An “independent”, agenda-setting bureaucracy 10/24/16

There is an op-ed article today in the WSJ, unfortunately behind the firewall, that unwittingly lays bare the unconstitutionality of the regulatory state as it currently exists in the US. The article was written by former Chairman of the SEC, Arthur Levitt Jr., and is ostensibly a critique of Senator Elizabeth Warren’s call for current SEC Chairman Mary Jo White to be removed for failing to implement a “rule” regarding corporate political donations that Warren favors. Levitt correctly calls out Warren for improperly trying to influence the SEC’s “agenda”, but his reasoning reveals the mindset of these unelected bureaucrats and how shamelessly unmoored from the Constitution the regulatory state has become.

Levitt says:

No rule—no matter how merited—is worth the damage that would be caused if the SEC were compelled by political intimidation to write it. That’s not how good regulations emerge, and what’s worse, it would poison the regulatory process for all time. The moment the SEC loses its ability to set its own agenda is the moment it loses its ability to protect the investing public.

The SEC does not operate as a pass-through entity for Congress, merely following congressional direction. Rather, it’s an independent agency, and its chairman is empowered to set the agenda for the agency’s work. This agenda takes shape in many forms—rule makings, speeches and enforcement actions—and must be set by the chairman, not Congress. This is by design.

Say what? The “agenda” of unelected bureaucrats agency “must be” set by themselves and not by the elected members of Congress? Perhaps Levitt would like to point out where in the Constitution such bureaucrats have been granted this rather awesome power. Contrary to what Levitt seems to think, that the SEC is supposed to operate as a “pass-through” entity for Congress, following its direction, is the only way it can operate that would justify its existence.

Levitt goes on to say:

That’s not to say the agency should be free from congressional oversight. Throughout its history, politicians from both parties have sought to influence its work. That’s to be expected, and a good regulator welcomes outside views, especially those coming from elected leaders who write the laws the SEC implements. Ultimately, Congress holds the power to pass laws requiring agency action; and that option is available to Sen. Warren.

But Congress must respect the SEC’s independence, and thus freedom, to focus on a fixed agenda. Once confirmed to lead the SEC, its chairman has a singular goal: To meet the agency’s mandate to protect investors, facilitate capital formation, and ensure fair and orderly markets.

Well, isn’t that generous. Good regulators should “welcome” the “outside” views of elected representatives, the very people who are actually empowered by the Constitution to write legislation.

Levitt is of course correct to inform Warren that if she wants to impose a new law, Congress has the power to do exactly that through actual legislation. But it is precisely the vaguely defined regulatory “mandate” that Levitt himself embraces which allows the likes of Warren to think that she can impose new laws without the hassle of actually going through the constitutional process.

This is an excellent example of how pervasive and shameless the undemocratic, unconstitutional mindset that typifies the regulatory bureaucracy has become.

(This link may or may not work to get the article…not sure:

Morning Report: More rent versus buy 10/21/16

Vital Statistics:

Last Change
S&P Futures 2124.7 -12.0
Eurostoxx Index 343.3 -1.0
Oil (WTI) 50.3 -1.3
US dollar index 88.6 0.0
10 Year Govt Bond Yield 1.74%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.57

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

No economic data today, however we do have some Fed-speak.

Following on yesterday’s rent-versus-buy article from Trulia, I crunched some numbers to demonstrate the relative value proposition currently. Using census data for median asking rent and median house prices, I plotted the median asking rent against the mortgage payment for a FHA loan with 3.5% down, including mortgage insurance, property taxes, homeowner’s insurance, and the tax benefit of deducting interest and property taxes for a borrower making the median income. Historically, buying has resulted in a payment higher than the median rent payment. This makes sense: your mortgage payment will be more or less fixed, while rent will increase with inflation.

The chart below plots the two numbers in absolute dollars. You can see the two lines converging which means the rent-versus-buy decision is about as far skewed towards buying than it ever has been.


In the second chart, I plotted the difference between the “median” mortgage payment and median asking rent. The range recently has been anywhere from -10% to 100%.


The other thing to keep in mind with the rent vs buy decision is that the world’s central banks are on a mission to create inflation. They will eventually succeed, and over time the asking rent is going to increase, while the mortgage payment will be largely fixed, with the exception of property taxes and perhaps homeowner’s insurance. On the other side of the coin, home price appreciation will probably maintain at least a mid-single digit rate of appreciation, which is higher than the mortgage interest rate, especially when you take into account the tax benefits.

The takeaway is that the Fed is giving the homeowner a gift in low rates, and that won’t last forever.

Morning Report: Buying is still a better deal than renting 10/20/16

Vital Statistics:

Last Change
S&P Futures 2135.3 -3.0
Eurostoxx Index 341.6 -2.0
Oil (WTI) 50.7 -0.9
US dollar index 88.0 0.0
10 Year Govt Bond Yield 1.75%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.57

Stocks are lower this morning after ECB President Mario Draghi said the ECB is not looking at doing more QE after the program ends in March. Bonds and MBS are up.

