NAR – The Daily Tearsheet

Morning Report: Existing home sales disappoint, but some internals are better

Vital Statistics:

	Last	Change
S&P futures	2999	-8.5
Oil (WTI)	56.94	0.14
10 year government bond yield		2.05%
30 year fixed rate mortgage		4.06%

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are flat.

Today is a big day for earnings, with numbers coming out for Ford, Boeing, Caterpillar, Facebook, and Tesla.

House prices rose 0.1% in May, according to the FHFA House Price Index. They were up 5% on a YOY basis. Home price appreciation has been decelerating across the board, but it is most pronounced in the Pacific and Mountain regions.

Mortgage Applications fell by 2% last week as purchases and refis fell by the same amount. This was despite a 4 basis point drop in rates.

Existing Home Sales fell 1.7% in June, according to NAR. “Home sales are running at a pace similar to 2015 levels – even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country,” said Lawrence Yun, NAR’s chief economist. Yun says the nation is in the midst of a housing shortage and much more inventory is needed. “Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices,” he said.

Inventory was 1.93 million units, which represents a 4.4 month supply. Historically a balanced market had 6 – 6.5 months’ worth of supply. As Yun notes above, there is a big mismatch in inventory, with a complete dearth of properties at the low / mid price points. McMansions abound, however. Despite these issues, the first time homebuyer accounted for 35% of sales in June, which is approaching the historical norm of 40%. The first time homebuyer had been largely MIA for most of the post-crisis timeframe, accounting for 30% of sales (or even less). On the flip side, investors (represented by all cash sales) fell to 10%. With home price appreciation leveling out, we may start to see some funds who raised capital for the REO-to-Rental trade in the aftermath of the crisis ring the register and sell some of these properties as the funds wind down. Certainly cap rates are not what they were 10 years ago.

The median home price reached an all-time high of 285,700. Sentier Research has the median income at $63,400 as of May 2019. This puts the median house price to median income rate at just about 4.5x. Historically this is a very high number, however it is important to note that interest rates will influence this number. If you look at other metrics besides incomes and prices, homes are not that expensive on a historical basis.

Morning Report: What does 2019 look like if the Fed is out of the way?

Vital Statistics:

	Last	Change
S&P futures	2510	24
Eurostoxx index	337.45	1.25
Oil (WTI)	46.4	1.01
10 year government bond yield		2.73%
30 year fixed rate mortgage		4.60%

Stocks are higher as close the books on 2018. Bonds and MBS are down small.

Today should be relatively quiet as we have an early close in the bond market and no economic data to speak of. Economic data has been delayed due to the government shutdown, but so far it looks like BLS is still working so we should get the jobs report on Friday.

Pending home sales dropped 0.7% in November, according to NAR. YOY, activity was down 7.7%. Lawrence Yun, NAR chief economist, said the current sales numbers don’t fully take into account other data. “The latest decline in contract signings implies more short-term pullback in the housing sector and does not yet capture the impact of recent favorable conditions of mortgage rates.” The government shutdown is not going to help things going forward, as the inability to get flood insurance will probably affect some 40,000 home sales.

People are looking at 2019 and largely assuming that it will be a carbon copy of 2018 with respect to the mortgage business. That is probably a safe bet, however there is one big difference: if you believe the Fed Funds futures are correct, the Fed is out of the way. For example, Freddie Mac anticipates that the 30 year fixed rate mortgage is going to be 5.1% and originations are going to increase slightly to 1.69MM. When that forecast was made (in August of 2018), people were thinking we would probably have two more hikes in 2019. I suspect that the forecasts for 2019 have yet to factor in a Fed that does nothing further.

Where will rates go, then? I suspect that unless the data changes markedly, they probably go nowhere. If we see a dramatic drop in GDP (say Q1 GDP drops to 1%) then rates are going lower as the yield curve will probably invert. If we see a dramatic jump in inflation (say Q1 core PCE hits 3%) then the Fed might hike again and we should see higher mortgage rates. However, the most likely bet is that they kind of meander around in the mid 4%s for the year.

