Morning Report: Existing home sales flat 9/20/18

Vital Statistics:

Last Change
S&P futures 2926 11.5
Eurostoxx index 382.7 2.72
Oil (WTI) 71.58 0.46
10 year government bond yield 3.09%
30 year fixed rate mortgage 4.86%

Stocks are higher this morning after China agreed to cut some tariffs. Bonds and MBS are getting slammed.

Bond yields are up 27 basis points over the past month. Not sure what is driving that (at least nothing specific), but it is a worldwide phenomenon. Bunds and JGBs have also been selling off, though not as dramatically. The Fed funds futures have become more hawkish over the same period, raising the probability of a Dec hike from 63% to 87%. This has certainly stopped the flood of hand-wringing stories in the business press about the flattening yield curve.

Initial Jobless Claims hit a 50 year low, and are within striking distance of the 200,000 level. Meanwhile, the Index of Leading Economic Indicators took a step back in August, rising 0.4% after July’s torrid 0.6% growth. Still strong numbers, however.

Consumer comfort rose to a 17 year high, according to the Bloomberg Consumer Comfort Index (highest since Jan 2001).

One reason why consumption has been strong is growing home equity, which rose almost a trillion YOY in the second quarter. This is an increase of 12.3%. The number of homes with negative equity fell by half a million to 2.2 million, or about 4.3% of all mortgaged homes. On average, the typical homeowner saw a $16,200 increase in housing wealth. Only 3 states: North Dakota, Connecticut, and Louisiana saw declines.

Existing home sales remained flat in August, according to NAR.  Lawrence Yun, NAR chief economist, says the decline in existing home sales appears to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.” The median house price was $264,800, up 4.6% YOY. Inventory is still tight, at 4.1 month’s worth, and days on market ticked up slightly to 29 days. First time homebuyers accounted for 31% of sales. Historically, that number has been closer to 40%.

Closing rates jumped across the board to 71.7%, according to Ellie Mae’s Origination Insight Report. Average FICOs were 724, and average LTV was 79%. Both those numbers are more or less unchanged YOY. It typically took 43 days to close a loan.

When is the best time of year to buy a home? It depends. Prices do decline however during the winter, with purchases in January and February 8.5% cheaper than the peak summer months. Even in Autumn, they fall 3%. So, don’t get too depressed about your Z-scores during the winter months. It could be just seasonality.

Morning Report: Housing starts jump 9/19/18

Vital Statistics:

Last Change
S&P futures 2908.75 -3
Eurostoxx index 378.74 0
Oil (WTI) 69.94 0.09
10 year government bond yield 3.05%
30 year fixed rate mortgage 4.78%

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

Mortgage applications increased last week despite a big uptick in rates. The overall index rose 1.6%, driven by a 4% increase in refis and a 0.3% increase in purchases. FWIW, I wonder if there is some sort of strange adjustment related to the Labor Day holiday going on. Rates hit a 7 year high, with the conforming 30 year fixed hitting 4.88%.  ARMs increased to 6.5% of all activity.

Housing starts rose to an annualized pace of 1.28 million in August, which is up over 9% on a MOM and YOY basis. Permits disappointed however, falling just under 6% on a MOM and YOY basis. Multi-fam (which is notoriously volatile) drove the decline in permits and the increase in starts. Single family permits were up about 6%. Geographically, the action was in the West and South, while the Northeast and Midwest were flat / barely up.

Housing starts will probably take a step back in the next few months as construction workers will be occupied rebuilding North Carolina.  Labor remains an issue for new home construction, but the tariff-driven spike in lumber prices is over, and futures are trading at 18 month lows.

lumber

Fannie Mae thinks growth has peaked for this cycle and that the second quarter’s torrid growth rate of 4.2% was artificially boosted by inventory build ahead of tariffs. This had the effect of borrowing growth from future quarters. In all fairness, they are probably correct – a 4.2% growth rate is so far above historical trend that it is almost by definition unsustainable. Housing continues to punch below its weight as affordability issues weigh on sentiment. Note that the number of people saying it is a good time to buy a house has hit the lowest level since the survey began 8 years ago. Blame rising rates and home price appreciation outstripping income growth.  FWIW, they are somewhat bearish on consumer spending going into the 4th quarter, which seems to defy a lot of data we are getting about retailer activity.

Insured losses form Hurricane Florence will be in the $1.7 to $4.6 billion range.

