RedFin – The Daily Tearsheet

Morning Report: Spring Selling Season slows down dramatically

Vital Statistics:

	Last	Change
S&P futures	2359	-52.4
Oil (WTI)	21.91	2.39
10 year government bond yield		1.14%
30 year fixed rate mortgage		3.58%

Stocks are lower this morning as volatility continues. Bonds and MBS are down.

Late yesterday, the Fed announced measures to support short-term money market mutual funds. Global central banks have been cutting rates and conducting currency interventions.

Initial Jobless Claims came in at 288k last week, a big increase but hardly recessionary. The big tell will what happens next week, which will include people who were laid off this week.

The government has imposed a 60 day moratorium on foreclosures and evictions.

Redfin has suspended its iBuying program. This was the program where Redfin would buy homes directly from sellers and handle the sale. I have to imagine Zillow won’t be far behind. While the Fed is pulling out all the stops to keep the financial markets functioning, if lines of credit are at risk of getting pulled, this strategy absolutely does not work.

The NYSE has shut down floor operations and is going all electronic in response to the virus. To be honest, I am surprised at how well the stock market has functioned during this whole sell-off. I thought the algorithmic traders would disappear with this volatility. So far, so good.

The Spring Selling Season it taking a hiatus due to Coronavirus. After a 27% increase in traffic, it was flat over the past week. Redfin has canceled open houses, and at some point appraisals will become an issue if appraisers don’t want to go into homes.

Dismayed by the lack of inventory at your local supermarket? Don’t be.

Morning Report: Home price appreciation accelerates in September

Vital Statistics:

	Last	Change
S&P futures	3134	1.25
Oil (WTI)	58.39	0.24
10 year government bond yield		1.74%
30 year fixed rate mortgage		3.93%

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

Jerome Powell spoke last night and said that the Fed cut rates this year as the economy wasn’t as strong as anticipated. He reiterated that the Fed won’t be making any moves unless things change “materially” in the US economy: “Monetary policy is now well positioned to support a strong labor market and return inflation decisively to our symmetric 2 percent objective. If the outlook changes materially, policy will change as well. At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.”

Home prices rose 1.1% in the third quarter, according to the FHFA House Price Index. They are up 4.9% on a YOY basis. They added an interactive map, so you can drill down to MSA-level home price appreciation. Separately, the Case-Shiller home price index rose 3.2% on an annual basis in September.

Mortgage delinquency rates fell in October, according to Black Knight’s First Look. The Deep South still has the highest delinquency rates, while the West Coast and Mountain states have the lowest levels. Prepay speeds are up 134% on a YOY basis.

Redfin makes its predictions for the 2020 housing market.

a return of bidding wars
30 year fixed rate mortgage stabilizes at 3.8%
home prices will rise in the Southeast as people get priced out of the cities

Morning Report: Fed decision day

Vital Statistics:

	Last	Change
S&P futures	2851	-1.25
Eurostoxx index	382.92	2.82
Oil (WTI)	58.48	0.39
10 year government bond yield		2.60%
30 year fixed rate mortgage		4.27%

Stocks are higher this morning as we begin the FOMC meeting. Bonds and MBS are flat.

The FOMC decision is set to be announced at 2:00 pm EST. Be careful locking around that time. They aren’t going to raise interest rates, but the focus will be on the dot plot and their interest rate forecast for 2019. There will also be interest in the size of the balance sheet, but it won’t be market moving.

The stock market has been rallying on hopes that the Fed will be taking 2019 off. Note that FedEx reported disappointing numbers, which is a canary in the coal mine for the global economy. The stock and bond markets have been sending different signals about the economy, with the stock market rising (signalling strength) and interest rates falling (signalling weakness). Part of this has been due to global growth concerns – especially in Europe and China. Global weakness doesn’t necessarily translate into a recession for the US, but it is a reach to think it won’t affect us at all.

Mortgage Applications rose 1.6% last week as purchases rose 0.3% and refis increased 4%. Mortgage rates drifted lower and are at the cheapest in a year.

The NAHB / Wells Fargo Housing Market Index was flat at 62 as we kick off the Spring Selling Season. Sales ticked up, but traffic is way down. Overall, the new home sales market is similar to where we left off in fall. We will get a read on existing home sales this Friday. We are seeing some evidence of cooling in housing markets, especially in the Northeast. According to the Redfin competitive numbers, places like Greenwich CT are at 9 on a scale of 1 – 100. Even erstwhile hot markets like San Diego have been cooling. The heat is in the laggard markets, with places like Harrisburg PA and Indianapolis doing very well.

