Toll Brothers – The Daily Tearsheet

Morning Report: Adverse Market fee delayed until December

Vital Statistics:

	Last	Change
S&P futures	3446	2.6
Oil (WTI)	43.54	0.87
10 year government bond yield		0.71%
30 year fixed rate mortgage		2.94%

Stocks are flat this morning as Hurricane Laura is expected to make landfall sometime tonight. Bonds and MBS are flat.

The FHFA delayed the 50 basis point adverse market fee until December 1. It also carved out refinances below $125,000. From the press release: “The fee is necessary to cover projected COVID-19 losses of at least $6 billion at the Enterprises. Specifically, the actions taken by the Enterprises during the pandemic to protect renters and borrowers are conservatively projected to cost the Enterprises at least $6 billion and could be higher depending on the path of the economic recovery.” Now the big question will be whether the aggregators remove the fee or keep it in their rate sheets. Quicken and PennyMac have already. Here is the MBA’s take on it.

Mortgage applications fell by 6.5% last week as purchases increased by 0.4% and refis decreased by 10%. “Mortgage rates were mixed last week, but the rates for 30-year fixed mortgages and 15-year fixed mortgages declined,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite the lower rates, conventional refinance applications fell 11 percent and government refinance applications fell 6 percent, which pushed the total refinance index to its lowest weekly level since July.” Rates had been ticking up for a while, with the 10 year bond stuck around 70 basis points.

Luxury homebuilder Toll Brothers reported earnings yesterday. Sales revenue fell due to the pandemic, but orders were up 23% in units and 18% in dollar value. The $2.21 billion in new contracts was a record third quarter (they have an October fiscal) for the company.

Consumer confidence declined in August as expectations of a quick economic recovery were quashed. “Consumer Confidence declined in August for the second consecutive month,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index decreased sharply, with consumers stating that both business and employment conditions had deteriorated over the past month. Consumers’ optimism about the short-term outlook, and their financial prospects, also declined and continues on a downward path. Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead.”

Durable Goods orders rose 11.2% in July, which was much higher than expectations. Ex-transportation orders rose 2.4% and core capital goods orders (a proxy for capital expenditures) rose 1.9%.

Morning Report: First quarter GDP revised downward

Vital Statistics:

	Last	Change
S&P futures	3043	5.1
Oil (WTI)	32.94	-0.69
10 year government bond yield		0.7%
30 year fixed rate mortgage		3.28%

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

Initial Jobless Claims came in at 2.1 million, about in line with expectations. At a minimum we need to see this number fall back to the six digit area to have any prayer of a recovery.

Luxury homebuilder Toll Brothers beat on the top line and the bottom line. This quarter ended on April 30, so half of the quarter was pre-COVID and half was post-COVID. Revenues fell 11% YOY, while signed contracts were down 22%. Backlog was flat YOY. CEO Doug Yearley noted that deposit activity rebounded in May and was up YOY. This is a leading indicator of housing demand.

“While net signed contracts in the first four weeks of May were down 37% year-over-year, we are very encouraged by recent deposit activity. Our deposits, which typically precede a binding sales contract by about three weeks and represent a leading indicator of current market demand, were up 13% over the past three weeks versus the same three-week period last year. Importantly, our recent deposit-to-contract conversion ratio has remained consistent with pre-Covid-19 levels. Web traffic has also steadily improved from the lows we experienced in mid-March and has returned to the same strong activity we enjoyed pre-Covid-19 in February. These early trends suggest the housing market may be more resilient than anticipated just two months ago.”

Homebuilding is an early-cycle play, so you should expect to see a turnaround in that sector first. Overall, it sounds like the builders have been pleasantly surprised at how the sector has held up during the crisis.

First quarter GDP was revised downward to -5% from -4.8% in the second estimate. Inflation continues to be tame, with the headline number up 1.3%. Ex-food and energy it rose 1.8%. In other economic news, Durable Good Orders fell 17% in April. Most of this data is pretty much irrelevant to stock prices right now. The stock market is looking over the valley.