Morning Report: The Urban Institute examines manufactured housing 9/18/18

Vital Statistics:

Last Change
S&P futures 2899 3.25
Eurostoxx index 377.35 -0.96
Oil (WTI) 69.63 0.75
10 year government bond yield 3.01%
30 year fixed rate mortgage 4.68%

Stocks are higher after Trump’s proposed tariffs against China were smaller than expected. Bonds and MBS are flat.

Same store sales increased 5.4% last week, continuing a string of strong reports. Consumption data suggests that the fourth quarter is going to be strong, supported by the best holiday shopping season since the recession.

Builder sentiment was unchanged in September, according to the NAHB Housing Market Index. A lack of construction workers and higher construction costs are offsetting a strong seller’s market for new homes.

The credit markets for corporations with speculative credit remains robust. A Blackstone-led investor group raised $13.5 billion for a 55% stake in Reuters data business. Huge leveraged buyouts have been largely absent since the financial crisis, and the covenants are extremely borrower-friendly. Aside from the RMBS shenanigans of the 06-07 era, we saw a lot of reaching on leveraged buyout deals (LBO firms buying non-LBO friendly businesses like semis and retailers). In fact, the first indication of a problem in the credit markets in 06 was when the buy side refused to bite on the paper issued to fund the Alliance Boots transaction (an LBO of a British drug store chain). The banks got stuck with the inventory, and the rest is history.

With LBO credit widely available, you would think the private label MBS market would be coming back. So far, it is a shadow of its former self, with a number of issues (prepays, conflicts) preventing it from returning in any size. If it can’t do so in this environment, it almost makes you wonder if it ever will.

A UBS strategist is out with a bold call that the Fed will take a break after September and skip tightening at the December meeting. He believes that trade war fears will keep the Fed cautious, and will not be as inflationary as feared.

new study by the Urban Institute finds that contrary to popular belief, manufactured homes appreciate in value, although at a smaller rate (3.4% annually versus 3.8% for tradition homes). They suggest that geographical differences could explain the difference – mannies are concentrated in slower growth states and are underrepresented in pricey markets like the California. Currently the government only finances mannies when the land is part of the deal, and since this study uses the FHFA House Price Index, they are excluding structure-only chattel loans, which are something like 80% of the market. Note that mannies are overall more volatile that site-built homes, which means more risk for the lender all things being equal and therefore justifies the LLPAs.

A couple of economists think they have found a profitable trading strategy around the Fed. The idea is to buy or sell the market after the Fed makes a surprisingly dovish or hawkish monetary announcement and then unwind the trade 15 days later. The trade provides a higher return without increasing risk (higher Sharpe ratio). Something to think about ahead of next week’s FOMC announcement. If the dot plot comes out a bit more dovish than expected, supposedly you can make some money buying some SPYs and unwinding the trade mid-October. Full disclosure, not recommending you do that, just saying the study says it should work.

 

Morning Report: Hurricane Florence damage estimates 9/17/18

Vital Statistics:

Last Change
S&P futures 2908.5 -2.9
Eurostoxx index 377.97 0.1
Oil (WTI) 69.63 0.64
10 year government bond yield 3.01%
30 year fixed rate mortgage 4.68%

Stocks are flat on no real news. Bonds and MBS are down.

We should have a quiet week ahead with not much in the way of economic data and no Fed-speak. Bonds have been selling off ahead of the FOMC meeting next week. The Fed Funds futures continue to bump up the chance of a December hike, with the odds now over 80%.

While not market moving, we will get some housing data with builder sentiment tomorrow, housing starts on Wednesday, and existing home sales on Thursday.

Chinese stocks are trading at a 4 year low, partially driven by threats of a trade war. Declining stock markets typically put pressure on real estate prices (asset classes generally correlate on the downside), and China has a bubble on its hands. This has the potential to spill over to the US, at least in the higher priced West Coast markets, which should see an exit of Chinese speculative money. Separately, China is considering declining further trade talks.

Trade talks should continue on NAFTA this week. The biggest effect of NAFTA talks will be on housing costs, particularly lumber prices. Base metals have been weak on trade issues, which should dampen the inflation indices a bit.

Hurricane Florence didn’t pack the punch that people expected, but the flooding has been probably worse. CoreLogic estimates that the insured flood costs will be between 3 and 5 billion. For servicers, this will suck up some cash, as delinquencies will invariably spike and we will be heading into the holiday forbearance period just as these loans go 90 days down. Nonbank servicers should expect to see a spike in advance activity to go along with the normal seasonal spike.

Manufacturing growth moderated in September, according to the Empire State Manufacturing Survey. New Orders and employment were pretty much the same.

