All Things in Moderation

Vital Statistics:

Stocks are higher this morning on end of month / quarter window dressing. Bonds and MBS are up.

Stocks are set to break a 9 quarter winning streak. The market leaders – the FAANG stocks – have been taking a beating as Facebook gets hit on data issues, and Amazon finds itself in the Administration’s doghouse.

The bond market will close early today, at 2:00 pm EST. Get your locks in early, as secondary marketing types will probably build in a margin cushion to protect themselves over the long weekend.

Personal Income rose 0.4% in February, while personal spending rose 0.2%. The Personal Consumption Expenditure Index rose 0.2% MOM and 1.8% YOY. The core PCE index (the Fed’s preferred measure of inflation) was up 0.2% MOM and 1.6% YOY. The core PCE numbers were a touch higher than the Street was looking for, and everything else was in line. The savings rate rose. Bonds are rallying a bit on the report.

Initial Jobless Claims fell to 215,000 last week, barely missing the late February number of 210,000. We haven’t seen these levels since the early Carly Simon’s “Your’e So Vain” topped the charts. When you take into account population growth the number is even more dramatic.

The FHFA announced that Fannie and Freddie will be issuing a new uniform mortgage backed security beginning in June of 2019. “The transition to the new, common security requires planning, investment, and preparation by a wide variety of market participants,” said FHFA Director Melvin L. Watt. “We have now set the specific date that the Enterprises will start issuing the UMBS and I urge the industry to get ready now to ensure smooth, successful implementation.” This will help bring Fannie and Freddie pricing more in line with each other.

Is fintech reaching parts of the market that have not been fully served by traditional banks and lenders? The Philly Fed finds some evidence that it does, particularly in areas where there is high lender concentration (i.e. only a few banks) and areas that don’t have much in the way of banks.

Barclay’s Bank agreed to pay $2 billion in civil penalties to settle an investigation concerning RMBS issued during the bubble years. “In general, the borrowers whose loans backed these deals were significantly less credit-worthy than Barclays represented,” the Justice Department said in a statement Thursday. Barclay’s had committed to keep the settlement under $2 billion in 2016, but the Obama Justice Department balked.

A Reuters poll of 75 bond strategists suggests that fears of oversupply in the Treasury market are overblown. They are looking for an increase of 40-50 basis points in the 10 year bond yield in 2018. Considering that we are already up 30 basis points this year, we probably aren’t looking at major increases from here – maybe we will find a range of 2.8% to 3% and bounce around.

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Vital Statistics:

Stocks are lower this morning following yesterday’s sell-off. Bonds and MBS are up on the risk-off trade.

The market leaders (in other words the FAANG stocks) are getting taken to the woodshed on Facebook is down about 20% from mid-February. Is it time to rename the index fAANG?

Mortgage applications rose 4.8% last week as purchases rose 3% and refis rose 7%. Despite the jump in refis we are still at lows not seen for a decade.

Q4 GDP was revised upward by 40 basis points to 2.9% in the third and final revision. The Street was looking for an upward revision of 20 bps. Consumption was bumped up 20 bps to 4%, while the price index was unchanged at 2.3%. Inventory was increased as well. For 2017, GDP increased 2.3% compared to 1.7% in 2016.

Pending Home Sales rose 3.1% in February, according to NAR. Despite the gain, it is still over 4% lower than a year ago. That said, February 2017 was exceptionally strong. Expect to see a decrease in March, at least in the Northeast, after a series of storms.

Home Price appreciation continues as the Case-Shiller Home Price Index increased 6.3% YOY in January. Seattle led the group, increasing almost 13%, followed by San Francisco and Las Vegas. All MSAs reported year-over-year gains. The smallest increases were in the Washington DC and some of the Midwest.

Increasing real estate prices are pushing up home equity, which grew over $15,000 on average in the fourth quarter, according to CoreLogic.  It was biggest in California, where it jumped $40,000. This is the biggest increase in 4 years, and should bump up consumer spending. Since home equity is considered more permanent than stock market equity, it should affect consumer spending more.

Consumer confidence slipped a little in March, but is still at elevated levels. The tax cuts are helping to offset some of the losses in the stock market. Generally speaking, consumer confidence indices are inverse S&P indices, so expect them to fall if this sell-off continues.

As the Spring Selling Season takes shape, we are seeing the biggest home price appreciation at the middle and lower tiers of the market, where there is the biggest supply problem. While mortgage rates are rising, so far they aren’t making a dent in housing demand. Surprisingly, Moody’s thinks the tax new tax law will dampen home price appreciation about 4% over the next few years, due to the changes in the mortgage interest deduction (which will pretty much only affect the high end in certain states) and increased interest rates due to rising deficits. Perhaps. At any rate, I think the supply / demand imbalance is the biggest driver of home prices, and that will probably get worse before it gets better.

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Vital Statistics:

Stocks are higher this morning on optimism that a trade war with China can be averted. Bonds and MBS are down.

We will have a short week, with the bond market closed on Friday. On Thursday, we will have an early close. There will be a lot of Fed-speak this week, although not much in the way of market-moving reports.

Economic growth picked up in February according to the Chicago Fed National Activity Index. Production and employment-related indicators drove the increase.

San Francisco Fed Chairman John Williams is the front-runner to replace William Dudley at the New York Fed. Policy-wise he is considered a centrist, although not necessarily a markets guy. He is a long-term macro sort of guy – he doesn’t keep a Bloomberg terminal on his desk – which makes him somewhat of an odd pick to run the NY Fed which is all about markets.

Speaking of the NY Fed, it is set to launch its replacement for LIBOR next week – the SOFR (or secured overnight funding rate). Regulators are looking for a replacement for LIBOR after it was found that banks were manipulating it in order to help their own proprietary positions. LIBOR is a reference rate for many adjustable rate mortgages, as well as lines of credit so its replacement will affect the mortgage industry. The big difference between the two is that LIBOR is set based on the forecast of bankers, while SOFR will be based on actual transactions in the money markets. This makes it much less susceptible to manipulation.

Bond market observers will be watching as the Fed auctions off almost $300 billion in paper this week, with the biggest 2 year auction since 2014. Amid weakening demand for US Treasuries, the results could buffet rates a bit. Note China has threatened to stop buying US Treasuries in response to tariffs.

Mortgage banking profits fell in the fourth quarter to $237 a loan from $929 in the third quarter. This was the lowest reading since Q1 when it hit $224. Higher costs and decreasing volumes drove the decrease. Margins also fell as banks cut margins in a more competitive environment. 56% of the firms in the study reported positive pre-tax profit in the quarter, down from 77% in the prior quarter.

California is mulling a new idea to increase the supply of homes on the market, by giving a tax break to people 55 and older who downsize and move to a new county. Many homeowners are reluctant to move because they will get hit with higher property taxes on the new property.

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Vital Statistics:

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

Troubles with Facebook and the potential for a trade war with China caused a 3% decline in the stock market yesterday. This pushed the 10 year bond yield down towards 2.8%.

New Home Sales came in at 618k, more or less flat on a MOM and YOY basis.

Durable Goods orders came in much stronger than expected, increasing 3.1% MOM and almost 9% YOY. Ex-transportation, they rose 1.9% MOM and 8.1% YOY. Core Capital Goods orders (a proxy for business investment / capital expenditures) rose 1.8% MOM and 8% YOY. We might see some strategists bump up their Q1 GDP numbers on that reading.

KB Home reported first quarter earnings that missed on the top line; however the stock was up regardless after hours. Operating Margins improved, driven by an increase in gross margins. Bottom line numbers are not really comparable given the big adjustment to deferred tax assets as a result of the corporate tax cut. It is interesting to see an increase in gross margins, which have been falling pretty much across the industry. Perhaps it is a sign that home price growth is again outstripping cost growth (particularly labor and commodities).

The Senate passed a $1.3 trillion spending bill that will keep the government open. Donald Trump is mulling a veto over wall funding, but that is probably just noise.

Historically, house prices and the homeownership rate have correlated rather closely, but that broke down after house prices bottomed in 2012. What is going on? The first question to ask is whether the increase in homeownership that started in the mid-90s was due to increasing home prices or something else. We know that the Clinton Administration began to pull on some policy levers (and jawbone the GSEs) to increase lending to underserved markets and areas.

The wealth that was being created in the stock market rally probably helped as well. Easy credit during the bubble also pulled some people into the housing market as well. Once the bubble popped, many people lost their homes and became renters. Finally, tight supply in the aftermath of the bubble is preventing many from buying, and professional investors who are buying starter homes to rent them out are exacerbating the problem.

Prepayments hit a 4 year low, according to Black Knight Financial Service’s First Look on February mortgage performance data. Foreclosure starts fell 25% MOM after spiking in January. Hurricane-related delinquencies fell.

Realtor.com says that this Spring Selling Season is set to become one of the most competitive ever, with lots of buyers who were unable to find anything last year competing with new homebuyers. How are homebuyers reacting to the environment? Increasing down payments, increasing earnest money, and bidding through the asking price.

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Vital Statistics:

Stocks are lower this morning after the Fed hiked rates and the Bank of England decided to stand pat. Bonds and MBS are up.

In a unanimous decision, the FOMC hiked the Fed Funds rate 25 basis points yesterday and released its new dot plot and projections. The projection materials showed a meaningful hike in projected GDP: from 2.5% to 2.7% in 2018 and from 2.1% to 2.4% in 2019. They also took down their estimate for unemployment: from 3.9% to 3.8% in 2018 and from 3.9% to 3.6% in 2019. They also cut their long term estimate of the unemployment rate from 4.6% to 4.5%. The dot plot bumped up their projections for the Fed funds rate across the board, by about a quarter in 2018 and 2019 and by 3/8 in 2020. The Fed funds futures didn’t move much. The May futures are predicting no change, the June futures are predicting a 78% chance of another 25 basis point hike, and the Dec futures are predicting a 42% chance of another 25 basis point hike.

Note the dot plot comparison and how the interest rate forecasts inched up: Bill Gross isn’t buying the forecast. He thinks a Fed Funds rate above 2% when inflation is only 2% will be too destabilizing in such a highly leveraged world. Of course Bill is probably talking his book a bit too.

Home prices rose 0.8% MOM and 7.3% YOY according to the FHFA House Price Index. The Middle Atlantic and Midwest lagged while the West Coast and Mountain states led.

Initial Jobless Claims ticked up 3k last week to 229,000.

The Index of Leading Economic Indicators came in much stronger than expected in February. January was revised upward as well.

The Trump administration plans to announce $50 billion in tariffs against the Chinese for intellectual property violations. The US accuses China of using foreign investment restrictions to force US companies to share technology.

Fannie and Fred are stepping up their purchases of affordable housing loans under their “duty to serve” mandate. Between them, they will buy roughly 8,400 more loans for manufactured, rural, and affordable housing. The problem with these areas (especially rural areas) is that the low loan balances make the loans themselves less profitable. On the other hand, low balance loans generally have higher servicing values, all things being equal. The GSEs are targeting Appalacia, the lower Mississippi Delta, and Native American areas.

Loan gestation times fell to 42 days in February, according to the latest Ellie Mae Origination Insights Report. This is a big drop on a year-over-year basis as well, which strips out some of the seasonality issues. Credit scores also fell a touch.

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Vital Statistics:

Stocks are lower as we await the FOMC decision. Bonds and MBS are down.

The FOMC decision is scheduled to be released at 2:00 pm EST. This will be Jerome Powell’s first rate hike and press conference, so the markets will be hanging on his every word. Here are some of the things the Street will be focusing on. The biggest will be the dot plot for the rest of the year. Do the tax cuts and planned infrastructure spend push the Fed to bump up their consensus of 3 hikes this year to 4%? If so, that is bearish for bonds (higher rates). Another will be the long term neutral Fed Funds rate, which currently stands at 2.8%. Do they move it up to 3%? That sort of revision would be taken as hawkish as well and would push rates higher. Finally, the long-term unemployment rate is currently set at 4.6%, which implies the current rate of 4.1% is too low. If they move down the longer-term unemployment rate, that could be interpreted as dovish.

While most mortgage market participants are rightly focused on the 10 year bond yield, there is another rate that is gathering attention – LIBOR. LIBOR has been rising steadily over the past 18 months, and and 3-month LIBOR is at levels not seen since 2008. LIBOR and the 1 year T-bill rate are the reference index in many adjustable rate loans. What does this mean for the mortgage industry? Funding costs are rising, while volumes are falling. Not a good mix for profitability. Also note that this is yet another reason for borrowers with ARMs to consider a refi into a 30 or 15 year fixed rate mortgage. Long-term rates have been much more stable than LIBOR, and therefore the relative attractiveness is increasing.

Note that increasing short-term rates are having a spill-over effect onto other asset classes. Long-term bonds have had no competition from money market instruments for a decade. That is changing.

Mortgage Applications fell 1% last week as purchases rose 1% and refis fell 5%.

Existing home sales rose 3% in February to a seasonally adjusted pace of 5.54 million. This is up 1.1% YOY. The median home price rose 5.9% to $241k. Total housing inventory stood at 1.59 million, which is 8% lower than a year ago.  The first-time homebuyer accounted for 29% of sales, which is down from 31% a year ago, and well below the historical average of 40%. Days on market fell to 37. The average contract rate for a 30 year mortgage increased 3 basis points to 4.33%. Distressed sales fell to 4%. Overall, it is the same story – tight inventory and rising prices.

For the first time homebuyer, this is bad news, as most of the inventory is at the high end, not the low end. Starter homes in the Bay Area are over $800k, and engineers in Silicon Valley are struggling to pay the rent. Starter homes account for 22% of the inventory, while luxury accounts for almost 60%.

Meanwhile, construction job openings are the approaching post-recession highs. Lack of labor remains the biggest issue for construction companies.

Congress seems close to a deal to keep the government open after funding expires on Friday.  Fiscal conservatives will be unhappy, as the trade seems to be higher military spending for higher non-military spending. For originators, the biggest issue with a government shutdown is the inability to get 4506-T reports out of the IRS.

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Vital Statistics:

Stocks are higher this morning after yesterday’s bloodbath in tech. Bonds and MBS are down small.

Current funding for the government is set to expire on Friday, and Congress is still working on a plan to keep the lights on. Sticking points include funding for the military, the border wall, and the NY-NJ Hudson River Tunnel. Votes are looking likely for Thursday and Friday, so there isn’t a lot of margin for error. Making matters worse is a major snowstorm which is set to hit the East Coast tomorrow. Washington is set to get 4-8 inches which could shut down government for the day. New York is set to get a foot.

We could see some movements in interest rates over the next couple of days with the FOMC decision tomorrow and the Bank of England decision on Thursday. A 25 basis point hike is more or less assured, but the markets will be focused on the projection materials, particularly the dot plot. This will be Jerome Powell’s first rate hike, so every word in the statement and everything he says in the press conference will be parsed even more closely that usual.

The government is mulling a change in the bankruptcy laws that would allow more students to reduce or eliminate student loan debt in bankruptcy. High levels of student loan debt are one reason why the first time homebuyer has been missing in action in this housing recovery. As of now, tax debt and student loan debt are more or less permanent – bankruptcy doesn’t eliminate them. Student loan servicers are required by Department of Education regulations to oppose bankruptcies, even if they know there is little chance of recovery. The servicers realize this is often throwing good money after bad.

Freddie Mac crunched the numbers on how rising interest rates affect the housing market and the mortgage industry. Since 1990, increases in interest rates have dropped home sales by 5%, cut housing starts by 11% and cut mortgage origination by 30%. Of course the rate hikes since 1990 were in the context of a secular bull market in bonds that started around 1981 and ended around 2016 or so. In other words, these rate hikes were short-lived. This time around, that probably isn’t happening. That said, starts are so depressed relative to demand to begin with that we probably won’t see an 11% drop. Unless inflation picks up massively, the Fed will continue to go slow and will be loath to knock the economy back into a recession.

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Vital Statistics:

Stocks are lower this morning on overseas weakness. Bonds and MBS are down as well.

The FOMC will meet on Tuesday and Wednesday with the announcement scheduled for 2:00 pm Wednesday. The consensus is that the Fed will raise the Fed Funds rate a quarter of a percent. Aside from the Fed meeting, there shouldn’t be much in the way of market moving data.

Housing starts for February came in lower than expected at 1.24 million. Building Permits were 1.3 million. This was about a 90k drop month-over-month, which was driven by a decline in multi-family construction. Building Permits exhibited similar activity, where the decline was driven by multi-family. Multi-family construction is much more volatile than single family construction, so it is hard to read too much into this number. We are seeing evidence of oversupply in some luxury markets like NYC and landlords are cutting rents slightly. That said, there is still a complete dearth of supply at the lower price points, and affordable housing advocates are pulling out their hair trying to figure out what is wrong and what policy lever can be pulled to do something about it.

Freddie Mac has a piece discussing the demographic issues driving the low starts. Interesting stat: There are about 4 million more people aged 25-34 than there are aged 35-44. Yet the headship rate (that is the rate of young adults forming households) is 3.6% less than what it was in the year 2000. If today’s young adults aged 25-34 were forming households at the same rate of the year 2000, we would have seen an extra 1.6 million household formations in 2016. What would that have meant in terms of housing starts? 2 million perhaps? The trend in America has been for people to hit milestones (moving out of the house, getting married, having kids) later in life, and maybe we are close to an inflection point. But as of now, they remain a source of pent-up demand, but not a source of real demand.

Industrial Production rose 1.1% in February and manufacturing production rose 1.2%. Capacity Utilization increased to 78.1%. The capacity utilization number shows there is still some slack in the system (historical average is closer to 82%-83%). Inflationary pressures are going to be relatively muted until that slack gets taken up.

Job Openings hit a record in January hitting 6.3 million, according to the JOLTS report. This is an increase of almost 600k jobs, however previous months were revised downward. The biggest increases in job openings were in the professional and business services category, and the trade, transportation and utilities category. The quits rate however, remained largely unchanged at 2.2%, where it has been for a long time. The quits rate is the biggest predictor of future wage growth and is something the Fed watches closely – it is invariably mentioned in the FOMC assessment of the economic situation.

The University of Michigan preliminary reading for March consumer sentiment jumped to 102. Interesting internal: the “current conditions” component of the index increased pretty strongly for the lower income groups, and actually fell for the higher income groups. I don’t know if that is the beginning of a trend (it could simply be a reflection of the stock market sell-off), but for almost all of the post-crisis period, those numbers have been reversed.

While sentiment may be ebullient for consumers, that isn’t the case for mortgage bankers. The latest Fannie Mae Lender Sentiment Survey shows that lenders are expecting a net negative profit margin for the 6th straight quarter, and matched the low of Q1 2016. “Lenders have faced an increasingly difficult market environment, as they report the most sluggish refinance demand expectations in more than a year, the most anemic purchase demand outlook on record for any first quarter, and the worst profit margin outlook in the survey’s history,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. The lack of purchase demand is disturbing, and shows that we have had a slow start to the Spring Selling Season. Lack of inventory remains an issue, and the double whammy of increasing interest rates and rising prices are affecting affordability. Lenders are not increasing the credit box to gain a competitive advantage – standards actually tightened during the quarter.

Finally, on a personal note, I have left iServe and am seeking new opportunities. I will probably be reaching out to many of you over the next few days / weeks.

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Vital Statistics:

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

Initial Jobless Claims fell to 226k last week. We are at levels not seen since the 1960s.

Import prices rose 0.4% MOM and are up 3.5% YOY. Declining oil prices actually pushed the index lower. A weaker dollar is helping bolster exports, however it also makes imports more expensive. It probably won’t make a difference to the Fed, which tends to focus on the Personal Consumption Expenditure metric when formulating monetary policy.

Manufacturing continues to exhibit strength, according to the Empire State Manufacturing Survey and the Philly Fed. We will see if Larry “King Dollar” Kudlow is able to put a floor under the US dollar, which has been weakening to the benefit of exporters. He is already telling the Fed to “let it rip” regarding the economy.

The NAHB Homebuilder Sentiment Index fell to 70 in March.

Homeowner’s equity increased 12% (or just about $900 billion) according to CoreLogic. Negative Equity fell by 21% to 2.5 million homes or about 5% of all homes with a mortgage. For LOs, this represents an opportunity: Anyone who did a FHA loan with 3.5% down a few years ago might have built up enough equity to qualify for a conforming mortgage without MI. With higher rates driving down the refi index, there aren’t many opportunities out there, so review your past production.

Home prices increased 8.8% YOY according to Redfin. This is the fastest pace in 4 years. The median home price is $285,700. Home prices are again ahead of incomes, with the median house to median income ratio back at 4.8x, which is about where it peaked during the bubble years. Low inventory is driving this, and homes are moving quickly. The average time on market fell by a week to 53 days. In Seattle, the average home goes to contract in 8 days.

The House is introducing a bill to rename the CFPB and to have it run by a 5-person board. The new name will be the Financial Product Safety Commission. The bill is bipartisan. Separately, the Senate passed a bill yesterday which eases regulatory requirements for smaller banks.

In the developing world, a lack of affordable housing is a huge problem. One company’s solution: 3D printed houses, which will cost about $4,000 to build. The company will introduce its first community of 3D printed homes next year in El Salvador.

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