Ex-Obama staffer Jason Furman predicts that we are about to see the best economic numbers the country has ever seen. FWIW, I agree with his sentiment. The COVID Crisis is about 3 months old. There was nothing wrong with the economy going into the crisis, and the shock to the economy should feel more like a natural disaster than a traditional bubble-driven recession. If we have passed the bottom (admittedly a big “if”) then the economy could be on fire by late summer / early fall. And speaking of “fire,” the government poured a few trillion gallons of fiscal gasoline on it.

Pending Home Sales fell 22% in April, according to NAR. “While coronavirus mitigation efforts have disrupted contract signings, the real estate industry is ‘hot’ in affordable price points with the wide prevalence of bidding wars for the limited inventory,” NAR Chief Economist Lawrence Yun said. “In the coming months, buying activity will rise as states reopen and more consumers feel comfortable about homebuying in the midst of the social distancing measures. Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded for both home sales and prices, with home sales to decline by only 11% in 2020 with the median home price projected to increase by 4%,” Yun said. “In the prior forecast, sales were expected to fall by 15% and there was no increase in home price.”

Those hoping to snap up recession-driven bargains in the real estate market may be disappointed. That said, the bargains (if any) would be in the higher priced area, not the more affordable price points. “The mix of homes that are on the market now is a little bit different,” says Ratiu. “What’s really selling at a premium are lower-priced homes. The higher-priced homes are sitting on the market longer.”

Morning Report: March rate cut comes into view

Vital Statistics:

	Last	Change
S&P futures	3143	11.25
Oil (WTI)	49.46	0.19
10 year government bond yield		1.36%
30 year fixed rate mortgage		3.54%

Stocks have stabilized this morning and rates are up a touch from their intra-day all time lows yesterday. At one point, the 10 year Treasury was trading at 1.31%. This morning, Treasuries are down a touch and MBS are flat. For the most part, MBS underperformed Treasuries yesterday.

Mortgage applications rose 1.5% last week as purchases increased 6% and refis fell by 1%. “Last week appears to have been the calm before the storm,” said MBA Chief Economist Mike Fratantoni. “Weaker readings on economic growth caused a slight drop in mortgage rates, bringing them back to their level two weeks ago, but applications overall moved 1.5 percent higher. Refinance applications for conventional loans dropped a bit, but FHA refinances increased more than 22 percent. Purchase volume remained strong, supported both by low rates and the increased pace of construction over the past few months. With housing supply at low levels, new inventory is a positive development for prospective homebuyers.”

The Coronavirus issue has spooked the Fed funds futures market. The futures are now predicting a 1 in 3 chance of a rate cut at the March meeting. Just one month ago, the March futures were handicapping a 4% chance. Take a look at the December futures, which are now forecasting 2 or 3 cuts this year.

fed funds futures

Note that Dallas Fed President said yesterday: “It is still too soon to make a judgment about how it might relate to monetary policy. I still think we are a number of weeks away from being able to make the judgment” whether a rate change is required.” The April futures are already pricing it in.

Coronavirus fears didn’t do much to dampen US consumer confidence, which rose again. Historically consumer confidence has been an inverse of gasoline prices, in other words, when gasoline rises, consumers get salty and vice versa. Oil is now trading below $50 a barrel, and the refineries are beginning to switch from heating oil to gasoline refining. Good news for the summer driving season.

Luxury homebuilder Toll Brothers reported lower than expected earnings this morning and the stock is getting hammered pre-open (down about 9%). Earnings were down big and revenues missed guidance.

Morning Report: Housing starts at a 12 year high

Vital Statistics:

	Last	Change
S&P futures	3200	3.25
Oil (WTI)	60.46	0.14
10 year government bond yield		1.87%
30 year fixed rate mortgage		3.97%

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

Housing starts posted a 12 year high, coming in at 1.365 million units. Building Permits also moved up, rising 11% YOY to 1.485 million units. While 12 year highs seem like something big to cheer, in reality, we are still below our pre-bubble historical averages. Shortages of available homes are still at acute levels, however. This homebuilding cycle has a long way to run, and its positive impact on the economy could be one of the big surprises of 2020.