Realtor.com lists the top 10 suburbs in the US. Most are pretty pricey with respect to incomes, with median price / median income ratios ranging from 3.5x to 7.4x. To put that number in perspective, up until the late 90s, the median home price to median income ratio averaged about 3.2 – 3.6. It peaked at 4.8 in 2006. While median home price to median income ratios are an imperfect measure (since they ignore the effects of interest rates on affordability) they are still a relevant measure of how overpriced an area can be.

Retailers are struggling to hire temps heading into the holiday season. Some decided to start hiring this summer in order to beat the expected shortages, while others are offering higher pay and vacation time. Is the just-in-time employment model about to exhibit its weakness?

Goldman is forecasting growth to slow to 2.6% in 2019 and 1.6% in 2020. Many are now calling for a recession in 2020. The catalyst will be higher interest rates and end of the Trump tax cut “sugar high.” Perhaps the big investment in inventory build we are currently seeing will be the catalyst. Regardless, we don’t seem to have any asset bubbles in the US so we probably aren’t going to be looking at any sort of credit crunch. Overseas, there are issues (Canada, Scandinavia, Australia, China).

Morning Report: Initial Jobless Claims in perspective 9/13/18

Vital Statistics:

Last Change
S&P futures 2898 9.5
Eurostoxx index 378.25 1.14
Oil (WTI) 69.66 0.71
10 year government bond yield 2.95%
30 year fixed rate mortgage 4.64%

Stocks are higher this morning on positive trade comments out of China. Bonds and MBS are up.

The European Central bank left rates unchanged, which is helping bonds rally.

Inflation at the consumer level came in weaker than expected, with the Consumer Price Index rising 0.2% MOM and 2.7% YOY. Both numbers were 10 basis points below Street estimates. Ex-food and energy, they were up 0.1% / 2.2%, which pretty close to the Fed’s target. Falling health care costs, which make up about 10% of the index, helped offset increasing housing costs.

Increased housing costs are fueling a rise in home improvement activity. Both The Home Despot and Lowes are surging following results. Consumer Comfort rose for the first time in 5 weeks. Despite the run over the last month, the index is at highs not seen since 2000 (as are most of the consumer confidence / sentiment indices).

Initial Jobless Claims fell to 204,000, which is another 50 year record. When you take into account population growth, the number becomes even more dramatic:

Hurricane Florence has been downgraded to a Category 2 hurricane, but it is still expected to pack a wallop and dump a lot of rain. The hurricane is expected to dump 20-30 inches of rain over the area, which means flooding issues well inland. Servicers should expect to see an uptick in DQs going into the end of the year. Note that fewer households have flood insurance this time around. “Residents of these states are materially less prepared than they were in the past to deal with the financial consequences associated with major flooding events,” said Robert Hartwig, a risk-management and insurance professor at the University of South Carolina’s Darla Moore School of Business.

Ex-US Treasury Secretary Jack Lew is getting into the mortgage business, joining the advisory board of Blend, which is a consumer finance start-up that handles online mortgage applications for the GSEs and some of the larger banks.

Doug Kass made the great observation about the business media and the 10th anniversary of the financial crisis, recalling Mickey Mantle’s observation: “I didn’t know how easy the game of baseball was until I entered the broadcasting booth.”

HUD Secretary Ben Carson plans on doing more to remove zoning impediments to multifamily construction, though his approach will be different than the Obama Adminstration’s. He plans on using Community Development Block Grant funds to encourage changes in zoning. The Obama admin sued localities directly, with the most prominent case being Westchester County in New York. Westchester County ended up being able to fend off HUD for the most part, which kind of shows the futility of that exercise. Westchester should have been a lay-up. Separately, the House is looking at regulatory costs and multifamily construction, which supposedly account for 30% of the cost of multi fam homebuilding according to NAHB.

Morning Report: Wholesale inflation remains in check 9/12/18

Vital Statistics:

Last Change
S&P futures 2888.5 -0.25
Eurostoxx index 376.66 1.28
Oil (WTI) 70.21 0.93
10 year government bond yield 2.97%
30 year fixed rate mortgage 4.64%

Stocks are flat this morning as the East Coast braces for Hurricane Florence. Bonds and MBS are flat.

Mortgage Applications fell 1.8% during the Labor Day week as purchases increased 1% and refis fell 6%. The refi index is now at an 18 year low. We saw a 5 basis point increase in rates, which drove the drop in refis. As rates rise, cash-outs, fixed-for-ARM, and FHA for conventional are about the only game in town.

Despite tariffs and increases in raw materials prices inflation at the wholesale level remains under control. The producer price index fell 0.1% last month but rose 2.8% on an annualized basis. Ex-food and energy, the number was down 0.1% MOM and up 2.3% YOY. So, despite the increase in wages we saw in the jobs report, inflation overall remains subdued.

