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.

Morning Report: Bank earnings 4/14/16

Stocks are up this morning as commodities rally. Bonds and MBS are down.

Initial Jobless Claims fell to 253k from 266k the week before. This is the lowest reading since 1973. When you take into account population growth, the number is even more dramatic. Employers are hanging onto their workers, but they aren’t necessarily paying them more.

Inflation remains muted at the consumer level, with the Consumer Price Index rising 0.1% month over month. Ex-food and energy, it is up 0.9%. The core index, which excludes food and energy was up 0.1% MOM and 2.2% YOY. Real average weekly earnings were up 1.1%.

Consumer comfort increased slightly last week to 43.6 from 42.6 the week before.

Wells reported numbers this morning, with a decrease in profit on loan loss provisions. Mortgage loan origination volume and margins both fell on a QOQ and YOY basis. Originations fell 6% from Q4 and 10% YOY. Margins fell 15 bps QOQ and 25 bps YOY. Non-conforming mortgage growth was up 8% YOY. The stock is down a couple percent pre-open. Overall, lower net interest margins are hurting the banking business in general. Separately, the US government increased Well’s “systemically important” rating, which means they could be subject to higher capital requirements. JP Morgan, Citi, Morgan Stanley and Goldman are also in that club.

Bank of America also reported weaker-than expected earnings this morning. Losses in the energy patch are hurting them. The stock is down about a percent. The big legal fees and settlements should be in the rear view mirror now.

Hillary Clinton and Bernie Sanders are debating in New York over whether the financial industry should be drowned in boiling oil or just put before a firing squad.

Morning Report: Banks fail the living will test 4/13/16

Markets are higher this morning after equities rallied overnight. Bonds and MBS are down on the “risk-on” trade.

Mortgage applications increased 10% last week as purchases rose 8.4% and refis rose 11.3%. The average 30 year fixed rate mortgage rate fell from 3.86% to 3.82%. Refis dipped to 54.9% of all loans.

Retail Sales fell 0.3% in March which was lower than expected. The control group, which excludes autos, gas and building products rose 0.1%, which again was lower than expected. January and February were revised higher, however.

Inflation remains muted at the wholesale level, with the Producer Price Index falling 0.1% in March, again below estimates. On a year over year basis, the core rate is up 0.9%, well below the Fed’s inflation target of 2%.

Business inventories fell 0.1% in February, in line with expectations. January was revised downward as well.

JP Morgan reported better than expected earnings this morning. Mortgage Banking revenues increased 7.3% YOY, and charge-offs fell. It appears that units fell while average loan sizes increased.

Regulators have rejected the living wills submitted by 5 of the largest banks, which could ultimately force them to raise more capital and could subject them to being broken up. In spite of all of these TBTF banks, we do have the least concentrated banking system in the world. Most countries are dominated by 3 or 4 massive banks.

Confirming everyone’s suspicions, the government knew that Fannie and Fred were about to become profitable when they changed the rules and began to take everything the GSEs made. The government’s cover story was that the two GSEs were too weak and therefore all profits needed to be swept to protect taxpayers. Fannie stock rallied from 1.33 to 2.05 on the news.

Morning Report: Small Business and Consumers are more negative on the economy 4/12/16

Markets are higher despite a lousy start to the earnings season. Bonds and MBS are down.

Earnings season kicked off last night with Alcoa missing on revenues and revising down their forecast for aluminum demand. As if on cue, the IMF took down their global growth forecast for 2016 from 3.4% to 3.2%. Fastenal also missed this morning.

Import prices rose for the first time since June of last year. Energy prices increased and food prices decreased. On a year-over-year basis, import prices are down over 6.2%. We will get two more inflation indicators this week, with the Consumer Price Index and the Producer Price Index.

The NFIB Small Business Optimism index fell again to a two year low. The bright spot? Businesses are still adding employees, although there is a mismatch between the skills they want and the available labor pool. A net 22% of employers reported increasing wages. Capital expenditures are rising slightly, although it is tough to tell if that is merely maintenance capex or growth capex.

Consumers are getting more pessimistic about the economy as well, according to Gallup. Voters are mad as hell, and they aren’t going to take it anymore.

Completed foreclosures fell to 34k in February, according to Corelogic. This is a decline of 10% YOY. There are 434k homes in foreclosure, down 24% from a year ago. This is roughly where foreclosures were in late 2007. 1.25 million mortgages are seriously delinquent, which is down 20% from a year ago. Foreclosures remain an issue in the judicial states (especially in the Northeast) but aren’t an issue anywhere else. We are seeing delinquencies creep up in the energy states.

Another day, another settlement with the DOJ. Goldman settled with the DOJ for $5.1 billion.  I wonder how the fines stack up compared to the bailout money received.

Morning Report: Sentiment lowest in 18 months 4/11/16

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

No economic data today – in fact this week looks pretty data-light. We will get retail sales, inflation and industrial production data this week, but none of these should be market moving, unless inflation comes in way higher than expected. The Fed doesn’t really pay too much attention to the CPI and PPI numbers.

Earnings season kicks off this week in the traditional way, with Alcoa reporting after the close. The first week is usually pretty slow, and dominated by the banks. JP Morgan and Citi report Wednesday and Friday, respectively. The banks are being squeezed by a flattening yield curve as the Fed is tightening while long-term rates are falling. This compresses net interest margins and cuts profits. The stock market has been hitting the financials lately, which you can see below with a relative performance graph of the S&P SPDRs versus the XLF financials ETF

Consumer home purchase sentiment is the lowest in 18 months, according to Fannie Mae. Pessimism over the economy is spilling over into the real estate market. They haven’t been this pessimistic about the economy since March of 2014.

Want to hear something depressing? Check this out: Hillary’s take on the banking industry…(feel free to ignore the commentator) She thinks lending discrimination is rampant in our industry, which is a preposterous assertion in the age of automated underwriting systems. The ironic thing is that if the government was on a mission to restrict credit to poor people, push mortgage origination to the biggest TBTF banks, and depress the economy, they would be doing exactly what they are doing. Worse, they don’t even realize it.

Following on that theme, Wells just settled with the DOJ for $1.2 billion over errors in its FHA loans from 2001 to 2008. According to the settlement, Wells Fargo “admits, acknowledges, and accepts responsibility” for having from 2001 to 2008 falsely certified that many of its home loans qualified for Federal Housing Administration insurance. Wonder if Wells is going to follow JP Morgan in de-emphasizing FHA loans.

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