In economic data this morning, initial jobless claims rose 13k to 260k. Separately, the Bloomberg Consumer Comfort Index fell. The Philly Fed manufacturing index improved in September, but manufacturing has generally been weak across the board as the stronger dollar hurts competitiveness overseas.

Existing Home Sales rebounded in September to an annualized pace of 5.47% from a downward-revised pace of 5.3 million in August. The median home price was up 5.6% to $234,200. The first time homebuyer represented 34% of all sales, which is a big improvement from the 30% – 32% range it had been stuck in for the past year. Inventory remains tight, however with about 2.05 million homes on the market, which represents a 4.5 month supply. A balanced market is closer to 6.5 months. Distressed sales (foreclosures and short sales) represented 4% of all sales, which is a post-crisis low. Days on market ticked up to 39 days from 36 in August. The increase in the first time homebuyer is definitely good news, and we may finally be seeing the pent-up demand that has been building over the past 10 years finally come to market.

In spite of all that pent-up demand, housing starts remain anemic given where we are in the economic cycle. Housing construction has been the missing link this whole recession. Note the shaded grey areas on the chart. Those are recessions. See how housing construction historically experienced a sharp rebound after the economy bottomed? We haven’t seen that this time around. Some of that was due to an overhang of inventory from the bubble years that needed to be sold, however that adjustment was made by 2011 or so. Since then, tight inventory and rising prices have been the story. The reason why this recovery has been so tepid has been the absence of a robust housing construction market.


Note that Fannie Mae thinks that housing construction will remain muted. In their latest Economic Commentary, they forecast housing starts will grow to about 1.3 million in 2017, which is about 12% higher than their forecast for 2016. The bright spot? SFR will increase to 15% to an annualized pace of 883k. SFR will cannibalize multi-fam going forward as the economy improves and more Millennials go from being renters to being buyers. Speaking of which…

Trulia has a good piece out on the advantages of buying versus renting. Buying a home is 37% cheaper than renting nationally. Naturally, the advantage differs from market to market, but even the worst markets for buying are still 17% cheaper. This assumes the buyer puts down 20% and stays in the house for 7 years. The advantage was as high as 41% in 2012, and got as low as 34% in 2014. Of course this is a moving target as mortgage rates and house prices change. Where are the tipping points to flip the relationship? For home prices, it is a median house price of $468k. For mortgage rates, it is 9.1%.


Who Needs to Internet Hack a Secured Computer if the Hired Hands can Walk Out With Thumb Drives Every Night?

They expressed astonishment that Mr. Martin managed to take home such a vast collection of classified material over at least 16 years, undetected by security officers at his workplaces, including the N.S.A., the Office of the Director of National Intelligence and Pentagon offices.

I could understand a contractor coming in for a specific project requiring a specialist.

One of my remaining Friday morning group of friends, George, was the electronics/room environment/controls specialist at IBM’s huge Austin facility until he retired at 58. Since then, he has done month long projects for other folks, including Chinese companies, finding glitches and spikes, hunting down and changing out motherboards with heating problems, measuring the cooling necessary in an enclosed area, imposing clean standards in a room, but also rewriting control software code and substituting parts that gives him access to secret or proprietary stuff. George often faces days of security checks on his work that slow him down, as one result, but allay his employer’s fears, as another.

Of course I am sure NSA has in-house employed engineers for the job of keeping the control systems operational and up to date, but I am sure there would be a need for specialists from time-to-time.

I draw a distinction between that use of short term one-off specialists and Martin having so many years of continuing access. That’s crazy.

Working at NSA should come with weekly polygraph tests and federal courthouse level searches every morning and every night, at least. Whatever they are doing to secure against physical theft by thumb drive, it isn’t working.

Morning Report: Housing starts disappoint 10/19/16

Vital Statistics:

Last Change
S&P Futures 2137.5 4.0
Eurostoxx Index 343.1 0.6
Oil (WTI) 51.1 0.8
US dollar index 88.0 0.0
10 Year Govt Bond Yield 1.76%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.57

Stocks are up this morning as earnings reports continue to pile in. Bonds and MBS are flat.

Mortgage Applications rose 0.6% last week as purchases rose 3% and refis fell 1%.

Housing starts fell to a 1.05 million pace in September, driven by a big drop in multi-fam. Single fam was up around 8%. Building Permits rose to 1.23 million. Housing continues to be the biggest underperformer in the economy, but the subject hasn’t really come up in this election, for either side.

We have some Fed-speak today, with John Williams speaking at 8:45, Rob Kaplan at 1:30 and William Dudley tonight.