Morning Report: No revelations in Humphrey Hawkins testimony

Vital Statistics:

	Last	Change
S&P futures	2785.75	-5
Eurostoxx index	372.14	-1.55
Oil (WTI)	56.64	1.06
10 year government bond yield		2.63%
30 year fixed rate mortgage		4.34%

Stocks are lower this morning on no real news. Bonds and MBS are up.

Jerome Powell’s Humphrey-Hawkins testimony didn’t really reveal much in the way of new information. Here are his prepared remarks. The Fed will be patient as it evaluates incoming data: “With our policy rate in the range of neutral, with muted inflation pressures and with some of the downside risks we’ve talked about, this is a good time to be patient and watch and wait and see how the situation evolves.” He didn’t volunteer too much information regarding balance sheet runoff other than to say the Fed is evaluating the timing. For the most part, the bond market didn’t really react much to the testimony other than to rally somewhat on his view that he doesn’t see much in the way of wage-push inflation. The message to the bond market: don’t freak out if you start seeing wage growth with a 3 handle.

Home prices rose 1.1% in the fourth quarter, according to the FHFA House Price Index. December was up 0.3% from November. The hot markets of 2017, especially the West Coast markets, have cooled substantially and are now experiencing appreciation more in line with the rest of the country. This chart probably understates the deceleration in the hotter markets, as the index only looks at loans with a conforming mortgage, which means it is only measuring the lower price points, which is where the strength lies. The jumbo market has been struggling.

Mortgage Applications increased 5.3% last week as purchases rose 6% and refis rose 5%. Mortgage rates were little changed last week, but as we anticipated, homebuyers are responding favorably to this more stable rate environment,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Purchase applications for both conventional and government loans rose last week, with the government gain led by a 14 percent increase in applications for VA purchase loans.”

A Senate Panel voted to advance Mark Calabria to a full vote on the Senate floor. The vote was 13-12, straight along party lines. The industry applauded the appointment.

Both Zillow and Redfin have models to value homes – which one is more accurate? It turns out that if you look at listed homes, Redfin is the winner, with an error rate of 1.8%. However, for homes off the market, it rises to 6%. Zillow, who doesn’t break out on the market / off the market for its error estimates comes in around 4%. FWIW, appraisers consider an error range of 4% about accurate. Note though that these are median error rates. In newer subdivisions, where square footage and lot sizes are similar, the estimates will be pretty predictive of final sales prices. As the properties become more diverse the error ranges increase. Note that in MSAs like Chicago, the median error is 4%, but over 40% of all home sales are not within 5% of the final sales price.

Morning Report: Existing home sales fall

Vital Statistics:

	Last	Change
S&P futures	2641	9.75
Eurostoxx index	356.16	1.08
Oil (WTI)	52.77	-1.03
10 year government bond yield		2.76%
30 year fixed rate mortgage		4.48%

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

Mortgage applications fell 2.7% last week as purchases fell 2% and refis fell 5%. This was a bit of a give-back after a torrid start to the year. Rates were more or less unchanged, and the unadjusted purchase index was close to a 9 year high. Still, it is encouraging to see activity picking up ahead of the Spring Selling Season, which is just around the corner.

Existing Home Sales fell 6.4% in December according to NAR. The seasonally adjusted annual number comes out to 5 million, which is down 10% YOY. The median house price rose 3% to $253,600 and inventory fell to 1.55 million units, down from 1.74 million in November. At current rates, it represents a 3.6 month supply, which is an increase from 3.2 month’s worth in November. Days on market increased to 46 days, up from 42 in November and 40 a year ago. While the 30 year fixed rate mortgage fell from 4.87% in November to 4.64% in December, these sales would represent transactions done under a higher interest rate regime – the drop in rates will probably be reflected in January data. There is still quite the mismatch between what is available for sale – largely luxury properties – and what is needed, which is entry-level housing. The first time homebuyer still represents about 32% of all sales – historically that number has been closer to 40%. The Northeast and the Midwest experienced the biggest drops in sales.

The Senate will vote on a plan to open government – wall funding in exchange for temporary protection for Dreamers. The Democrats have declared this a non-starter, but we’ll see how close this comes to passing. The Democrats have their own bill in the Senate which doesn’t include wall funding and is also unlikely to pass. The big question concerns what Trump will actually sign.

