Morning Report: The home ownership rate falls 4/29/16

Markets are lower after yesterday’s bloodbath. Bonds and MBS are down.

Personal incomes rose 0.4% in March, while spending rose 0.1%. The savings rate rose to 5.4%, this highest since late 2012. The Great American De-Leveraging continues..

The PCE Core Index (which is the inflation measure preferred by the Fed) rose 0.1% in march and is up 1.6% YOY. This is still below the Fed’s 2% target rate. We simply aren’t going to see much in the way of inflation until we see wage growth.

Speaking of wage growth, the employment cost index rose 0.6% in the first quarter as wages and salaries increased by 0.7% and benefits increased by 0.5%. On an unadjusted YOY basis, compensation increased 1.9% as salaries increased 2% and benefits increased 1.7%.

Consumer sentiment fell in April, according to the University of Michigan Consumer Sentiment Survey.

The homeownership rate fell to 63.5% in the first quarter, which is back below the levels of the mid 80s through the mid 90s. The gains in homeownership that started with the Clinton Administration’s social engineering via the housing market in 1995 have been given back.

As the Millennial generation ages, that number should increase, and does represent pent-up demand for housing. Affordability remains a big issue, along with high DTI ratios due to student debt. The homeownership rate for Gen Xers was 59%.

Worried about the increase in the price of oil? Don’t be. It is due to a massive short squeeze. For every barrel of oil being bought by a long speculator, there are 9 shorts exiting their position.

Morning Report: The FOMC statement soothes markets 4/28/16

Stocks are lower this morning after the Bank of Japan declined to add further stimulus measures to the economy. Bonds and MBS are down.

First quarter GDP came in at 0.5%, lower than expected. Consumption and the core price index both rose. This is the advance estimate, so it will be revised twice over the next two months. Positive contributors to GDP included personal consumption, residential fixed investment, and state / local government spending. Negative contributors include inventory, non-residential fixed investment, and federal government spending. This is the lowest quarterly print in 2 years, although weakness in the oil patch does explain a good chunk of it.

The Fed maintained interest rates yesterday, and made few changes to the language of the FOMC statement. The most substantive change was that they removed the language regarding weakness in global financial markets. They noted the US economy slowed recently however the labor market continues to improve. Housing and capital expenditures continue to remain soft.  After a few headfakes immediately after the release, the bond market finally decided that the statement was good news and rallied a couple basis points. Stocks took the “glass half full” view and rallied as well. Here is Mohammed El-Arian’s take on the statement.

Initial Jobless Claims rose to 247k last week. The Bloomberg Consumer Comfort index rose to 43.4 from 42.9 last week as well. lays out the hottest real estate markets this month. The West Coast and the Rust Belt lead the pack. Has the Rust Belt finally become too cheap to ignore?

Morning Report: FOMC day 4/27/16

Stocks are lower this morning after some tough earnings reports, especially out of Apple. Bonds and MBS are up.

Last night 5 primaries were run in the Northeast. Bernie is pretty much done and Trump is declaring himself the presumptive nominee.

Mortgage Applications fell 4.1% last week as purchases fell 2.4% and refis fell 5%.

Pending Home Sales rose 1.4% month-over-month and increased 2.9% year-over-year, according to the NAR. This is the highest level in a year. Only the West reported a decline in contract activity. The surprise drop in rates is easing some of the affordability issues caused by higher prices.

The FOMC decision should be released around 2:00 pm today. Be careful locking loans around that time. If the Fed intends to raise rates at the June meeting, they will probably telegraph it in the statement. Financial conditions have definitely improved since earlier this year. Here is the latest analysis of the situation.

For anyone who is on the fence about renting versus buying, show them this poll: Renters are twice as likely as owners to worry about not being able to pay housing costs. Given the tight inventory for housing, you are seeing mid single-digit increases in rents. Granted, house price appreciation has been in the same neighborhood, however that has been offset by falling rates. Many younger renters are still under the impression that they need 20% down to buy a home.