Builder confidence is at a 20 year high, according to the NAHB. “Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes, low mortgage rates and a strong labor market,” said NAHB Chief Economist Robert Dietz. “While we are seeing near-term positive market conditions with a 50-year low for the unemployment rate and increased wage growth, we are still underbuilding due to supply-side constraints like labor and land availability. Higher development costs are hurting affordability and dampening more robust construction growth.”

Echoing this number, Toll Brothers noted on their earnings conference call that traffic and orders were better in the November – mid December period compared to July-October. Impressive indeed, given that this is the seasonally slow period.

Industrial production surprised to the upside, rising 1.1% compared to expectations of a 0.9% increase. Manufacturing production and capacity utilization also rose.

You can get a mortgage for under 1% in many European cities. Unsurprisingly, house prices are rising as a result. According to the NY Times: “Prices jumped at least 30 percent in Frankfurt, Amsterdam, Stockholm, Madrid and other metropolitan hot spots, and are up an average of over 40 percent in Portugal, Luxembourg, Slovakia and Ireland.” Denmark has negative mortgage rates. This is bubble material, and shows how central banks are playing with fire when setting interest rates below zero.

Morning Report: Fannie and Freddie are interviewing investment banks

Vital Statistics:

	Last	Change
S&P futures	3138	3.25
Oil (WTI)	58.87	-0.14
10 year government bond yield		1.82%
30 year fixed rate mortgage		3.98%

Stocks are up as we head into the FOMC meeting. Bonds and MBS are flat.

The FOMC will meet today and tomorrow, with the interest rate announcement expected Wednesday at 2:00 pm. The Fed Funds futures are predicting no change in rates. That doesn’t necessarily mean the markets will ignore what is going on, as subtle changes in language can have out-sized effects on the markets. One such word is “symmetric.” The word symmetric refers to the Fed’s 2% inflation target, and how much they will tolerate inflation above that target. The Fed desperately wants to avoid the low inflation / low growth trap that evolved in Europe and Japan, and is signalling to the markets that they will allow inflation to run above 2% for an extended period of time.

The Fed will also be watching the overnight repurchase market, to ensure we don’t have another situation like late September where overnight rates spiked over 10%. This was due to a shortage of cash in the market. While this sort of thing doesn’t affect mortgage lending directly, it does raise the cost of borrowing for MBS investors, which can cause them to sell these securities to raise cash. That flows through to rate sheets. While the shortage caught the Fed flat-footed in September, they have been discussing the issue, so hopefully we don’t see another replay at the end of this month.

Fannie and Freddie are tightening the restrictions for their Home Ready and Home Possible programs. Previously, borrowers with incomes at the Area Median Income (AMI) were qualified for these 3% down programs; now they will be limited to borrowers at 80% of the AMI. This is all part of the strategy to reduce Fan and Fred’s overall risk prior to setting them free. Note that they are currently interviewing banks to handle the IPO, which will be somewhere between $150 billion and $200 billion. This would dwarf the record for the largest IPOs in history – Saudi Aramco and Alibaba – by over 6x.

Despite a glut of McMansions in some areas, Toll Brothers beat estimates and forecasted a strong 2020. The company noted demand increased throughout the year, and the recent weeks have been stronger than the prior quarter, which is encouraging given that typically you see a slowdown this time of year. Douglas C. Yearley, Jr., Toll Brothers’ chairman and chief executive officer, stated: “Fiscal 2019 ended on a strong note. Building on steady improvement in buyer demand throughout the year, our fourth quarter contracts were up 18% in units and 12% in dollars, and our contracts per-community were up 10% compared to one year ago. Through the first six weeks of fiscal 2020’s first quarter, we have seen even stronger demand than the order growth of fiscal 2019’s fourth quarter. This market improvement should positively impact gross margins over the course of fiscal 2020.”

