Morning Report: Wages and Salaries increase 2.3% 1/31/17

Vital Statistics:

Last Change
S&P Futures 2270.3 -5.8
Eurostoxx Index 362.9 0.3
Oil (WTI) 53.0 0.3
US dollar index 90.8 -0.3
10 Year Govt Bond Yield 2.48%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.16

Stocks are lower as earnings come in (and some are bad). Bonds and MBS are up small.

Employment costs increased 0.5% in the fourth quarter as wages and salaries increased 0.5% and benefit costs increased 0.4%. On a year-over-year basis, wages and salaries are up 2.3%, an uptick from the 2.1% pace a year ago. This report is more or less in line with expectations and shouldn’t have much of an effect on the FOMC’s rate decision. The meeting starts today, with an announcement scheduled for 2:00 pm EST tomorrow.  FWIW, the Fed Funds futures are pricing in a 13% chance of a rate hike tomorrow, and a 50% chance of a hike by June.

Home prices increased 5.6% YOY in November, according to the Case-Shiller Home Price Index. This index has recouped all of its losses from the bubble years. The Pacific Northwest led the charge, with prices increasing double digits in Portland and Seattle. Washington DC and NYC were the laggards.

Here is the income required to buy the median home in various locations. It varies from almost $150k in San Francisco to $34k in Cincinnati. As they say, all real estate is local.

Donald Trump promised to “do a big number” on Dodd-Frank yesterday. While the President is limited in what he can do unilaterally, he can ease the burden somewhat without legislation.

One economic historian thinks the current bond market most closely resembles the late 1960s, as we exited a multi-decade period of low inflation. From 1965-1970, inflation rose from 1.6% to 5.9%, and long term Treasuries lost 36% in real terms. The lesson from the 1960s is that inflation can sneak up on you very quickly. Of course there are fundamental structural differences in the economy that make it harder to see inflation creep up the way it did in the 1960s and 1970s, so it is probably unlikely that we will see any sort of 1970s conflagration. First, the US was insulated from globalization in the late 60s and early 70s as postwar Asia and Europe were still rebuilding. Second, union contracts had automatic cost of living increases which caused wage-push inflation. Today, we don’t have that. In fact, technology is replacing labor, which is pushing costs down, not up. Capacity Utilization rates were in the high 80s back then versus mid 70s now. Inflation is a case of too much money chasing too few goods. We might have too much money at the moment, but we don’t have too few goods. If anything, we have too much money chasing too few assets, which is why we have experienced asset bubbles over the past 30 years, not inflation.

Speaking of asset price inflation, the best investment in inflationary times can be real estate, especially when you use a 30 year fixed rate mortgage.

Single women buy houses as twice the rate of single men. Most likely explanation: kids.

Last week, I participated in a webinar for HousingWire where we discussed interest rates, regulation, and MI. The playback is here.

Morning Report: Incomes and spending rises 1/30/17

Vital Statistics:

Last Change
S&P Futures 2281.5 -7.5
Eurostoxx Index 364.2 -2.2
Oil (WTI) 53.1 0.0
US dollar index 91.4 0.0
10 Year Govt Bond Yield 2.48%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.16

Dow 20,000 hats are off this morning as corporate earnings continue to come in. Bonds and MBS are up.

Donald Trump temporarily restricted immigration from 7 countries over the weekend until new vetting procedures are put in place. This story dominated the news cycle.

Personal Incomes rose in December by 0.3% while spending rose 0.5%. The core PCE index (the Fed’s preferred measure of inflation) is up 1.7% YOY.

Pending Home Sales increased in December, according to NAR. The challenge for 2017 will be increasing inventory enough to offset higher borrowing costs. NAR is forecasting housing starts to increase 8% this year to 1.26 million. Normalcy is closer to 1.5 million, so we have a ways to go there.

We have a big week for data, with the FOMC meeting and the jobs report on Friday. We also get productivity and employment costs, which is another huge number. We are also in the middle of earnings season with several heavyweights reporting this week.

Steve Mnuchin doesn’t appear to be interested in removing the Volcker Rule, which prohibits banks with FDIC backing to conduct proprietary trading. He does believe that it has restricted market liquidity in its implementation however and he is interested in tweaking it. Overall, it looks like Dodd-Frank will be fixed but not repealed.

A war is brewing over the state of the CFPB. Donald Trump has yet to weigh in on the agency or the fate of Richard Cordray. Also, it is looking like the CFPB will be remade into a bipartisan board as well.

80% of all mortgage borrowers are completely honest on their loan applications, according to a study by UBS. The inaccuracies generally fall into four buckets: overstated income, underreported debt, underreported expenses, and overstated assets.

The NAR’s quarterly survey of mortgage lenders is out, and problems with appraisers (or lack thereof) dominate the headaches. Over half of all respondents reported issues in this area, with 11% characterizing them as significant. One problem is the lack of new entrants, however 28% of lenders won’t accept an appraisal done by a trainee, and 44% require direct supervision of all aspects performed by a trainee. Non-QM lending fell slightly during the quarter, however investor demand for the product is rising. Rising rates are expected to have some effect on purchase demand, however there is such tight supply that it shouldn’t affect volumes overall.

Home prices are now within 0.3% of their peaks on a national level according to Black Knight Financial Services.

Morning Report: GDP disappoints 1/27/17

Vital Statistics:

Last Change
S&P Futures 2294.3 0.3
Eurostoxx Index 366.1 -1.4
Oil (WTI) 53.5 -0.3
US dollar index 91.5 0.1
10 Year Govt Bond Yield 2.51%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.16

Stocks are flattish after GDP comes in weaker than expected. Bonds and MBS are down small.

Fourth quarter GDP growth came in at 1.9%, lower than the 2.2% Street estimate. For the year, GDP came in at 1.6%. Trade was the big drag, along with Federal government spending. This is the advance estimate and will be subject to two more revisions. Disposable personal income rose 3,7% and the PCE deflator (the Fed’s preferred measure of inflation) increased 2%, right in line with the Fed’s inflation target. Ex-food and energy it increased only 1.3%. The savings rate also fell.

The Fed has been consistently high with its estimates for GDP growth. Check out the chart below. It shows the Fed’s forecast for 2016 GDP starting with the June 2014 FOMC meeting. They started out forecasting 2.75% growth, and it actually came in at 1.6%.


Durable Goods orders disappointed in December, falling 0.4% versus expectations of a 2.6% increase. Capital Goods orders (a proxy for business capital expenditures) increased .8%, which was below expectations again.

Consumer sentiment improved in January, according to the University of Michigan survey.

I crunched some numbers looking at the last few tightening cycles, and compared the move in the 10 year bond yield to the move in the Fed Funds rate. During the last 3 tightening cycles (1994, 1999, and 2004) the yield curve flattened, meaning that long term rates went up less than short term rates. In fact, for every percentage point increase in the Fed Funds rate, the 10 year increased by about 34 basis points. The 10 year was at 2.2% when the Fed began its latest hike. With the Fed expecting an increase of 50-75 basis points in the Fed Funds rate this year, we should see an end of 2017 Fed Funds rate of about 2.6% or so. With the 10 year already at 2.5% plus, the market is treating these increases as if they have already been made. The 10 year has gotten ahead of itself a little bit, which means we could see the yield stay at these levels during the year while the Fed Funds rate catches up.

I talked about this and other stuff during the HousingWire 2017 Housing Outlook webinar: Trump’s Mortgage Nation. There is a link in the article for a playback if you missed it. We discussed interest rates, regulation and mortgage interest.

Mortgage backed securities got beat up a little yesterday after Brookings released an article by former Fed Chairman Ben Bernanke that discussed ending the practice of re-investing the cash from maturing bonds and MBS back into the market. The Fed’s balance sheet has been stuck at $4.5 trillion since QE ended, and they purchased about 360 billion worth of MBS last year to maintain their exposure. Given that total originations were probably around $2 trillion, that number is not insignificant. Does that mean spreads will widen once the Fed ends this practice of re-investing maturing proceeds? The short answer is “probably not” The spread between the 10 year and the mortgage rate is about 165 basis points or so. Prior to QE, it was around 166, and you didn’t really see any decrease in that spread when QE was active. The end of reinvestment should be a nonevent for the mortgage market.

Blue Horseshoe loves Annacott Steel

Morning Report: New Home sales drop 1/26/17

Vital Statistics:

Last Change
S&P Futures 2294.5 0.5
Eurostoxx Index 367.7 1.1
Oil (WTI) 53.1 0.3
US dollar index 91.2 0.4
10 Year Govt Bond Yield 2.53%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.16

Stocks are flattish as earnings roll in. Bonds and MBS are down small.

New Home sales fell pretty dramatically in December, to an annualized pace of 536k from November’s revised 598k number. New home sales is a notoriously volatile number, so don’t read too much into it. The 3 month moving average has been pretty steady for the past 6 months. The median sales price was $322k (up about 7.8%) and the average sales price was $384k (up 7.2%). There were about 259,000 units for sale at the end of December, which represents a 5.8 month supply at the current rate. Sales were flat in the West, rose in the Northeast, and fell in the Midwest and South.

