All Things in Moderation

Vital Statistics:

Stocks are higher this morning after yesterday’s bloodbath. Bonds and MBS are down as well.

Should be a relatively quiet day ahead of the July 4 weekend. Expect liquidity to dry up in the bond market as most of the Street will be on the LIE by noon.

Consumer sentiment increased in June, according to the University of Michigan survey, while the Chicago PMI also jumped.

Personal incomes rose 0.4% in May, while spending rose 0.1%. Inflation remained muted as the core PCE index (the preferred inflation measurement for the Fed) rose 0.1% MOM and 1.4% YOY. The increased spending was driven primarily by utility spending, so it isn’t that great of an indicator for the economy going forward. The savings rate increased to 5.5%, and has rebounded from the lows of the bubble years. The increase in the savings rate represents the de-leveraging of the American consumer, which does depress GDP in the near term.

Regulatory issues are restricting mortgage credit, according to Treasury. This is causing people at the lower end of the credit spectrum to be shut out of the mortgage market. The recommendations largely involve clarifying QM and TRID rules to make them less uncertain, which drives risk-averse behavior out of lenders. They also propose a moratorium on new servicing rules. They also recommend revising or repealing the residential mortgage risk retention requirement, which has more or less shut down the private label MBS market. The goal of this is to (a) increase credit, and (b) draw private capital into the market. As of now, the US taxpayer bears pretty much all of the credit risk of new origination.

Unicredito Bank’s Chief Economists sees the US unemployment rate falling to 3%. If you believe the Phillips Curve, that level should trigger inflation, however we have so much slack in the labor market with the long-term unemployed we still might not see much wage inflation. Janet Yellen has already said the Fed is willing to let the employment market “run hot.” At any rate, the Fed is just moving from “ultra-accommodative” to simply “accommodative.”

Blue Apron priced its IPO at the lower end of its reduced range and broke price (i.e traded lower than the IPO price) in the aftermarket. Old-timers might remember the days when something like that was a huge embarrassment for the issuing bank. For the most part, getting in on a IPO typically meant at least a 20% pop on the first day of trading. The behavior of APRN represents the change in the landscape in investment banking over the past 20 years. 20 years ago, IPOs were priced that way in order to reward the buy side for their trading business. Since issuers used investment banking services only sporadically, and the investment banks dealt with the big mutual funds every day, the banks were more concerned with making sure that the buy side was happy and therefore under-priced IPOs (which means the issuer was leaving money on the table). Fast forward 20 years, and trading commissions are now 5% – 10% of what they used to be. Nowadays the banks are more worried about keeping the issuers happy, which means IPOs are no longer underpriced. Which is why IPOs are no longer the free money trade they used to be.

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Vital Statistics:

Stocks are up this morning after the ECB said that they will continue to stimulate the economy. Bonds and MBS are down

Last week was bad for mortgages as applications fell 6%. Purchases were down 4% and refis were down 9%. The index was up 10% from a year ago, however. The refi share fell a point to 45.6%. Note that applications have an income skew: starter home buyers are still aggressive, while it is the jumbo space that is taking a breather.

Pending Home Sales fell 0.8% in May, which was the third consecutive monthly decline. Lawrence Yun, NAR chief economist, says it’s clear the critically low inventory levels in much of the country somewhat sidetracked the housing market this spring. “Monthly closings have recently been oscillating back and forth, but this third consecutive decline in contract activity implies a possible topping off in sales,” he said. “Buyer interest is solid, but there is just not enough supply to satisfy demand. Prospective buyers are being sidelined by both limited choices and home prices that are climbing too fast.”

As demand for mortgages falls and competition increases, lenders are looking to ease lending standards to capture business, according to the latest Fannie Mae Lender Sentiment Survey. The net share of lenders reporting demand growth fell to a 2 year low, while the number of lenders who expect to ease standards rose to a 2 year high.

More on inventory woes. Trulia found that over the past year, the inventory of starter homes has fallen by 16%. The inventory of move-up homes has fallen by 13%, and the number of luxury homes has fallen by 3.9%. Inventory is so tight in California that only 25% of the homes for sale remain on the market for over 2 months. Trulia’s recommendation to buyers: Move fast, make multiple offers, and be willing to adjust to the seller’s timetable.

Redifin looked at 11 metro areas and found that 33% of the people who bought a home in the past year made an offer without visiting the property. Note to LOs who are worried about rates: Only 5% of the respondents said they would cancel their purchases if mortgage rates topped 5%. The metro areas were Baltimore, Boston, Chicago, Dallas-Fort Worth, Denver, Los Angeles, Portland, San Diego, San Francisco, Seattle and Washington, D.C.

