Morning Report: Foreclosure starts lowest in 18 years

Vital Statistics:

 

Last Change
S&P futures 2720 4
Eurostoxx index 362.25 3.31
Oil (WTI) 54.26 -0.3
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.40%

 

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

 

Donald Trump stressed bipartisanship and unity at the State of the Union address, and reiterated his demands for border wall funding but stopped short of invoking emergency powers to get one built. Predictably, the reaction to the speech fell along partisan lines.

 

Mortgage Applications fell 2.5% last week as purchases fell 5% and refis rose 0.3%. This was a disappointment given that rates fell about 7 basis points, however the prior week had the MLK holiday adjustment so maybe there is some technical adjustment noise happening. Despite lower rates on a YOY basis, applications are down about 2% annually.

 

The service sector continued to grow in January, albeit at a slower pace, according to the ISM Non-Manufacturing Report. Some of this may have been government shutdown-driven. Employment rose, while new orders fell.

 

Foreclosure starts in 2018 decreased to 576,000, the lowest level in 18 years. Foreclosure completions were 175,000, another 18 year low. These numbers are 40% below their pre-recession averages. Higher loan quality in the aftermath of the credit crisis is a contributing factor, however the performance of refinances are better than purchases, which also is driving these numbers.

 

Housing reform and CFPB regulations may be headed for a conflict if what is called the “GSE patch” is not renewed when it expires in 2021. The CFPB discourages loans with debt to income ratios above 43%, but also permits GSE backed loans to fall under the QM umbrella, even though they permit DTIs up to 50%. Roughly a third of GSE loans fall in the 43-50% DTI range, which could become non-QM loans once the patch expires. The Urban Institute recommends that the GSEs replace the DTI rule with a 150 basis point cap over APOR to determine eligibility under QM.

 

Home prices rose 0.1% MOM and 4.7% YOY according to CoreLogic. Since house prices have been rising faster than incomes, affordability has suffered. Falling interest rates masked that issue most of the post-crisis period, but the music has stopped. CoreLogic now estimates that 33% of the housing stock in the US is now overvalued.  Separately, Redfin now estimates that the West Coast is a buyer’s market.

 

Corelogic overvalued

Morning Report: REO-to-Rental exit time?

Vital Statistics:

 

Last Change
S&P futures 2706 1
Eurostoxx index 359.39 -0.56
Oil (WTI) 55.07 0.02
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.40%

 

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

 

The upcoming week will be data-light, as is typical the first week of every month. Jerome Powell speaks on Wednesday, and that is about it. Productivity and costs on Wed could be interesting, but there just isn’t going to be much to move bonds.

 

The money for the government runs out on Feb 15 and we are back to a possible shutdown. Judging by the jobs report, it doesn’t appear the government shutdown had much (if any) effect on the overall economy. If we have another shutdown, we should probably see the same old situation of the inability to process VOEs for Federal employees, but that is it.

 

Rental prices for 1 bedroom apartments fell a couple of percent last year. Not sure about the methodology for the study, but it does comport with several other studies that show rental prices falling, at least in luxury areas. For the real estate sector, this is probably good news. One of the best post-crisis trades has been the REO-to-Rental trade, where professional investors and hedge funds purchased distressed foreclosures, fixed them up and rented them out. Cap rates in the aftermath of the crisis were high single digits, which were super attractive given the 0% interest rate environment. Tack on home price appreciation and you have a phenomenal trade. Unfortunately, phenomenal trades rarely stay that way, and between rising mortgage rates and falling rents, cap rates are getting squeezed, and it might be time for some of these investors to exit the trade. Ultimately that means we should see a lot more starter homes for sale which will alleviate the inventory problem we are currently experiencing.

 

Bill Gross is retiring from money management. The Bond King ruled the Great Bond Bull Market of 1982 – 2016 and is stepping out as we head into what should be a decades-long secular bear market in bonds.

 

Fannie and Fred will be released from Federal conservatorship subject to tight market-share restrictions under a new plan released by Senate Republicans. Fan and Fred would retain their role as mortgage guarantors, and would be subject to competition. “We must expeditiously fix our flawed housing finance system,” Crapo, an Idaho Republican, said in a statement. “My priorities are to establish stronger levels of taxpayer protection, preserve the 30-year fixed-rate mortgage, increase competition among mortgage guarantors and promote access to affordable housing.” That is a tall order and pretty much forecloses any sort of radical change of the housing finance system. If the social engineering aspect (affordable housing) and the subsidies (30 year fixed rate mortgage) will remain, we are pretty much looking at the same system we had pre-bubble. The model that seems to have gained the most traction is putting the government in the second-loss position, with PMI taking the first loss position. It would represent a bit of a step of re-introducing free market economics in what is one of the most nationalized housing finance systems on earth.