Initial Jobless Claims rose last week to 259k from 239k the week before.

The Chicago Fed National Activity Index improved in December to .14 from -33 the month before. This is a meta-index of about 85 different variables, some of which lag quite a bit. The 3 month moving average was still negative however. Production related indices drove the increase, while consumption and housing became somewhat less negative. Employment was flat.

The Index of Leading Economic Indicators improved to 0.5% in December versus 0.1% in November.

At 2:00 PM EST, I will be participating in Housing Wire’s 2017 outlook webinar, where I will discuss the Fed, interest rates, and why fears of further hikes in mortgage rates might be overblown. Here is the link to the webinar. Other subjects include the regulatory environment in Washington DC as well as the latest developments in mortgage insurance premiums. Registration is free.

Despite the change in MIP, Washington might be coming to a consensus that tight credit in the housing market is a problem and it might be time to roll back some of the more restrictive regulatory policies and begin to encourage homeownership. Now that the housing market is back to record highs, liberals want to see more lending to lower credit / income borrowers and are realizing that bashing the banks isn’t the best way to go about it. On the other side of the aisle, conservatives are becoming more accepting of government social engineering via the housing market and want to see housing starts rebound to some semblance of normalcy. Of course the elephant in the room is the mortgage interest deduction, which could become a casualty of tax reform.

What Dow 20,000 means for mortgage rates. Punch line: not much. It is indicative of the current “risk-on” mentality of investors, where they sell safer assets like Treasuries to buy stocks. At the margin, this does push up interest rates, however that doesn’t necessarily mean mortgage rates move up in lockstep. Note that Dow 20,000 doesn’t have nearly the hype associated with it as Dow 10,000 had. That is the difference between the tail end of a secular bull market and the tail end of a secular bear market. It took the Dow roughly 17 years to double between 10,000 and 20,000. During the 80s-90s stock bull market, the Dow quintupled from 1982-1999. Dow 10,000 was the age of stock split beepers, “poof IPOs,” and companies that found they could double their multiple by adding “.com” to their corporate moniker. This time around, investors are more jaded.

One strategist expects the Fed to begin a rapid-fire 25 basis point every quarter starting in late 2017. The consensus is that the Fed would really like to see the Fed Funds rate at 3%, which it considers a “normal” level. Much depends on what we get out of Washington and whether we get some sort of major fiscal stimulus. Aside from fiscal policy, wage inflation is probably going to be the biggest driver.

Here are the hottest markets in real estate according to Some markets are what you would expect to see (like San Francisco) while others are surprises (Fort Wayne, IN). As usual, California dominated the list with 8 of the top 10 markets. California’s housing crunch is creating pushback against laws intended to discourage development.

Morning Report: Dow 20,000 1/25/17

Vital Statistics:

Last Change
S&P Futures 2284.3 10.0
Eurostoxx Index 366.3 4.4
Oil (WTI) 52.8 -0.4
US dollar index 91.1 0.0
10 Year Govt Bond Yield 2.49%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.16

Global stocks are rallying on no real news. The Dow hit 20,000 this morning (CNBC is probably breaking out the champagne as we speak) Bonds and MBS are down on the “risk on” trade.

Mortgage applications increased 4% last week as purchases rose 6% and refis rose 0.2%. This is a 7 month high for purchases.

Home prices increased 0.5% in November, and are up 6.1% YOY, according to the FHFA House Price Index. Geographically, the Pacific and Mountain states continue to lead the way, while the East Coast lags, however prices are decelerating out West and accelerating in the East. Prices have more than recouped the losses from the bubble years and are hitting new highs.


Further slicing and dicing the home price data, the luxury end of the market continues to lag, while the lower price points are accelerating. Know where is getting killed in this segment? Washington DC. This shift makes sense as the Millennial generation is beginning to reach the family-forming stage and needs starter homes. Starter homes should be a fertile area for the builders over the next decade or so. We are even beginning to see a reduction in the NIMBY-ism in places like California, which face acute housing shortages.

Treasury Secretary Steve Mnuchin supports an independent central bank and is not a member of the “audit the Fed” crowd. Congressional Republicans have been pushing for more Congressional oversight of monetary policy, however independence from politicians is critical for the Fed to do its job. Politicizing the Fed is a recipe for inflation because no politician likes a recession and sometimes they are necessary to suppress inflation. In fact, the last time Congress got involved with monetary policy was the dual mandate, which requires the Fed to minimize unemployment while controlling inflation. Sounds like a reasonable policy, however in practice it has resulted in asset bubble after asset bubble.