Venezuela is in such bad shape that it doesn’t have the money to pay for its money. Like Weimar Germany, citizens need a wheelbarrow to buy a loaf of bread: the largest note is a 100 bolivar note, which is worth about one cigarette. Making all that cash isn’t cheap, and Venezuela doesn’t have the money to pay the firms that make it.

Morning Report: Real estate prices rising, but problems developing at the high end? 4/26/16

Talk about it here:

Stocks are up this morning on overseas strength. Bonds and MBS are flat.

The S&P / Case-Shiller index of home prices rose .66% on a MOM basis and is up 5.38% YOY. Their take on the housing market: “Mortgage defaults are an important measure of the health of the housing market. Memories of the financial crisis are dominated by rising defaults as much as by falling home prices (see first chart). Today as well, the mortgage default rate continues to mirror the path of home prices. Currently, the default rate on first mortgages is about three-quarters of one percent, a touch lower than in 2004. Moreover, the figure has drifted down in the last two years. While financing is not an issue for home buyers, rising prices are a concern in many parts of the country. The visible supply of homes on the market is low at 4.8 months in the last report. Homeowners looking to sell their house and trade up to a larger house or a more desirable location are concerned with finding that new house. Additionally, the pace of new single family home construction and sales has not completely recovered from the recession.”

In other economic news, durable goods orders rose 0.8% in March, versus Street expectations of an increase of 1.9%. Capital Goods orders (a proxy for business capital investment) was flat. The Markit US Services PMI and the Markit US Composite PMI indices both improved in April. The Richmond Fed Manufacturing index fell, as did consumer confidence.

The FOMC begins their two day meeting today. Here is Mohammed El-Arian’s take on what to look for in the statement. Here is a more in-depth parsing of what the Fed may say and what it means.

What is going on this weekend aside from the NFL draft? Buffetapalooza or Woodstock for Capitalists. The Berkshire Hathaway shareholder meeting in Omaha, where you can play ukelele with the Fruit of the Loom guys listen to Warren wax poetically about value investing. This year, it will be streamed live.

We are starting to see weakness in the top end of the hottest real estate markets as supply surges and foreign demand begins to wane. Will it spread?

Did you know Trump and Hillary share the same address?

Get Your Piece of ARAMCO 4/26/16

The 31 YO rising star of the Saud dynasty, Mohammed bin Salman, has announced a broad goal of bringing Saudi Arabia into the mid 19th Century by 2030.  Being an incrementalist myself, I recognize some movement out of the Ston[ing] Age as a positive.

One worry everyone in the west seems to share is that the blowback from other parts of the family will stifle this little candle in the night.

I also must wonder if it is a good business decision to do an IPO of 5% of the nation’s wealth when the current pricing for its one commodity is low.  That move has an air of desperation to me.


Am I wrong?  Why?


Morning Report: FOMC week 4/25/16

Stocks are down this morning on lower commodity prices. Bonds and MBS are flat.

We have a lot of data this week, with new home sales, Case-Shiller, and GDP. The FOMC will meet Tuesday and Wednesday, although the market is predicting that the Fed won’t hike rates. Given the posture of traders, the risk is probably on the hawkish side. Here is an analysis of what the markets will be looking for.

New home sales fell to an annualized pace of 511k in March.

Why did interest rates rise so suddenly and dramatically last week? Many market participants were scratching their heads wondering what was going on. One theory: The European Central Bank’s decision to adopt a “wait and see” attitude towards future stimulus gives the Fed the opportunity to raise rates at the June FOMC meeting.

Republicans John Kasich and Ted Cruz came to an agreement to split their delegates in order to deny Donald Trump the 1,237 delegates he needs to claim the nomination. Bernie Sanders is pretty much down to his last 48 hours or so and should exit this week sometime. In other news, Charles Koch (who took the Darth Vader of the left mantle from Dick Cheney) said he could vote for Hillary over the Republican nominees. Does that mean he will give money to her campaign? Probably not, however he will probably put money to work down-ticket.

Former Fed Head Narayana Kocherlakota says the Fed must be more aggressive in combating deflationary expectations.