Small business optimism grew in November, according to the NFIB. Recession worries faded into the background, and impeachment remains little more than a curious albeit boring sideshow, similar to the Clinton impeachment saga which had zero effect on the markets. Improving labor conditions were a big driver, with 26% of firms planning on raising compensation in the coming months – the highest in 30 years. (BTW, this is music to the Fed’s ears). It looks like the drag from the 2017-2018 rate hikes are behind us, and the headwind has turned into a tailwind courtesy of the recent rate cuts.

Productivity declined in the third quarter as output increased 2.3% and hours worked increased 2.5%. Unit labor costs increased by 2.5%.

Morning Report: Why mortgage rates are underperforming Treasuries

Vital Statistics:

	Last	Change
S&P futures	2922	23.5
Oil (WTI)	56.73	0.64
10 year government bond yield		1.59%
30 year fixed rate mortgage		3.83%

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

We will get the minutes from the July FOMC meeting at 2:00 pm EST. Given the dramatic change in the Fed’s posture over the past several months, there is a possibility that it could be market-moving.

The Trump Administration floated the idea of a payroll tax cut and a capital gains tax cut in order to stimulate the economy. Note that a payroll tax cut would require Congressional approval, which means there is a less than 0% chance of this happening ahead of the 2020 election.

Mortgage applications fell 0.9% last week as purchases fell 4% and refis rose 0.4%. The MBA mentioned how much mortgage rates have underperformed the Treasury market: “In a week where worries over global economic growth drove U.S. Treasury yields 13 basis points lower, the 30-year fixed mortgage rate decreased just three basis points. As a result, the refinance index saw only a slight increase but remained at its highest level since July 2016,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The small moves in rates and refinancing are potentially signs that lenders may be approaching capacity constraints as they continue to deal with the largest wave of refinance activity in three years. The refinance share of applications, at almost 63 percent, was also at its highest level since September 2016.” Turn times are certainly getting longer from correspondent lenders as this refi wave caught the entire industry off guard.

What is driving the underperformance of MBS versus Treasuries? Capacity constraints are one big possibility – as firms use up their operational excess capacity, they will increase margins. The other issue is that the inverted yield curve is wreaking havoc on MBS investors, who borrow short and lend long. The big agency mortgage REITs (Annaly Capital and American Capital Agency) cut their dividends recently. Two Harbors also cut their dividend. This is a warning sign that the mortgage REIT sector is losing money as rising prepayment speeds kill the value of their portfolios. Since mortgage REITs are probably deleveraging in response, that means they are either selling MBS or at least cutting back their purchases. That lack of demand means that mortgage rates will be higher than you would expect. So, if you are running scenarios and wondering why you can’t get par pricing at X%, that is a big reason why.

McMansion builder Toll Brothers reported better than expected earnings last night. That said, most numbers were down on a YOY basis – earnings, revenues, contracts, margins. Despite the mediocre numbers, the stock is up pre-market. Douglas C. Yearley, Jr., Toll Brothers’ chairman and chief executive officer, stated: “In our third quarter, we had strong revenues, gross margin, and earnings. While our third quarter contracts were down modestly, we are off to a good start in our fourth quarter. Low mortgage rates, a limited supply of new and existing homes, and a strong employment picture are providing tailwinds. We are focused on measured growth through geographic, product and price point diversification, and capital-efficient land acquisitions. We continue to expand the buyer segments that we serve with homes now ranging in price from $275,000 to over $3 million. Our balance sheet remains strong and our book value continues to grow. With ample liquidity, moderate leverage, and limited near-term debt maturities, we have the flexibility to execute on our balanced capital allocation strategy.”

Morning Report: Dovish FOMC minutes

Vital Statistics:

	Last	Change
S&P futures	2835.25	-22.4
Oil (WTI)	60.47	-0.95
10 year government bond yield		2.36%
30 year fixed rate mortgage		4.41%

Stocks are lower this morning on trade fears and European elections. Bonds and MBS are up.

