All Things in Moderation

Markets are up this morning after Chinese stocks rallied overnight. Bonds and MBS are down.

The second revision to first quarter GDP came in at 0.8%, slightly below the Street estimate of 0.9%. This was an upward revision from the initial 0.5% estimate.

Personal incomes rose 0.4% in April, in line with expectations. Personal spending rose 1%, which topped the 0.7% estimate. The personal consumption expenditures index (which is the inflation measure preferred by the Fed) rose 0.2% month-over-month and is up 1.6% annualized. We are seeing some sell-side firms take up their second quarter GDP estimates on this number.

Home prices rose 0.9% MOM and 5.4% YOY, according to the Case-Shiller Home Price Index. This was slightly ahead of estimates. An improving labor market along with tight inventory is driving prices higher.

In other economic data, both the Chicago Purchasing manager index and the consumer confidence index fell.

The highlight of this short week will be the jobs report on Friday, which will be the last big data point before the FOMC meeting in a couple of weeks. The number to watch: average hourly earnings. Average hourly earnings growth has been accelerating over the past 6 months or so, to around 2.5%. You can see the trend in average hourly earnings growth in the chart below:

On Friday, Janet Yellen hinted that the next rate hike is probably at the June or July FOMC meetings.

Mortgage Applications rose 2.3% last week as purchases rose 4.8% and refis rose 0.4%. The average 30 year fixed rate mortgage rose 3 basis points to 3.85%. The average jumbo rate increased 8 basis points to 3.82%.

Home prices rose 0.7% in March, according to the FHFA House Price Index. “While the overall appreciation rate was robust in the first quarter, home price appreciation was somewhat less widespread than in recent quarters,” said FHFA Supervisory Economist Andrew Leventis. “Twelve states and the District of Columbia saw price declines in the quarter—the most areas to see price depreciation since the fourth quarter of 2013. Although most declines were modest, such declines are notable given the pervasive and extraordinary appreciation we have been observing for many years.” Interesting to see prices begin to decline in some states.

A US appeals court threw out the $1.27 billion judgement against Bank of America for Countrywide’s sins related to the “hustle.” The 2nd U.S. Circuit Court of Appeals in New York said the proof at trial was insufficient under federal fraud statutes to establish liability. No comment yet from Manhattan U.S. Attorney Preet Bharara.

Hillary Clinton is trying to take Donald Trump to task over comments made as the real estate bubble was bursting. Not sure how much traction that is going to get, however she had a conference call with reporters to push the message. Separately, the Republican party is beginning to unite behind Trump.

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

New Home Sales came in much stronger than expected, at an annual rate of 619,000. This is the highest level since early 2008. While it is premature to bust out the champagne quite yet (prior to the bubble, the last time sales were this low was the early 90s), it is an encouraging sign. The Spring Selling season got off to a somewhat slow start, but seems to be picking up momentum. Note this number has an unusually wide margin for error this month, so expect a revision.

Speaking of new home sales, we got second quarter numbers out of Toll Brothers this morning. Earnings beat on the top and bottom lines, with revenues increasing 31% in dollars and 9% in units. Interestingly, average selling prices of signed contracts were flat. Contracts only rose 3%, and the problems were in California, with not enough inventory for sale. They continue to build out their urban apartment segment and plan to expand it to smaller cities and suburbs.

The Richmond Fed manufacturing index fell in May to -1 from 14.

More millennials are living with their parents than they are with a partner or significant other, for the first time in the modern era. This is probably a reflection of a lot of things – from the weak economy to people getting married later in life. However, it does represent pent-up demand for housing.

Foreclosure starts fell to 58,700 in April, the lowest level since 2006. Delinquencies increased slightly, but are still down 10% YOY. The active foreclosure inventory fell below 600,000 for the first time since 2007. The Northeast still has some wood to chop in terms of liquidating foreclosures.

Markets are lower this morning after the FOMC minutes shocked bond markets yesterday. Bonds and MBS are down.

The sentence that sent bonds reeling: Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.” The FOMC minutes caused a 7 basis point spike in the 10 year and a 6 basis point spike in the 2 year. The Fed Funds futures contracts (which is what the “likelihood implied by market pricing” phrase alludes to) moved from a 10% chance of a June hike to a 25% chance of a June hike and a 60% chance of a hike by September. Earlier this year, the futures were basically betting the Fed would be on hold for the rest of the year. The markets were perhaps a little too complacent about another rate hike. That said, the Fed has set up the markets for rate hikes several times over the past year or two only to get cold feet.

