All Things in Moderation

Vital Statistics:

Markets are lower this morning on no real news. The Employment Cost Index increased .3% in the first quarter and Q412 was revised down. Wages and salaries increased .5% while benefit costs dropped .1%. No inflationary pressures in the labor market. Today starts the two day FOMC meeting. Bonds and MBS are up slightly.

The S&P / Corelogic / Case-Schiller index of home values came in at + 9.32% year over year and + 1.24% month-over-month. This was the biggest increase since May 2006. Of course the real estate market is pretty bifurcated, with annual growth in the high teens out West and mid-to-high single digit growth elsewhere. They note that housing is now becoming a driver of GDP growth, although the mix still is skewed towards apartments and not single family residences.

Chart:  Case-Schiller indices

Apple is doing a massive bond issue – 6 different issues, including a 30 year bond. The proceeds will be used to fund dividends and buybacks and will help Apple avoid repatriation taxes on the over $100 billion in funds it holds overseas. The 30 year bond is supposedly going to be priced at a 115 basis point spread to Treasuries. That would be around 4%. The 5 year paper will be issued at 1.2%. Those are positively Japanese yields. Grandpa, tell me again about the days when companies would issue debt with yields lower than their dividend yield.

PIMCO’s Mohammed El-Arian thinks that the tone of the FOMC meeting will shift from “when do we end QE?” to maintaining it and possibly increasing stimulus. That would certainly be MBS bullish, which could start another refi wave, although prepay burnout has got to be pretty big at this point. He does note the risks of the record amount of stimulus: “The benefits of the Fed come with costs and risks. What I worry about is when you run a system at artificial price levels, you start creating damage, resources are misallocated, too much risk is taken.”  Exhibit (A):  Apple is borrowing money for 30 years at 4% to fund a stock buyback. 

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Vital Statistics:

Markets are higher this morning after better-than-expected consumer spending data. Personal Income data was lower than expected. Bonds and MBS are up small

Personal Spending was projected to be flat, but actually rose .2%. The Bureau of Economic Analysis is claiming that it was primarily due to weather – a cooler than normal spring brought higher utility spending. Personal Income was forecast to rise .4%, and ended up at .2%. The PCE deflator showed inflation remains subdued.

Pending Home Sales increased 1.5% in March, according to the National Association of Realtors. Economists had forecast a 1% increase. Pending home sales are up 5.8% year-over-year.

Lender Processing Services reported that home prices increased 1% in February and rose 7.3% year-over-year. The West is experiencing the biggest gains, while the Northeast and Mid Atlantic continue to languish. This has been borne out by the earnings reports of the homebuilders as well – the ones primarily focused on California have knocked the cover off the ball, while those with an East-Coast / Midwest focus have reported gains, but nowhere near what the West Coast builders are reporting.

Lots of data this week, but the big driver will be the FOMC meeting. We will get the rate announcement on Wed. Investors will be looking for information concerning the end of QE. We will get the jobs report on Friday, which will have the biggest potential to move interest rates.

Lots of homebuilders reported earnings last week – pretty much everyone except NVR beat estimates. Anyone with exposure to the West Coast did well and backlog is up nicely at all of the builders. We will hear from Standard Pacific and Beazer Homes this week. The Homebuilder ETF (XHB) is on a tear and sitting right at resistance.

 U.S. News and World Report has a good piece on the state of the first time homebuyer.

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Markets are slightly weaker after Q1 GDP came in weaker than expected. D.R. Horton reported better than expected earnings. Bonds and MBS are stronger

Q1 GDP came in at + 2.5%. lower than the 3% estimate. This is the advance estimate – Q1 GDP will be revised twice in the next two months. Consumer spending increased at 3.2% and the savings rate declined. The back-to-back drop in defense spending was the biggest since 1954. Real disposable incomes fell 5.3% in Q1 on increased taxes. C = 3.2%, I = 3%, G = -4.1%. 

The Senate voted to end sequestration-related furloughs for air traffic controllers and the measure will be sent to the House today. President Obama has said he will consider whatever is sent to him. 

CoreLogic has acquired Case-Schiller.

The CFPB has proposed amendments to the QM rule.  The proposals are here.