House flipping is back to bubble-era levels. Home flippers accounted for 6.1% of sales in 2016, the highest level since 2006 when the number hit 7.3% of sales. Scarce inventory is making a good environment for house flipping, with strong home price appreciation. Eventually builders will begin to meet this demand, however for the moment, home price gambling is a big trade in places like Las Vegas.

Donald Trump met with automotive CEOs yesterday to talk about regulation and bringing jobs back to the US. He cited environmental regulations as a big disincentive to manufacture in the US. Note that there are currently about 300,000 regulations controlling manufacturing in the US. Separately, Trump allowed the permitting process for the Keystone XL and Dakota Access pipelines to begin again.

Morning Report: Home inventory at a record low 1/24/17

Vital Statistics:

Last Change
S&P Futures 2262.5 0.5
Eurostoxx Index 361.2 0.2
Oil (WTI) 53.1 0.4
US dollar index 90.9 0.2
10 Year Govt Bond Yield 2.43%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.19

Stocks are flat this morning as earnings continue to roll in. Bonds and MBS are down.

Existing home sales fell 2.8% in December to an annualized rate of 5.49 million, according to the NAR. This caps off 2016 as the best year for existing home sales since 2006. The median home price was $232,200, up 4% YOY. Tight inventory remains a problem, with inventory dropping to a record low of 1.65 million homes for sale. This represents a 3.6 month supply, which is well below the 6.5 month supply which represents a balanced market. NAR estimates that housing starts need to be at 1.5 – 1.6 million to keep up with demand and demographic changes, which are historically normal levels. We have been at recessionary levels for the past 8 years. After recoveries, it is not unusual to see starts approaching 2 million. The first time homebuyer accounted for 32% of sales – historically that number is closer to 40%.

Ben Carson has his work cut out for him in terms of easing the regulations that are preventing home construction. Many regulations are local, however which the Federal Government can’t really do much about.

Manufacturing is improving in January according to the flash PMI.

The US dollar hit a 6 week low after Treasury Secretary nominee Steve Mnuchin said a too-strong dollar could hurt the economy. The response was to a written question about a hypothetical 25% rise in the value of the dollar, so don’t read too much into it. That said, the early indication is that the Trump administration wants to talk down the dollar a little. That ultimately will make imports more expensive and exports cheaper however it is unclear what it means for Fed policy. That will depend on a lot of things, particularly whether wages increase or not.

The new administration is going to begin to tackle a re-negotiation of NAFTA within the next 30 days. Here are the different negotiation points. Essentially, Canada wants to stay out of the way, and Mexico wants to keep tariffs out of the equation. Separately, Trump will meet with automotive executives today. It is important to remember that trade barriers weaken the economy by definition, assuming that trading partners retaliate with tariffs of their own. This could lop 25-50 basis points off GDP, which will have implications for the Fed and their tightening plans. If Trump imposes new tariffs, and our trading partners retaliate with tariffs of their own, we will need some sort of fiscal stimulus to offset that drag. If that happens, expect the Fed to go more slowly, which which should be beneficial for interest rates. A lot of moving parts for sure, but uncertainty keeps the Fed on the sidelines. Separately, Trump also officially pulled the US out of the TPP, which probably wasn’t happening anyway.

Any sort of change in trade policy could be accomplished either directly via tariffs or hidden in corporate tax reform. Congress prefers to go the latter route, and that also ensures that any sort of stimulus via the tax code is married to trade barriers.

One of Trump’s first acts was a regulatory freeze, which gives the incoming administration time to review any last-minute edicts from Obama administration. This is something that pretty much every incoming president does, especially if there is a change in party. The MIP reduction probably fell under this freeze, so it may well survive, depending on the state of the FHFA insurance fund and FHA delinquency rates.

Despite all of the uncertainty in Washington, economic confidence is at a post-recession high, according to Gallup. Current conditions and the outlook both improved, making this a little more durable. Confidence goes a long way towards improving the economy and can prove to be elusive.

As the economy strengthens, Fed officials are now thinking about what to do with their $4.5 trillion of Treasuries and MBS, which are a legacy of the QE days. As of now, they are re-investing maturing proceeds to maintain their assets at approximately $4.5 trillion. Normalization of monetary policy certainly includes returning the balance sheet to its pre-QE levels of under $1 trillion, but that may turn out to be a 2018 event.

iServe’s own Mike Macari, Chief Communications Officer, wrote an article for the Scotsman’s Guide with John McDade, discussing VA loans, and why they are so important to our country.

