Morning Report: Incomes and spending up 7/31/18

Vital Statistics:

Last Change
S&P futures 2811 7.75
Eurostoxx index 391.64 0.72
Oil (WTI) 69.72 -0.41
10 Year Government Bond Yield 2.95%
30 Year fixed rate mortgage 4.62%

Stocks are higher as earnings continue to come in. Bonds and MBS are up on news that the Bank of Japan will continue to hold down rates.

Personal spending and personal income rose 0.4% in June, according to BEA. Inflation remains under control with the PCE price index up 2.2% YOY and the core rate up 1.9%. The income and spending numbers were in line with expectations, and the inflation numbers were a touch below. Good news for the bond market as we start the FOMC meeting. Separately, another strong number out of the Chicago PMI.

The employment cost index rose 2.9% in the second quarter with wages and salaries increasing 2.9%. Benefit costs increased 2.9%.

Punch line: wages and salaries up 2.9%, inflation up 2.2% – we are seeing real wage growth despite all the stories in the press that wages are stagnant.

Home prices rose 6.4% in May according to the Case-Shiller home price index. San Francisco, Seattle and Las Vegas all reported double-digit gains. All MSAs are beginning to correlate a little tighter, with the spread between fastest and smallest falling to 10 percentage points, which is much smaller than the 25 ppts we saw during the bust years and the 20 ppt average since 2001. My guess is that this is a function of the improving job market in the Midwest and working through the last of the foreclosure inventory in the Northeast.

Mission creep out of the GSEs? Some Republican congressmen are calling foul as Fannie and Fred started a pilot program where they buy low downpayment loans and pair them with MI from Arch. Many in Congress would like to see Fannie and Freddie reduce their footprint in the mortgage market, not increase it. The FHFA has justified this move as necessary to perform their affordable housing mission. This will be a constant partisan battle, between Republicans who are alarmed by the fact that the US taxpayer bears the majority of the credit risk in the US mortgage markets and Democrats who are alarmed by the lack of affordable housing.

Young people are shunning construction jobs. The share of younger (under 24) workers in the construction industry has fallen 30% since the bubble days. The number of workers in the industry has fallen as well – from 11.7 million in 2006 to 10.2 million 10 years later. The typical construction job stays open for 39 days nationally, and many builders are hiring ex-cons to meet demand. The obvious answer would be for builders to raise pay to attract people, but what do you do if you are in the starter home business? Between higher wages and regulatory costs, your starter home might be unaffordable to people with the starter income. Note the industry has promised to train 50,000 workers over the next 5 years, but this is a drop in the bucket.

Morning Report: Homeownership rate ticks up 7/30/18

Vital Statistics:

Last Change
S&P futures 2817.75 0
Eurostoxx index 391.62 -0.46
Oil (WTI) 69.98 1.29
10 Year Government Bond Yield 2.98%
30 Year fixed rate mortgage 4.58%

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

Global bonds are under pressure this morning on fears that the Bank of Japan may make some changes to its monetary policy. While these sorts of things don’t impact the US directly, global sovereign bonds tend to trade as a group and US yields will be influenced by them.

We have a lot of important numbers this week, with personal incomes / personal spending on Tuesday and the jobs report on Friday. We also have the FOMC meeting on Tuesday and Wednesday. No changes in policy are expected, however the language of the statement will be in focus as always.

Earnings season continues, with announcements from Freddie Mac, Annaly, Pennymac, and MFA.

FHFA Director Mel Watt was accused of sexual harassment. His term expires at the end of the year, but he will probably be shown the door regardless.

The homeownership rate increased to 64.4% from 64.3% in the second quarter, according to the Census Bureau. This is a 4 year high. Interesting, the geographic dispersion is quite large, ranging from 59.7% in the West to 68.3% in the Midwest. Affordability matters, but that is a big divergence. We also saw a marked increase in younger homeowners, with the under-35 age cohort increasing from 35.3% to 36.5%. Rental vacancy rates fell from 7% to 6.8% while homeowner vacancy rates were flat at 1.5%. The overall homeownership rate is below the long term average, however the increase that started in 1994 and ended with the top of the housing bubble was probably artificial.