Where will home prices go? Most forecasts assume that home price appreciation will slow this year, and that is probably a solid bet. Home prices have become largely untethered from incomes again and will probably lack much impetus to move higher unless wages get a strong boost. There is a housing shortage that needs to be addressed, but that doesn’t necessarily mean SFR construction – the needs are at the lower price points, and that means more multi-fam, not necessarily SFR. There is a glut of high priced properties as well.

I suspect that even if rates do move lower, there has been enough prepayment burnout to prevent any sort of meaningful refi boom. Volume is going to have to come from additional products (non-QM etc) and new construction. Volume probably won’t be as bad as 2018, but it won’t be better than 2017 either. Margin compression will probably ease up as competition decreases and marginal players exit the business.

Morning Report: The Fed raises rates

Vital Statistics:

	Last	Change
S&P futures	2511	6.5
Eurostoxx index	339.04	-2.44
Oil (WTI)	47.96	1.72
10 year government bond yield		2.77%
30 year fixed rate mortgage		4.60%

Stocks are higher this morning after the Fed hiked rates. Bonds and MBS are flat.

As expected, the Fed hiked rates 25 basis points yesterday. The vote was unanimous, and the statement was pretty bland. The forecasts were tweaked slightly, but nothing major. The biggest change was in the dot plot, which basically removed one tightening from 2019’s forecast. The left plot is September, while the right one is December. Note that the dispersion has decreased as well.

Bonds took the tightening favorably, while stocks used it as an excuse to sell off. The initial head fake in the bond market was intense, with 2.86% printing before falling below 2.80 and eventually to 2.76%. MBS spreads widened considerably before settling in. The press conference was uneventful, with Powell dodging questions about Trump and the Central Bank’s independence while stressing that the economy is extremely strong right now and it made sense to raise rates. He also said that the Fed Funds rate is now at the lower end of the neutral range and the Fed has no intentions of deviating from its pace of balance sheet reduction.

Existing home sales rose 1.9% in November, for a second straight month. Lawrence Yun, NAR’s chief economist, says two consecutive months of increases is a welcomed sign for the market. “The market conditions in November were mixed, with good signs of stabilizing home sales compared to recent months, though down significantly from one year ago. Rising inventory is clearly taming home price appreciation.” The median home price rose 4.2% to $257,700, while inventory fell to 1.74 million. This represents a 3.9 month supply, which is well below what would be considered an equilibrium market. “A marked shift is occurring in the West region, with much lower sales and very soft price growth,” says Yun. “It is also the West region where consumers have expressed the weakest sentiment about home buying, largely due to lack of affordable housing inventory.” I wonder if Chinese money is exiting the area as their economy slows and you start seeing credit issues there. Finally, days on market rose to 42 and the first time homebuyer accounted for 33% of sales.

The Senate passed a stopgap spending measure which would fund the government through February. No word on whether the House will go along, but it certainly looks like any sort of shutdown over the holiday period isn’t going to happen.

Morning Report: Blowout GDP number

Vital Statistics:

	Last	Change
S&P futures	2842	2
Eurostoxx index	391.88	1.35
Oil (WTI)	69.55	-0.1
10 Year Government Bond Yield		2.95%
30 Year fixed rate mortgage		4.62%

Stocks are up this morning after blowout earnings from Amazon and a strong GDP report. Bonds and MBS are up.

Second quarter GDP came in at 4.1%, a big jump from the first quarter, and the highest print in 4 years. Q1 was revised upward to 2.2% from 2.0%. The inflation numbers were good as well. Q2 inflation came in at 1.8% which was a decrease from the 2.5% pace in Q1. Ex-food and energy, prices increased 2%. Consumption increased 4%, while investment increased 2.1%. Capital Expenditures increased strongly, while residential construction fell. Inventories fell, which dismisses the talking point that Q2 was artificially boosted by inventory build ahead of a trade war.

Note that international trade was a big boost to GDP numbers. While economists talk about trade wars negatively affecting growth, remember that GDP includes the net trade balance. So if imports fall in response to tariffs, that will actually increase GDP. Does that mean you can goose growth via trade spats? No, but trade wars that reduce the trade deficit will bump up the GDP numbers, which is largely an accounting question.

