Morning Report: Average home sizes falling again 2/21/17

Vital Statistics:

Last Change
S&P Futures 2352.8 4.8
Eurostoxx Index 372.3 1.3
Oil (WTI) 54.5 1.1
US dollar index 91.4 0.4
10 Year Govt Bond Yield 2.45%
Current Coupon Fannie Mae TBA 102.045
Current Coupon Ginnie Mae TBA 103.17
30 Year Fixed Rate Mortgage 4.14

Stocks are up as the markets have a risk-on feel to them. Bonds and MBS are down small.

Not much in economic data, but we will have Fed-speak all day, with Kashkari, Harker, and Williams speaking.

The highlight of the week should be the FOMC minutes coming out tomorrow. Other than that, we get existing home sales, new home sales and the FHFA House Price Index.

The initial look at February manufacturing indicates a slight decline as the flash PMI falls from 55.5 to 54.3. Services came in at 53.9.

Goldman is tempering their enthusiasm for the S&P 500, warning that investors are overly optimistic. They predict the stock market will go nowhere for the rest of the year. Their concerns are that the good earnings from Q4 won’t continue, and any sort of fiscal stimulus out of Washington will take time to be felt.

Despite TRID’s best efforts, about 17% of consumers end up being surprised by the existence of closing costs when getting a mortgage. The surprises run the gamut of points, up front MI and taxes.

Speaking of taxes, here are some tax tips from NAR.

House Financial Services Committee Chairman Bill Huizenga (R-MI) has introduced a bill to clarify the definition of points and fees under the CFPB QM rule by excluding title charges and escrowed T&I.

We are starting to see average new home sizes decline, which is a function of the emerging first time homebuyer and the market for starter homes. After the real estate bust, the only segment of the new home market that was working was the ultra-luxury end, which meant that average home sizes increased. From 2009 to 2015, it looks like average square footage increased by close to 400 square feet. Now, as more and more starter homes and townhouses are being built, we are seeing average size decline again. Strange to think that the luxury end is the only part that works in the aftermath of a bust, but there you go.

One often overlooked advantage to buying versus renting: The fact that making your mortgage payment every month amounts to a savings plan as you pay down your principal on your loan.

The Despot reported better than expected earnings this morning as more and more people do work on their homes. Comps were up 6.3%.

Morning Report: Housing affordability returns to pre-crisis levels 2/17/17

Vital Statistics:

Last Change
S&P Futures 2338.5 -7.0
Eurostoxx Index 368.5 -1.6
Oil (WTI) 53.1 -0.3
US dollar index 910.9 0.1
10 Year Govt Bond Yield 2.41%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.11

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

The index of leading economic indicators rose 0.6%, stronger than expected.

Household debt increased in the fourth quarter, as growth in non-mortgage debt outpaced growth in mortgage debt. The 4th quarter saw $617 billion in newly originated mortgages, the highest level since Q32007. Auto loans and student loans saw an uptick in 90 day delinquencies, while credit cards and mortgages saw an improvement. Remember, this is only the debt side of the equation – both incomes and asset prices (especially housing) are higher than they were in 2007.

Housing affordability remains about in line with pre-crisis levels, according to the NAHB. As of the end of the year, approximately 59.9% of all homes were affordable to a borrower with the median income. You can see the big swing in affordability between the boom and bust years. Tight inventory is being offset by (still) low mortgage rates. California remains the biggest issue regarding affordability. In the San Francisco MSA, just 7.8% of the homes sold were affordable to people earning the median income of $104,700.

The median home price increased 7% in January to $261,100, according to Redfin. Home sales were up 5.6% compared to January 2016, which shows that the uptick in rates hasn’t affected the purchase market. Inventory is down 12% YOY, and listings have dropped 5.1%. 18% of homes sold above list price, and the average sales to list ratio was 93.7%. Days on market fell 7 days YOY to 59.

