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: Mortgage rates lag Treasury yields

Vital Statistics:

 

Last Change
S&P futures 3217 -17.25
Oil (WTI) 63.87 0.74
10 year government bond yield 1.78%
30 year fixed rate mortgage 3.89%

 

Stocks are lower as the markets continue to digest the Iranian strike last week. Bonds and MBS are up.

 

Friday’s rally in the bond markets left some LOs disappointed, as mortgage backed securities barely moved. This is typical behavior to big shocks in the bond markets – mortgage backed securities (and therefore mortgage rates) invariably lag. We are seeing the same effect again this morning with bond yields falling and MBS barely moving.

 

Senior central bankers saw a possibility that interest rates could go even lower in the future, driven by changing demographics (in other words, an aging population). This is precisely the issue that has been dogging Japan for the past 30 years.

 

There was nothing earth-shattering in the FOMC minutes which were released on Friday. The Fed did nothing at the December meeting, so no new revelations were really expected. Officials “discussed how maintaining the current stance of policy for a time could be helpful for cushioning the economy from the global developments that have been weighing on economic activity.” Note that the latest NY Fed forecast has Q4 GDP coming in at 1.1%, which seems far below the other forecasts out there. This was largely due to the weak December ISM survey which showed manufacturing continue to decline. New orders, production, and employment all were contracting. The report was actually the weakest since 2007. It is probably too early to tell if this is a temporary blip or the new Phase 1 deal with China will make a difference. Punch line: No rate hikes for a while

 

 

Morning Report: The Fed maintains current interest rate policy

Vital Statistics:

 

Last Change
S&P futures 3140 -3.25
Oil (WTI) 58.90 -0.14
10 year government bond yield 1.79%
30 year fixed rate mortgage 3.97%

 

Stocks are flattish after the Fed maintained interest rates yesterday. Bonds and MBS are up.

 

The Fed maintained the Fed Funds rate at current levels and gave a generally upbeat assessment on the economy. The FOMC took down their future unemployment estimates by .2% and left all other projections unchanged. The biggest revelation was the dot plot, which was a bit more dovish than the September plot, but is still forecasting the possibility of a hike in 2020, along with no forecasts for a rate cut.

 

Dec dot plot

 

The Fed Funds futures, which have been (a) more dovish than the Fed’s dot plots and (b) more correct, went from forecasting a 50% chance of a cut in 2020 to a 70% chance of a cut. The bond market adjusted as well, with the 10 year bond yield falling about 4 basis points in the afternoon.

 

The Producer Price Index (PPI) was unchanged in November, and up 1.1% on a year-over-year basis. The PPI measures inflation at the wholesale level, and is a companion inflation index to the Consumer price index. Ex-food and energy, the index fell in November and was up 1.3% YOY.

 

Initial Jobless Claims jumped to 252,000 last week. This is a huge jump, and I am not sure what drove it. We have been hanging around in the low $200,000s for quite some time. FWIW, this jump in new jobless doesn’t necessarily comport with the other labor market indicators out there, but it is less of a lagging indicator than the others.

Morning Report: Fed Day

Vital Statistics:

 

Last Change
S&P futures 3139 3.25
Oil (WTI) 58.99 -0.24
10 year government bond yield 1.84%
30 year fixed rate mortgage 3.98%

 

Stocks are flattish as we await the FOMC decision. Bonds and MBS are flat as well.

 

Mortgage applications increased 3.8% from a week earlier, according to the MBA. The purchase index dropped 0.4%, while the refi index rose 9%. Interest rates rose one basis point.

 

The FOMC decision is set for 2:00 pm EST. Given that the Fed is on the sidelines for a while, there shouldn’t be anything market moving in it.

 

Consumer prices rose 0.3% in November, according to the BLS. Higher shelter and energy prices drove the increase. The index was up 2.1% on an annualized basis. Ex-food and energy, the index was up 0.2%. These numbers were a hair higher than street expectations.

 

The first time homebuyer is returning, according to the Genworth First Time Buyer report.  The rebound in the third quarter was driven primarily by falling interest rates and increasing home affordability. Supply constraints, particularly at the affordable price points have been the issue. “The first-time homebuyer market rebounded this quarter and although the rebound was modest compared with the number of first-time homebuyers a year ago, and a quarter behind the broad rebound, it was a strong rebound from the previous quarter allowing first-time homebuyers to make up some lost ground,” said Tian Liu, Genworth Mortgage Insurance Chief Economist.

 

The report noted that repeat buyers (read move-up buyers) have increased as well. The lack of move-up buyers has depressed housing mobility, which may have been driven by lack of home equity from purchases made during the bubble years. Given the change in the house price indices over the past 10 years, negative equity is less of an issue than it was a few years ago.

 

Interestingly,  the number of first-time homebuyers this quarter was comparable to the peak of the last housing boom in 2005 and 2006, and only modestly below the peak levels of 1999 and 2000. Still, the Millennial generation is bigger than Gen X by a large margin, so there should be more room to run here.

 

quarterly sales to first time homebuyers

Morning Report: Fannie and Freddie are interviewing investment banks

Vital Statistics:

 

Last Change
S&P futures 3138 3.25
Oil (WTI) 58.87 -0.14
10 year government bond yield 1.82%
30 year fixed rate mortgage 3.98%

 

Stocks are up as we head into the FOMC meeting. Bonds and MBS are flat.

 

The FOMC will meet today and tomorrow, with the interest rate announcement expected Wednesday at 2:00 pm. The Fed Funds futures are predicting no change in rates. That doesn’t necessarily mean the markets will ignore what is going on, as subtle changes in language can have out-sized effects on the markets. One such word is “symmetric.” The word symmetric refers to the Fed’s 2% inflation target, and how much they will tolerate inflation above that target. The Fed desperately wants to avoid the low inflation / low growth trap that evolved in Europe and Japan, and is signalling to the markets that they will allow inflation to run above 2% for an extended period of time.

 

The Fed will also be watching the overnight repurchase market, to ensure we don’t have another situation like late September where overnight rates spiked over 10%. This was due to a shortage of cash in the market. While this sort of thing doesn’t affect mortgage lending directly, it does raise the cost of borrowing for MBS investors, which can cause them to sell these securities to raise cash. That flows through to rate sheets. While the shortage caught the Fed flat-footed in September, they have been discussing the issue, so hopefully we don’t see another replay at the end of this month.

 

Fannie and Freddie are tightening the restrictions for their Home Ready and Home Possible programs. Previously, borrowers with incomes at the Area Median Income (AMI) were qualified for these 3% down programs; now they will be limited to borrowers at 80% of the AMI. This is all part of the strategy to reduce Fan and Fred’s overall risk prior to setting them free. Note that they are currently interviewing banks to handle the IPO, which will be somewhere between $150 billion and $200 billion. This would dwarf the record for the largest IPOs in history – Saudi Aramco and Alibaba – by over 6x.

 

Despite a glut of McMansions in some areas, Toll Brothers beat estimates and forecasted a strong 2020.  The company noted demand increased throughout the year, and the recent weeks have been stronger than the prior quarter, which is encouraging given that typically you see a slowdown this time of year. Douglas C. Yearley, Jr., Toll Brothers’ chairman and chief executive officer, stated: “Fiscal 2019 ended on a strong note. Building on steady improvement in buyer demand throughout the year, our fourth quarter contracts were up 18% in units and 12% in dollars, and our contracts per-community were up 10% compared to one year ago. Through the first six weeks of fiscal 2020’s first quarter, we have seen even stronger demand than the order growth of fiscal 2019’s fourth quarter. This market improvement should positively impact gross margins over the course of fiscal 2020.”

 

Small business optimism grew in November, according to the NFIB. Recession worries faded into the background, and impeachment remains little more than a curious albeit boring sideshow, similar to the Clinton impeachment saga which had zero effect on the markets. Improving labor conditions were a big driver, with 26% of firms planning on raising compensation in the coming months – the highest in 30 years. (BTW, this is music to the Fed’s ears). It looks like the drag from the 2017-2018 rate hikes are behind us, and the headwind has turned into a tailwind courtesy of the recent rate cuts.

 

Productivity declined in the third quarter as output increased 2.3% and hours worked increased 2.5%. Unit labor costs increased by 2.5%.

Morning Report: Fed Week

Vital Statistics:

 

Last Change
S&P futures 3144 -6.25
Oil (WTI) 58.59 -0.64
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.98%

 

Stocks are slightly lower as we head into a Fed Week. Bonds and MBS are up.

 

There are two big events this week: the FOMC meeting on Tuesday and Wednesday and the spate of new Chinese tariffs expected to take effect at the end of the week. We will get some interesting economic data in productivity, inflation and retail sales, but with the Fed on the sidelines trade and overseas markets will be driving interest rates.

 

The Fed Funds futures are predicting no changes to interest rate policy at the meeting this week. The June 2020 futures are predicting a roughly 50/50 chance of another rate cut.

 

The average size of a first-time homebuyer’s mortgage was $231,974 for the first 3 quarters of 2018 and was up 4.2% on a YOY basis.

 

first time mortgage size

 

Interesting stat courtesy of the Harvard Joint Center for Housing Studies: annual household growth over the next 10 years is expected to be 1.2 million per year. With housing starts around the same level, we are not taking into account functional obsolescence and deterioration.

 

Is a homeowner who sells his house via iBuyers (think Zillow and Opendoor) leaving money on the table? Turns out the average discount to market value is about 1.3%. The typical fee charged an iBuyer is around 7%. So the total costs is 8.3%. Compare that to using traditional realtors and paying 6%, along with the expense of showing the home, etc. Essentially the seller is paying for convenience, which is a non-contingent offer in a week, with no showing necessary. In this case the fee is about 2.3%, which represents the additional fee of 1% the iBuyer charges along with the 1.3% market value discount.

 

Paul Volcker, the Fed Chairman who slayed the 1970s inflation dragon has passed away.

Morning Report: Construction spending disappoints

Vital Statistics:

 

Last Change
S&P futures 3092 -21.25
Oil (WTI) 55.39 -0.54
10 year government bond yield 1.78%
30 year fixed rate mortgage 3.98%

 

Stocks are lower this morning on negative trade talk out of the White House. Bonds and MBS are up, following German Bund yields lower.

 

Home Prices rose 3.5% YOY in October, according to CoreLogic. “Nationally, over the past year, home prices are up 3.5% with the rate of growth accelerating from September into October,” said Frank Martell, president and CEO of CoreLogic. “We expect home prices to rise at least another 5% over the next 12 months. Interestingly, this persistent increase in home prices isn’t deterring older millennials. In fact, 25% of those surveyed anticipate purchasing a home over the next six to eight months.” CoreLogic conducted a survey with RTi Research regarding to consumer-housing sentiment and found that millennials are largely unconcerned about qualifying for a mortgage.

 

Construction spending disappointed in October, falling 0.8% on a MOM basis and rising 1.1% on an annual basis. Residential Construction fell 0.9% on a monthly basis and was up only 0.5% year-over-year. Despite the lousy number, the National Association of Realtors is optimistic that homebuilding will step up in 2020. “This housing cycle is definitely unique in the sense that it’s been a decade and we’re not back to normal in terms of home building,” said Lawrence Yun, NAR’s chief economist. “Many small-time builders are still out of the game. It was small-time builders in the aggregate that built many more homes than the big builders, and they’ve hesitated to get back in, even though it appears there is a money-making opportunity….All the factors that contribute to higher home sales like the job situation are terrific, and of course mortgage rates are critical to buying a home and those are favorable,” Yun said.” Note that construction loans increased 0.8% in the third quarter.

 

The Fed is considering raising its inflation target above its 2% target, according to the Financial Times. The idea (called the “make-up” strategy) would be to temporarily raise the target level if inflation comes in below 2% (the current target). The Fed fears deflation more than inflation, and has been utterly vexed by their inability to push inflation up to their target rate. This would be a signal to the markets that the Fed intends to keep rates lower for longer, although many members are worried about communication issues with the markets.

 

HUD has put out a request for information regarding affordable housing development, specifically which laws, regulations or administrative practices are inhibiting building. “Owning a home is an essential component of the American Dream. It is imperative that we remove regulatory barriers that prevent that dream from becoming a reality,” said HUD Secretary Ben Carson, who is also Chairman of the White House Council on Eliminating Regulatory Barriers to Affordable Housing. “Through this request, communities across the country will have the opportunity to identify roadblocks to affordable housing and work with State, Federal, and local leaders to remove them.”