The minutes from the April FOMC meeting were released yesterday, and the Fed continues to adjust its sails to the messages from the market. The bond market took the minutes to be dovish, and bond yields dropped after they were released. The quote that investors focused on:

“Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some
time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve.”

That statement (even if global economic and financial conditions continued to improve) is an all-clear signal to the bond market that positive economic data is no longer a threat. Given the background of creeping Eurosclerosis and a trade dispute, the highs for interest rates are probably in, and strategists are already talking about an insurance rate cut.

Talk of a rate cut is probably premature however. The data just don’t support it, and with the jawboning out of the White House the Fed is going to resist cutting rates if only to prove they are independent. That said, the circumstances required to justify a rate hike are even more unlikely.

Troubles in the luxury end of the real estate market? Not so fast. McMansion builder Toll reported earnings yesterday that exceeded street expectations, and Toll CEO Doug Yearley noted that the Spring Selling Season, which had been a bit of a disappointment, has finally woken up. “We are encouraged by the improvement in demand as the quarter progressed. FY 2019’s April contracts surpassed FY 2018’s April on both a gross and per-community basis. Although the Spring selling season bloomed late, it built momentum. We view this as a positive sign for the overall health of the new home market.”

Initial Jobless Claims ticked up to 215,000 last week, while the Markit purchasing managers’ index decreased in April.

New home sales ticked down in April, falling to a seasonally adjusted annual pace of 673,000. That said, March’s numbers were revised upwards to 732,000. The median home price was more or less flat YOY at $326,400 and the inventory of 332,000 units represents a 5.9 month supply.

Morning Report: 2018 GDP highest in 12 years.

Vital Statistics:

	Last	Change
S&P futures	2788	-6.75
Eurostoxx index	371.36	-1.22
Oil (WTI)	56.82	-0.13
10 year government bond yield		2.67%
30 year fixed rate mortgage		4.34%

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

Fourth quarter GDP came in at 2.6%, a deceleration from the third quarter reading of 3.4%, but much higher than many in the political economic punditry were predicting. Consumer spending rose 2.8%, while inflation rose 1.6%. Inflation fell from 1.8% in the third quarter. For 2019, GDP came in at 2.9%, the highest reading since 2006.

Initial Jobless Claims rose to 225,000 continuing a string of extremely low readings.

One of the most politically explosive issues these days concerns wage growth – why it seems to be so low and what can be done about it. Many will misinterpret cherry-picked numbers to make the claim that wages have not increased for 40 years, which is preposterous. That said, wage growth has been running in the high 2s, and with inflation around 2%, that equates to under 1% real wage growth. Modest, but certainly not what you would expect, especially this far into a recovery, especially with unemployment running below 4%. If the numbers don’t appear to comport with common sense, often times there is an issue with the numbers. That seems to be the case here. It turns out that wage growth is quite a bit higher, and it is due to the measurement problems inherent in the Bureau of Labor Statistic’s calculations. The BLS basically adds up wages paid and divides it by hours worked. If higher paid older workers are exiting, and younger lower paid workers are entering it will depress the averages, and it won’t accurately measure the growth that someone who has stayed in the labor force for the entire year has seen. Take a look at the chart below, where the Fed imputed average wage growth from census data as opposed to the BLS. Wage inflation jumps from 3% to 5%, which makes a lot more sense given the current economic numbers.

average hourly earnings vs census

Toll Brothers reported an increase in pretax earnings and sales for the first quarter of 2019. Orders declined in a big way however, falling 24% in units and 31% in dollars, driven primarily by weakness in California. Home price appreciation has been moderating in the hotter markets, and it is especially pronounced in the luxury segment, where Toll resides. The cancellation rate jumped to 9.6% from 5.3% a year ago. Tax reform limited the mortgage interest deduction, and the luxury segment is most prominent in high tax states, so those two effects are squeezing demand.

Realtor.com predicts this year’s Spring Selling Season could be the weakest in years despite rising inventory. While lower rates have improved conditions compared to late 2018, we are still weaker than early 2018.