Despite all the missteps of the initial days of the Trump administration, stocks are partying like it is 1999. This certainly has the political class (and the business press) scratching their heads. First, while the first 100 days of the Official U.S. Airing of The Grievances may seem dramatic, it doesn’t mean much for business (except for some consumer product companies and retailers who suffer from ideologically-driven boycotts). Second, for all the talk in the business press of “uncertainty,” investors are sensing (correctly, I think) that gridlock is going to rule the day in DC. Nothing is more “certain” than gridlock, and if regulations get eased a bit, that is good for business. Gridlock also means the Fed has some room to go slower. At the end of the day, earnings drive the stock market, not the histrionics in Washington and the media.

Morning Report: Markets predicting a higher chance of a March hike 2/16/17

Vital Statistics:

Last Change
S&P Futures 2345.5 -5.0
Eurostoxx Index 370.4 -1.1
Oil (WTI) 53.4 0.3
US dollar index 91.0 -0.2
10 Year Govt Bond Yield 2.49%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.11

Stocks are taking a breather after several record highs. Bonds and MBS are flat.

Housing starts came in at 1.246 million in January, a little better than expected. Starts are up 4.6% MOM and 8.2% YOY. Single family increased, while multi-family fell. Building Permits came in at 1.285 million. We are still way below historical averages in housing starts, which is even more apparent when you adjust for population. This is why inventory is so tight right now. While the aging of the baby boom and the bubble explain some of the weakness, the Millennials are a bigger generation than their parents. If the reason for a lack of construction is credit related, we could see an improvement as there is bipartisan consensus that Dodd-Frank put too big of a regulatory burden on the smaller community banks, and they are the ones who finance the smaller builders.

Housing starts:


And housing starts adjusted for population growth:


Separately, house flippers are relying more and more on crowd-funding as opposed to hard money loans.

Initial Jobless Claims came in at 239k, which is one of the strongest prints since the early 1970s. Separately, consumer comfort improved last week.

Speaking of strong indicators, the Philly Fed index hit the highest number since 1983. While improved sentiment drove some of the increase, new orders (which is a tangible number) also hit a record. Employment indicators rose, with companies increasing the number of workers, and the number of hours. While these regional Fed reports aren’t really big market-moving indicators, you can’t ignore what they are saying either.

After Yellen’s testimony and yesterday’s stronger-than-expected CPI numbers, the Fed funds futures market increased their implied probability of a March rate hike to 42% from 30%.

Fed Vice Chair Stanley Fischer says that inflation and employment are improving, and monetary policy remains accomodative. He expects “to be moving closer to the 2-percent inflation rate and that the labor market would continue to strengthen. If those two things happen we’ll be on the (policy) path that we more or less expected.” So, staying with either 2 or 3 hikes this year.

Despite the increase in rates, refis accounted for 47% of loans in January, which is pretty much where it has been since October. FHA and VA both increased. Time to close ticked up a day to 51. The average FICO score dropped by 4 points to 722.

Fortress Investment, a majority shareholder of Nationstar, was bought by Japan’s Softbank yesterday. Masayoshi Son is interested in building a US financial services business. Fortress’s distressed mortgage portfolio did reasonably well, but their macro hedge funds have underperformed, and the stock has been dead money for years. What this means for Nationstar is anyone’s guess.

Morning Report: Janet Yellen spooks the bond market 2/15/17

Vital Statistics:

Last Change
S&P Futures 2334.8 -2.3
Eurostoxx Index 371.3 1.1
Oil (WTI) 53.1 -0.1
US dollar index 91.4 0.1
10 Year Govt Bond Yield 2.50%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.11

Markets are flat this morning as Janet Yellen continues to speak. Bonds and MBS are down.

Mortgage Applications fell 3.7% last week as purchases fell 5% and refis fell 3%. The average conforming rate fell 3 basis points, which makes this a surprise, but it could just be the vagaries of the slow season, which is pretty much over.

