Morning Report – Fannie and Fred will continue for a while 1/31/14

Vital Statistics:

Last Change Percent
S&P Futures 1761.9 -19.3 -1.08%
Eurostoxx Index 2974.7 -52.6 -1.74%
Oil (WTI) 97.39 -0.8 -0.86%
LIBOR 0.237 -0.001 -0.42%
US Dollar Index (DXY) 81.23 0.140 0.17%
10 Year Govt Bond Yield 2.65% -0.04%
Current Coupon Ginnie Mae TBA 106 0.1
Current Coupon Fannie Mae TBA 104.7 0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.31
They’re beating the tape with the ugly stick as emerging markets continue to get clobbered. Bonds and MBS are rallying, with the 10 year trading at 2.65%.
We had some mixed earnings reports, with good news out of Google, a miss out of Mastercard, and a warning from Wal Mart.
Personal income came in flat in December (versus a .2% forecast), while personal spending rose .4%. The savings rate dipped to 3.9%. As I have said before – this is how recessions end. Spending increases and then wages increase. The PCE deflator came in in at 1.1%, showing inflation remains a non-problem.
Squabbling among Senate Democrats probably means that nothing will get done about the GSEs this year. Left wing Democrats like Elizabeth Warren and Sherrod Brown will refuse to back any plan to re-organize the GSEs unless it guarantees affordable loans for most buyers. This means they want whatever entity that replaces Fannie and Fred to be more than simply a re-insurer of privately insured mortgages – they want to continue the social engineering role of the GSEs. Not all Democrats are onboard with this idea, let alone Republicans who rightly view government activism as a contributor to the housing bubble. The left would be more than happy to continue the status quo, with Mel Watt (a CRA guy) running the show.

Does Being Rich Make You Mean?

Playing Monopoly reveals the truth! Being wealthy makes you self-entitled, rude, and uncharitable!

Poor people are just nicer. But then, maybe that’s why their poor.

I feel skeptical. Not necessarily that all the data is wrong or cooked or perhaps not revelatory, and the tendency of human beings to attribute clearly “rigged” advantages in a situation to their own virtue or hard work is an objective truth (most of us, I suspect, have seen it all our lives).

But I just get the sense that the guy doing the presentation already has settled on his desired conclusions, and perhaps things are more complicated than the talk displays. For example, could it be that people who obtain wealth without work are ruder and less charitable, but those that work hard and are well-rewarded for their hard work are nicer and more charitable than your average non-wealthy person.

People in more expensive cars are more prone to break traffic laws or threaten pedestrians? I have a hard time believing that’s much more than coincidence.

Speaking of mean wealthy people . . . are gay people mean? They must be, if gay people are all rich!

Freakonomics takes on the myth of homosexuality = wealthy. Well, at least for gay men.

Morning Report – 4Q GDP comes in at 3.2% 1/30/14

Vital Statistics:

Last Change Percent
S&P Futures 1780.7 9.5 0.54%
Eurostoxx Index 3010.3 -1.2 -0.04%
Oil (WTI) 97.75 0.4 0.40%
LIBOR 0.238 0.002 0.85%
US Dollar Index (DXY) 80.96 0.456 0.57%
10 Year Govt Bond Yield 2.71% 0.04%
Current Coupon Ginnie Mae TBA 105.8 -0.1
Current Coupon Fannie Mae TBA 104.4 -0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.31
Markets are higher this morning after 4Q GDP came in at +3.2%, as forecast by the Street. Facebook is up big on good earnings. Bonds and MBS are still digesting the FOMC meeting and are lower
The advance estimate of fourth quarter GDP came in at +3.2%. Consumption rose 3.3%, which was below the 3.7% estimate. The Commerce Department estimates that the shutdown took .3% off of the number. Finally, the inventory build that drove the large (4.1%) third quarter number wasn’t reversed in this reading.
The FOMC decided to reduce asset purchases by another $10 billion per month yesterday, which markets took in stride. The decision was unanimous, the first one the Bernank has had since 2011. Janet Yellen now takes the reins with more hawkish Committee. The Fed’s balance sheet will continue to grow, just slower than it did last month. The Fed’s balance sheet just passed 4 trillion (it was under 1 pre-crisis)

Pulte reported fourth quarter earnings, which beat expectations. Revenues were in line, but EPS beat by 12 cents. Gross margins expanded as the company raised prices – average selling prices jumped 13% to $325,000, while unit volume dropped by 4%. Orders are down 18%. The stock is up a buck (around 5%) pre-open.
December Pending Home Sales dropped dramatically (down 6.1% year-over-year and 8.7% month-over-month). The Street was forecasting a drop of .3%, so this was a big miss. November was revised down as well. This would comport with the big drop in mortgage applications we have seen.