The bond market is as dangerous as it has ever been, according to many bond managers. A small uptick in rates can wipe out a year’s worth of return. The flip side: borrowing is as attractive as it has ever been. The trade is to get out of ARMs, which will have their rates determined by LIBOR and into a 30 year fixed.

Freddie Mac makes some predictions for 2016: Mortgage origination will be $1.7 trillion (an increase of $50 billion from their last estimate), Q1 GDP of 1.1%, and an average fixed rate mortgage of 4% for 2016.

Morning Report: Good numbers out of the builders 4/21/16

Markets are flattish after the European Central Bank declined to initiate further stimulus measures. Bonds and MBS are down.

The Chicago Fed National Activity Index fell slightly in March as the economy continues to grow slightly below trend.

Initial Jobless Claims printed below  250k last week, The last time we saw an initial jobless print below 250k? Late 1973. For all the fears of mass layoffs in the oil patch, we aren’t seeing evidence of it in the jobless numbers.

The FHFA House Price Index rose 0.4% in February, according to the FHFA House Price Index. Prices are up 5.6% overall. The index, which only looks at a subset of the housing market, has surpassed its bubble highs. The West Coast markets continue to be the hottest, while New England continues to bring up the rear.

In other economic news, the Philly Fed manufacturing index fell, while the index of leading economic indicators improved. Consumer comfort fell.

Homebuilder PulteGroup reported better than expected earnings this morning. Revenues increased 28%, while backlog rose 31%. Average selling prices rose 9%. The CEO characterized the housing market this way: “Looking to the broader housing market, we remain pleased with overall demand and expect new home sales will continue to move higher over the coming years as the industry benefits from an improving economy, ongoing employment and wage gains, low interest rates, a limited supply of homes and the gradual release of pent-up demand, We believe our business is extremely well positioned to be successful in this type of operating environment given our disciplined investment practices and focus on investing in high returning projects.”

We also heard from D.R. Horton this morning, who also put out better-than expected numbers. Revenues increased 16%, while backlog increased 14%. D.R. Horton is up about 80 cents a share this morning. They took up guidance for the year, which means perhaps the slowdown in the energy sector is not affecting their geographies. DHI has a lot of Texas exposure.

Millennials may want to buy a home, but they are not saving enough for a downpayment. The article assumes a 20% downpayment is required, and doesn’t mention FHA loans, which only require 3.5% down. If journalists aren’t aware that you don’t need 20% down, it means the industry still has some more educating to do.

Morning Report: Existing home sales rise 4/20/16

Stocks and bonds are flattish this morning on no real news.

Mortgage Applications rose 1.3% last week as purchases fell 0.5% and refis rose 2.6%.

Existing Home Sales rose 5.1% MOM to 5.33 million in March. The median home price rose 5.7% to $222,700. This puts the median house price to median income ratio at 3.9x, which is higher than its historical range in the 3.2x – 3.6x. There are 4.5 months’ worth of inventory, which was an uptick from the 4.4 months’ worth in February. Days on market fell to 47 however. Sales slowed at the $1 million + price points, which could be a reflection of the global economic slowdown. The number of first time homebuyers was steady at 30%. Historically, that number has been closer to 40%.

Given the weak housing starts data and the existing home sales data, we aren’t getting the breakout spring selling season that some had hoped for. We should get some important data points tomorrow when we get earnings results out of Pulte and Horton.

The weakness in housing starts remains a conundrum, given the demand for housing. Builders have pointed to a shortage of labor, but as Goldman Sachs points out, you aren’t seeing increases in wages in the construction sector, at least not yet. Interestingly, the average age of a construction worker is the highest ever, as young people are not entering the sector. The other issue: regulations, and lots of them. You would think that government would be interested in seeing more housing construction, because that is the difference between 2% and 3% GDP growth, but the only discussion of housing these days revolves around how hard to slug the originators.

Hillary Clinton and Donald Trump won convincingly in NY last night.

Morning Report: Housing starts and building permits going the wrong way 4/19/16

Markets are higher this morning as commodities rally. Bonds and MBS are flattish.