In terms of the economy, the members and the staff noted that the labor market continues to improve despite a deceleration in economic growth. Inflation remains well below the Fed’s target, however they attribute that to commodity price movements, which are transitory.

The minutes also mentioned that residential mortgage credit was getting a little looser on the government side, but also noted that non-traditional and credit-challenged borrowers still face tight credit conditions. The corporate bond market has improved after a slow January and February.

In economic news today, the Chicago Fed National Activity Index rose to .10 from a downward-revised -.55 in March. The 3 month moving average is still negative, meaning the economy is growing slightly below its long-term trend. Separately, the Philly Fed Business Outlook Index fell to -1.8.

Initial Jobless Claims fell to 278k from 294k last week. As a general rule, people are hanging onto their jobs these days.

The Bloomberg Consumer Comfort index was flat last week at 44.5.

The Index of Leading Economic Indicators rose from 0.2% to 0.6% in April. The FOMC minutes mentioned the Fed expects growth to accelerate into the second half of the year.

Interesting stat: The number of homes worth $1 million has doubled in the last 4 years. Of course 2012 was pretty much the bottom of the real estate market, and it has been the big urban areas like San Francisco and Manhattan that have led the charge higher. Heck, in San Francisco, the median home price is over $800k.

And that ties into….a lack of starter homes.  Homebuilders are having a tough time making starter homes work financially. Increased regulatory and compliance costs, mandated open space, lower density, higher land prices, and fees imposed by counties and cities are all combining to make affordable starter homes impossible to build. Indeed, the number of starter homes is at a historical low and falling. Here are some industry quotes: “When you start with a high land basis, it’s very hard to end up with a purchase price that the first-time buyer finds affordable,” said Stuart Miller, CEO of Miami-based Lennar. “No. 1, you see it in just the pure requirements. Those requirements can be a very lengthy list of things you maybe wouldn’t have seen 10, 15, 20 years ago. But you’re also seeing it in fees that counties and cities impose on new home construction. Fees can be anywhere from $50,000 to $100,000 per home to build,” said Taylor Morrison’s Bodem. “Things like that ultimately get passed on to the consumer and the price of housing. That’s one reason why you see the cost of housing so expensive, especially here in Southern California.” I have said it before, housing is the #1 thing keeping GDP growth around 2% instead of 3%.

Turn times increased for refis last month, according to the Ellie Mae Origination Insight Report. Time to close all loans was steady at 44 days, but refis increased from 41 to 44. Turn times are now below where they were pre-TRID.

Was at the MBA conference Monday and Tuesday, so no report the last two days. People are still buffaloed by regulation. They staged a debate between David Axelrod and Laura Ingraham. She got in some digs on Hillary, but there was no discussion of regulation in the financial sector, which was a shame. Met someone from Fannie Mae who is trying to get lenders to make sub 600 FICO loans and is struggling to get lenders to go there. The government simply has no clue how lenders think…

Stocks are lower this morning on Fed worries and emerging market woes. Bonds and MBS are flat

We will get the minutes from the April FOMC meeting today at 2:00 pm EST. The markets have been focusing like a laser on any sort of Fed-speak, so this could present the possibility of some volatility in the bond markets. Just be aware.

Yesterday, Atlanta Fed President Dennis Lockhart and San Francisco Fed member John Williams said that two hikes this year may be the proper course.

Mortgage Applications fell 1.6% last week as purchases fell 5.8% and refis rose 1.4%.

We had some housing data earlier this week. First, the NAHB Housing Market Index was steady at 58. This is the homebuilder sentiment index. After peaking in late 2015, it has fallen slightly. Builders are certainly happy with mid single-digit increases in average selling prices, but they aren’t pumping out more units yet.

The drop in sentiment is evident in housing starts, which continue to be mired in the 1.1 million to 1.2 million unit range. In April, starts rose to 1.17 million from an upward-revised 1.1 million. Building permits rose to 1.1 million. It is amazing that we have such low inventory of homes and yet starts are around 25% less than historical, pre-bubble numbers. That is even more dramatic when you factor in population. We have only approached the lows from the 81-82 recession, which was a bad one.