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Vital Statistics:

Markets are higher after earnings continue to look decent. Initial Jobless Claims fell, although the data tends to be volatile this time of year. Bonds and MBS are down

Yesterday, the House Financial Services Committee held a hearing on the private label securitization market. Generally speaking the theme centered around regulatory certainty, and that until QRM issues get resolved, the private label market will still be a trickle. Everyone agreed that Fannie and Fred will remain doing what they do for quite some time. Interestingly, Ranking Member Maxine Waters expressed concern about the effects principal mods will have on investors – I wonder if CALPERs and PIMCO had a word with her. If Maxine Waters isn’t onboard with principal mods, maybe the whole push is losing momentum. Fun fact that came out of the hearing:  The U.S. government currently bears 50% of the credit risk of the entire mortgage market.

We have had quite a few homebuilders report over the past week, and it is generally a tale of two geographies. The builders that are in the West Coast markets have done great (KBH, MTH, RYL), while the ones with more East Coast exposure (NVR, PHM) are doing better, but nowhere near the others. NVR actually missed estimates and the stock was clobbered for 6% at one point, but it has clawed back its losses with the general strength in the market. Pulte reported this morning and is looking down a quarter. Ryland, which focuses on the first time homebuyer and the second-time move up buyer reported great numbers. Perhaps the long-awaited return of the first-time homebuyer is finally here.

The connection between the first time homebuyer and household formation is something that I have been harping on for a while. CoreLogic talks about it in its latest Market Pulse. Household formation numbers have been depressed ever since 2006, and that has given the illusion that the homebuilders have been building enough starter homes. The problem is that the drop in household formation wasn’t due to demographics – it was due to a lousy economy. If a normal run rate is 1 million new households per year, and we average around 600 for five years, that means we have roughly 2 million new households in pent-up demand, along with the normal demand. Of course as the economy improves, many of these households will become renters first, and not first-time homebuyers. But what sort of housing start number will we see in the future to accommodate this demand? Remember, 1.5 million starts is “normalcy.” Certainly not the 1 million print we saw last week. Probably closer to 2 million. Think about the homebuilding stocks on double the activity…

Chart Household Formation:

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Vital Statistics:

Markets are flat this morning after a slew of earnings releases. Apple reported a mixed bag last night, with better than expected earnings, but a disappointing Q2 forecast. They are increasing their buyback, which is raising concerns about future growth. Ford reported better than expected earnings as well. We will hear from Ryland and Meritage Homes today. MBA mortgage applications rose .2% last week, while durable goods orders fell. It appears most of the drop in durable goods was defense-related, so you probably shouldn’t read too much into it. Bonds and MBS are down small.

New Home Sales rose to 417,000 units in March, which was up 1.5% from February. We are seeing a pickup in activity in the Northeast and the South. The inventory of new homes for sale was 4.4 months, while the median price was 247,000, and the average price was 279,000. Average prices actually dropped on a year-over-year basis, which means luxury building must be decreasing.

Lender Processing Services released their February Mortgage Monitor yesterday, showing delinquencies and foreclosures continue to fall. DQ + FC fell to 10.18% from a peak of 14.82% in Jan 2010. This is still well above normalcy, which is a DQ+FC percent in the 5% range. Mods are starting to pick up havter having declined for 6 consecutive quarters.

PennyMac reported earnings yesterday. Seem to be growing in all 3 business lines: origination, servicing, and distressed MBS.  Some of the highlights:

• PMT reported earnings of .90, better than expectations of .76
• Correspondent loan purchase volume $8.5B, down 15% from Q4
•  Lock volume $8.1B, down 22% from Q4
• MSR portfolio up 36% to $17B UPB
•  Strong demand for reperforming loans
• Correspondent margins decreasing but still above historical norms
• Correspondent will increase as a share of origination market
• Anticipating increase in refi activity as LTVs decrease
• Re-launched prime jumbo program, did over $100M in locks in Q1
• Targeting Q313 for first jumbo private label securitization transaction

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Vital Statistics:

Markets are stronger this morning after weak European economic data raised the possibility of further easing. Apple will report after the close. The Markit US Flash PMI came in light. Bonds and MBS are up.

FHFA reported that home prices increased .7% MOM in February. Year-over-year, prices rose 7.1%. The FHFA index reports sales of homes with mortgages owned by Fannie Mae or Freddie Mac, so it is more of a “central tendency” index. It doesn’t include cash sales in places like Phoenix or San Francisco which is skewing some of the other indices. Prices are back to October 2004 levels

Chart:  FHFA Home Price Index.

