NAHB Housing Market Index – The Daily Tearsheet

Morning Report: Fed meeting begins.

Vital Statistics:

	Last	Change
S&P futures	2565	10
Eurostoxx index	342.92	-0.38
Oil (WTI)	48.4	-1.48
10 year government bond yield		2.84%
30 year fixed rate mortgage		4.62%

Stock index futures are up after yesterday’s bloodbath. Bonds and MBS are up.

Stocks sold off heavily yesterday as investors begin to fret about next year’s growth. Energy stocks got hammered as oil slipped below $50 a barrel, and some of the healthcare stalwarts continued their slide from last week when Obamacare was ruled unconstitutional. All of this should give the Fed an excuse to do nothing this week, but the reaction if they don’t move could be worse than if they do. FWIW, the Fed funds futures are cheating down the probability of a hike this week. We are at a 71% probability down from 80% last week. Note Donald Trump has been jawboning the Fed to take their foot off the brakes, which adds another dimension to this. The Fed is independent of politics, and if they pass on a hike this week, they run the risk of being accused of being swayed by politics.

Even if the Fed does increase rates tomorrow, there are ways that the sting could be taken out of it. If the dot plot moves markedly lower, that would be taken as dovish and the markets could rally. Conversely, language in the statement regarding financial markets and their forecasts could offset a hike as well. That said, the Fed wants to end its hand-holding of the markets, so they could be opaque on purpose. This meeting has the feeling of a crap shoot. The potential for surprises (and big moves in the financial markets) is much bigger at this meeting than it has been recently. Don’t forget there will be a press release after the meeting, so the potential for market movement will last for an hour after the official release. That said, the press will probably spend the whole time trying to get Powell to say something negative about Trump, so we might not hear anything interesting at all.

Homebuilder confidence slipped 4 points, according to the NAHB Housing Market Index. Affordability issues remain the culprit, and the confidence decreases were most prevalent in the high-income MSAs. The big West Coast / Mountain States markets have been slowing dramatically, although their high single digit / low double digit rates of appreciation were unsustainable in the first place. The withdrawal of foreign speculative money may be behind this, as it appears that China’s real estate bubble is on borrowed time and corporate defaults are on the upswing. The biggest challenge remains the lower price points, where high labor costs and regulatory costs make it difficult to keep the “affordable” in “affordable housing.”

Don’t forget, there is still the threat of a partial government shutdown as Democrats and Trump posture over the wall. It probably won’t affect the mortgage business – if it is a “partial” shutdown, they probably will just shut down a couple monuments in DC to make it visible, but everything else will be fine. During the last major shutdown, Ginnie Mae continued to work as normal, though the IRS did not.

Morning Report: Markets now predicting a 50% chance of 4 hikes this year

Vital Statistics:

	Last	Change
S&P futures	2724	-6.25
Eurostoxx index	393.28	1.09
Oil (WTI)	71.74	0.78
10 Year Government Bond Yield		3.04%
30 Year fixed rate mortgage		4.57%

Stocks are lower this morning on earnings and retail sales. Bonds and MBS are down on hawkish comments out of Europe.

Retail Sales rose 0.3% in April, according to Census. The control group rose 0.4%. Both numbers were in line with consensus estimates. There is a push-pull effect in the numbers as tax cuts will encourage spending, while higher gas prices will depress it.

Speaking of retail sales, comps at the Home Despot came in lower than expected, although some of that was weather-related. The company noted that traffic in May has been strong. As home affordability gets worse, home improvement projects generally increase as people renovate instead of moving to a nicer home. The builders (and mortgage originators) have noted that the Spring Selling Season has been a dud this year.

The Empire State Manufacturing Survey came in at 20, higher than expected, while homebuilder sentiment improved to 70. Strong pricing is being offset by weak traffic, particularly among the first time homebuyer. Separately, inventories were flat in March, which will probably cause some houses to take down their estimate for first quarter GDP growth.

