Morning Report: Existing Home Sales rise 3/21/18

Vital Statistics:

Last Change
S&P futures 2719 -3.75
Eurostoxx index 374.05 -1.52
Oil (WTI) 63.42 1.36
10 Year Government Bond Yield 2.90%
30 Year fixed rate mortgage 4.46%

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.

12 Responses

  1. I like Douthat as a rule, and I attributed his Never Trumpism more to job security than sincere First Principals- here is the tell:

    The depth and breadth of Trump skepticism among right-wing pundits was a pretty solid indicator of his unfitness for high office.

    Liked by 3 people

    • The most common sense response to the assertion that “the internet did it” is in fact that DJT was an oversold TV personality who continued to dominate the cable news on each of the 24/7 cable channels and dominate most press coverage as well. While the majority of the internet voters were for HRC the solely TV generation was DJT’s strength.

      Nevertheless I am convinced that HRC lost that race on her own merits and failings.

      When a basketball team blames the refs for missing a key call it overlooks the fact that the team didn’t put the game out of reach on its own on the other 100 plays during the game on offense and defense.

      I am not diminishing what Douthat wrote. He favored any number of conservatives in the R primaries, probably all of them over DJT. So there it is more than plausible that his TV analysis about the phony personna created by years of TV stardom is what pretty much carried the day for DJT against the field.

      Liked by 1 person

      • I am not diminishing what Douthat wrote. He favored any number of conservatives in the R primaries,

        I wonder when it hit Douthat that the percentage of Real Conservatives in the Republican Party is negligible. I wonder if Buckley ever realized how few Real Conservatives there really are.

        As regards the election, both candidates were unpopular, as I suspect both Lincoln and Douglas were unpopular, one has to win and one has to lose, the argument about He Won versus She Lost will go on forever. I think DJT campaigned harder and was perceived by the electorate as more sincere. In terms of governing, I have to wonder what the Never Trumper Republican pundit class are complaigining about? The ONLY way to overhaul the business tax code is to cut taxes for the middle class and to disguise it as such while exploding the debt even further. A less burdensome tax structure for business has, I think we’ll find, helped unburden business. More importantly, unregulating business is the other half of the equation to help unleash the economy, though it’s impossible to run on, it’s so easily demagogueable. What Trump has discovered is that even minimal border enforcement combined with the tax and regulatory unshackling has seen positive wage pressure on the bottom of the income bracket.

        No one will ever manage the government in a fiscally responsible way, it’s electorally impossible. Since that’s the case, YOLO with what you want when you win, for Republicans, it’s lower business taxes and regulations are the fruits of victory. To access the power though, they have to embrace debt and tight immigration.

        Liked by 1 person

        • No one will ever manage the government in a fiscally responsible way, it’s electorally impossible.

          At least it’s highly unlikely. And I think it is partly structural in three ways.

          First, the HoR represents 435 constituencies competing for $$.

          Second, bureaucratic bloat has multiple federal agencies competing for $$.

          Third, the bigger lobbies are competing for favor.

          The only one that I think can be seriously attacked in real time is management of the bureaucratic bloat.

          That would include instituting the management ideas first seriously proposed by Peter Drucker in the 70s.

          It would include the imposition of double entry bookkeeping for the Army which was promised in 2012 “by 2017”. The nation is still without an ability to actually audit the Army as it has not been able to do since before the Civil War, when Lincoln purposely clouded the military budget from audit.

          IIRC, by the 90s Drucker was proposing a drastic reduction in the size of the Cabinet by consolidation of redundant activities. He had a checklist of costly overlaps. Instead, we added an entire ginormous Cabinet Department redundant to both Defense and State called Homeland Security.

          I don’t think anything can actually be done about either the HoR or the lobbies within our system. But modern management is possible if both parties realize it actually would make the kind of difference that alleviates pain rather than causes it. It’s not romantic or pulse pounding stuff politically but it also should be a no brainer.


        • Brent is probably familiar with Drucker’s ideas. If you are not, I promise they are a refreshing read, even today.


        • Mark:

          And I think it is partly structural in three ways.

          I think it is primarily ideological. Once the feds got into the wealth redistribution business, everyone wants and expects a piece, and there will never be enough to cover all the promises that are made by politicians, promises that are pretty much a requirement of getting elected. Structural changes might have an effect on the margins, but there is a reason that deficits have been a near constant feature of the federal budget ever since the Progressive movement came of age and got the 16th amendment passed.


        • We’re all MMT’ers now!


        • Scott, while this article does not have the detailed nuts and bolts of Drucker’s assessments of reorganizing gummint it has his view from 50000 feet. It was written during the Clinton years.


        • Mark:

          I am all for his idea of abandoning welfare!

          Apart from that, I’d draw an analogy of being on the Titanic and talking about the most efficient ways to bail water. Sure, there are all kinds of inefficiencies in the government and programs that are not achieving their purpose or even exacerbating things. And undoubtedly a fresh approach could fix and/or eliminate those inefficiencies and programs. But the fundamental problem will remain. The fiscal irresponsibility of the government is not the result of inefficiencies or ineffective programs. It is the inevitable result of an ideology of wealth redistribution in a system where both sides of the redistribution get to vote.


    • He left out another key reason for Trump’s victory was that Hillary was a bad candidate. And ran an awful campaign.


  2. Who wants to bet this will be called the warmest winter on r cord?

    Liked by 1 person

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