Morning Report: Inflation remains below the Fed’s target 10/31/16

Vital Statistics:

Last Change
S&P Futures 2126.3 2.5
Eurostoxx Index 339.5 -1.3
Oil (WTI) 48.2 -0.6
US dollar index 88.8 0.1
10 Year Govt Bond Yield 1.84%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.62

Markets are up on earnings and merger mania. Bonds and MBS are down.

Personal Incomes rose 0.3% in September, which was a little below expectations. Consumer spending rose 0.5%, which was in line with expectations. Core PCE inflation – the number the Fed uses to measure inflation – rose 1.7% YOY, so we are still below the 2% target.

The Chicago PMI Index fell to 50.6 from 54.3.

The FBI re-opened the email investigation on Hillary late Friday night. Democrats are attacking Comey (who just went from hero to goat). This will take until mid-week to be fully reflected in the polls, and the pundits will be watching polls in VA and NC closely.

IMO, regardless of who wins, gridlock will be the result, unless Democrats sweep. So more of the same. I don’t see much of an effect happening in either interest rates or stock prices. The Fed is much more influential than who occupies the WH.

Home prices are up 0.3% MOM and 5.3% YOY, according to Black Knight Financial Services. The index now stands at $266k, which is 0.7% below the 2006 peak of $268. The report has good state-by-state info, so check it out.

Banks continue to hoard Treasuries, and are tightening credit to business. Deposit growth is outstripping loan demand, which is the biggest reason. As the US savings rate increases, consumer spending is affected. Part of this is demographics: The baby boom is retiring and will inevitably cut spending, while the Millennials have yet to make any real money and start spending.

Morning Report: Strong headline GDP number 10/28/16

Vital Statistics:

Last Change
S&P Futures 2127.5 4.0
Eurostoxx Index 340.8 -0.9
Oil (WTI) 49.2 -0.6
US dollar index 88.9 0.0
10 Year Govt Bond Yield 1.85%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.58

Stocks are higher this morning as earnings reports pile in. Bonds and MBS are flat.

The first estimate of Q3 GDP came in at +2.9%, which was higher than expected. Inventory and exports drove the increase. This is a sharp rebound after 3 extremely weak reports. Disposable personal income rose 3.6% and the savings rate was flat at 5.7%. This number will be revised at least once before the December Fed meeting.


Inventories and exports are not great indicators of domestic demand, however and that is what really drives the economy. If you strip those two things out, you can see that demand increased, but it wasn’t the blockbuster number that the headline GDP print suggests. This helps explain why GDP growth can be 2.9% (which is a robust expansion) and not feel like it. Consumer spending decelerated in Q3 from 4.3% to 2.1%. Back-to-school numbers for the retailers were disappointing, and this number bears that out.


Employment costs rose 0.6% in the third quarter as comp increased 0.5% and benefits increased 0.7%. Judging by the increase in Obamacare insurance premiums, benefit cost inflation will continue to increase the costs of employees which will act as a damper on wage growth.

Pending home sales increased 1.5% in September, according to the NAR. According to NAR Chief Economist Lawrence Yun, tight inventory remains a problem: “The one major predicament in the housing market is without a doubt the painfully low levels of housing inventory in much of the country…It’s leading to home prices outpacing wages, properties selling a lot quicker than a year ago 2 and the home search for many prospective buyers being highly competitive and drawn out because of a shortage of listings at affordable prices.” Of course this means the ratio of house prices to income is getting stretched. Wage inflation is needed to maintain these prices.

The US 10 year has gotten hammered over the past month. What is going on? Economic data has generally been soft (today’s GDP report notwithstanding). IMO, we are in the middle of a correction in global bonds. Using the German Bund as proxy for global bonds, you can see that yields have backed up in a big way over the past month. US Treasuries may not necessarily be rising ahead of the December GDP report and may simply be correlating with bond yields overseas. Note that the yield is higher than it was pre-Brexit.



We’re # 4!

Germany’s “Heritage” ranking alone justified labeling this post “Goofy”.

