bond yield 2.74%
30 year fixed rate mortgage 4.44%

 

Stocks are higher this morning on real news. Bonds and MBS are down.

 

The big data this week will be the jobs report on Friday. Jerome Powell said in his Humphrey-Hawkins testimony that he would like to see further wage increases, which should calm the bond markets if the average hourly earnings number comes in a bit hotter than expected. Other than that, we will get new home sales and the ISM data.

 

The homeownership rate ticked up to 64.8% in the fourth quarter, according to the census bureau. This is up from 64.4% in the third quarter and 64.2% a year ago. The homeownership rate has been slowly ticking back up after bottoming at 62.9% in 2016. Note that we are nowhere near the highs of around 69.2% during the bubble years. Bumping up that number by lending to Millennial borrowers is going to drive the mortgage business going forward, and will have to replace the rate / term refi business that drove earnings for years.

 

homeownership rate

 

28 organizations, including the MBA, NAR and a whole host of affordable housing advocates sent a letter to Acting FHFA Director Otting counseling him to go slow in GSE reform.  “A well-functioning housing finance system should provide consistent, affordable credit to borrowers across the nation and through all parts of the credit cycle without putting taxpayers at risk of a bailout,” the letter states. “We urge policymakers to take these principles into account to ensure that access and affordability are preserved under the current, and any future, housing regime.” FHFA had indicated it was willing to make some reforms without Congress, which prompted the letter. Any true GSE reform will require legislation.

 

Despite a strong Q4 GDP print of 2.6%, first quarter estimates are in the 0% to 1% range. Does the economy “feel” like it rapidly decelerated in the past couple of months? Some of the numbers suggest it – as in personal income and consumption.  I don’t sense it, but that’s what the pros are saying. As a general rule, people’s subjective assessment of the economy is often influenced by their personal partisan values. When Democrats are in charge, Republicans tend to feel the economy is worse off than it really is, and the same goes in reverse. During the Obama years, the professional economists (including the Fed) were consistently high on their GDP estimates. Now, during the Trump years, professional economists seem to be undershooting the numbers – i.e. actual growth numbers out of the BEA are much higher than forecast. I doubt there is any tampering going on, but it is something to keep in mind, especially when locking around big economic events.

Morning Report: Changes happening at the CFPB

Vital Statistics:

Last Change
S&P futures 2774 1.75
Eurostoxx index 386.72 -0.16
Oil (WTI) 65.25 0.52
10 Year Government Bond Yield 2.98%
30 Year fixed rate mortgage 4.58%

Stocks are higher this morning as trade tensions with China ease. Bonds and MBS are lower.

Initial Jobless Claims fell to 222k last week. We are still bouncing around lows that we haven’t seen since the Vietnam War.

Changes are afoot at the CFPB. First, Mick Mulvaney dismissed all 25 members of the Consumer Advisory Board in order to cut costs and increase the diversity of voices. The Community Bank Advisory Board and the Credit Union Advisory Board were also terminated. Apparently, these committees were traveling to DC on taxpayer expense. Many of these people are simply professional political activists in the business of raising money for liberal candidates, and were often given funds from settlements – in other words, it was a bit of a political money-laundering operation. So, there is no reason for an agency under a Republican Administration to fund the Democratic political machine. Also, the Obama / Cordray CFPB was one-sided – they listened only to consumer advocates and had zero interest in input from the industry. For better or worse, you make better policy when you have input from the people who will be affected by your rules and regulations.

Separately, the CFPB is prepared to dismiss its case against PHH. The PHH case is a tricky one, where the CFPB unilaterally increased a judge’s $6 million penalty to $106 million. PHH won a big victory last January when an appeals court threw out the judgement. There structure of the Agency was also brought into question during this case, which helps explain why the CFPB is anxious to make this case go away.

Independent mortgage bankers lost money on average in the first quarter, according to the MBA. Net production losses were $118 per loan (or about 8 basis points). The last time we saw something similar was the first quarter in 2014. The first quarter is always a seasonally weak period.  Declining volumes, increasing costs, and thinner margins are driving the losses. Net secondary marketing income was more or less flat, and purchases accounted for 71% of the volume. Pull-through rates fell to 70% from 74% in the fourth quarter. Production expenses and personnel expenses increased quite a bit, to almost $9,000 a loan. That number has been closer to $6,200 since 2008. Productivity also fell to 1.9 loans per employee from 2 loans in the fourth quarter.

Chinese money has been pushing up real estate prices in many cities, from Vancouver to Seattle, to Sydney. Local governments are finding more and more of their citizens are being priced out of the market and are trying to do something about it. In Vancouver, prices were appreciating at an annual rate of 30% before the government imposed a foreign investments tax. The money then left and moved to Toronto. Ultimately probably nothing will change until the Chinese real estate bubble bursts, and no one has any idea when that will happen. One thing is for sure, however. When the bubble does burst, these cities will get hit first. In a financial crisis, you sell what you can, not what you want to.

Chinese money

How easy is credit these days? Twitter is offering $1 billion in convertible bonds paying 25 basis points of interest that convert into Twitter stock at a 44% premium to the current share price. That is as close to free money as you are going to get.

Apparently the market cap of the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) is now higher than the GDP of Germany. Most crowded trade since the Nifty 50 in the 1970s.