In the wake of the GDP report, the Fed funds futures are predicting a 90% chance of a Sep hike and a 68% chance of a Sep and Dec hike.

Freddie Mac reported that delinquencies fell in June and they are back to pre-hurricane levels.

Foreign demand for US residential property fell in 21% Q1, according to NAR. Foreign buyers accounted for 8% of existing home sales, a drop from 10% in the previous period. While a drop in foreign buying will help alleviate the supply / demand imbalance in the US resi market, new construction is really needed to square the circle, and judging by the GDP numbers, that still isn’t happening.

Morning Report: 10 year pushing towards 3%

Vital Statistics:

	Last	Change
S&P futures	2675	3.9
Eurostoxx index	381.41	0
Oil (WTI)	67.33	-1.07
10 Year Government Bond Yield		2.97%
30 Year fixed rate mortgage		4.51%

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

US Treasury Secretary Steve Mnuchin signaled that the US is ready to discuss a truce in the trade war with China. He characterized his mood as “cautiously optimistic” and said he won’t make a commitment on timing. Beijing welcomed the announcement. Separately, Mnuchin also discussed easing sanctions on Rusal which sent aluminum prices back down.

Existing home sales rose on a month-over-month basis in March, but are down on an annual basis according to NAR. Lawrence Yun, NAR chief economist, says closings in March eked forward despite challenging market conditions in most of the country. “Robust gains last month in the Northeast and Midwest – a reversal from the weather-impacted declines seen in February – helped overall sales activity rise to its strongest pace since last November at 5.72 million,” said Yun. “The unwelcoming news is that while the healthy economy is generating sustained interest in buying a home this spring, sales are lagging year ago levels because supply is woefully low and home prices keep climbing above what some would-be buyers can afford.”

The median home price was $250,400, up 5.8% YOY. Inventory is down over 7% YOY to 1.67 million units, which represents a 3.6 month supply at current sales levels. A historically balanced market would be 6.5 month’s worth. Properties stayed on market for an average of 30 days, which is down almost a week YOY. The first time homebuyer accounted for 30% of sales, and all-cash sales were 20% of transactions.

Commodity price inflation has pushed the 10 year yield to 3%. Many technical analysts consider that to be confirmation that the 3 decade bull run in bonds is over. The one caveat is that the sell-off is being driven by rising commodity prices which tends to be temporary, especially if it doesn’t translate into wage growth. You can see the pop in yields post-election below. Hard to believe we were sub 1.8% in late October 2016.

This week will have some important data to the bond market, with GDP and the employment cost index on Friday. We will also get a slew of housing data with existing home sales, new home sales, and Case-Shiller.

The Street estimate for Q1 GDP is 2%. Generally speaking, the estimates from the banks are lower than the estimates from the regional Federal Reserve banks.

Economic activity moderated in March, according to the Chicago Fed National Activity Index. Production and employment indicators fell. February’s reading was unusually strong, however. The CFNAI is a meta-index of 85 different economic indices, and can be volatile. It isn’t a market-mover.

A paper suggests that the ratings agencies largely got it right with the bubble-era RMBS. The AAA tranches (even subprime) were largely money good, and the study pours cold water on the popular narrative that inflated ratings on RMBS caused the financial crisis.

The big banks are rushing to launch websites and apps for mortgages as volume contracts. Bank of America, Wells Fargo, and JP Morgan have either launched or plan to launch mortgage banking tech products in response to Rocket Mortgage from Quicken. The company claims that 98% of its customers in the first quarter (some $20 billion in origination) accessed Rocket at some point in the application process. That is an astounding number, though I wonder if that includes push notifications that the borrower didn’t necessarily respond to or interact with.

Speaking of tech, HUD is looking into allegations of housing discrimination by Facebook. Facebook uses big data to allow advertisers to slice and dice the demographics any way they want to target their specific market. What if advertisers decide to target some demographics and not others? That is considered non-problematic for things like consumer products, but housing could be a different story.