Beethoven, Mozart, and uh…

Morning Report: Wages and assets 10/27/16

Vital Statistics:

Last Change
S&P Futures 2142.4 9.0
Eurostoxx Index 341.9 0.1
Oil (WTI) 49.3 0.1
US dollar index 88.7 0.0
10 Year Govt Bond Yield 1.84%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.58

Back from the MBA conference in Boston. The main chatter was about Ginnie’s new plan to discourage the serial VA IRRRL shops. Consensus is that it will work because it will decimate the margins on these loans. The prepay speeds on VA loans have gotten so high that Ginnie Mae servicing prices are being affected.

Separately, Richard Cordray took aim at servicers at the conference.

Let’s get caught up on economic data.

Durable Goods orders fell 0.1% MOM in September. Business capital expenditures fell 1.2% MOM and are down 4.1% YOY. Some of that has been due to the strength in the dollar, and continued fallout from energy prices.

The Chicago Fed National Activity Index improved to -.14. The 3 month moving average (the number to look at) is still negative at -.21, which means the economy is growing below trend. When the 3 month MA drops below -.7 that is a recessionary signal.

Home prices continue to rise according to the FHFA. Prices increased 0.7% MOM and 6.4% YOY in August. Prices are now about 5% higher than the peak 2006 levels. Note that this is a subset of all homes (only those with conforming mortgages) but it is a good estimate for the “middle of the plate” housing in the US.

Separately, Case-Shiller was up 0.2% MOM and 5.1% YOY.

New Home Sales came in a little lighter than expected, up just under 600k, however July and August were revised sharply downward. The South performed best, while the West performed the worst. Take the Census numbers with a grain of salt, however. The sample sizes are small and therefore the confidence intervals around those numbers are very wide. Homebuilder earnings usually tell the story a bit better.

Mortgage Applications fell 4% last week as purchases fell 7% and refis fell 2%. Purchase activity is still up smartly YOY, however refis are at the worst levels since June.

Initial Jobless Claims came in at 258k, which is a quite strong number.

Wages are increasing for skilled labor, especially in construction. Below is a chart plotting annual wage growth for manufacturing and construction labor. Construction labor wage inflation is back to the bubble years, and manufacturing wage growth is approaching those levels as well.


Ultimately this is good news for the economy. Wage growth has been a disappointment in this recovery. This probably isn’t great news for homebuilding stocks (the SPDR homebuilder ETF XHB is down about 13% over the past 6 weeks), and is probably not great news for manufacturers either. That said, the elephant in the room is the Fed. Does this push the Fed to hike more aggressively than forecast? Given how many times the Fed has gotten cold feet already, and the fact that unskilled labor remains in a glut, I don’t think so. Janet Yellen has said the Fed will let the labor market run hot for a while in order to bring back some of the long term unemployed.

In the same article, Joe Lavorgne of Deutsche Bank has a chart that is a bit more worrisome, which looks at the ratio of household net worth to disposable income. We are back at levels associated with the stock market bubble peak and the residential real estate bubble peak. Taking this chart at face value you would probably conclude that asset prices are in bubble territory, which is definitely the case for sovereign debt. However, if wage growth is accelerating, then the ratio will fall going forward, for the right reason. However if wages continue to stagnate, then yes we could be vulnerable to a sell-off in asset prices.


An “independent”, agenda-setting bureaucracy 10/24/16

There is an op-ed article today in the WSJ, unfortunately behind the firewall, that unwittingly lays bare the unconstitutionality of the regulatory state as it currently exists in the US. The article was written by former Chairman of the SEC, Arthur Levitt Jr., and is ostensibly a critique of Senator Elizabeth Warren’s call for current SEC Chairman Mary Jo White to be removed for failing to implement a “rule” regarding corporate political donations that Warren favors. Levitt correctly calls out Warren for improperly trying to influence the SEC’s “agenda”, but his reasoning reveals the mindset of these unelected bureaucrats and how shamelessly unmoored from the Constitution the regulatory state has become.

Levitt says:

No rule—no matter how merited—is worth the damage that would be caused if the SEC were compelled by political intimidation to write it. That’s not how good regulations emerge, and what’s worse, it would poison the regulatory process for all time. The moment the SEC loses its ability to set its own agenda is the moment it loses its ability to protect the investing public.

The SEC does not operate as a pass-through entity for Congress, merely following congressional direction. Rather, it’s an independent agency, and its chairman is empowered to set the agenda for the agency’s work. This agenda takes shape in many forms—rule makings, speeches and enforcement actions—and must be set by the chairman, not Congress. This is by design.

Say what? The “agenda” of unelected bureaucrats agency “must be” set by themselves and not by the elected members of Congress? Perhaps Levitt would like to point out where in the Constitution such bureaucrats have been granted this rather awesome power. Contrary to what Levitt seems to think, that the SEC is supposed to operate as a “pass-through” entity for Congress, following its direction, is the only way it can operate that would justify its existence.

Levitt goes on to say:

That’s not to say the agency should be free from congressional oversight. Throughout its history, politicians from both parties have sought to influence its work. That’s to be expected, and a good regulator welcomes outside views, especially those coming from elected leaders who write the laws the SEC implements. Ultimately, Congress holds the power to pass laws requiring agency action; and that option is available to Sen. Warren.

But Congress must respect the SEC’s independence, and thus freedom, to focus on a fixed agenda. Once confirmed to lead the SEC, its chairman has a singular goal: To meet the agency’s mandate to protect investors, facilitate capital formation, and ensure fair and orderly markets.

Well, isn’t that generous. Good regulators should “welcome” the “outside” views of elected representatives, the very people who are actually empowered by the Constitution to write legislation.

Levitt is of course correct to inform Warren that if she wants to impose a new law, Congress has the power to do exactly that through actual legislation. But it is precisely the vaguely defined regulatory “mandate” that Levitt himself embraces which allows the likes of Warren to think that she can impose new laws without the hassle of actually going through the constitutional process.

This is an excellent example of how pervasive and shameless the undemocratic, unconstitutional mindset that typifies the regulatory bureaucracy has become.

(This link may or may not work to get the article…not sure:

Morning Report: More rent versus buy 10/21/16

Vital Statistics:

Last Change
S&P Futures 2124.7 -12.0
Eurostoxx Index 343.3 -1.0
Oil (WTI) 50.3 -1.3
US dollar index 88.6 0.0
10 Year Govt Bond Yield 1.74%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.57

Stocks are lower this morning on no real news. Bonds and MBS are up.

No economic data today, however we do have some Fed-speak.

Following on yesterday’s rent-versus-buy article from Trulia, I crunched some numbers to demonstrate the relative value proposition currently. Using census data for median asking rent and median house prices, I plotted the median asking rent against the mortgage payment for a FHA loan with 3.5% down, including mortgage insurance, property taxes, homeowner’s insurance, and the tax benefit of deducting interest and property taxes for a borrower making the median income. Historically, buying has resulted in a payment higher than the median rent payment. This makes sense: your mortgage payment will be more or less fixed, while rent will increase with inflation.

The chart below plots the two numbers in absolute dollars. You can see the two lines converging which means the rent-versus-buy decision is about as far skewed towards buying than it ever has been.


In the second chart, I plotted the difference between the “median” mortgage payment and median asking rent. The range recently has been anywhere from -10% to 100%.


The other thing to keep in mind with the rent vs buy decision is that the world’s central banks are on a mission to create inflation. They will eventually succeed, and over time the asking rent is going to increase, while the mortgage payment will be largely fixed, with the exception of property taxes and perhaps homeowner’s insurance. On the other side of the coin, home price appreciation will probably maintain at least a mid-single digit rate of appreciation, which is higher than the mortgage interest rate, especially when you take into account the tax benefits.

The takeaway is that the Fed is giving the homeowner a gift in low rates, and that won’t last forever.

Morning Report: Buying is still a better deal than renting 10/20/16

Vital Statistics:

Last Change
S&P Futures 2135.3 -3.0
Eurostoxx Index 341.6 -2.0
Oil (WTI) 50.7 -0.9
US dollar index 88.0 0.0
10 Year Govt Bond Yield 1.75%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.57

Stocks are lower this morning after ECB President Mario Draghi said the ECB is not looking at doing more QE after the program ends in March. Bonds and MBS are up.