A new ransomware attack is hitting Europe. It is similar to the Wanna Cry attack a few months ago. So far it has not been reported in the US, but it has hit big European companies like advertising giant WPP and shipper Maersk, which has shut down shipping terminals worldwide. The cost to decrypt your machine is $300 in bitcoin. Obviously don’t open suspicious attachments – and also note that the hackers are getting better and better at disguising these attachments. For example, an email might appear to be coming from a vendor you work with frequently, but if you check the actual email address it is clear that it isn’t actually from that vendor.

Separately, it is good news the hackers are asking for a fixed dollar value of Bitcoin, since is has been on a tear the past couple of months.

Janet Yellen said that another 2008 style crisis is not likely in our lifetimes. While she attributes that to regulation and increased capital, the real reason is that only residential real estate bubbles cause this sort crisis. Residential real estate bubbles are the Hurricane Katrinas of banking and economics, and they really only come around ever few generations. That said, we will undoubtedly see another 2008 style financial crisis – it just won’t be in the US. China has an immense real estate bubble and is trying to find a way to deflate it slowly. Canada has one as well, although it is probably tied pretty closely to Chinese money.

MBA head Dave Stevens and ex-FHFA head Ed DeMarco will testify in front of the Senate today on housing reform.

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Vital Statistics:

Stocks and bonds are lower this morning as we have a lot of central bankers speaking today.

Home prices rose .5% in April and are up 5.7% YOY, according to the Case-Shiller Home Price Index. Seattle home prices rose almost 13%, while Portland and Dallas rose over 9%. They ask the question whether we are in another bubble, which we are not. Bubbles are fundamentally psychological phenomenons, where both investors and lenders view an asset as “special” and argue that it cannot fall in price. While home prices may be reaching unsustainable levels, the lending side of the business is emphatically not exhibiting bubble-like behavior. Credit is still tight for anything that doesn’t fit in the government / GSE box. In fact, the government would like lenders to take more risk than they are willing to take at the moment.

Consumer confidence rose in June, while the Richmond Fed Manufacturing index improved.

Fannie Mae’s latest Housing Outlook is out, and they are predicting 2% GDP growth for 2017. For Q2, they are forecasting 2.9%. Housing will continue to be held back by labor and land shortages, however mortgage rates will remain supportive of the housing market in general.

Senators Bob Corker and Mark Warner are working on a plan to break the Fannie / Freddie duopoly. The plan would split the single-family and multi-family lines and break the single family up into more independent firms. The broad guidelines are to increase competition, reduce barriers to entry, reduce risk to the taxpayer, and to maintain the 30 year fixed rate mortgage. The most difficult part will be dealing with low-to-moderate income support, where there are genuine philosophical differences between Republicans and Democrats.

The bloom is off the rose for the post-election surge in confidence, according to Gallup. The economic confidence index stayed at 3 last week, off of its March high of 15, but still above the pre-election level of -11. Much of this breaks down along partisan lines, with Democratic voters the most gloomy about the economy and Republican voters most confident. Before the election, this dynamic was reversed – with Democrats optimistic and Republicans pessimistic.

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Vital Statistics:

Stocks are higher this morning on good economic news overseas. Bonds and MBS are flat.

Not a lot of important data this week, although we will have a lot of Fed-speak tomorrow. Personal Income and Personal Spending on Friday will be the biggest event.

Durable Goods orders fell 1.1% last month, as aircraft orders (which are notoriously volatile) fell again. Ex transportation, they were up .1% MOM and 5.5% YOY. Capital Goods orders (which is a proxy for capital expenditures) fell .1% MOM and is up 5% YOY.

Economic Growth slowed in May, according to the Chicago Fed National Activity Index. This looks like a bit of a reversal from a strong April reading. Production indicators drove the decrease, while employment and housing contributed.

The recent rally in the markets could provide another justification for rate hikes, according to NY Fed President William Dudley. “When financial conditions ease, as has been the case recently, this can provide additional impetus for the decision to continue to remove monetary policy accommodation.”

Note the language “remove monetary policy accommodation.” To the Fed, they are still stimulating the economy, and they are dialing back that accommodation, not tightening in the classic sense.