NVR reported disappointing earnings yesterday. The Reston VA-based homebuilder / mortgage originator reported sales increased by 28% and origination increased by 13%. The EPS and revenue numbers were light, however and the stock sold off. NVR is primarily East Coast based, which explains the difference between its results and KB Home’s which showed a 60% increase in revenues.

Flights are being delayed across the country due to furloughs of air traffic controllers. This is President Obama’s last and best chance to show the country that the sequestration cuts will hurt. His most recent budget will raise taxes on pretty much everyone, although it will mainly hit those who make $200,000 or more. It also includes AMT II, aka the Buffet Rule. 

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Vital Statistics:

Markets are higher this morning after good earnings from Halliburton and a miss by Caterpillar. CAT’s miss was mainly due to a mining slowdown. Bonds and MBS are down small.

Earnings season really begins in earnest this week with heavyweights like Apple and Google reporting. On the real estate front, we will get NVR today, Pennymac tomorrow, ARM Agency REITS Capstead and Hatteras on Wed, Pulte on Thursday and D.R. Horton on Friday. It will be interesting to see what the pipeline looks like for the homebuilders, as the housing starts number last week indicated single family residences were falling while multi-fam was rising. 

The week ahead is relatively data-light, although we have the FHFA House Price Index on Tuesday. The FHFA House Price index covers homes with conforming mortgages, so it tends to be more of a central tendency index which strips out the noise of distressed sales / cash-only buyers, and the valuation extremes. CA prices supposedly rose 8.3% in March, supposedly. And no, that number is not annualized. On Friday, we will get the first estimate of Q1 GDP. The street is forecasting a 3.1% rise after a weak Q4.

Americans are starting to pick up on the increase in real estate prices, as 51% think that prices will increase and 34% predict prices will stay the same. The West is the most bullish, and the Midwest is the least. About 1/3 of the respondents are underwater.

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 Vital Statistics:

Markets are weaker this morning after some disappointing economic data. Initial Jobless Claims camea at 352k, slightly higher than expectations and the prior week was revised upward. Philly Fed and Leading Economic Indicators were also disappointing.  Bond and MBS are up.

Freddie Mac released their April Economic and Housing Outlook yesterday which does a decent job of going over the latest and greatest economic statistics. They are predicting that GDP will come in at +3% for Q1, dip to +1.3% for Q2 and then rebound into the mid 2s for the final half of the year. For 2013, they are predicting growth above 3%. They believe that construction employment will drive the recovery. Of the 5.5 million jobs lost since bust, 2.2 million (or 40%) were in construction. Since then we have added only 330k construction jobs. If you count the half a million jobs lost in financial services, real-estate related jobs accounted for 50% of the jobs lost in the Great Recession.

The Fed’s Beige Book survey contains the words “moderate” and “modest” a lot. The Cleveland, Richmond, St. Louis, Minneapolis, and Kansas City districts were growing at a “moderate” pace, while Boston, Philadelphia, Atlanta, Chicago, and San Francisco noted “modest” growth. Increases in auto and residential construction were offset by cuts in defense-related weakness. The labor markets were generally unchanged, although the Fed noted wage pressures in IT, construction, and engineering.

Minneapolis Fed Head Kocherlakota says that low interest rates will probably generate signs of financial instability, but it is a necessary evil. He noted that QE has helped the housing market and said it would be nice if they could do even more along those lines.

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Stocks are declining again as Bank of America stunk up the joint with an earnings miss. MBA mortgage applications increased Commodities are still coming in. Bonds and MBS are up

Bank of America’s miss was largely due to lower mortgage banking income and declining gains on the sale of debt securities. They funded $25 billion in mortgages and home equity loans in Q1, up 11% from Q4 and up 56% from a year ago. In spite of the increase in loans originated, margins fell such that core production revenue was $815 million, down from $928 million a year earlier. Delinquencies fell. Headcount fell by 4,378 during the quarter. Separately, they agreed to a $500 million settlement to end a class action lawsuit over Countrywide MBS.

Is the economy headed for a spring swoon? Indicators are starting to point down, and earnings season has not been the blockbuster that the street was expecting. Another year of “sell in May and go away?”

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