Morning Report – What to watch for with the FOMC 1/29/14

Vital Statistics:

S&P Futures 1775.5 -18.0 -1.02%
Eurostoxx Index 3010.7 -27.9 -0.92%
Oil (WTI) 96.97 -0.4 -0.45%
LIBOR 0.236 -0.001 -0.21%
US Dollar Index (DXY) 80.71 0.137 0.17%
10 Year Govt Bond Yield 2.72% -0.03%
Current Coupon Ginnie Mae TBA 105.8 0.2
Current Coupon Fannie Mae TBA 104.5 0.3
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.33
Markets are getting slammed this morning on weakness in Europe and emerging markets currencies. Bonds are rallying on the risk-off trade. We should hear from the Fed at 2:00.
The Street is predicting that the Fed will decrease asset purchases by 10 billion a month, equally split between MBS and Treasuries. I would be surprised if they mention the turmoil in emerging markets, and it probably won’t affect their thinking regarding QE unless credit begins to tighten. I don’t think anyone expected the Fed to stick the landing with regard to extricating themselves from the asset markets, so sell-offs like these should be expected.
The WSJ has a good write-up on what to look for in the statement today. It also looks at the new voting members that will accompany Janet Yellen. If anything the Federal Reserve Board will become slightly more hawkish, especially with the addition of Philly Fed President (and my ex faculty adviser) Charles Plosser and Dallas Fed Head Richard Fisher.
I don’t see emerging markets affecting the U.S economy all that much. That said, Canada’s real estate bubble is bigger than ours and is ripe to burst. Most mortgages in Canada are guaranteed by the government or by the Ontario Teachers Fund, so it won’t have the soft of fallout that 2008 had, but there could be still be some issues that could roil credit markets. Luckily for the Canadians, their government doesn’t view housing as an vehicle for social engineering.
Mortgage Applications fell .2% last week, which was a holiday-shortened week. A short week + a 6 basis point drop in rates = a wash. Purchases increased while refis fell.
There were 41,000 completed foreclosures in December, according to CoreLogic. This is a decrease of 4% month-over-month and 14% year-over-year. Approximately 847,000 homes were in some stage of foreclosure as of the end of the year, versus 1.2 million a year ago. The foreclosure inventory remains the highest in the judicial states.

Morning Report – Disappointing Durable Goods 1/28/14

Vital Statistics:

Last Change Percent
S&P Futures 1780.8 5.1 0.29%
Eurostoxx Index 3024.4 9.8 0.32%
Oil (WTI) 96.37 0.7 0.68%
LIBOR 0.236 0.000 0.00%
US Dollar Index (DXY) 80.52 -0.001 0.00%
10 Year Govt Bond Yield 2.75% 0.01%
Current Coupon Ginnie Mae TBA 105.5 0.1
Current Coupon Fannie Mae TBA 104.3 0.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.34
Stocks are higher this morning in spite of some weak economic data and disappointing sales out of Apple. Ford reported good numbers. Bonds and MBS are flat. Later on today we will get consumer confidence and Richmond Fed.
The FOMC starts its two day meeting today, which will be swan song for the Bernank.
Durable Goods orders came in at -4.3% vs. the Street expectation at +1.8%. This continues the trend we have seen of data suggesting a weak December. It is possibly weather-related, or tax related. Capital Goods orders were weaker than expected as well.
Continuing that trend, new home sales were weaker in December as well. New home sales fell to an annualized 414,000 pace in December from a downward-revised 445,000 pace in November.
Case-Shiller rose 13.71% year-over-year although it reported its first month-over-month decline in prices. Most experts think the torrid pace of the last couple of years will not be repeated in 2014 as increasing prices and increasing rates take their toll.  Prices are back to mid 2004 levels.

Homebuilder D.R. Horton reported first quarter earnings that topped estimates. Orders increased 4% in Q1. Gross margins continue to expand as average sales prices jump 10%. It has been a tale of two markets as there is strong demand from the move-up buyer and the first time homebuyer struggles to get a foot on the first rung of the ladder. The stock is up a few percent pre-open. We will get a better read on the first time homebuyer later this week when PulteGroup reports.