On an inflation-adjusted basis, home prices have been outstripping inflation for decades. In the 1940s, the median house price (inflation adjusted to 2000 dollars) was $30,600. The median home price in 2000 was almost 200k, inflation adjusted. If you look at non-inflation adjusted numbers, the median home price in 2000 was $2938, and the median income was $956, making the median house price to median income ratio 3.07x. Generally speaking, that ratio is in the 3.1x – 3.6x range historically. It did peak at 4.8x in 2005, and we are back to elevated levels again.

Speaking of inflation, while things like healthcare, college tuition have outstripped inflation, technology has driven it lower. Check out this Radio Shack Flyer from 1991. Everything on that page cost over $3,200 and all that functionality can now be found on your smartphone. (Yes, even the CB can be monitored via browser). Here is what your phone may be able to do in 10 years.

Delinquent GSE mortgages are at the lowest level since 2008. DQ GSE loans were 1%, while DQ FHA loans were 4%. DQs overall were 2.8%.

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Vital Statistics:

Stocks are flattish after the Fed gave a clean bill of health to the banks it stress-tested. Bonds and MBS are up small.

One year ago today, the UK voted to leave the EU, which ignited a big rally in the bond market and pushed the 10 year down to a 1.37% yield.

New Home Sales ticked up in May to a seasonally adjusted pace of 610k. This was up 2.9% MOM and 8.9% YOY.  The median new home sales price was $345,800 and the average price was $406,400. There are 268,000 new homes for sale at the moment. The 610k print was pretty much the average for the US from 1965-1995. New home sales peaked at over 1.3 million during the bubble years, but we are still a long way from normalcy, given population growth and obsolescence.

34 systemically important banks passed their stress tests yesterday. The banks are getting better at passing these exams, and the sense is that the Trump Administration will nominate someone to the Fed who will dial back these exams a bit. Next week, the Fed will release its comprehensive capital review, which will determine whether the big banks can increase their dividends or buy back stock.

Here is a good way to determine how tight a local housing market is: compare the ratio of new jobs to new building permits. In the Bay Area, that ratio is 6.4x: over the past 5 years, that MSA has added 373,000 new jobs, but has issued permits for only 58,000 new units. Lack of land, along with regulatory issues are holding back building there. In less constrained MSAs (both land and regulation) like Houston, the ratio is 1.3x. For the whole US, the country added just about 2.2 million jobs in 2016 and building permits totaled about 1.2 million, or a ratio of 1.8x.

The Canadian housing bubble continues to defy gravity, but the signs are there that its days are probably numbered. Warren Buffet took a 38% stake in troubled Canadian lender Home Capital and agreed to provide a $2 billion line. You can see from the chart below how far the Canadian bubble has exceeded the US one: Note that these are inflation-adjusted indices which is why US prices appear to have not recouped the losses from the bubble years. They have on a nominal basis, but not an inflation-adjusted basis.

The current median house price in Canada is about 520k and the median income is about 76k, putting the median house price to median income ratio at 6.8x. The US ratio peaked at 4.8x, which gives you some idea of how far prices have gone up North. Once the bubble bursts, it is bound to have some knock-on effects in the US, especially at the high end of the market which is probably more linked to China’s bubble than people care to admit.

The US Government has recommended that the new benchmark short term rate become the Treasury repo rate instead of LIBOR, which is subject to manipulation (as we saw in the UK). Not sure how this will affect current adjustable rate mortgages, but new ones will probably lose LIBOR and will use constant maturity treasuries or some alternative index.

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Vital Statistics:

Stocks are lower this morning as oil turns into a bear market. Bonds and MBS are up small.

Initial Jobless Claims rose 3000 last week to 241k, while the index of leading economic indicators rose again. The LEI report noted that pretty much everything is improving, except for housing and the manufacturing workweek.

Home Prices rose 0.7% in April, according to the FHFA House Price Index. On a YOY basis, they are up 6.8%. As inventory gets tighter, price increases are accelerating, which is a problem as house prices are now pretty stretched versus incomes. The West Coast is still experiencing close to double digit growth, while home price inflation in the Upper Midwest and Northeast lag the rest of the country.

Some Trump advisors are recommending that Janet Yellen be replaced when her term ends in February. Yellen is a dove, and Trump recently seemed to reverse his pre-election view on interest rates. As a general rule, politicians love dovish Feds, so this is unsurprising. Treasury Secretary Mnuchin says Trump “hasn’t given this much thought” since it is so far away. Among the other names being mentioned include Stanford’s John Taylor, Columbia’s Glenn Hubbard, and former Fed governor Kevin Warsh.