Housing starts fell 9% MOM in March to an annualized rate of 1.09 million, a highly disappointing number. Both SFR and multi-fam fell. This is the lowest level since October. Building Permits also fell around 8%, hitting a 1 year low. It is astounding that we have such a deficit of housing in this country, and are building 25% fewer homes than we did before the bubble, Housing (or lack thereof) has been the reason why this recovery has been so weak. Take a look at the chart below, which shows housing starts from 1959. Typically you see V-shaped recoveries in housing starts, however this time you haven’t. Granted some of that was due to oversupply from the bubble years, but that excess inventory got worked off years ago. Is the problem a lack of skilled labor? Credit? Regulation? Probably all three.


While housing starts remain depressed, builder confidence is still strong, with the NAHB Housing Market Index (a measure of homebuilder sentiment) holding steady at 58 in April. The builders continue to report big increases in average selling prices, although gross margins are lagging. This means input prices (raw land, sticks and bricks, and labor) are rising faster than prices. Given that incomes aren’t rising in the mid-high single digits the way ASPs have been, we have to be hitting the ceiling. Note we will get earnings from Pulte and D.R. Horton on Thursday.

There are signs of weakness building in the labor market – temporary employees are typically the canary in the coal mine, and temp hiring is falling. Historically, that has been an early warning sign of a recession. Separately, the Federal Reserve’s Labor Market Conditions Index, which is a meta-index of leading and lagging indicators has been turning downward. Could 2015 have been the peak of the labor market recovery?


Certainly things are not going swimmingly in the financial sector: Goldman reported a 60% drop in earnings as revenues fell. The bright side? The multi-billion fines from the government may finally be in the rear view mirror. I wonder if you tally up all the bailout money and compare it to the revenues the government has received in paybacks, fines, and Fannie Mae profits how profitable was the Great Recession for the government.

Morning Report: Consumer sentiment is falling 4/15/16

Markets are lower this morning as commodity prices fall. Bonds and MBS are up.

The Empire Manufacturing Index increased in April to the highest level in over a year. The bad news is that industrial production, manufacturing production and capacity utilization all fell in March. Some of that is going to be due to low oil prices, however global demand continues to fall. Economists are looking for weak Q1 GDP numbers, possibly below 1%.

Consumer Sentiment dipped in April, as increasing gasoline prices rose. Most consumers think the economy is getting worse. This was borne out in the Fannie Mae Housing sentiment index where consumers are the most pessimistic about the economy in two years.

Citigroup posted better than expected earnings this morning based on cost cutting. They launched a new round of layoffs, with up to 2,000 people being let go. Cost-cutting is the theme of banking right now, as Goldman is also calling for the deepest cuts in years.

Foreclosures are declining in importance in most markets – in fact foreclosure activity is below pre-recession levels in just over a third of metro areas, according to RealtyTrac. “Despite a seasonal bump higher in March, foreclosure activity in most markets continues to trend lower and back toward more healthy, stable levels,” said Daren Blomquist, senior vice president at RealtyTrac. “More than one-third of the 216 local markets we analyzed were below their pre-recession foreclosure activity averages in the first quarter, and we would expect a growing number of markets to move below that milestone the rest of this year — while the number of markets with a lingering low-grade fever of foreclosure activity continues to shrink.”

We are starting to see weakness at the very high end of the real estate market. A combination of fevered building of luxury urban properties and waning overseas demand has created a glut of property in places like Miami, where prices are sliding 6% – 8%. The top 10% of condos saw a 15% price decline. Ever since the bust, luxury has been the only place that has been consistently working for builders.

Economists are becoming less convinced we will see 2 more rate hikes this year. Given the fragile global economy and the complete absence of inflation, the risks of hiking are growing larger. Until you see wage inflation, it is hard to imagine any real inflation pushing through to consumers. Even then, the Fed has said they want to let the labor economy “run hot” for a while, which probably means they will accept moderate wage inflation for some period in order to get the labor force participation rate back up.

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