In economic data this morning, initial jobless claims rose 13k to 260k. Separately, the Bloomberg Consumer Comfort Index fell. The Philly Fed manufacturing index improved in September, but manufacturing has generally been weak across the board as the stronger dollar hurts competitiveness overseas.

Existing Home Sales rebounded in September to an annualized pace of 5.47% from a downward-revised pace of 5.3 million in August. The median home price was up 5.6% to $234,200. The first time homebuyer represented 34% of all sales, which is a big improvement from the 30% – 32% range it had been stuck in for the past year. Inventory remains tight, however with about 2.05 million homes on the market, which represents a 4.5 month supply. A balanced market is closer to 6.5 months. Distressed sales (foreclosures and short sales) represented 4% of all sales, which is a post-crisis low. Days on market ticked up to 39 days from 36 in August. The increase in the first time homebuyer is definitely good news, and we may finally be seeing the pent-up demand that has been building over the past 10 years finally come to market.

In spite of all that pent-up demand, housing starts remain anemic given where we are in the economic cycle. Housing construction has been the missing link this whole recession. Note the shaded grey areas on the chart. Those are recessions. See how housing construction historically experienced a sharp rebound after the economy bottomed? We haven’t seen that this time around. Some of that was due to an overhang of inventory from the bubble years that needed to be sold, however that adjustment was made by 2011 or so. Since then, tight inventory and rising prices have been the story. The reason why this recovery has been so tepid has been the absence of a robust housing construction market.


Note that Fannie Mae thinks that housing construction will remain muted. In their latest Economic Commentary, they forecast housing starts will grow to about 1.3 million in 2017, which is about 12% higher than their forecast for 2016. The bright spot? SFR will increase to 15% to an annualized pace of 883k. SFR will cannibalize multi-fam going forward as the economy improves and more Millennials go from being renters to being buyers. Speaking of which…

Trulia has a good piece out on the advantages of buying versus renting. Buying a home is 37% cheaper than renting nationally. Naturally, the advantage differs from market to market, but even the worst markets for buying are still 17% cheaper. This assumes the buyer puts down 20% and stays in the house for 7 years. The advantage was as high as 41% in 2012, and got as low as 34% in 2014. Of course this is a moving target as mortgage rates and house prices change. Where are the tipping points to flip the relationship? For home prices, it is a median house price of $468k. For mortgage rates, it is 9.1%.


Who Needs to Internet Hack a Secured Computer if the Hired Hands can Walk Out With Thumb Drives Every Night?

They expressed astonishment that Mr. Martin managed to take home such a vast collection of classified material over at least 16 years, undetected by security officers at his workplaces, including the N.S.A., the Office of the Director of National Intelligence and Pentagon offices.

I could understand a contractor coming in for a specific project requiring a specialist.

One of my remaining Friday morning group of friends, George, was the electronics/room environment/controls specialist at IBM’s huge Austin facility until he retired at 58. Since then, he has done month long projects for other folks, including Chinese companies, finding glitches and spikes, hunting down and changing out motherboards with heating problems, measuring the cooling necessary in an enclosed area, imposing clean standards in a room, but also rewriting control software code and substituting parts that gives him access to secret or proprietary stuff. George often faces days of security checks on his work that slow him down, as one result, but allay his employer’s fears, as another.

Of course I am sure NSA has in-house employed engineers for the job of keeping the control systems operational and up to date, but I am sure there would be a need for specialists from time-to-time.

I draw a distinction between that use of short term one-off specialists and Martin having so many years of continuing access. That’s crazy.

Working at NSA should come with weekly polygraph tests and federal courthouse level searches every morning and every night, at least. Whatever they are doing to secure against physical theft by thumb drive, it isn’t working.

Morning Report: Housing starts disappoint 10/19/16

Vital Statistics:

Last Change
S&P Futures 2137.5 4.0
Eurostoxx Index 343.1 0.6
Oil (WTI) 51.1 0.8
US dollar index 88.0 0.0
10 Year Govt Bond Yield 1.76%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.57

Stocks are up this morning as earnings reports continue to pile in. Bonds and MBS are flat.