As rates have fallen, prepayment speeds have increased, which is generally good news for originators, but bad news for those who own servicing. Delinquencies have reversed their calendar-driven April rise as well, according to Black Knight Financial Services. In fact, loans 90 days down or in foreclosure hit a 10 year low.

The average closing rate for a mortgage inched up in May, according to the Ellie Mae Origination Insight Report. The typical FICO rose a point to 723, with an 80 LTV. The closing rate hit 70.4%.

What are the priorities for the MBA in the upcoming year?  Removing regulatory barriers to housing, GSE reform, GNMA servicing, and much more.

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Vital Statistics:

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

Mortgage applications rose 0.6% last week as purchases fell 1% and refis rose 2%. The average 30 year fixed rate mortgage was flat at 4.13%. The share of refis rose to 46.6% from 45.4%.

Existing home sales rose 1.1% MOM and 2.7% YOY, according to NAR. Lawrence Yun, NAR chief economist, says sales activity expanded in May as more buyers overcame the increasingly challenging market conditions prevalent in many areas. “The job market in most of the country is healthy and the recent downward trend in mortgage rates continues to keep buyer interest at a robust level,” he said. “Those able to close on a home last month are probably feeling both happy and relieved. Listings in the affordable price range are scarce, homes are coming off the market at an extremely fast pace and the prevalence of multiple offers in some markets are pushing prices higher.”

Chicago FRB President Charles Evans said the Fed can wait until December to hike rates, and that it could begin to start shrinking its balance sheet earlier than that. Note the Fed Funds futures are predicting the Fed will stand pat at the July and September FOMC meetings. The median house price was up 5.8% to $252,800. Unsold inventory is at 4.2 months’ worth and days on market fell to 27 days. The first time homebuyer accounted for 33% of sales, down a percentage point from April but up 3 from a year ago.

On this day, 10 years ago the financial crisis began as creditors began to auction off collateral at two Bear Stearns hedge funds.

Is the high price of housing in the Bay Area bringing back the 19th century concept of the company town? Google has been buying apartments for temporary housing for its employees. Interesting issue, where builders won’t take the risk on building new housing, but companies need the housing for their employees.

The government is looking to tackle GSE reform again, Johnson – Crapo from 2014 was simply too complicated, and affordable housing types were against it as well. Sen Mike Warner said: “We have consensus on the importance of the 30-year loan, we have consensus that there needs to be more capital on the front end so in the event of a catastrophic event where the government guarantee kicks in, you’ll have private capital at risk. We’re also thinking of using Ginnie Mae as the wrap. And we’re trying to maintain an active TBA market so there is liquidity and the ability of borrowers to lock in their mortgage rates.” Warner went on to say that GSE reform could happen before financial reform as there is more bipartisan consensus on that.

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Vital Statistics:

Stocks are lower as oil continues to fall. Bonds and MBS are flat.

No economic data today, however we do have some Fed-speak. Overnight Stanley Fischer observed that some countries have real estate bubbles and low interest rates might have played a role. (Gee, ya think?) The planet’s central bankers are on a mission to create inflation, however the inflation they want (wages) is not happening – it is going into inflation they don’t necessarily want (asset prices). Fischer noted that the US government basically IS the mortgage market in the US and that government support for MBS should be made explicit.

Lennar reported better than expected earnings this morning, with revenues up 19%. Deliveries increased 15% and backlog was up 20% in dollar terms. While revenues rose, margins are falling, with gross margins down 160 basis points. Lennar CEO Stuart Miller said: “We are now seeing, contrary to recent reports on housing starts and building permits, more of a reversion to normal in the housing market than the slow and steady recovery pace of the last several years.” The stock is up a couple of percent pre-open.

Meanwhile, the lousy housing starts number prompted a number of houses to take down their Q2 GDP estimates. Merrill took their estimate down to 2.2%, while the Atlanta Fed took their estimate down to 2.9%. The NY Fed’s estimate is coming in at 1.9%.

Credit risk for new mortgages edged up according to CoreLogic. The index is at similar levels to 2001-2003, which CoreLogic considers a baseline for credit risk. Part of this is due to the effect higher interest rates have on credit scores. As CoreLogic observes: “Since 2009, for every one-half percentage point increase in mortgage rates, the average credit score on refinance borrowers has dipped by 9 points, and this pattern will likely continue if mortgage rates move higher. That is because when rates rise, applications drop off and loan officers spend more time with the applicants that have less-than-perfect credit scores, require more documentation or have unique property issues.”

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