Morning Report – Renting vs. Buying 1/27/14

Vital Statistics:

Last Change Percent
S&P Futures 1788.5 6.4 0.36%
Eurostoxx Index 3033.9 5.7 0.19%
Oil (WTI) 96.81 0.2 0.18%
LIBOR 0.236 0.001 0.32%
US Dollar Index (DXY) 80.53 0.076 0.09%
10 Year Govt Bond Yield 2.74% 0.03%
Current Coupon Ginnie Mae TBA 105.6 -0.2
Current Coupon Fannie Mae TBA 104.4 -0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.33
Stocks are up following last week’s late selloff. Emerging Markets have been getting beaten due to a potential default of a major Chinese Bank’s bond issue. That accounts for some of the reason for the risk-off trade (stocks fall, bonds rise). Bonds and MBS are down.
This week promises to be eventful with the FOMC meeting on Tuesday and Wednesday as well as 4Q GDP on Friday. We will also get Pending Home Sales and Case-Shiller as well. The markets are handicapping another $10 billion / month reduction in asset purchases out of the Fed. Finally, we will hear from a couple of homebuilders – D.R. Horton and PulteGroup, which should give us hopefully a peek into how the spring selling season is shaping up, which unofficially kicks off next week.
What has been going on in emerging markets? Well, first there is a high yield bond issue from Industrial and Commercial Bank of China. This was intended to raise money for a coal miner that collapsed in 2012 and absconded with the money. ICBC will make good on investor’s money. Second, we have had a couple currencies hit the wall – specifically the Argentina Peso and the Turkish Lira. These may not have the makings of a crisis, but you never know. IMO, this will not affect the Fed’s thinking regarding tapering unless they see credit begin to become constrained in the U.S. However it is causing a small (and probably short-lived) rally in the bond market. LO’s, any buyers on the fence that were balking at these high rates? Tell them the market just let them back in. Take advantage of it.
Speaking of talking to your potential buyers, here is a good chart to show them – a comparison of renting vs. buying. I charted the median monthly rent versus the expected monthly mortgage payment for the median house (assuming 20% down and the 30 year conforming rate that existed at the time). In spite of the increase in house prices and interest rates, the rent vs. buy decision is still heavily skewed towards buying. This should be shown to every first-time homebuyer. Check it out:

So far, the government has not changed the tax treatment for short sales and debt forgiveness. On January 1, the temporary tax reprieve for short sales and principal mods lapsed and now these events are treated as ordinary income. There doesn’t seem to be much momentum to change it. Although with the FHFA home price index within 10% of its peak, it makes you wonder how many people are left who bought at the tippy top of the market.

Morning Report – Housing still very affordable 1/24/14

Vital Statistics:

Last Change Percent
S&P Futures 1812.4 -11.8 -0.65%
Eurostoxx Index 3075.9 -41.2 -1.32%
Oil (WTI) 97.19 -0.1 -0.13%
LIBOR 0.235 -0.003 -1.36%
US Dollar Index (DXY) 80.45 0.007 0.01%
10 Year Govt Bond Yield 2.74% -0.04%
Current Coupon Ginnie Mae TBA 105.4 0.1
Current Coupon Fannie Mae TBA 104.2 0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.38
Markets are lower again after yesterday’s bloodbath. Emerging markets have been getting smoked lately, which is probably QE – driven to some extent. Bonds are beneficiaries of the risk-off trade, with the 10 year trading below 2.75%.
The government’s guns are not only trained on mortgage bankers, they are also on payday lenders who are running afoul of usury laws. The Feds seem to forget that if a lender is going to make a loan that only lasts a week or so, they have to charge a high enough interest rate to make it worthwhile. Which means an eye-popping rate if you annualize it. They also hate check cashing places too. Not sure what low-income people are going to do for cash once these guys are chased out of business, but I am sure fair lending will have something to do with the “solution.”
Another chart to show how affordable buying has become. I took the median house price since the mid 70s, and calculated the expected mortgage payment using the conforming rate at the time (with 20% down) and divided that by median income. We have just bounced off all-time lows, so even though housing is more expensive than it was a year ago, it is still very cheap historically.

Morning Report – No expanded HARP for you 1/23/14

Vital Statistics:

Last Change Percent
S&P Futures 1828.6 -10.0 -0.54%
Eurostoxx Index 3145.5 -5.8 -0.18%
Oil (WTI) 96.92 0.2 0.20%
LIBOR 0.239 0.002 0.63%
US Dollar Index (DXY) 80.64 -0.528 -0.65%
10 Year Govt Bond Yield 2.81% -0.05%
Current Coupon Ginnie Mae TBA 105.3 0.3
Current Coupon Fannie Mae TBA 104 0.3
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.41
Stocks are lower on overseas weakness. Initial Jobless Claims came in at 326k, a little better than expected. The Markit PMI and the Chicago Fed National Activity Index came in lower than expected. Bonds and MBS are up
Existing home sales increased to 4.87 million in December, below the 4.93 million expectation. The median price increased 9.9% year-over-year to $198,000. All cash buyers remained steady at 32%, and just over 1/4 were first time homebuyers. Days on market jumped from 56 to 72.
The FHFA House Price Index rose .1% in November, which was lower than expected. Year-over-year, prices are up 7.6% and we are within 8.9% of the April 2007 peak. Home prices are at roughly the same level they were in April 2005. This index looks at houses with conforming mortgages only, so it tends to be a little less volatile than Case Shiller, etc which include distressed / cash sales as well as jumbos.
Fifth Third reported that origination volumes fell 46% quarter-over-quarter and 67% year-over-year.
senior Treasury official spoke at the asset backed securities conference in Vegas and gave some insight as to the government’s thinking regarding the mortgage market. Key takeaways:
  • Treasury does not support changing the cut-off date for HARP
  • Treasury  would like to extend HARP to non-conforming loans as a way to deal with the eminent domain issue.
  • Fannie and Fred loans will probably trade in the same MBS at some point
  • The administration thinks mortgage standards are too inflexible, and wants to see more CRA lending.
  • The administration wants to restart private mortgage securitization, but doesn’t know how.
The WSJ has a good article on why hiring is still sluggish in the manufacturing sector, even as production increases. We still have some slack in the system and we probably won’t see a big hiring push until utilization levels are in the low / mid 80s.

