Morning Report: Richard Cordray resigns 11/16/17

Posted on November 16, 2017 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2572.0 7.0
Eurostoxx Index 382.0 -1.9
Oil (WTI) 55.4 0.1
US dollar index 87.3 0.0
10 Year Govt Bond Yield 2.34%
Current Coupon Fannie Mae TBA 102.688
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.87

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

Some economic data this morning: Initial Jobless Claims rose to 249k last week, which is still a remarkably low number. We are starting to see wage inflation at the blue collar level. Manufacturing is still strong in the Northeast, with the Philly Fed index coming in at 22.7. Inflation remains on the low side, although import prices did increase by 0.2% MOM / 2.5% YOY on a weaker dollar. Finally, industrial and manufacturing production came in higher than estimates, while capacity utilization improved to 77% from 76.4%. All of these data point to less slack in the economy.

Homebuilder sentiment bounced back in November, according to the NAHB. The index rose to 70  from 68 in October. The index hit a post-recession peak of 71 in early 2017, and the last time above that level was in late 2005. Builders are happy, bit supply remains low. In fact, inventory is so low in San Jose, days on market is less than two weeks, and prices rose almost 20% to hit a median value of over $1 million.

CFPB Chairman Richard Cordray announced his resignation yesterday and said he will be stepping down at the end of the month. The speculation is that he will challenge John Kasich for governor of Ohio. No word on who might replace him. What’s Angelo Mozillo up to these days?

The House is scheduled to vote on tax reform today, while the Senate continues to work on it. Public support for tax reform remains weak, probably because there hasn’t been a plan yet to actually sell to the public – it remains in such a state of flux nobody knows what it will actually entail. The latest potential provisions include sunsetting the individual tax cuts, removing the Obamacare mandate, and cutting Medicare. While these may or may not be smart things to do, Congress and the WH need to be singing from the same sheet of music, which they aren’t. Meanwhile, opponents have been able to run stories against it largely unopposed. Ironically, tax reform in the Senate will probably hinge on two Republicans who will not be facing re-election again in their lives: John McCain and Jeff Flake. I stand by my initial thoughts on this – that the only thing that has a chance of passing is something small and largely symbolic. Re-doing the corporate tax code should be a bipartisan endeavor with comment periods, a visible public debate, etc.. Not finalizing a plan hours before the vote.

Home equity wealth hit a new high of $13.9 trillion, half a trillion over the 2006 high and double the low at the nadir of the Great Recession. It is important to remember that these are nominal numbers (in other words, not adjusted for inflation). Inflation-adjusted home prices still have yet to recoup their highs, in fact they are still 17% below their peak levels. This is why affordability remains decent in spite of the nominal home price indices hitting new highs. It is also why articles in the financial press warning of a new real estate bubble are complete and utter nonsense.

Filed under: Economy, Morning Report |

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17 Responses

  1. markinaustin, on November 16, 2017 at 9:41 am said:

    As to real estate bubbles, learning from the recent unpleasantness, what would be the canaries in the coal mine?

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    • Brent Nyitray, on November 16, 2017 at 10:13 am said:

      We won’t see another one in our lifetimes. Basically, you need a mindset on the part of investors and bankers that an asset is “special” and you cannot lose money in it.

      We saw it in the real estate market, where people used their home equity as an ATM. In the past, people would take out home equity loans to build a deck or remodel a kitchen. During the bubble years, they took out home equity loans to buy a boat or go on a vacation. That is a bubble mentality on the part of borrowers.

      Bankers didn’t care about delinquencies because they thought the increasing value of the collateral would bail them out. If you are backstopped by an asset that is appreciating at 6% a year, why would you care about credit quality, especially if you are securitizing them?

      Investors didn’t worry because they thought that diversification would bail them out. We hadn’t seen a nationwide drop in real estate prices since the Great Depression, and investors figured that any pockets of weakness would be isolated, like Texas real estate in the 1980s. As long as the mortgage backed securities were overcollateralized, they figured they would never have to take actual investment losses. Their only risk (in their mind) was when they would get paid, not if they would get paid.

      Nowadys, none of these things are present. Home equity loans and cash-out refis are largely being used to refinance credit card debt or do home improvements, not fund consumption. Bankers are reluctant to finance anything that isn’t easily saleable. There are a handful of bankers that do the tough stuff, but the rates are high and terms are short. Finally, the private label MBS market has been gone since 2006 and shows no sign of returning.

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  2. Let the mutherfuker burn!, on November 16, 2017 at 6:25 pm said:

    How freaked out is Biden right now?

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