Morning Report: Trade Detente?

Vital Statistics:

 

Last Change
S&P futures 2646.5 11.25
Eurostoxx index 355.63 4.9
Oil (WTI) 52.63 0.58
10 year government bond yield 2.77%
30 year fixed rate mortgage 4.48%

 

Stocks are up this morning on overseas strength. Bonds and MBS are down.

 

Stocks got a lift yesterday around 2:30 when the Wall Street Journal reported that the US was considering lifting tariffs on China in order to secure a trade deal. Stocks shot up on the news while the 10 year bond yield rose to 2.75%. We didn’t see much movement in MBS (FWIW, I don’t think I saw any reprices), but the weakness in bonds is continuing this morning. The Trump Administration did say that nothing has been decided and nothing is imminent. Treasury Secretary Steve Mnuchin is in favor of trade detente, while U.S. Trade Representative Robert Lighthizer is more hawkish.

 

Initial Jobless Claims fell to 213,000 last week as expected seasonal layoffs failed to materialize.

 

The new FHFA Director Mark Calabria has more of a libertarian bent than his predecessor, Mel Watt. For instance, he is skeptical of the whole originate to securitize model, which introduces more risk into the system in his view. He also doesn’t support the subsidies that make things like the 30 year fixed rate mortgage possible. For those that don’t know, the US residential real estate financing system is unique, with all sorts of subsidies to borrowers. 30 year fixed rate mortgages are unheard of overseas, with most mortgages being adjustable rate. Second, overseas banks “eat their own cooking” – in other words, they hold and service the loans they make. That is generally not the case in the US – most loans are securitized and sold to pension funds, sovereign wealth funds, etc. In other words, the borrower bears the interest rate risk and the bank bears the credit risk. In the US, the investor bears the interest rate risk while the taxpayer bears the credit risk.

 

Calabria comes in when the government / GSE system is pretty much the only game in town. Even Obama’s FHFA wanted to see the private sector take on a bigger role in mortgage finance, however the simple fact is that it hasn’t really stepped up yet. There are many reasons for this that I discussed here that are independent of policy levers. Given that reality, the chance that anything changes much in the mortgage space is pretty remote.

 

 

Morning Report: Luxury home prices falling

Vital Statistics:

 

Last Change
S&P futures 2605 -8
Eurostoxx index 349.68 -0.7
Oil (WTI) 51.56 -0.75
10 year government bond yield 2.72%
30 year fixed rate mortgage 4.48%

 

 

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

 

The NAHB Housing Market Index rebounded slightly in January, but it is still way lower than the index peak in December 2017. The recent drop in rates is helping, but affordability issues and input costs are still dogging the homebuilding industry. Lennar and KB Home still reported decent numbers, and we have yet to see builders having to offer large incentives to move inventory. The supply / demand imbalance is still solidly in favor of the builders, but affordability issues are contributing to a decline in foot traffic.

 

CoreLogic estimates that refinances will account for only 25% of all mortgage origination in 2019, the lowest in 25 years. Rate / Term refis will become even less important, as prepayment burnout has taken hold at these levels. The opportunities will be largest in cash-out, where homeowners can refinance high interest rate credit card debt, and in product swapping, where FHA borrowers with sufficient home equity will be able to refinance into a product with no MI.

 

refi share

 

The Fed’s Beige Book noted that growth is slowing, but is still decent. The language in the report changed from growth being “solid” or “strong” “moderate to modest.” Many companies noted that input prices are rising, but they are unable to pass those increases on to customers. While residential real estate is rising in price, commercial and industrial real estate is not.

 

More problems for real estate prices at the high end. Greenwich CT prices continue to fall, which is about luxury real estate prices as much as it is about the changing nature of the financial industry. Note however that prices have fallen 7.3% in San Jose. Apple is reducing hiring due to weaker than expected iPhone sales, and the fizz is pretty much out of the social media craze.

Morning Report: Bank earnings coming in

Vital Statistics:

 

Last Change
S&P futures 2609 2
Eurostoxx index 347.72 0.2
Oil (WTI) 51.15 0.64
10 year government bond yield 2.74%
30 year fixed rate mortgage 4.44%

 

Stocks are flattish as bank earnings continue to come in. Bonds and MBS are down.

 

Inflation at the wholesale level declined 0.2% MOM and rose 2.5% YOY. Ex-food and energy, it rose 0.1% MOM and 2.3% YOY. Rising food prices more than offset declines in energy. More and more strategists are thinking the Fed will stand pat: “We expect the Fed to sit tight until June, and odds are rising that it could be an even longer pause given the absence of an acceleration in inflation, past tightening in financial market conditions, slowing in the global economy and uncertainty surrounding geopolitical events,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

 

Mortgage applications jumped 13.5% last week as rates fell to the lowest levels in 9 months. Purchases rose 9% while refis rose 19%.

 

Last week United Wholesale announced that they were removing most LLPAs from their loans in order to guarantee the best rate. Yesterday cross state rival Quicken announced they would cut pricing as well to compete. We have a wholesale price war in Amityville.

 

Wells Fargo announced earnings that disappointed the street as revenues declined. Mortgage banking volumes were down 28% on a YOY basis. Despite a flattening yield curve, net interest margins were flat with Q3 at 2.94%.

 

JP Morgan reported a sequential drop in revenues as well, however earnings were up smartly. There is some tax cut noise in the numbers however. The mortgage business had a rough go of it as originations fell 30% to $17.4 billion.

 

Fitch sees a stable mortgage market in 2019, after a 9% decline in 2018. Good news: delinquencies and arrears continue to fall. Bad news: lack of affordability will depress origination.

 

Kansas City Fed Head Esther George thinks now would be a good time to pause in the normalization process. FWIW, she doesn’t think we are quite at “neutral” yet but we are close. Note that she is on the hawkish end of the spectrum.

Partial Shutdown – “unintended” security consequence (from WaPo)

Dozens of government websites have been rendered insecure or inactive.

Some NASA, Justice Department and other government agency websites were insecure or not working as of today because important security certificates had expired, according to a report from Internet security company Netcraft. With so many federal employees out, the agencies probably do not have the IT resources to renew the certificate.

Check out the link.

Morning Report: Jerome Powell stresses flexibility

Vital Statistics:

 

Last Change
S&P futures 2587.75 -6.75
Eurostoxx index 348.54 -0.31
Oil (WTI) 52.94 0.34
10 year government bond yield 2.72%
30 year fixed rate mortgage 4.48%

 

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

 

Initial Jobless Claims fell to 216,000 last week.

 

Jerome Powell stressed that the Fed has the flexibility to be patient in raising rates and will react to new data as appropriate. “Especially with inflation low and under control, we have the ability to be patient and watch patiently and carefully as we … figure out which of these two narratives [slowdown or inflation] is going to be the story of 2019,” Powell said at the Economic Club of Washington. Separately, St. Louis Fed President James Bullard said that the Fed had “reached the end of the road” in this tightening cycle.

 

The Fed Funds futures have retraced some of their December move and are now forecasting that the Fed will do nothing in 2019. In November, they were forecasting another hike in 2019, and then swung to forecasting a cut in December. They are now more or less agreeing with James Bullard that this tightening cycle is in the books.

 

fed funds futures

 

Bonds largely ignored the Fed Speak and stocks were more focused on punishing the mall based retailers and department stores, many of which had a difficult holiday shopping season.

 

Fannie Mae reported another drop in delinquencies, as the SDQ percent fell to .76% of their portfolio from .79% a month ago and 1.12% a year ago. The DQ rate for loans originated during the bubble years is 4.5%. The DQ rate for loans originated since is .33%.

 

It is looking more and more likely that Trump will declare a national emergency to allocate funds to the wall and to re-open the government. It will then be up to the courts to decide if such a move is legal, which opens up a new can of worms as the executive branch continues its decades-long path of power consolidation.

Morning Report: FOMC minutes and homebuilder earnings

Vital Statistics:

 

Last Change
S&P futures 2569 -13.5
Eurostoxx index 346.51 -1.2
Oil (WTI) 51.94 -0.24
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.48%

 

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

 

The FOMC minutes didn’t really contain much interesting information – the committee noted that financial conditions were tightening slightly and that the stock market was falling (we bottomed on Christmas Eve), but still decided unanimously to hike the Fed Funds rate 25 basis points. Despite fears in the market that the Fed has overshot, that possibility was not entertained by either the members or the staff. Incidentally, we will have a lot of Fed speakers throughout the day.

 

Homebuilder Lennar reported strong earnings for the fourth quarter, however it decided to hold off giving guidance on 2019 due to opaque market conditions. That said, new orders were up big, and margins were strong. Lennar is transitioning into a pure-play homebuilder and has been exiting businesses like asset management and real estate brokerage. This quarter should be the last with any CalAtlantic integration noise in the numbers. The Street was happy with the numbers, sending the stock up about 8%.

 

KB Home also reported numbers, although they saw a decrease in revenues, margins and a fall in average selling prices. KB is more of a turnaround story, however and the whole sector is so out of favor that it seems any non-disaster is taken as positive. KB was up 4% on its numbers.

 

Canary in the coal mine? No high-yield debt has been issued since November, according to DealLogic. This is the first December without junk issuance since 2008. This could have simply been due to the gyrations in the stock market, but this bears watching. Despite a spike at the end of 2018, credit spreads are still at historically normal levels, so it is too early to sound any alarms yet. The Fed noted tightening credit conditions in its FOMC minutes as well.

 

Donald Trump met with Democratic Congressional leaders yesterday on the subject of border security and the government shutdown. He characterized the meeting as a “waste of time” after being told there is basically no way Democrats will allocate funds for the wall. The government shutdown is almost 3 weeks old, and Federal workers are not getting paid. That said, unlike the Obama-era shutdowns, the Trump Administration is trying to make the shutdown as invisible as possible to the average citizen. The IRS is back issuing refunds and 4506-Ts, so for the most part there isn’t much of an effect on real estate with the exception of flood insurance. 75% of all realtors noticed no impact on buyers.

 

Michael Bright, who has been the interim president of Ginnie Mae for a year and a half, has resigned and will return to the private sector. 

 

The drop in interest rates means that another half a million borrowers (total of 43 million) will find it attractive to refinance, according to Black Knight Financial Services. This is up 29% from the bottom, but still down 50% from last year.

“As recently as last month, the size of the refinanceable population fell to a 10-year low as interest rates hit multi-year highs,” said Graboske. “Rates have since pulled back, with the 30-year fixed rate falling to 4.55 percent as of the end of December. As a result, some 550,000 homeowners with mortgages who would not benefit from refinancing have now seen their interest rate incentive to refinance return. Even so, at 2.43 million, the refinanceable population is still down nearly 50 percent from last year. Still, the increase does represent a 29 percent rise from that 10-year low, which may provide some solace to a refinance market still reeling from multiple quarters of historically low – and declining – volumes.

“In fact, through the third quarter of 2018, refinances made up just 36 percent of mortgage originations, an 18-year low. And of course, as refinances decline, the purchase share of the market rises correspondingly. So now, in the most purchase-dominant market we’ve seen this century, we need to ask whether the shift in originations will have any impact on mortgage performance. The short answer, based on historical trends, is that it certainly bears close watching.  Refinances have tended to perform significantly better than purchase mortgages in recent years. When we take a look back and apply today’s blend of originations to prior vintages, the impact becomes clear. A market blend matching today’s would have resulted in an increase in the number of non-current mortgages by anywhere from two percent in 2017 to more than a 30 percent rise in 2012, when refinances made up more than 70 percent of all lending. As today’s market shifts to a purchase-heavy blend of lending, Black Knight will continue to keep a close eye on the data for signs of how – or if – this impacts mortgage performance moving forward.”

Morning Report: FOMC minutes today

Vital Statistics:

 

Last Change
S&P futures 2577 4.5
Eurostoxx index 348.5 3.89
Oil (WTI) 50.86 1.06
10 year government bond yield 2.74%
30 year fixed rate mortgage 4.48%

 

Stocks are higher this morning as optimism for trade talks with China is offset by pessimism over the government shutdown. Bonds and MBS are down.

 

The minutes from the December FOMC meeting are scheduled to come out at 2:00 pm EST. Given the massive change in sentiment over the past month, they will be the most interesting in a while. Generally these are not market-moving events, but today could be an exception, especially since rates have dropped so much recently. I would be leaning towards higher rates as investors get a reality check about how strong the economy really is.

 

Job openings fell to 6.9 million in November, according to the JOLTS job openings report. The quits rate edged down to 2.3% from 2.4%, which is surprising given the bump in wages from Friday’s jobs report. Overall, it continues to show a strong labor market – there are almost 900k more open positions than there are unemployed people. There is a skills gap to be addressed, but the jump in the unemployment rate shows that the long – term unemployed are beginning to return to the labor force and look for a job.

 

The drop in rates is finally beginning to show up in mortgage applications. The MBA reported that applications increased 24% from the previous week. Refis rose 35%, and the refinance percentage of applications is the highest since February 2018. Purchases were up 17%. Rates fell anywhere from 9 to 20 basis points depending on the product. While there is some holiday noise in the numbers, they are also being depressed by the government shutdown.

 

Amerisave is buying the retail mortgage operations of TMS as they focus more on servicing and fintech than origination.

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