Morning Report – credit scores still main impediment to getting a mortgage 1/22/14

Vital Statistics:

Last Change Percent
S&P Futures 1841.6 7.3 0.40%
Eurostoxx Index 3168.0 14.8 0.47%
Oil (WTI) 94.59 0.2 0.23%
LIBOR 0.237 -0.001 -0.21%
US Dollar Index (DXY) 81.3 0.076 0.09%
10 Year Govt Bond Yield 2.84% 0.02%
Current Coupon Ginnie Mae TBA 105.3 0.0
Current Coupon Fannie Mae TBA 104 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.39
Markets are flat as the Northeast digs out of a snowstorm. Apparently NYC got hit pretty hard so desks are probably thinly staffed today. Bonds and MBS are down small.
Another day of no economic data, except for mortgage applications, which increased 4.7% last week Purchases dropped 3.6%, while refis climbed 9.9%.
The latest CoreLogic Market Pulse asks where credit is still constrained in the mortgage market. It turns out if you look at the different variables that affect access to credit, low credit scores are the biggest impediment. High LTV loans are actually more prevalent than normal (must be the fact that FHA loans are now a major part of the mortgage market). If you look at the graph below, the red line shows where we are now, the blue line is “normalcy” and the green line is where things got during the go-go days of the bubble.

In the same issue, they say that cash sales made up 37% of total home sales in September. Historically, that number has been closer to 20%. This speaks to the professional investor’s presence in the market, which will undoubtedly wane as prices / interest rates continue to climb. Tomorrow we will get existing home sales. The Street is expecting a 4.93 million annualized pace. That works out to about 3.1 million mortgages. If we get back to our historical levels of cash sales, that would equate to 3.94 million mortgages, or a 27% increase in business, even if existing home sales go nowhere. Given that refis are still 64% of all mortgage applications, that won’t make up for the loss in refi business, but it does soften the blow a little. Of course there is always the potential for FHFA to tweak the HARP eligibility dates, which would boost refi activity.
Mohammed El-Arian resigned from PIMCO, where he was the heir apparent to Bill Gross. Neel Kashkarian (of TARP fame) resigned as well, and plans to run for Governor of California on the Republican ticket. Bill tweets that he is ready for another 40 years. Good for him – it might be that long until we see another bond bull market.
Wells is selling a $39 billion MSR portfolio to Ocwen. Terms were not disclosed.

Morning Report – Low construction hiring the new normal? 1/21/14

Vital Statistics:

S&P Futures 1841.6 7.3 0.40%
Eurostoxx Index 3168.0 14.8 0.47%
Oil (WTI) 94.59 0.2 0.23%
LIBOR 0.237 -0.001 -0.21%
US Dollar Index (DXY) 81.3 0.076 0.09%
10 Year Govt Bond Yield 2.84% 0.02%
Current Coupon Ginnie Mae TBA 105.3 -0.1
Current Coupon Fannie Mae TBA 104 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.39
Markets are higher this morning on no real news. We won’t have any economic data until Thursday. We also have a snowstorm targeting the Northeast today, so bond desks will probably start heading home early and tomorrow may be a thin day as people are snowed in.
This week promises to be dull as there are no important economic data points and the FOMC meeting looms large next week. On Thursday, we will get existing home sales and the FHFA Home Price Index.
The WSJ is predicting that next week’s FOMC meeting will be full speed ahead on tapering.
Construction spending continues to increase, but construction hiring is lagging, according to CoreLogic. Is this a new normal? You can see from the chart below that construction spending and hiring used to correlate reasonably well, but but they did not during the recovery. It is certainly possible that the reason for this is that construction firms still had excess capacity and were able to meet the new demand without workers. FWIW, virtually every publicly traded homebuilder has been saying that skilled construction labor is hard to find. Don’t forget that we have underbuilt for 10 years and once household formation begins to recover we will need a lot of new construction.

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