Employment for residential construction remains healthy, according to the NAHB. The number of open construction jobs was 184k in November, according to the JOLTs report, however hiring is seasonal. That number peaked at 225k in July. The spring selling season is just around the corner, beginning in early / mid February. Getting homebuilding back to a sense of normalcy would go a long way towards improving the economy for both buyers and workers.

Morning Report: Change in mortgage insurance was short-lived 1/23/17

Vital Statistics:

Last Change
S&P Futures 2261.8 -4.0
Eurostoxx Index 361.2 -1.4
Oil (WTI) 52.3 1.0
US dollar index 91.1 -0.5
10 Year Govt Bond Yield 2.44%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.6
30 Year Fixed Rate Mortgage 4.19

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

We are entering the quiet period for the Fed ahead of next week’s FOMC meeting, so bonds should be less volatile as there is no Fed-speak. We also don’t have much for market-moving data this week until Friday when we get the first look at Q4 GDP and durable goods.  We will get some housing data with existing home sales, new home sales, and the FHFA House Price Index.

HUD has suspended the planned decrease in annual MIP for the moment. It was scheduled to go into effect this week, however the new Administration wants to take a look at the health of the FHFA insurance fund before making any changes. The timing of the MIP cut was suspect to begin with – if it was such a great idea, why wait until the last minute to make a change? Note that this change will positively affect FHA and VA pricing for the higher note rates.

Separately, Donald Trump put a moratorium on all new regulations for the moment. This is something every President does as agencies often try and slip some onerous stuff in at the last moment especially when the incoming Administration has large philosophical differences with the outgoing one.

Hedge funds are pressing their short speculative bets in the Treasury market. At the same time, institutional investors are aggressively buying Treasuries after the increase in yields. This is a classic “fast money versus real money” trade and usually the real money wins by dint of sheer firepower. Much will depend on what the new Trump administration does with respect to fiscal stimulus. The first priority seems to be repealing and replacing Obamacare, not infrastructure or tax reform. Every president has a limited amount of political capital, and this one seems to be spending it on healthcare, which means a tougher road forward for infrastructure spending and tax reform. The less stimulus out of Washington, the more the Fed can take their time raising rates, and the more that rates will stay low. This also sets the stage for short squeezes in the bond market, or brief periods where rates fall dramatically. Borrowers who are on the cusp with a refi could sneak in a good rate.

One thing to keep in mind with respect to interest rates is the US dollar. For the past two decades, a strong dollar has been the mantra of both Republican and Democratic administrations. Trump has made comments that the US dollar is too strong, especially with respect to the yuan. The markets seem to be taking this as “Trump being Trump” but it bears watching. A lower dollar is good for manufacturers in the US, but generally bad for consumers. It also is bad for bonds (inflationary), which means pushing up interest rates at the margin.

The Fed may begin to shrink its balance sheet this year, as the Fed Funds rate tops 1%, Philadelphia Fed President Patrick Harker said on Friday. The Fed increased its balance sheet to $4.5 trillion from about $800 billion in assets via quantitative easing, and has been re-investing maturing proceeds back into the market. At the margin, this means somewhat higher mortgage rates unless other entities like mortgage REITs and sovereign wealth funds pick up the slack.

The appraiser shortage is clogging up the system. There were 2000 fewer appraisers in 2016 versus 2015, and the average age is 53. Many are looking to retire, and the pipeline of new appraisers is shrinking. Regulatory challenges have largely caused the problem, and the industry is looking for ways to attract new blood into the industry, via waiving the degree requirement and shortening the number of apprentice hours required. The ones that remain however have so much work that they don’t have the time to train anyone.

Interesting article from John Maudlin about the state of things in DC. The takeaways: The consensus is that Dodd-Frank, Obamacare, and the tax code will be restructured, but that is about the end of the consensus. How it will be done is anyone’s guess. As time goes on, it looks like the changes in Obamacare will be marginal, not dramatic. Second, Trump’s management style is much more in the private sector style, which will mean more turnover than is typical. This will inevitably be described as “disarray” by the press, which isn’t used to seeing this sort of style.

Black Knight Financial Services has their first look at December mortgage data. The inventory of loans in some phase of foreclosure dropped by 200,000 in 2016, the best improvement of any year on record. Loan delinquencies were 4.42%, down .91% MOM and 7.5% YOY. Prepay speeds fell 5.5%.

Finally, I will be on the panel for HousingWire’s Housing Outlook 2017: Trump’s Mortgage Nation on Jan 26 at 2:00 pm EST. I will be discussing rates and the economy, and we will also delve into the regulatory environment and mortgage insurance. Registration is free and it promises to be an informative event.

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