Yesterday’s JOLTs report showed the quits rate (which is considered a leading indicator for wage inflation) hit the highest level since early 2001. Construction job openings increased to set another post-bubble high. Hurricane Florence will only exacerbate the labor shortage as workers get drawn into repair jobs. This probably means disappointing housing starts numbers for the rest of the year.

Below is a chart which shows that average hourly earnings and the quits rate tend to correlate pretty closely.

Here are some things that homeowners in the path of Florence can do in order to prepare for impact. Note that the hurricane is expected to stall out once hit hits land, so you should expect some flooding inland. Servicers should prepare for an uptick in delinquencies.

Redfin has a good retrospective on the top lasting impacts from the financial crisis. Probably the biggest surprise was that a leftist president presided over a huge jump in inequality. Given that Fed policy in the aftermath of the crisis was aimed at supporting asset prices, this shouldn’t be a surprise. The other big surprise was the complete drop off in housing construction despite a tight housing market. 10 years down the road, it is still a head-scratcher. Everyone has a theory about the driver, from gun-shy builders, to labor shortages, to zoning restrictions. The places where the demand is greatest (CA and Seattle) have tight restrictions on building, and such an expensive market that businesses are relocating somewhere cheaper. On the other side of the coin, the Rust Belt is growing again, and that area has a surfeit of housing already built.

Morning Report: NFIB, JOLTs, wage pressures 9/11/18

Vital Statistics:

Last Change
S&P futures 2872 -8.25
Eurostoxx index 373.62 -1.89
Oil (WTI) 67.66 0.12
10 year government bond yield 2.97%
30 year fixed rate mortgage 4.62%

Stocks are lower this morning on trade and weather fears. Bonds and MBS are continuing their post jobs-report sell-off.

Job openings hit a record high in July, hitting 6.9 million, according to the JOLTS survey. Job openings increased in finance and insuring, but fell in retail and government. The quits rate increased to 2.4%, the highest level since 2001.

Small business optimism set a record last month, hitting 108.8 and beating the previous high set in July 1983. The number of businesses saying it is a good time to expand hit a high, and plans for capital expenditures and inventory investment also hit pre-crisis highs. The NFIB index had a discontinuous jump upward starting in late 2016, but that was primarily driven by expectations of hiring and investment. Now the index is being driven higher by actual hiring and investment and that is driving GDP growth. Labor shortages continue to be a problem.

Same store sales continued their recent strength, rising 6.3% last week. All of this points to a strong Q4.

Signs of building wage pressures? Leaders for the United Steelworker’s Union are demanding pay increases as steelmakers get a profit boost from tariffs. They are targeting US Steel and Arcelor Mittal. Steel prices are up 30% – 40% this year, which is boosting profits. This issue of course is that these increases will probably prove to be temporary as the tariffs are a negotiating tool. That said, expect to see more of this as the labor market tightens. US Steel has offered the union a 4% wage increase next year, and 3% the following two years. After that, base pay will increase by 1%, but profit-sharing bonuses will be implemented.

Finally, a note on 9/11

I was on the trading floor at Bear, Stearns in London. It was just after lunch. A headline went across Bloomberg saying a plane had hit one of the WTC towers. CNBC mentioned the story as well, but no one was thinking “terrorism.” I emailed one of my friends at Merrill Lynch (right across the street at the World Financial Center) and he wasn’t even aware of what happened. The European markets were down a bit on the day, but didn’t really react to the first hit.

After a few minutes, CNBC started showing live footage of the fire and then we saw plane 2 hit. Immediately, the world realized what had happened. The Euro markets were collapsing and I was inundated with sell orders. The news of the Pentagon hit came out. People on our floor started freaking out. We were in Canary Wharf (One Canada Square) in the tallest building in the UK. Planes routinely come close to the building as they approach City Airport. The head of Bear Stearns Europe came on the trading floor and told everyone if they were uncomfortable, to go home. No one knew if today was “fly a plane into financial headquarters day” Everyone bailed, and I was one of the last guys on the trading floor, trying to reconcile my book by hand and get flat before I left.

I looked up at CNBC before I left and saw the place I got married at a year earlier collapse on my birthday.

P.S. As I headed to the tube to go home, I passed the Slug and Lettuce (a pub) and found all of the “uncomfortable” Bear Stearns employees having a pint directly below the building they were so uncomfortable being in.

By the way, I am still searching for a senior capital market role at a mortgage bank. If anyone is hearing of anyone looking, I would appreciate the head’s up.

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