The consumer price index rose more than expected, increasing 0.6% month-over month and 2.5% year-over-year. The core rate, which excludes food and energy rose 0.3% MOM and is up 2.3% YOY. Both numbers are above the Fed’s 2% inflation target, which is why bonds are selling off further this morning. Higher motor vehicle prices drove the increase, which is the highest reading in 4 years. Note that yesterday’s PPI number (which typically leads CPI) showed very little inflation. While the Fed focuses on the Personal Consumption Expenditure index as its preferred method of measuring inflation, wage inflation is what matters. Until you see wage inflation, commodity push inflation will generally be self-correcting.

Retail sales came in better than expected, rising 0.4% month-over-month. Excluding autos and gas, they rose 0.7%.

In manufacturing data, the Empire State Manufacturing Survey increased to 18.7. Industrial production fell 0.3% however, while manufacturing production rose 0.2%. Capacity Utilization fell to 75.3%. Low capacity utilization rates are generally non-inflationary. Business inventories rose 0.4%, and the inventory to sales ratio fell from 1.38 to 1.35. A high inventory to sales ratio is generally bearish for the economy as it portends a slowdown in manufacturing while business works off excess inventory. The ratio is still elevated, but below last year’s levels.

The post-election bump in builder confidence was given back last month as higher rates discouraged traffic. The index dropped from 68 to 65, which is still a strong reading.

Janet Yellen testified in front of Congress yesterday, beginning her two-day Humphrey-Hawkins testimony. Here are her prepared remarks. Bonds sold off during the testimony, apparently because of this statement: “As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.” Seems to be a pretty benign (and obvious) statement, but there you go. The 10 year added 5 bps in yield but recovered some of those losses later in the day. There was also mention of ending the program of re-investing maturing MBS proceeds back into the market, but that is probably something we won’t see until next year. The effect of that on the MBS market is going to be a function of current rates and the average coupon of the portfolio.

Morning Report: Janet Yellen heads to the Hill 2/14/17

Vital Statistics:

Last Change
S&P Futures 2327.0 0.8
Eurostoxx Index 369.9 -0.2
Oil (WTI) 53.2 0.3
US dollar index 91.0 -0.2
10 Year Govt Bond Yield 2.43%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.06

Stocks are flat this morning after the producer price index comes in a little hotter than expected. Bonds and MBS are flat.

As expected, Steve Mnuchin was confirmed by the Senate to be the new Treasury Secretary.

The Producer Price Index (which measures inflation at the wholesale level) came in at 0.6% in January, higher than the 0.3% consensus estimate. On a year-over-year basis, it is up 1.6%. The core rate, which strips out the volatile energy and food components, was up 0.2% and is up 1.6% YOY. Inflation remains under control, and won’t really accelerate until we see wage growth.

Despite the early missteps of the Trump administration, small business remains optimistic about the future, according to the NFIB. Small business added on average .15 workers in January, the highest reading in two years, and historically a very high number. 53% reported trying to hire workers and 47% were unable to find qualified candidates.

Janet Yellen begins her two-day Humphrey-Hawkins testimony to Congress. There probably won’t be much in the way of market-moving headlines, as I suspect the focus will be on deregulation and changes to Dodd-Frank. Any references to monetary policy should pretty much echo the Feb 1 FOMC statement.

PIMCO is warning investors to be prepared if the Fed makes a mistake by tightening too fast. Historically central banks have moved a little too quickly trying to bring back rates from the zero bound (or close to it). In fact, the Bank of Japan has tried twice since their 1989 crash to get off the zero bound and has had to reverse course each time. The markets are currently forecasting a 30% chance of a Fed hike at their March meeting. The risk isn’t so much that the current board of governors will move to fast – it is that Trump nominates hawks. That said, no politician likes a hawkish central bank except on the campaign trail, so that fear could be overblown.

Richmond Federal Reserve Bank President Jeffrey Lacker (nonvoting) said the markets are underestimating the pace of Fed rate hikes this year. “”Rates need to rise more briskly than markets now seem to expect. The elevated uncertainty now surrounding fiscal policy, particularly the potential for substantial fiscal stimulus, suggests that our next increase should come sooner rather than later in order to reduce the risks associated with having to raise rates more rapidly later on.” The way things are looking in DC, it seems pretty unlikely we are going to see any sort of cooperation on anything, least of all a tax cut.

It bears repeating that interest rate cycles are long. Coming out of the Great Depression, long term Treasury rates stayed below 3% from 1934 to 1956. Below is a chart going back almost 100 years. Long term rates are pretty much around the levels we saw in the 1940s. Note the uptick in interest rates around 1932. That was the Fed tightening that pushed the economy over the edge during the Great Depression. The Fed didn’t make the same mistake this time around, which is probably the biggest reason why the Great Recession didn’t become the Great Depression II. Ironically, it took Ben Bernanke to officially admit that the Fed screwed up in the 30s.


Completed foreclosures fell 40% year-over-year in December to 21,000. The foreclosure inventory is down 30%. The seriously delinquent rate is 2,6%, which is the lowest since June 2007. Foreclosures remain concentrated in the judicial states of NY and NJ. The rest of the country has pretty much worked through their foreclosure inventory.

Real estate agents are optimistic for 2017, according to NAR. Changes in the FHA rules for condos is helping.

Regulators put the kibosh on a strategy by JP Morgan and Redwood to help ease the path for private label securitizations. The idea was for JP Morgan to create a junior structure which contained the riskiest mortgages, sell off that piece to Redwood, and to retain the senior tranches. The hope was that this would reduce the amount of capital JPM would be required to keep against the mortgages. The OCC rejected the deal.

Morning Report: Janet Yellen heads to Capitol Hill this week 2/13/17

Vital Statistics:

Last Change
S&P Futures 2318.0 5.3
Eurostoxx Index 369.8 2.4
Oil (WTI) 53.4 -0.4
US dollar index 91.1 0.2
10 Year Govt Bond Yield 2.44%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.06

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

No economic data this morning, but we will get some inflation data this week with the consumer price index and the producer price index. Janet Yellen also delivers her 2 day Humphrey-Hawkins testimony on the Hill on Tuesday and Wednesday. My hunch is that monetary policy will take a backseat to banking regulation as the main subject of questioning. Note that top Fed banking regulator Daniel Tarullo has announced his resignation. Tarullo was viewed as a tough regulator (and was disliked by the industry for opacity and for changing the rules in the middle of the game. GE executive and former deputy to Hank Paulson David Nason is the front-runner to replace Tarullo.

Donald Trump will get to fill 3 Federal Reserve Board governorships (maybe 4 as Lael Brainard is rumored to be resigning as well). It is unlikely that he will go with nominees in the mold of Janet Yellen and will choose business leaders instead of academics to fill those seats. While Trump criticized the Fed on the campaign trail as keeping rates too low for too long, there isn’t a politician on the planet that likes a hawkish Fed. In fact, if Trump is successful in making big fiscal changes to the fiscal situation in DC, then he may prefer to have a more dovish Fed to keep rates low.

Foreign investors are dumping Treasuries, although this has been going on for almost a year, so it is hard to characterize it as Trump-related. Foreign selling has been absorbed by US domestic money managers, which has lowered the impact. Ultimately, the Fed is probably driving it: While the Fed sees the light at the end of the tunnel for QE and extraordinary stimulus, the ECB and the Bank of Japan are still in the middle of it. While the US has some of the highest yields in the world, it is at the biggest risk of a big bond market sell-off. The cost to foreign investors in hedging the US currency is also extremely high. For example, a Japanese money manager isn’t getting 2.44% when they buy a Treasury. It turns out to be around 90 basis points when you add in hedging costs.

Treasury Secretary nominee Steve Mnuchin looks like he will get past the Senate today.

The Washington Post has a good run-down on potential changes to Dodd-Frank. Overall, the reforms center on the Volcker Rule, the CFPB, and small banks. The paper obtained a memo from Jeb Hensarling which discussed some of the reforms. The biggest component is the financial CHOICE act, which allows banks an exemption from some of the Dodd-Frank restrictions (think prop trading) if they raise more capital. The CFPB would continue to be run by a single director who could be fired at will by the President. It will also have some restrictions on rule-making and enforcement, making it look more like the Federal Trade Commission. The CHOICE act probably has enough votes to clear the House, but getting it through the Senate will be a challenge.

Professional economists are still scratching their heads over the lack of wage growth in the economy. If we are truly at full employment, the laws of supply and demand say that wages should be increasing. This is the biggest driver for the Fed, so getting it right is important. If the Fed tightens in expectation of wage inflation that was never going to arrive in the first place, they could choke off the recovery. The Bank of Japan made the same mistake twice since 2000. My sense is that the term “full employment”is a misnomer. Yes, we are at full employment according to the Bureau of Labor Statistics, but that is because we no longer count the unemployed once they hit 6 months without a job. They are still unemployed, however and that shadow inventory of workers colors the mindset of both workers and employers.

There is some concern about Ben Carson as the leader of HUD, and what he intends to do with respect to affordable housing. Carson doesn’t have a large body of work discussing housing policy, however he has made some contradictory statements, referring once to efforts by HUD to change local zoning laws as “social engineering” yet mentioning local regulatory impediments to housing affordability in his testimony to Congress. What these regulatory impediments are is anyone’s guess. They could be zoning restrictions, environmental restrictions, or even things like open space requirements. Obama’s HUD was very aggressive in suing localities to change their zoning laws, and we will have to see if that continues. Overall, the Federal government doesn’t have a lot of influence over local zoning rules. and has gotten nowhere in ultra-blue Westchester County NY, even with the the carrot of Federal housing money and the stick of lawsuits.

Morning Report: The Trump reflation trade is back 2/10/17

Vital Statistics:

Last Change
S&P Futures 2307.0 2.8
Eurostoxx Index 366.8 0.0
Oil (WTI) 53.9 0.9
US dollar index 91.2 -0.1
10 Year Govt Bond Yield 2.42%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.06

Stocks are following through on yesterday’s strength. Bonds and MBS are down small.

President Trump made some comments about corporate tax reform which brought back the Trump reflation trade, at least for a day or two. While everyone agrees we need corporate tax reform, in practice it is going to be a lot harder than it looks, simply because almost everyone has some sort of tax break they don’t want to give up. An undertaking this big will also need some things to bring Democrats onboard, so it will probably be watered down. Initial price talk is a corporate tax rate of 20%, with an exemption on overseas earnings, and some sort of border adjustment tax. As you can imagine, some industries will love this new arrangement, while others will hate it.

Import prices rose 0.4% last month and are up 3,7% YOY. Ex petroleum, they are down small. We will be getting more inflation data next week with the consumer price index and the producer price index.

Consumer sentiment slipped in the preliminary reading for February. It came in at 95.7 after a January reading of 98.5. The drop was almost 100% in the future expectations index, as the current conditions index was more or less flat. Perceptions of Donald Trump and his effect on the economy was pretty much split: 30% favorable, 29% unfavorable.

A top Fannie Mae official (Brian Brooks) is reportedly being considered to replace Richard Cordray as Director of the CFPB. Another possibility is Todd Zywicki, an economist with the Mercatus Center. Discussions are preliminary as the future of the CFPB remains up in the air.

The Mortgage Bankers Association plans to lobby Congress to turn the GSEs into private utilities and allow new entrants to compete on the same terms, meaning their securitizations will have a government backstop as well. Partisan politics will be an issue, as Republicans want to government backstop to become smaller, and Democrats worry about the social mission of the GSEs falling by the wayside.

The Spring Selling season is more or less beginning now, and tight inventory remains the biggest issue. A second problem is mismatched markets, where there is a disconnect  between what buyers want and what is available for sale. Affordable starter homes are the biggest problem, as builders have focused on the luxury end of the market since 2008. Luxury was the only segment that worked for builders post-crisis, but 10 years on, the boomers that bought McMansions are looking to downsize, and the Millennials are beginning to start families.

Millennial women are more likely to use FHA loans than men. Not sure why – it could be any number or reasons: income, education, lenders highlighting them more. Worth watching, however. has some good advice for the first time homebuyer. Hint: you don’t need 20% down.

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