Morning Report: Durable Goods orders rise 3/23/18

Vital Statistics:

Last Change
S&P futures 2648.75 5
Eurostoxx index 365.94 -3.21
Oil (WTI) 64.54 0.24
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.46%

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. 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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