Morning Report: Mortgage Applications fall, Blue Wave never materializes

Vital Statistics:

 

Last Change
S&P futures 2782 25
Eurostoxx index 366.66 0.41
Oil (WTI) 62.93 0.71
10 year government bond yield 3.20%
30 year fixed rate mortgage 4.96%

 

Stocks are higher this morning after Midterm elections. Bonds and MBS are flat.

 

Democrats took a narrow 7 seat majority in the House last night, while Republicans increased their majority in the Senate. There were largely no surprises last night – urban voters stayed reliably Democrat, rural voters stayed reliably Republican, however some suburban voters flipped from Republican to Democrat. That change could have been due to either (a) the tendency of educated voters to skew more Democrat, or (b) tax reform. I wonder if tax reform played a part, since higher income suburban voters probably got hit the hardest from the deduction limits on property taxes and state / local taxes.

 

One takeaway from the election: Progressive darlings flopped. Beto O’Rourke, Richard Cordray, and Andrew Gillum all lost. So while the energy in the D party is with the resistance, that doesn’t necessarily mean the voters are there too. The Blue Wave never materialized. The other takeaway: The Never Trump Republicans (the John McCains and the Bob Corkers) are gone as well. So DC is going to be more polarized than ever.

 

What will the election mean for markets? Nothing. Gridlock is generally positive for the stock market, and the bond market is being driven by the Fed. Oh, by the way there is a Fed FOMC meeting starting today.

 

There were about 7 million job openings at the end of September, according to the JOLTs report. This is a decrease of about 285k jobs from August’s record 7.3 million number. The quits rate was flat at 2.4%. While anecdotal evidence abounds regarding the inability of companies to fill positions and retain workers, that has yet to really show up in the government’s numbers.

 

Home prices rose 5.6% MOM in September, according to CoreLogic. They estimate that 38% of all MSAs are now overvalued, when looking at home prices versus incomes. Just under 20% were undervalued. Of course overvaluation / undervaluation is a moving target, so that can all change if incomes rise, especially if mortgage rates stay the same. Betting on a flattening yield curve late in an economic cycle is usually a decent bet, especially after the Fed finishes a round of monetary tightening.

 

Mortgage credit availability increased in October according to the MBA Mortgage Credit Availability Index. “Credit availability increased in October, driven largely by an expansion in the supply of conventional credit, while government credit fell slightly over the month,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “Reversing a trend from last month, lenders made more conventional and low down payment programs available to prospective borrowers. This increase in supply was likely in response to a growing number of first-time home buyers in the market, as home price appreciation has slowed and wage growth has picked up. Jumbo credit availability also expanded last month, with the jumbo index increasing again to its highest level since the survey began.”

 

MCAI

 

Last week’s drop in interest rates didn’t have much of an effect on mortgage applications, as the MBA’s index fell 4%, driven by a 3% drop in refis and a 5% drop in purchases. Activity hit a 4 year low.

 

Zillow is getting into the home buying business in Houston, by making cash offers for homes from qualified sellers and then listing the home for sale. It looks like Zillow is selling this as a service to make it easier to sell a home rather than just real estate speculation, but who knows? We do know that Z-estimates are often wildly inaccurate, so Zillow might not have such a big edge.

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.

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.

tariffs

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

Morning Report: Housing starts still below demand

Vital Statistics:

Last Change
S&P futures 2698 16.25
Eurostoxx index 379.67 1.95
Oil (WTI) 66.26 0.05
10 Year Government Bond Yield 2.83%
30 Year fixed rate mortgage 4.44%

Stocks are higher this morning as China relaxes ownership restrictions on domestic manufacturers. Bonds and MBS are flat.

We have a lot of Fed-speak today, especially in the morning. Separately, Trump announced two Fed nominees: Richard Clarida of Columbia, to be the Vice Chairman of the Fed and Michelle Bowman, previously a bank executive from Kansas. For all of his criticism of the Fed while on the campaign trail, Trump has nominated pretty much middle-of-the-fairway people to the Board.

Housing starts came in at 1.32 million, better than expectations but still well below what is needed to meet demand. Building Permits came in at 1.35 million. Single family starts fell, while multi rose. Most of the increase was in the Midwest.

Industrial Production rose 0.5% last month, while manufacturing production rose 0.1%. Capacity Utilization increased to 78%. So far we aren’t seeing any tariff effects in the numbers.

Bank of America announced earnings yesterday, and lumped mortgage banking income into the miscellaneous “all other income” category. What an ignominious end to Countrywide. Bank earnings season continues.

Independent mortgage bankers saw profit per loan get cut in half last year as refis dried up and the business got more competitive. Refis fell from 36% of all origination volume to 25%.

Zillow crunched the numbers and looked at the typical homebuyer in 2017. The typical buyer is 40 years old, making 87k. Millennials make up 42% of the cohort. They typically spend about 4.3 months finding a home. Interestingly, despite the size of the investment, most homebuyers only contacted 1 lender. Here is what is important to homebuyers when thinking about a lender:

lender characteristics

The median home was sold in 81 days, and that includes the closing process. This means the typical home was on the market for only 1 month. This is 8 days faster than 2016.

The National Low Income Housing Coalition has a new report showing how acute the housing shortage is at the low end. Only 35 affordable and available rental homes exist for every 100 extremely low income renter households. Rising home prices and mortgage rates are reducing affordability, however interest rates are still extremely low historically. In the early 80s, a the first year’s mortgage payment consisted of 99% interest, 1% principal.

The IMF forecasts that global growth will hit 3.9% this year, the fastest since 2011, driven by emerging Europe, and the US.

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.