Morning Report – New Home Sales hit post – bubble highs 9/24/14

Markets are higher this morning as Europe rallies. Bonds and MBS are down small.

Mortgage Applications fell 4.1% last week. Purchases dropped .3% while refis fell 7%. After ignoring the rally in bonds all summer, mortgage rates are increasing as bond yields increase. It seemed like the 30 year fixed rate mortgage was stuck at 4.25%, even as the 10 year yield approached 2.3%. Now that rates are increasing, mortgage rates are increasing in lockstep. Note that MBA has the average 30 year fixed rate mortgage at 4.39%, while Bankrate has it at 4.18%.

New Home Sales increased to 504k, the highest level since May of 2008. That said, half a million is still well below “normalcy” of 800k or so, or even the peak in 2005 at 1.4 million. Again, further evidence of just how much housing has been absent from this recovery, and also how much pent-up demand we have.

Chart: New Home Sales 1990 – Present

Homebuilder KB Home missed earnings expectations in a big way, with eps coming in at $0.28 vs expectations of $0.41 and revenues of $589 million vs expectations of $646 million. Revenues increased 7% driven by a 9% increase in ASPs and 2% drop in orders. ASPs were up 21% (!) on the West Coast. KB’s mortgage banking JV with Nationstar began during the quarter. Gross margins continue to improve. The company noted an “appreciable uptick” in traffic levels which they saw as “strong evidence of the pent-up demand for new housing.” The stock is down about a buck and a half pre-open.

Soon after Jack Lew and Obama released their new plans on corporate inversions and declared companies that pursue such strategies “unpatriotic,” that old triangulator Bill Clinton refused to go there and instead talked about tax inversion. I guess Bill will be floating all of Hill’s trial balloons, and acting as Obama’s back-seat driver for the rest his term. Obama’s gotta love that. FWIW, the Street doesn’t seem to be taking this too seriously – Burger King (which is in the process of buying Tim Horton) said that it will continue to with its merger regardless, as did Medtronic. The COV / MDT spread didn’t even move.

The biggest foreign buyer of U.S. real estate is Canada, but who do you think is #2? Hint: It isn’t China. It is Norway. For those that don’t know, Norway (which has a population smaller than NYC) has a real estate bubble that has defied gravity for years. Foreign purchases of US real estate assets tends to accompany bubbles in their home countries, and China, Canada, and Norway all are in the midst of real estate bubbles. While this probably affects commercial more than resi, I could see some pressure at the high end as these bubbles burst.

Chart: Norwegian Home Prices

Lending to minorities is at a 14 year low. I guess buyback risk has gotten everyone so spooked, they aren’t interested in doing FHA and low income lending, except as needed to keep their fair lending numbers in the acceptable range. Anyway, lenders should expect some sort of response from the Administration, and fair lending enforcement is probably going to be stepped up.

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