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

Vital Statistics:

Last Change
S&P futures 2742.5 -13
Eurostoxx index 375.67 -2
Oil (WTI) 62.18 -0.17
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.

31 Responses

  1. Vox hits new levels of stupidity:

    “Banks have to know their customers. Shouldn’t Facebook and Twitter?
    Banks have a lot of regulatory oversight. The tech industry doesn’t.
    By Emily Stewart
    Updated Mar 19, 2018, 11:04am EDT”

    Liked by 1 person

    • “Antonio García-Martinez, Facebook’s first targeted ads manager, thinks so too. “For certain classes of advertising, like politics, a random schmo with a credit card shouldn’t just be able to randomly run ads over the entire Facebook system,” he told me.”

      you know what, just make it a public utility and be done with it.

      Liked by 1 person

      • PL jumps on the bandwagon arguing that social media needs to be regulated by the government.

        That they don’t see that sentiment as a threat to themselves is telling about how far things have descended into anti-Trump/anti-Russia hysteria.

        Liked by 1 person

        • How does that work? I mean, really? And some of the stuff they are fantasizing about won’t stand up if litigated up to SCOTUS. You’re not going to outlaw individuals making political endorsements with a little cash on Facebook. You’re not going to stop the Koch brothers from buy Facebook ads.

          Should they start regulating the press generally, or just the press that posts absurd, ridiculous stories about Democrats that distort the facts? Because the press does that, especially with headlines, in all sorts of stories. Including WaPo. And some of the garbage WaPo has regurgitated as news puts them in the same league as FaceBook when it comes to susceptibility to fake news.


        • jnc:

          That they don’t see that sentiment as a threat to themselves is telling about how far things have descended into anti-Trump/anti-Russia hysteria.

          I think it is just a reflection of the standard, ends-justifies-the-means approach that the left always takes. The left never sees their own arguments/positions as potential threats to themselves because they do not adopt those arguments/positions in good faith. Their arguments are almost always arguments of convenience, not principle. They have no shame about, and so are not concerned with, a future circumstance that would require them to repudiate tomorrow what they advocate for today in order achieve their desired ends.


  2. In macro as I learned it this would have been a no-brainer:

    …they remain a source of pent-up demand, but not a source of real demand.

    However, the world has come to think of “demand stimulus” and “supply side” as political issues and slogans, which they may have become.

    But as I learned it, pent-up demand was an invitation to targeted supply side stimulus. The reasoning was that meeting the pent-up demand with expanding supply sooner rather than later fostered increased economic activity, accelerator, etc. Pent-up demand meant that either supply was too short to meet demand or too expensive to meet demand, which were two ways of saying the exact same thing.

    Liked by 1 person

    • “It is now clear that Haspel did not take charge of the base until after the interrogation of Zubaydah ended”

      Which seems to me to be exactly like saying: we could have checked before running the story but didn’t because we ARE IN NO WAY JOURNALISTS. Thanks for reading!


  3. This is a pretty good issue to test State Nullification. I just can’t imagine sending in troops to issue DL’s to illegals.

    It’s a good way to test and see if anything can repulse Federal encroachment and if there is State sovereignty.


    • McWing;

      I just can’t imagine sending in troops to issue DL’s to illegals.

      Certainly Trump wouldn’t. To paraphrase Andrew Jackson’s (probably apocryphal) words, the Wise Latina has made her decision, now let her enforce it.

      Liked by 1 person

  4. I’ll be in my bunk.

    Liked by 1 person

    • Inflation doesn’t positively affect stock prices. Stock prices are discounted value of all future cash flows, and higher inflation will raise the numerator (profits), but it will also raise the discount rate (denominator). The effect on the denominator will be bigger…

      During the 1970s bear market, Buffett was buying the Amazons and Googles of the day at single digit P/Es…


  5. I know I reccomemt a lot Kos diaries, but this one is awesome!


  6. This should end well:

    “Some millennials aren’t saving for retirement because they don’t think capitalism will exist by then
    Despite what news media tells you, millennials do have plans for retirement — just not what you might think
    Keith A. Spencer
    03.18.2018•10:00 AM”

    Liked by 1 person

    • The headline seems to reverse the sentiment which is that they are unable to save. They then trade black humor on their expensive devices about their only hope for retirement being either a state supported poverty lifestyle or death.

      These are described as millennials on the left who think capitalism is so rapacious and automation so relentless that there will be no productive and remunerative work for them in the future, and precious little now.

      My twin granddaughters are already wanting to be a civil or mechanical engineer and an environmental geologist. If they collect artsy-fartsy barista friends in college who have no hope for the future I will get sick and die if I am still alive.

      Joe, the funny thing is, I remember those same nearly nihilistic third rate English majors from my first job as a prosecutor. That was in 1968. The defense attorneys called them “the client pool” as they were experimenting with hallucinogens because there was no tomorrow “in the plutocracy” until “the revolution” removed “the man”. In the meantime they were spaced out and their parents were a continuing source of revenue for the defense bar.

      It seemed as if there were a lot of them then. Crowds of them. They probably did not save for retirement, either.

      Liked by 1 person

    • I’m not saving for retirement per se. I’ve got Social Security, and I’m paying into my fortunately mandated pension for the great State of Tennessee, so I’ll probably have that. Probably.

      Otherwise I’ve got enough in IRAs to have a nice vacation somewhere and die immediately. So I’ve got that going for me.

      Also, inheritance. I will probably inherit decent money from both dad and mother, and my mother will probably pass away around the time I’m hitting 65 so the timing will be good. It won’t be a ton of money–and possibly won’t be anything, if she gets dementia and falls for some phone scam. But . . . it’s what I’ve got!

      The key to planning for retirement is not having children. That’s where all my retirement savings, if I were saving anything for retirement, is actually going.


    • you know what. bring on the illegals. they bitch less and are motivated.


  7. This is what bothers me the most.

    A listener then blurts out, “What’s the Second Amendment?”

    I could give a shit about some back-bencher Democrat Representative gaslighting the nuts, it’s idiots not knowing what the 2nd Amendment is that are voting.



    • Most back-bench politicians gaslight the nuts. Or are serious, being nuts themselves. But I like this response from the Republicans: “This video is incredibly disturbing. It’s surreal to watch a sitting member of Congress suggest that his constituents should take up arms against the president of the United States.”

      I mean, yes, but at the same time, what does he think the 2nd amendment is about? Sports hunting? Skeet shooting?


      • the new talking point seems to be:

        well, the 2A only makes sense if there isn’t a standing army. that’s why it in the BoR. and since we do have an army, the 2A doesn’t have a purpose.


  8. There’s a lot to laugh at in this article, but this stands out,

    “I did not expect that. I thought there would be more Jeff Flakes, more John McCains, more Bob Corkers—people who would defend our system of checks and balances, would speak out for decency, who would defend the First Amendment.”


    • I saw that earlier. I’ll take things that would never be said about or by Democrats even if their president turned out to be a boozing, philandering, pathological narcissist for $400, Alex.


    • And what’s wrong with these forkin’ ignorant naìve millennials? Jeff Flake and John McCain and Bob corker aren’t defending our system of checks and balances or speaking out for decency, their assessing their career options (and sometimes considering having to live with their children and marriage partners) in the Trump era. That’s all they are doing.


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