Non-traditional mortgages are making a comeback, after a long slumber. Originations for these types of products – bank statement loans and the like – increased 24% in 2018, however their share of the total mortgage market is still extremely small, around 3%. Investor demand for these products is picking up as well – securitizations quadrupled last year to $12 billion. While these loans are a far cry from the neg-am NINJA loans of the bubble years, regulators and affordable housing advocates are fretting over these loans.

New home sales fell 16% in 4 of the largest markets to close out the year, according to Redfin. Higher mortgage rates and tax issues are depressing sales in some of the pricier markets. Look for homebuilders to face a squeeze as well as rising input prices and slower price growth depress margins. Builders may have to concentrate on building lots of lower-priced entry level units, which is exactly where the demand is.

Morning Report: Inventory continues to fall, albeit at a slower pace

Vital Statistics:

	Last	Change
S&P futures	2862	4
Eurostoxx index	384.93	1.7
Oil (WTI)	67.47	1.04
10 Year Government Bond Yield		2.83%
30 Year fixed rate mortgage		4.58%

Stocks are higher this morning as earnings season winds down. Bonds and MBS are down.

Same store sales rose 4.7% last week, which is indicative of a strong back-to-school shopping season. BTS is a good predictor of the holiday shopping season, which would support strong GDP growth for the rest of the year. Consumption is about 70% of US GDP. Current projections are looking at north of 3% growth for the year.

The Fed Funds futures are now handicapping a 96% chance of a Sep hike and a 63% chance of a Sep and Dec hike. Meanwhile, the yield curve continues to flatten.

Trump made some comments about Fed Chairman Jerome Powell at a fundraiser, saying that he expected him to be a “cheap money guy” and didn’t expect him to raise interest rates. He also tweeted that he is “getting no help” from the Fed. While publicly discussing monetary policy is not a normal thing for the President to do, wishing rates were lower is. The only politicians who want higher rates are the ones not in power. He also called the Europeans and the Chinese currency manipulators. Under any other President this would be big, but the dollar and the bond market largely ignored it. It shows that markets are largely dismissing “Donald being Donald” communiques from the WH.

The YOY declines in inventory that have bedeviled the industry are beginning to moderate, at least according to Redfin. Inventory was down 5.8% in July, which is lower than the double-digit decreases we had been seeing. The median sales price rose 5.3%. Homes went under contract in 35 days, which is 3 days faster than a year ago. Activity is slowing in some of the hotter markets however, especially Washington DC. The inventory issue won’t be fixed until we get housing starts back to some semblance of normalcy, which means a few years of 2MM units before returning to historical averages of around 1.5MM.

Toll Brothers reporte d strong numbers this morning, which has sent the stock up 11%. Revenues were up 27% and deliveries were up 18%. Backlog rose 22% in dollars and 13% in units. They also bought back about $137 million worth of stock, which accounts for about 70% of earnings. Robert I. Toll, executive chairman, stated: “We believe there is room for continued growth in the new home market in the coming years. Household formations have been increasing and in many regions the aging housing stock may not satisfy the lifestyles of today’s buyers. Yet new home production has not kept pace with the growth in population and households. On the single-family side, housing starts, other than during the anemic years of this recovery, are at their lowest level since 1970. In addition, existing home values have increased, providing potential move-up and empty nester customers with more equity that they can put toward a new home purchase. We believe these two groups, along with the growing number of millennials starting to buy homes, are all sources of potential new demand in the coming years.”

I find it interesting that he talks about the low level of housing starts, while at the same time spending 70% of Toll’s net income on buybacks. Certainly the actions don’t seem to match the words.

Morning Report: Fed hikes rates as expected

Vital Statistics:

	Last	Change
S&P futures	2786	8
Eurostoxx index	389.9	1.7
Oil (WTI)	67.03	0.39
10 Year Government Bond Yield		2.94%
30 Year fixed rate mortgage		4.61%

Stocks are higher after the FOMC raised interest rates a quarter of a point. Bonds and MBS are up.

As expected, the Fed raised the Fed funds rate by 25 basis points to a range of 1.75% – 2%. The economy is clicking on all cylinders, with unemployment down, consumer spending up and business investment increasing. They took up their estimates for 2018 GDP growth to 2.8% from 2.7%, took up core PCE inflation to 2% from 1.9% and took down their unemployment rate forecast to 3.6% from 3.8%. The dot plot was increased slightly and the Fed funds futures shifted to a 60/40 probability of 2 more hikes this year.