The final debate is tonight, and it looks like Hillary is pulling away from Trump at this point. The black swan event for the markets is a Democratic Party sweep, which will probably cause the stock market to spit up a hairball.

Lending standards in the jumbo space are loosening, even as the luxury end of the housing market underperforms. Loan Depot is now offering 40 year jumbo products that are interest-only for the first 10 years. Redwood is now offering a 90 LTV product that goes down to a 660 FICO.

The NAR is releasing its latest Profile of Home Buyers and Sellers. Here are the big changes over the past 35 years.

  • The first time homebuyer is a smaller percentage than it has been in the past.
  • The internet is not replacing the real estate agent
  • Houses have been getting bigger of the past 30 years, but have leveled out in recent years
  • Down payments have been going down
  • The home search process is taking longer than ever due to tight inventory

Zillow has their own report on trends in housing. Here is the executive summary (the report is very long and detailed):

“The home buying experience is both an intimidating financial transaction and an emotional milestone. Half of home buyers in the U.S. are under 36, meaning a new generation— Millennials—is shaping the future of real estate. Despite demographic reports about young adults’ urban lifestyles, Millennials share their parents’ aspirations for a single-family home, often in the suburbs.

The process of finding or selling a home is much more collaborative for Millennials than for older generations. They bring all available tools to the process, including their smartphones, social media and online networks. While older generations rely on real estate agents for information and expertise, Millennials expect real estate agents to become trusted advisers and strategic partners.

Millennial home buyers are also diverse. While only 9 percent of all homeowners are Hispanic, nearly 15 percent of the Millennials buying homes are Hispanic—reflecting the changing demographics of the American middle class.

Homeownership remains a vehicle for wealth in the U.S., but it can also be a financial burden, as families stretch their finances to afford the space they need, and large, dated homes owned by Baby Boomers and the Silent Generation demand maintenance and improvements.”

Morning Report: Inflation returns 10/18/16

Vital Statistics:

Last Change
S&P Futures 2137.5 15.0
Eurostoxx Index 342.3 5.0
Oil (WTI) 50.4 0.4
US dollar index 88.1 -0.2
10 Year Govt Bond Yield 1.78%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.54

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

It looks like the Fed has made some progress in getting inflation up to its goal of 2%. The Consumer Price Index came in at 0.3% MOM. Ex-food and energy it is up 2.2% on a YOY basis. The Fed doesn’t really look at CPI all that much – it prefers the Personal Consumption Expenditure Index – but it looks like we are moving further away from the deflation ledge that central bankers fear.

What drove the increase in the core index? Owner-equivalent rent, which is a proxy for real estate prices. It rose 0.4%, which is the highest reading since 2006.

What does increasing inflation mean for the mortgage business? Assuming higher inflation translates into wage inflation, you should see a pick-up in the purchase business as Millennials get jobs / raises. On the other hand, the refi business is going to take a hit.

One Texas builder is focusing on the entry-level homebuyer and using USDA loans to help make the sale. LGI Homes, based in Houston, is marketing to people in apartment complexes with flyers discussing the monthly payment they could have if they bought. These are largely properties in the exurbs around Dallas and Houston, where lower land acquisition costs translate into lower average selling prices. ASPs for LGI are below 200k, while ASPs for new homes in general is over $350k. LGI reports seeing the steadiest demand in entry-level.

Sentiment for the builders is high in general. The NAHB Housing Market Index fell 2 points in October, from its record in September.

High property taxes got you down? Here is something you can do about it.

Morning Report: Manufacturing disappoints 10/17/16

Vital Statistics:

Last Change
S&P Futures 2126.5 -0.5
Eurostoxx Index 338.0 -2.0
Oil (WTI) 40.4 0.0
US dollar index 88.3 -0.2
10 Year Govt Bond Yield 1.78%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.58

Stocks are lower this morning on overseas weakness. Bonds and MBS are down.

Manufacturing in the US rose slightly in September, but came in lower than expected. August’s numbers were revised downward. Industrial Production rose 0.1%, while manufacturing production rose 0.2%. Capacity Utilization rose to 75.4%. The strength in the dollar is probably driving the weakness.

Manufacturing dropped in New York last month, according to the Empire State Manufacturing Index. The index fell for the third month in a row.

The black swan event for the financial markets? A democratic party sweep in November. If so, buy infrastructure stocks, sell pharma and financials.

Meanwhile, turnout is looking to be low this year as voters dislike both candidates and are tuning out all the rhetoric.

Elizabeth Warren fired a shot across the bow of the SS Hillary, directing her to demote SEC Chair Mary Jo White. Her sin? Not going along with the left who wants more disclosure of political activities and donations for corporations. Of course this has absolutely nothing to do with investor protection: it is more about using the regulatory power of the SEC to silence opinions that she doesn’t approve of (mainly businesses that donate to the Chamber of Commerce or other groups that argue for lighter regulation or lower taxes).

%d bloggers like this: