Morning Report – Disappointing Housing Starts 11/19/14

Markets are flattish this morning on no real news. Bonds and MBS are down.

Housing starts dipped slightly to 1.01 million units, which is about 67% of “normal” levels. Single Family starts rose from 668k to 696k, while multi-fam fell from 370 to 313. Multi-fam starts are notoriously volatile, so this number isn’t as bad as it initially appears, at least from a resi building perspective. Building Permits rose to 1.08 million however. As you can see from the chart below, we are a long way from “normalcy” in housing starts. When you correct for population, Compare the chart of housing starts from 1960, and then look at the chart when you divide starts by the population:

Chart 1: Housing starts (unadjusted)

Chart 2: Housing Starts (adjusted for population):

When you take into account population growth, we have only recently touched the worst level seen in the previous 50 years. You can see how much we really under-built over the past 6 years. This represents pent-up demand that will drive the economy for years.

Mortgage Applications rose 4.9% last week. Purchases rose 11.7% while refis rose .9%. This push towards the end of the year bodes well for 2015.

Later on today, we will get the minutes from the last FOMC meeting. Key things to look for: (1) a discussion of the speed limit for the economy, particularly when discussing the labor market. The leading indicators (initial jobless claims, job openings) are at boom time levels, while the lagging indicators are still average at best. Does the Fed believe that the labor force participation rate will increase as things get better, or will it stay depressed? If it stays depressed, that means there is less slack in the labor market than appears, and wages will start to increase quicker than people are thinking. It also means less consumption however, so in effect the “speed limit” of the economy is reduced. On the other hand, if the long-term unemployed return to the labor force, wage increases may be further off in the distance, but the economy will have higher growth potential. (2) Discussions about re-investing their maturing QE securities. At the moment, they are re-investing maturing MBS and Treasuries back into the market, which turns out to be a sizeable amount of money – around $17 billion a month or so.

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