What would happen if you listed your home at $1? Would the subsequent bidding war get you to the correct price? It certainly would create a huge buzz around your home and that will probably help. That said, there are problems associated with that tactic. First, you will get all sorts of low-ballers who will only clog up the process. More importantly, the sites like Realtor.com, Zillow etc generally have searches with price ranges. In other words, if you expect your house to be worth $500,000 and you list it for $1, it won’t show up if the buyer sets a $400,000 – $600,000 search range.

HUD is seeking comment on the Supreme Court’s Disparate Impact ruling and whether HUD’s current policy is consistent with the ruling. Disparate Impact means that you can get slammed for discrimination even if you didn’t intend to discriminate, but your numbers are not consistent with the population.

The Fed Funds futures now are handicapping a 50% chance of 4 rate hikes this year.

A combination of higher budget deficits and low unemployment has Goldman predicting a 3.6% 10 year yield by the end of 2019. This is the first time since WWII when we have had a combination of increasing deficits and falling unemployment. “”The sizeable demand boost provided by the recent deficit-increasing tax cuts and spending cap increases at a time when the economy is already somewhat beyond full employment is a striking departure from historical norms that is likely to contribute to further overheating this year and next and tighter monetary policy in response.” Of course the labor force participation rate is quite low, as is the employment-population ratio, two numbers that are not captured by the unemployment rate. Until you start to see wage inflation, the Fed will be content to go slow.

Morning Report: Zillow gets slammed after changing its business model

Vital Statistics:

	Last	Change
S&P futures	2672	14
Eurostoxx index	378.3	-0.91
Oil (WTI)	66.56	-0.84
10 Year Government Bond Yield		2.87%
30 Year fixed rate mortgage		4.44%

Stocks are higher despite coordinated strike in Syria over the weekend. Bonds and MBS are down.

Watch the oil markets. North Sea Brent crude is rising on tensions in the Middle East, but West Texas Intermediate (which is the main oil used in the US) is shrugging off the news. Bullish bets on Brent oil have hit record highs.

The 2 year hit 2.4%, the highest level since 2008. The flattening of the US yield curve continues.

There isn’t much in the way of market-moving data this week, although we will get a lot of Fed-speak. Probably the biggest one will be housing starts tomorrow.

Retail sales rose 0.6% in March, which was better than the Street 0.4% consensus. The control group increased by 0.4%, a touch below the 0.5% consensus estimate. Gasoline sales were up on higher prices. Revisions were lower, however.

Business activity in New York State decelerated last month according to the Empire State Manufacturing Survey. New Orders and Production slowed down somewhat, but employment remained firm and the workweek increased. Future sentiment declined to the lowest level in 2 years.

The NAHB / Wells Fargo Housing Market Index slipped last month, but builder sentiment remains strong.

Wells Fargo faces $1 billion in fines due to force-placed auto insurance and improper charges for lock extensions. The big banks have all reported strong earnings, and the tax law changes are certainly helping.

Zillow shares fell 9% on news they plan to get into the house flipping business. “We’re entering that market and think we have huge advantages because we have access to the huge audience of sellers and buyers,” Zillow CEO Spencer Rascoff said on CNBC’s “Squawk Alley.” “After testing for a year in a marketplace model, we’re ready to be an investor in our own marketplace.” Investors are understandably skeptical, as the multiple for a fintech company is much higher than one for a property company, and it puts Zillow in direct competition with the realtors who utilize the site. Investors are not wild about changing focus from an ad model with high margins and low balance sheet usage to one that is low margin and uses a lot of balance sheet. Another issue: will people trust Z-scores if the company has a financial interest in the value of real estate in a particular area?

Want to know how acute the housing shortage is in California? From 2000 – 2015, the state built 3.4 million too few homes to keep up with job, population, and income growth. That is over 2 year’s worth of current housing starts for the whole US population. Pretty astounding when you consider those years start before the housing bubble really got going. CA has always had NIMBY issues, and now there is a push to allow dense multi-family building near public transit, even if local zoning codes prohibit it. Separately, it looks like Dodd-Frank regulations did have an adverse affect on smaller banks. I wonder how much that plays into the housing shortage.

Speaking of CA housing, here is what you can get for $800,000 in San Jose. Handyman special.