Morning Report: Toll disappoints and the government targets VA cash-outs

Vital Statistics:

	Last	Change
S&P futures	2657	-42
Eurostoxx index	346.51	-7.2
Oil (WTI)	51.46	-1.45
10 year government bond yield		2.90%
30 year fixed rate mortgage		4.83%

Stocks are lower this morning as the global sell-off continues. Bonds and MBS are up.

While stocks are moving lower, the big news these days is the bond market rally. What appeared to be window-dressing last Friday (a sub 3% yield on the 10-year) has just kept going. A lot of market commentators have been scrambling to come up for a reason. Trade tensions make a convenient, if unsatisfying explanation. China and the US have reached an agreement to cool things off for 90 days, which should be good news. Economic data has been strong, and while we have had some slightly dovish comments out of the Fed, it is nothing dramatic. It feels like a major asset allocation trade out of equities into fixed income, but who or why is anyone’s guess. In other words, this could be just random noise, and therefore temporary. Note that 2s/10s (the difference in yield between the 10 year and the 2 year) got to single digits. Historically such behavior would signal a slowdown, but the Fed’s footprint in the Treasury market wasn’t so large before.

The business press is pushing out all sorts of “recession imminent?” articles, but if you read the ISM report on manufacturing, you will see nothing of the sort. New orders, production, and employment are all at historically very strong levels. The business press mirrors the mainstream media, and they are talking their ideological book a little.

In terms of MBS trading, they lagged the move big-time. On Tuesday, where yields touched 2.88% we saw only a couple of investors re-price for the better. So, all of those LOs who were running scenarios hoping to see an improvement were disappointed. TBAs did increase by 6 or 7 ticks, but the aggregators largely ignored it.

Construction spending fell 0.1% MOM in September, but was up almost 5% YOY. Residential construction fell 0.5% MOM and rose about 1.7% YOY. Lodging and office construction were up high / mid teens YOY, but resi (42% of total construction spending) continues to lag.

Speaking of resi construction, Toll Brothers reported a big drop in orders (down 13% in units / 15% in dollars). The cancellation rate jumped from 7.9% to 9.3%. Toll was one of the first builders to recover from the slowdown, making big bets on luxury urban apartments along with their traditional McMansion fare. California is the problem area, which is being hit by higher prices, higher rates, diminished foreign demand and new tax treatment. The whole sector was smacked, with the homebuilder ETF down about 5%. The XHB is down about 25% from its mid January levels.

Mortgage applications rose 2% last week as purchase activity rose 1% and refis rose 6%. Mortgage rates dropped about 4 basis points.

The VA is taking a closer look at predatory behavior in VA lending. From the Federal Register on November 30:

“VA is concerned that certain lenders are exploiting cash-out refinancing as a loophole to the responsible refinancing Congress envisioned when enacting section 309 of the Act. VA recognizes there are certain advantages to a veteran who wants to obtain a cash-out refinance, and VA has no intention of unduly curtailing veterans’ access to the equity they have earned in their homes. Nevertheless, some lenders are pressuring veterans to increase artificially their home loan amounts when refinancing, without regard to the long-term costs to the veteran and without adequately advising the veteran of the veteran’s loss of home equity. In doing so, veterans are placed at a higher financial risk, and the lender avoids compliance with the more stringent requirements Congress mandated for less risky refinance loans. Essentially, the lender revives the period of subprime lending under a new name.”

The government has already dealt with the serial refinancings by adding new seasoning requirements for loans to be eligible for standard Ginnie MBS, but that was about protecting MBS investors. This is different. For many veterans, it may sound like a great deal to be able to lop 50 bucks off your monthly payment and maybe get to skip a month or two, but that 3.3% funding fee is expensive, even though you get to finance it. If you are doing a VA cash-out to refinance credit card debt, it amounts to an expensive debt consolidation loan, though the drop in your rate and the tax treatment does offset that a bit.

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.