All Things in Moderation

Vital Statistics:

Stocks are flat as we head into the end of the year and volume dries up. Bonds and MBS are up again.

Initial Jobless Claims ticked up slightly to 365k last week.

Wholesale inventories increased 0.9% last month as autos and retailers had unsold items. This follows a decline in October. Chances are this inventory will be moved in December, however if it is not, it will have the effect of “borrowing” economic growth from Q1.

PHH has announced they are selling their entire MSR portfolio. New Residential was the buyer. This sale excludes the Ginnie Mae MSR, which were sold separately. The sale price is about 84 basis points of unpaid principal balance. MSR valuations were hurt during 2016 due to higher-than-expected prepayment speeds and lower interest rates. MSR valuations should firm going forward due to higher interest rates as well as new rules regarding the securitization of VA IRRLs. Higher MSR values should generally translate into better rates for the borrower.

Higher mortgage rates will probably force buyers to purchase lower-priced homes, according to a survey of realtors by Redfin. Almost half think that homebuyers will be forced to lower their price range, while another 15% think it will cause buyers to walk away. The rest either see no effect or think that sellers will decide to sit tight. Homebuilders will probably shift their production to lower price points, and builders like D.R. Horton and Pulte could be situated best. We are also seeing a migration of younger families from the coasts to the heartland, where real estate and the cost of living is much lower.

One other tidbit from the survey: more and more realtors are offering discounts.

Investor optimism hit a 9 year high, according to Gallup. There was a definite partisan birfurcation, as Republicans became more optimistic while Democrats became more pessimistic.

21% of home buyers regret their choice of mortgage lender, according to a study by J.D. Power. 27% of first time home buyers regretted their choice. The complaints basically fell into two categories: The first type included a customer experience that was harmed by lack of communication, unforseen problems, and broken promises. The second type felt pressured to choose a specific type of mortgage product. They ended up being happy with their rate, but felt like they weren’t exposed to other options. Of course for the first time homebuyer, some of this is to be expected. If your only experience with getting credit is a “sign and drive” event at a car dealership, then the mortgage process will be a new experience. TRID and everything that goes with it could explain some of disappointment as well. For the second type, the borrower typically already had a relationship with the lender, but felt like the menu was limited. Note that technology is becoming more important, with 28% completing their application online last year versus 18% 2 years ago.

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Vital Statistics:

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

Pending home sales fell 2.5% in November on rising mortgage rates and tight supply, according to the National Association of Realtors. They forecast existing home sales to hit just over 5.5 million in 2017, which works out to be a 10 year high. NAR anticipates that increasing wages will offset some of the problems with affordability.

Same store sales increased 2.1% last week according to Johnson Redbook. Despite the increases in consumer confidence indices, it doesn’t appear to be translating into actual buying.

Bob Shiller (of Case-Shiller fame) thinks that next year could usher in a housing boom, provided some regulatory relief happens. Initially, he thinks that rising rates could accelerate home purchases, as buyers realize that waiting will mean higher house prices and higher rates.

House flippers are making a comeback as well. The number of house flippers has reached a 9 year high, and average profits are up to 61k from 19k at the bottom of the market. About 1/3 are financed with debt, the highest level in 8 years. The market for home flipping loans is still relatively small compared to the vanilla home loan market, but it is expected to reach almost $50 billion this year. The banks don’t seem to be making these loans directly, but are lending to smaller finance companies that do. Since these loans are non-owner occupied, a lot of the post-crisis regulations don’t apply to them or the companies that make them. Rates are in the 7% – 12% range.

Zillow is predicting a modest slowdown in home price appreciation. They are forecasting a 0.7% increase in November, which works out to be a 5.6% increase YOY. Most analysts are looking for a 3% – 5% increase in house prices for 2017.

Here is a good summary of the various important housing charts, all in one place.

The key to improving housing and mortgage lending next year is to bring back the private label securitization market. You can see below that private label securitization is still way below pre-bubble levels. Increasing interest rates could actually be a help as the risk-reward ratios of home lending decrease, which will bring in more investor money. More regulatory clarity will help issuers.

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Vital Statistics:

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

Expect a dull week with thin volume on the exchanges as many traders take this week off. We will have some minor economic reports this week, but nothing should be market-moving.

New Home Sales increased to 592k in November. This is an increase of 17% YOY. New home inventory is about 250k, which is a 5.1 month supply at current levels. The median sales price was $305k, while the average sales price was $359k. The Midwest and the West had the biggest increases in sales.

Home prices rose 5.6% in October, according to the Case-Shiller Home Price Index. Affordability measures have shown 20% – 30% decreases since home prices bottomed in 2012. While affordability is not yet at a point to suggest a reversal in home price appreciation, we are probably approaching the limits of home price appreciation unless wage growth accelerates.

Note that these indices are not inflation-adjusted. While inflation has been pretty tame over the past 10 years, it hasn’t been zero. If you adjust the index for inflation, we are still below our 2006 highs.

The national foreclosure inventory fell below 500k for the first time in 10 years, according to Black Knight Financial Services. Delinquencies ticked up on a seasonal basis, but are down almost 10% YOY. Improvements in delinquencies are getting smaller as the market normalizes.

For bond investors who were taken by surprise by the Fed’s forecast of 3 rate hikes this year, it is instructive to look at how many hikes they thought they would be making this year. In fact, no one suggested less than 2. We only had one. This again stresses the data-dependency of what the Fed is thinking. GDP growth came in slower than expected, and then we had Brexit, which caused the Fed to think about being less aggressive. Ultimately, it will depend on inflation and whether it returns. Despite inflation being below the Fed’s target rate, they still plan to tighten.

Consumer confidence jumped in November, driven primarily by the election and improving expectations for future growth. Note that the current conditions part of the index actually fell, so this is largely a jump based on the perception of the future which may not play out as assumed.

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Vital Statistics:

Stocks are flattish this morning on no major news. Bonds and MBS are flat as well.

We have a slew of economic data this morning.

The final revision for third quarter GDP came in at 3.5%. This is the fastest quarterly growth rate in two years. The GDP price index increased 1.4%. The early estimate for the fourth quarter is about 2.2%. The Fed is forecasting 2% growth for 2017.

House prices rose 0.4% MOM and are up 6.2% YOY, according to the FHFA House Price Index. As you can see from the chart below, we are at record highs for the index. Note the FHFA HPI only covers loans with a GSE / government loan, so it excludes the high end and cash sales.

Durable goods orders fell 4.5% last month. Ex-transportation they increased 0.5%. The core capital goods rate rose 0.9%. The core rate is a good approximation for business capital expenditures.

Initial Jobless Claims rose to 275k last week. This is a 6 month high, but is still quite low by historical standards.

Corporate profits rose 4.3% YOY in the third quarter. If we get some sort of corporate tax reform and regulatory relief, they could rise substantially. That is what the rally in the S&P 500 is telling you.

Economic growth downshifted slightly in November, according to the Chicago Fed National Activity Index.

President Elect Donald Trump named Carl Icahn to be his adviser on regulatory overhaul. “Under President Obama, America’s business owners have been crippled by over $1 trillion in new regulations and over 750 billion hours dealing with paperwork,” Icahn said in a statement released by the Trump transition team. “It’s time to break free of excessive regulation and let our entrepreneurs do what they do best: create jobs and support communities.” There will be all sorts of conflict-of-interest issues with the appointment, as Carl owns stock in many companies that are affected by government regulation.

Refis held steady in November, despite the big increase in rates, according to Ellie Mae. Time to close picked up slightly to 49 days from 48 the month before. Adjustable rate mortgages fell to 3.9%, a new low.

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Vital Statistics:

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

Mortgage Applications rose 2.5% last week as purchases rose 3% and refis rose 3%. Not sure how that is possible, but there it is.

Existing home sales rose 0.7% in November to an annualized pace of 5.6 million. They are up 15.4% from a year ago and are the highest level since February 2007. The Northeast led the charge, with an 8% increase. The median home price was $234,900 which is up almost 7% YOY. Total housing inventory fell for the 18th straight month to 1.85 million, which represents a 4 month supply. The first time homebuyer accounted for 32% of sales. Historically that number has been closer to 40%. The combination of rising rates and prices continue to be a headwind for the first time homebuyer, however an improvement in the economy (and subsequent wage growth) will help offset that.

The rapid home price appreciation we have seen in some markets mean that people who have been foreclosed upon may find themselves with a profit at the end. This has historically been an extremely rare event, and even today it only happens in the hottest housing markets like Seattle and Denver.

Investor confidence continues to grow, as the Wells Fargo sentiment index rose for the third straight quarter and is at a 9 year high. Optimism over the 12 month economic outlook drove the increase, and 37% cite the election for that improvement. If Trump can get through some sort of corporate tax relief, then the forward earnings estimates on the S&P 500 are too low, compared to where they were before the election. That is part of what has been driving the markets. You take corporate tax rates from 35% to 20% or 25%, and the forward P/E multiple on the S&P drops even if pre-tax earnings don’t improve.

Talk about pent-up demand for housing: 40% of young adults (ages 18-34) were living with their parents in 2015, which is a 75 year high. “The number of adults under age 30 has increased by 5 million over the last decade, but the number of households for that age group grew by just 200,000 over the same period, according to the Harvard Joint Center for Housing Studies.” Housing starts have basically kept pace with household formation, but are unprepared if these people suddenly decide to move out. You can see the relationship between housing starts and household formation below: That 5 million equates to almost 4 years of housing starts based on our current run rate. That will be the catalyst to take growth from 2% to 3%+.

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Vital Statistics:

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

Not much in the way of economic data this morning, however Janet Yellen speaks at 1:30pm EST.

The flash services PMI fell slightly to 43.5.

Today the Electoral College votes for President. The vote will then go to Congress to be certified in early January.

Homebuilder Lennar reported earnings this morning, with revenues up 15%, new orders up 12%, and backlog up 17%. Average selling prices rose only 2.9% to $357k, which indicates that home price appreciation is slowing. The press release didn’t address the cancellation rate, which will probably begin to grow for the builders as higher rates kick in. Lennar has a November 30 fiscal year, so it is probably a little early to see how higher rates are affecting them.

Lenders foresee a drop in margins and demand going forward as rates rise, according to the Fannie Mae Quarterly Lender Survey.  Fully 2/3 of lenders view rates as “not favorable” at the moment. Lenders expect margin compression as well as refi shops cut prices to stay competitive. Lenders do expect to continue to ease lending standards. Lenders also intend to execute more through the GSEs and the government and plan to reduce the number of loans they hold on their balance sheet.

CoreLogic put out its forecasts for 2017. Home price appreciation will slow into 2017 as higher mortgage rates and home prices take a bite out of demand. Credit quality will remain good, however and we will start to see more HELOC activity, while refis will decrease. Vacancy rates will remain low, and rental inflation will be around 3%.

Here is a look at the effects of rising rates for the mortgage lending sector.

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