All Things in Moderation

Markets are higher this morning after the Chinese cut reserve requirements in an effort to stimulate their economy. Bonds and MBS are flattish.

The ISM Milwaukee Index improved to 55.2 from 50.4, while the Chicago Purchasing Manager index fell to 47.6 from 55.6.

Pending Home Sales fell 2.5% in January, according to NAR. A dearth of inventory continues to weigh on the market.

The corporate bond market is having difficulty digesting new issuance. Over the past 12 months, there have been 75 “no go” days, where the primary market was essentially shut. This is higher than the bad old days of 2008-2009. High Yield is even worse, with issuance down 75% year-over-year.

When the stock and bond markets disagree, go with what bonds say. Unsurprisingly, asset managers continue to rotate out of stocks and into bonds.

Warren says don’t worry, be happy. Also the annotated version of the annual letter.

What are the characteristics of houses that sell quickly? Spanish architecture and 1,500-2,000 square feet.

Originator and servicer Walter Investment reported lower than expected earnings this morning and the stock is down about 10%. for 2015, originations were up 36% and the servicing portfolio increased by 4%. In the fourth quarter, origination volume was up 8% YOY.

Walter wasn’t the only company to miss this morning: Ocwen also is down about 11% after missing its quarter. Delinquencies rose to 13.7% from 13.1%.

Markets are getting pounded on the new worry du jour: Brexit. Bonds and MBS are rallying..

Brexit is the threat of the UK leaving the EU. It has implications mainly in the foreign exchange markets, but if the markets need something to worry about, well there you go.

Mortgage Applications fell 4.3% last week as purchases rose 2.2% and refis fell 7.7%. The spike in rates last week killed the refis.

New Home Sales continue to disappoint. Sales fell in January to 494k from 544k in December. For whatever reason, homebuilders continue to hold back production and rely in price hikes to move the top line.

Regardless, people are still optimistic about the housing sector going forward. Toll Brothers mentioned that a dearth of skilled labor is an issue. Interestingly, average selling prices on signed contracts are falling for them in some areas of the country (the Mid-Atlantic and the South) and are flat in the West. Their urban luxury apartment sector was where all the ASP growth was. Perhaps the builders have pushed price hikes about as far as they can and now buyers are beginning to balk.

Donald Trump performed well in the Nevada caucuses, easily beating Ted Cruz and Marco Rubio.

Stocks are lower this morning on fears of another yuan devaluation. Bonds and MBS are down.

Home Prices continued to rally in December, according to the Case-Shiller Home Price Index. They were up 0.8% on a month-over-month basis and up 5.7% on a year-over-year basis. Prices remain about 11.5% below their July 2006 peak. Note the FHFA House Price index which we will get on Thursday is already at new highs.

Existing Home Sales were up 0.4% at 5.47 million units in January, according to the National Association of Realtors. On a year-over-year basis, they are up 11%, the biggest gain in 3 years. The median home price rose 8.2% year-over-year to $213,800 as supply constraints continue to drive up prices. Housing inventory is 1.82 million units, which represents a 4 month supply. A balanced market is more like 6 – 6.5 month’s worth. Ultimately, the big price increases are unhealthy because incomes have yet to really exhibit growth (although that may be changing). The median house price to median income ratio is roughly 3.8x, using the median income data from Sentier. 3.3 – 3.7x which is about normal.

Speaking of home supply, McMansion builder Toll Brothers reported earnings this morning. Revenues were driven again by an 11.7% increase in average selling prices and not by unit growth. Gross margins fell, which speaks to increasing costs. So far this February, deposits and contracts are flat with last year. The decline in stocks probably has a lot to do with it as the luxury buyer is going to be more sensitive to asset prices than the first time homebuyer.

Interesting to see this dynamic with the builders – a reluctance to build more units despite higher prices. Interestingly, CalAtlantic (the new name for Standard Pacific and Ryland after their merger) is bringing back the buydown loan.

In other economic news, consumer confidence slipped in in February, and the Richmond Fed Manufacturing Index both fell.

Blackrock is warning clients that the Fed is not likely to sit out the rest of 2016, the way the Fed Funds futures markets are predicting. Efficient market theorists might scoff at that notion, however the interest rate markets are so manipulated by central banks at the moment it makes sense to look at market signals with a jaundiced eye. What does that mean to mortgage types? Make hay now, because no one knows how long these low rates are going to stick around.

Speaking of credit markets, the new subprime – auto loans – are beginning to exhibit signs of trouble. Auto loans are being priced like mortgages, however a mortgage is secured by a generally appreciating asset, while an auto loan is secured by a depreciating asset. This is the result of financial repression, which is the act of pushing interest rates to the floor. Investors who have to earn a return (like pension funds and insurance companies) are forced to move further and further out on the risk curve to earn their required return. The actuarial tables really couldn’t care less that interest rates are zero.

Donald Trump looks to be cruising to a third consecutive victory in Nevada. The big question for the D is whether he is a plurality winner or a majority winner. Once the establishment coalesces around one candidate will he continue to lead? One other interesting tidbit: Democratic turnout for the primaries is pretty depressed. Republican turnout is huge. Kind of pokes a hole in the media’s attempt to create a Bernie Sanders movement, doesn’t it?