Mortgage Applications rose 0.6% last week as purchases rose 3% and refis fell 1%.

Housing starts fell to a 1.05 million pace in September, driven by a big drop in multi-fam. Single fam was up around 8%. Building Permits rose to 1.23 million. Housing continues to be the biggest underperformer in the economy, but the subject hasn’t really come up in this election, for either side.

We have some Fed-speak today, with John Williams speaking at 8:45, Rob Kaplan at 1:30 and William Dudley tonight.

The final debate is tonight, and it looks like Hillary is pulling away from Trump at this point. The black swan event for the markets is a Democratic Party sweep, which will probably cause the stock market to spit up a hairball.

Lending standards in the jumbo space are loosening, even as the luxury end of the housing market underperforms. Loan Depot is now offering 40 year jumbo products that are interest-only for the first 10 years. Redwood is now offering a 90 LTV product that goes down to a 660 FICO.

The NAR is releasing its latest Profile of Home Buyers and Sellers. Here are the big changes over the past 35 years.

  • The first time homebuyer is a smaller percentage than it has been in the past.
  • The internet is not replacing the real estate agent
  • Houses have been getting bigger of the past 30 years, but have leveled out in recent years
  • Down payments have been going down
  • The home search process is taking longer than ever due to tight inventory

Zillow has their own report on trends in housing. Here is the executive summary (the report is very long and detailed):

“The home buying experience is both an intimidating financial transaction and an emotional milestone. Half of home buyers in the U.S. are under 36, meaning a new generation— Millennials—is shaping the future of real estate. Despite demographic reports about young adults’ urban lifestyles, Millennials share their parents’ aspirations for a single-family home, often in the suburbs.

The process of finding or selling a home is much more collaborative for Millennials than for older generations. They bring all available tools to the process, including their smartphones, social media and online networks. While older generations rely on real estate agents for information and expertise, Millennials expect real estate agents to become trusted advisers and strategic partners.

Millennial home buyers are also diverse. While only 9 percent of all homeowners are Hispanic, nearly 15 percent of the Millennials buying homes are Hispanic—reflecting the changing demographics of the American middle class.

Homeownership remains a vehicle for wealth in the U.S., but it can also be a financial burden, as families stretch their finances to afford the space they need, and large, dated homes owned by Baby Boomers and the Silent Generation demand maintenance and improvements.”

Morning Report: Inflation returns 10/18/16

Vital Statistics:

Last Change
S&P Futures 2137.5 15.0
Eurostoxx Index 342.3 5.0
Oil (WTI) 50.4 0.4
US dollar index 88.1 -0.2
10 Year Govt Bond Yield 1.78%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.54

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

It looks like the Fed has made some progress in getting inflation up to its goal of 2%. The Consumer Price Index came in at 0.3% MOM. Ex-food and energy it is up 2.2% on a YOY basis. The Fed doesn’t really look at CPI all that much – it prefers the Personal Consumption Expenditure Index – but it looks like we are moving further away from the deflation ledge that central bankers fear.

What drove the increase in the core index? Owner-equivalent rent, which is a proxy for real estate prices. It rose 0.4%, which is the highest reading since 2006.

What does increasing inflation mean for the mortgage business? Assuming higher inflation translates into wage inflation, you should see a pick-up in the purchase business as Millennials get jobs / raises. On the other hand, the refi business is going to take a hit.

One Texas builder is focusing on the entry-level homebuyer and using USDA loans to help make the sale. LGI Homes, based in Houston, is marketing to people in apartment complexes with flyers discussing the monthly payment they could have if they bought. These are largely properties in the exurbs around Dallas and Houston, where lower land acquisition costs translate into lower average selling prices. ASPs for LGI are below 200k, while ASPs for new homes in general is over $350k. LGI reports seeing the steadiest demand in entry-level.

Sentiment for the builders is high in general. The NAHB Housing Market Index fell 2 points in October, from its record in September.

High property taxes got you down? Here is something you can do about it.

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