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: 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: 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: MBA urges tweaks to the CFPB

Vital Statistics:

 

Last Change
S&P futures 3199 3.25
Oil (WTI) 60.61 -0.34
10 year government bond yield 1.89%
30 year fixed rate mortgage 3.96%

 

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

 

Mortgage Applications fell by 5% last wee as purchases fell 2% and refis fell 7%. Mortgage rates were mostly unchanged, even as a potential trade deal between the U.S. and China caused rates to inch forward at the end of last week,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “With rates showing little meaningful movement, both refinance and purchase activity took a step back. As we move into the slowest time of the year for home sales, purchase application volume is declining but continues to outperform year-ago levels, when rates were much higher. Purchase activity was 10 percent higher than a year ago.”

 

Job openings ticked up to 7.3 million at the end of October, according to the BLS. Retail, financial, and durable goods manufacturing saw the biggest increases. The quits rate was stuck at 2.3%, which is odd given that the labor market is strong and wages are increasing.

 

iBuying, which means buying or selling property via platforms like Zillow, Opendoor or Offerpad accounted for 10% of all sales in several MSAs. These platforms permit the buyer and seller to bypass the traditional realtor and sell their properties directly to the company sponsoring the exchange. Does this save the seller money, since they aren’t paying realtor commissions? Not really. Zillow charges a 7.5% fee on average, which is higher than the 6% in realtor commissions a seller typically pays. That extra 1.5% is a convenience fee – you don’t have to stage the property, you get a non-contingent offer within a few days, and can sew the process up in a week or two.

 

The MBA and NAR filed amicus briefs urging the Supreme Court to maintain the CFPB, but to remove the language that says a Director can only be removed for cause. “When determining how to remedy an unconstitutional statute, courts seek to give effect to congressional intent and to avoid unnecessary disruption,” the brief said. “Striking down the entirety of the CFPA, or declaring it unconstitutional without addressing severance, would eliminate or call into question the legitimacy of the detailed, technical regulations that govern past and future real estate finance transactions, not to mention the authority of a federal agency responsible for enforcing a host of consumer protection laws. Such an outcome would immediately cause significant disruption to the American economy, overturning regulatory guideposts, upsetting settled expectations, and creating substantial uncertainty in our housing markets, all in contravention of Congress’s clearly expressed intent to promote financial stability. The Court should avoid causing such harm. Accordingly, in the event that the Court finds the for-cause removal provision unconstitutional, it should sever that provision from the statute.”

 

After yesterday’s blockbuster housing starts data, Fannie Mae took up their estimates for homebuilding in 2020. They anticipate housing starts will increase by 10% and housing will be the sector that leads the economy going forward.

Morning Report: Trade deal with China

Vital Statistics:

 

Last Change
S&P futures 3190 13.25
Oil (WTI) 60.14 0.14
10 year government bond yield 1.85%
30 year fixed rate mortgage 3.97%

 

Stocks are up this morning on trade with China. Bonds and MBS are down.

 

The last full workweek of 2019 won’t have much in the way of market-moving data. We will get some housing data (housing starts and existing home sales) and the third revision to Q3 GDP, but that is about it.

 

China agreed to purchase more agricultural products from the US as part of an agreement that canceled additional tariffs that were supposed to take effect last night. This deal should end the tit-for-tat tariffs that have been weighing down financial markets for the past several months.

 

More evidence of weakness in the Eurozone as the German ISM numbers were downright awful, and were echoed by weakness in the UK and France. This will be the push-pull driving interest rates in the near future: an accelerating US economy will push rates higher, while stagnation in Europe will pull them lower.

 

Retail Sales rose 0.2% MOM in November, which was lower than expectations. Ex autos and gas, sales were flat.

 

The Fed is injecting liquidity into the system to prevent a repeat of September’s cash crunch, which sent overnight repo rates up to 10% at one point.

 

 

 

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