Morning Report – More unintended consequences of ZIRP 7/22/14

Stocks are higher this morning as earnings reports pour in. Bonds and MBS are flat.

Existing Home sales rose 2.6% month over month to an annualized 5.04 million pace, according to NAR. The median home price rose to $223.3k (up 4.3% YOY), while the average price rose to $269.1 (up 3.1% YOY). Distressed sales accounted for 11% vs 15% a year ago, while the first time homebuyer slipped a point to 28%. All cash deals were basically flat at 32%, and days on market rose from 37 to 44. The housing market is becoming more balanced as inventories are increasing and prices are leveling off.

Home prices rose .4% in May, according to FHFA. This is up 5.5% year-over-year. Remember the FHFA index only looks at homes with conforming mortgages, so it is a narrower index than Case-Shiller. The West Coast performed the best, and the Midwest / Mid-Atlantic performed the worst.

FHFA HPI Geographic

The Consumer Price Index came in at .3%, bang in line with expectations. Ex-food and energy, it rose .1%. On a year over year basis, the CPI headline number increased 2.1% and ex food and energy it was 1.9%, more or less where the Fed would like to see the inflation numbers. Note that the Fed prefers to use PCE (Personal Consumption Expenditures) not CPI.

A good backgrounder on Bloomberg about returning vets and VA loans. The VA’s share of new mortgages is at a 20 year high. The stat that jumped out at me was this: VA loans accounted for 8.1% (just under $20 billion) of mortgages made in the first quarter. Last year, VA’s share in Q1 as 6.9% and 10 years ago it was under 2%. The record was 28% in 1947. VA and FHA are tailor made for the first time homebuyer, who wants to buy, but feels shut out of the market.

Speaking of first time homebuyers, here is another article discussing how the economy is depressing birth rates, which would influence household formation numbers. Classic catch-22: The economy needs the housing sector to at least get back to historical norms, but the first time homebuyer is the key to that and they won’t get in until the economy improves.

As a follow-up to yesterday’s comment about the Fed and their belief that (a) low interest rates don’t cause bubbles, and (b) bubbles can be prevented by smart regulation, the appetite for second-lien junk is increasing. Formula One is paying L+6.75 for a $1 billion covenant-light junior loan. Second lien paper is yielding about 9%, while first-lien is yielding about 5.3%. Interestingly, the better credit spreads are widening, while the junkier stuff is tightening. This is of course the unintended consequence of ZIRP, and the biggest risk for 2015 / 2016. The markets are blithely assuming the Fed can start raising rates without any negative consequences for the economy. The economy shook off the end of QE, so there is reason for hope, but I wouldn’t rule out someone big blowing up as rates start increasing, and it will be the junkiest stuff that gets hit the hardest.

9 Responses

  1. Heh.

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  2. Looks like the D.C Circuit court shitcanned subsidies in states that did not establish exchanges.

    Roberts will reverse however cause we’re fucked.

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  3. I generally agree – the Fed is trying to create inflation (inflation is a debtor’s best friend) and commodity price inflation without wage inflation sucks. It sucks less than outright deflation, though.

    That said, food price inflation is being driven more by weather than the Fed. And the high prices we are seeing will attract more resources. There is an old saying in the commodity markets: The cure for high prices is high prices. People see high prices, they boost output, which increases supply and lowers prices again.

    Regarding wage inflation, wages will increase as the labor market improves, but it will be a slog. Recoveries after residential housing bubbles suck, which is why I harp on the Fed and bubbles so much. That said, the markets have more or less cleared, so the worst part is behind us. Wage inflation will be the final step in the recovery process. Hopefully it comes sooner than later. I am thinking it will come as residential home construction improves. I was hoping this would be a 2014 phenomenon, but it is looking more like a 2015 event.

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    • It is incredible that the Simpsons is still funny and entertaining. Completely amazing. The rest of those animated shows are garbage.

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  4. i’m responding/posting only in Simpsons quotes on the PL today. with citations.

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