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

Real Average weekly earnings increased 1.2% in January.

Inflation at the consumer level was flat month-over-month and up 0.3% YOY. Ex food and energy, it was up 2.2%, which is the highest level since June of 2012. This would indicate the Fed is actually getting there as far as its inflation target. That said, the Fed prefers to use the Personal Consumption Expenditure index, which is still below their target.

Chart: YOY inflation, ex-food and energy:

Good explanation of why the markets and the price of oil have become positively correlated. Old timers might remember back when an increasing oil price was a bad thing. Punch line: the banks have a lot of exposure to the energy patch and are lugging debt that made sense at $60 a barrel, but not at $30. That said, energy companies have issued $5 billion in equity secondary offerings this year, which is a surprise. The appetite is there, at least for some investors.

The thinking behind negative interest rates, explained. European economists give their take on it. Basically they work well in smaller. open economies as a lever to manipulate foreign exchange rates, but they aren’t all that effective for larger economies which are trying to boost inflation and growth. In other words, they might work for Denmark, but probably won’t do much good here. Japan recently went negative, so that will be a good test of that theory.

Housing affordability is getting a little better as rates fall. Unsurprisingly, the Rust Belt and the Northeast are the most affordable, while California remains the worst. Note San Francisco is proposing transfer taxes for luxury properties in order to address affordability. Between rich tech workers and Chinese investors, property prices in San Francisco are sky-high.

There is legislation afoot to eliminate the caps on VA loans, which will make them much more popular in high cost areas. Basically it will become a no money down jumbo. It has passed the House, and the prospects are good in the Senate and the WH.

Stocks are higher this morning after oil continues its rally. Bonds and MBS are flat

Initial Jobless Claims fell from 269k to 262k., while the Philly Fed improved to -2.8.

The Bloomberg Consumer Comfort Index fell slightly to 44.3 from 44.5 the prior week. The Economic Expectations index fell markedly from 47 to 42.5.

The Index of Leading Economic Indicators improved slightly in January from -0.3% to -0.2%.

Mortgage Delinquencies fell from 4.99% to 4.77% and foreclosures fell from 1.88% to 1.77% in the fourth quarter, according to the MBA.

The FOMC minutes were released yesterday, and for the most part they were a non-event as far as the markets were concerned. The Fed did spend some time talking about the slowdown in China, and the reverberations in the markets. A number of officials are beginning to think the inflation forecasts are too high. In addition, the stresses in the financial system act as a tightening even if rates go nowhere. The Fed seems to be setting the stage for a cut in the GDP and inflation forecasts at the March meeting, as well as a pause in tightening. Separately, the OECD took down its forecast for global growth to 3.0% from 3.3%.

Mortgage REIT MFA Financial reported earnings this morning. They continue to position their portfolio of MBS more towards credit risk and less towards interest rate risk. When the private label securitization market comes back, REITs like MFA will be the big buyers of non-QM paper. Their appetite for non-agency MBS will be the key driver bringing back the widespread use of products that don’t fit in the agency box.

FHFA Chairman Mel Watt says that the GSE’s lack of capital is the most serious risk to the mortgage market right now. He says that guarantee fees have increased 25 basis points since 2009 and they are now “appropriate.” He also said that the current state of conservatorship is “not a desirable end state” and said that the GSE’s protection from market forces “presents itself in multiple decisions, including pricing.”

Stocks are higher this morning as yesterday’s rally has follow-through on overseas markets. Bonds and MBS are down.

Mortgage Applications rose 8.2% last week as purchases fell 3.7% and refis rose 16%.

Housing starts came in 1.1 million, missing the 1.17 million estimate. Building Permits were flat at 1.2 million.

The Producer Price Index rose 0.1% in January. The core index (ex food and energy) rose 0.4%. The headline number was up 0.6% YOY and the core number was up 0.8%.

Industrial Production jumped in January by 0.9%, however the preior month was revised lower from -0.4% to -0.7%. Manufacturing Production rose 0.5%. Capacity Utilization improved markedly from 76.4% to 77.1%.

At 2:00 pm, we will get the FOMC minutes. Given the uncertainty around the Fed’s future plans, we could see the market more sensitive to these than usual.

Neel Kashkari of the Minneapolis Fed gave a speech to Brookings yesterday, calling for even more regulation for the banks and to turn them into public utilities. Of course any examination over whether the Fed had a hand in creating the real estate bubble in the first place is nowhere to be found.

The new enemy for consumer direct is not the government – it is a new robot designed to waste a telemarketer’s time.

Green on the screen as investors return after a long weekend. Bonds and MBS are down small.

The Empire Manufacturing Index improved slightly to -16.64 versus -19.37 in the prior month.

The NAHB Homebuilder Sentiment Index fell to 58 from 61 in February.

Saudi Arabia, Russia, Venezuela and Qatar agreed to freeze production at January levels provided the other members of OPEC agree to go along. Apparently this has been in the works for a while, so oil isn’t having much of a reaction.

Household debt increased 0.4% in the fourth quarter, according to the NY Fed. Student Loan and Auto loan financing are growing the most, while mortgage and HELOC is steady or falling. Credit quality for mortgage debt remains strong, however you can see the increase in low-FICO auto loans (the new subprime). Debt levels below: