Morning Report: February housing starts reverse January’s gains 3/19/18

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10 Year Government Bond Yield 2.87%
30 Year fixed rate mortgage 4.43%

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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