Bonds initially sold off on the announcement, touching 3% at one point, but have since rallied back. The ECB also announced that it will stop buying bonds in September, depending on the data. Bunds are rallying on that statement and the 10 year could be rallying on the relative value trade. The Fed noted that longer-term inflation expectations have not changed, and they didn’t change their outlook for inflation from 2019 onward. One other thing of note: the Fed is going to start having press conferences after every meeting in order to disabuse people of the idea that the Fed can only hike in December, March, June and September.

In other economic news, initial jobless claims fell to 218,000 last week, while retail came in way higher than expected, rising 0.8% for the headline number and 0.5% for the control group, which excludes gasoline, autos and building materials. Restaurants and apparel were the big gainers, increasing 1.3% and 1.5%. Consumer discretionary spending is back, as the FOMC statement indicated. Finally, import and export prices were higher than expected, with increasing energy prices pushing up imports and higher ag prices increasing exports.

Outgoing Republican Congressman Darrell Issa is supposedly one of the finalists who will be appointed as the head of the CFPB. The Administration has said that it will abide by its June 22 deadline to appoint a permanent head of the CFPB. Acting Chairman Mick Mulvaney is not involved in the selection process. Mark McWatters, a former banking regulator is another top choice, and probably makes more sense than Issa.

The May real estate market was the strongest on record, according to Redfin. Prices rose 6.3% and the average home was on market 34 days. In Denver, the time on market was under a week. Over a quarter of the homes sold in May went over their listing price. San Jose saw a price increase of 27% YOY to a median home price of over $1.2 million.

Note that rents rose by 3.6%, which is tilting the rent-vs-buy decision a little. Interestingly, Sam Zell, a famous real estate financier, thinks the multifam market is topping and should become less attractive going forward.

Affordable home advocates are touting a statistic that shows a minimum wage worker cannot afford a 2 bedroom apartment anywhere in the country. That is an awfully high bar – heck entry level investment bankers can’t afford a 2 bedroom apartment either. That is why young adults usually have roommates. I get there is a shortage of affordable housing, but that is a completely disingenuous statistic. Sam Zell is probably correct, however there could in fact be a glut of luxury apartments and a shortage of affordable ones.

Morning Report: Productivity revised downward

Vital Statistics:

	Last	Change
S&P futures	2755.25	3.75
Eurostoxx index	386.61	-0.28
Oil (WTI)	65.11	-41
10 Year Government Bond Yield		2.95%
30 Year fixed rate mortgage		4.54%

Stocks are higher this morning as trade negotiations continue with China. Bonds and MBS are down.

Italian bond yields are higher this morning, but so far the market seems to have concluded that this will not snowball into a larger European problem. That said, continuing issues in Italy will provide at least a marginal bid for Treasuries.

Mortgage applications rose 4% last week as purchases and refis rose the same amount. Grazie.

Nonfarm productivity was revised downward to 0.4% from 0.7% in the second estimate for first quarter productivity. Output increased 2.7% and hours worked increased 2.3%. Unit Labor Costs were revised upward from 2.8% to 2.9%. Compensation increased 3.3% and productivity increased 0.4%. Since productivity increases drive standard of living improvements and wage gains, this somewhat explains the anemic wage growth we have been seeing. These numbers are going to concern the Fed a little, given that it might increase inflationary pressures, at least at the margin. Productivity is notoriously hard to measure however, so it carries with it a lot of uncertainty. The theme of the US post-crisis has been low productivity.

Freedom mortgage was penalized for serial VA refinancings. As part of their punishment, they are no longer allowed to issue mortgages into multi-issuer pools, which will severely reduce the number of potential investors for their paper. This is a temporary restriction, and they could be out of the doghouse as soon as next year. A couple of other lenders – Sun West and NewDay also were penalized.

Wells has sold its branches in the Rust Belt to Flagstar Bank. They will continue their presence in mortgage lending, commercial and wealth management however.

The FTC and DOJ held a hearing on the potential competition issues between the Zillow and Redfin online real estate duopoly. It also covered in more general terms the effects of companies like Zillow and Redfin on the brokerage model in general. Will technology end the need for a realtor? Perhaps for the experienced and professional buyer, but probably not for everyone else. Fees could be affected though.

Steve Mnuchin urged President Trump to exempt Canada from steel and aluminum tariffs. While tariffs are in general counterproductive, it is important to remember the US has much lower tariffs than our trading partners.

The media discovers FHA lending. And no, FHA lending is not the same as the no-no loans of the subprime days.