Morning Report: New Home Sales fall 2/26/18

Vital Statistics:

Last Change
S&P Futures 2757.3 8.5
Eurostoxx Index 383.2 2.1
Oil (WTI) 63.3 -0.2
US dollar index 83.5 -0.1
10 Year Govt Bond Yield 2.85%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.4

Stocks are higher this morning on the back of global strength overnight. Bonds and MBS are up.

The highlight of the week will probably be new Fed Chairman Jerome Powell’s testimony in front of Congress. There probably won’t be anything market-moving (the questions will probably focus on financial regulation and wage inflation), but just be aware. He testifies on Tuesday and Thursday. The jobs report will be released next Friday, not this one.

Economic activity moderated slightly in January, according to the Chicago Fed National Activity Index. The 3 month moving average fell as an unusually strong October reading fell off.

New Home Sales fell in January to 593,000. December was revised upward. The median price rose to 323,000. Inventory stood at just over 300k, which amounts to about 6 month’s worth of inventory at the current sales pace.

Goldman is forecasting a 3.25% 10 year yield by the end of the year, adding that if bond yields hit 4.5% you could see a big sell-off in the stock market (no kidding). Surprisingly, they don’t think that sort of yield would trigger a recession.

Quantitative hedge funds are having their worst month in 17 years, especially the trend-following ones. Some of these funds are down 10% plus this month. If this continues, expect to see redemption notices being filed, which means they will be unwinding positions. One of the biggest positions on the street, aside from being long stocks is being short bonds. This will actually provide some support for bond prices, which means that we could be looking at stable / rising rates in the near term.

Very surprising stat: Since the bubble peak, the median home price is up about 4.5% and the Case-Shiller Index is up 6.5%. The new home median price is up 27.5%. This demonstrates just how much the homebuilders focused on the luxury market after the bust. I think it also reflects a push towards urban construction as well.

As the Spring Selling Season begins, inventory is sparse. Most homebuyers have been searching for 3 months or more. The biggest issue? Finding a house they can afford.

Fannie Mae has almost delivered the 10% return on the preferred stock it sold the government during the financial crisis. Freddie has further to go. Once the GSEs pay their 10%, the preferred stock could be retired, perhaps in exchange for housing reform.

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