Pending home sales rose 0.9% in June, according to NAR. While this is a nice uptick from May, contract signings are still down 2.5% on a YOY basis. It looks like we are seeing an uptick in inventory in some of the MSAs with the biggest inventory issues: Seattle, San Jose, and Portland. With the lion’s share of 2018 in the books already, NAR is projecting a decline in existing home sales for 2018 of 1% and an increase in the median home price of 5%.

Morning Report: Blowout GDP number 7/27/18

Vital Statistics:

Last Change
S&P futures 2842 2
Eurostoxx index 391.88 1.35
Oil (WTI) 69.55 -0.1
10 Year Government Bond Yield 2.95%
30 Year fixed rate mortgage 4.62%

Stocks are up this morning after blowout earnings from Amazon and a strong GDP report. Bonds and MBS are up.

Second quarter GDP came in at 4.1%, a big jump from the first quarter, and the highest print in 4 years. Q1 was revised upward to 2.2% from 2.0%. The inflation numbers were good as well. Q2 inflation came in at 1.8% which was a decrease from the 2.5% pace in Q1. Ex-food and energy, prices increased 2%. Consumption increased 4%, while investment increased 2.1%. Capital Expenditures increased strongly, while residential construction fell. Inventories fell, which dismisses the talking point that Q2 was artificially boosted by inventory build ahead of a trade war.

Note that international trade was a big boost to GDP numbers. While economists talk about trade wars negatively affecting growth, remember that GDP includes the net trade balance. So if imports fall in response to tariffs, that will actually increase GDP. Does that mean you can goose growth via trade spats? No, but trade wars that reduce the trade deficit will bump up the GDP numbers, which is largely an accounting question.

In the wake of the GDP report, the Fed funds futures are predicting a 90% chance of a Sep hike and a 68% chance of a Sep and Dec hike.

Freddie Mac reported that delinquencies fell in June and they are back to pre-hurricane levels.

Foreign demand for US residential property fell in 21% Q1, according to NAR. Foreign buyers accounted for 8% of existing home sales, a drop from 10% in the previous period. While a drop in foreign buying will help alleviate the supply / demand imbalance in the US resi market, new construction is really needed to square the circle, and judging by the GDP numbers, that still isn’t happening.

Morning Report: Durable Goods orders increase 7/26/18

Vital Statistics;

Last Change
S&P futures 2836.5 -4.75
Eurostoxx index 388.69 1.55
Oil (WTI) 69.2 -0.1
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.62%

Stocks are lower after fAANG leader Facebook reported a slowdown in revenues. The stock is under severe pressure this morning, having traded down 24% last night. Bonds and MBS are flat.

As expected, the ECB kept rates unchanged and reiterated their plan to end QE this year. German Bunds are down in Europe, which is pulling US rates higher as well.

Durable goods orders rose 1%, which was lower than expected. Capital Goods orders rose 0.6%, which is better than expected. May numbers were revised upward as well. Capital Goods Orders are a proxy for business capital expenditures and it looks like we are breaching the $68 billion level where we have historically stalled out.

Initial Jobless Claims rose from a 48 year low to 217,000.

The US and the EU have come to an agreement on trade, where the Europeans will import more soybeans and LNG in exchange for an easing in auto tariffs. Euro automakers are up big this morning. They still have to come to an agreement on steel and aluminum tariffs however. Still it is good news for the markets and takes some of the pressure off.

PulteGroup reported strong earnings that beat consensus estimates. Revenues increased 25% and we saw margin expansion. New orders were only up 3%, however. Despite their strong growth, Pulte sold some land and bought back a lot of stock. Given the deceleration in new orders, it raises the question if they are sensing that the market is slowing down a little. With affordable land hard to come by, selling inventory and buying back stock in lieu of investing more in the business is a cautionary sign.

Maxine Waters (who will lead the House Financial Services Committee if Democrats take the House) said that reforming the GSEs will be a priority  Both liberals and conservatives would like to see the government less involved in residential real estate finance, and there is broad agreement on the model they would like to see. The problem is that there doesn’t appear to be the demand from private capital to pick up the slack, at least not yet. The private label securitization market is still a shadow of its former self and there are many governance issues that need to be solved before we see the buy side increase their appetite.

The FHFA announced that it will not make a decision about updating the credit scoring model and instead will continue to come up with new rules. Consumer advocates have complained that FICO scores are preventing some credit-worthy borrowers from accessing mortgages. Separately, Jeb Hensarling sounded like he is being considered to replace Mel Watt.

New rules intended to prevent the serial refinancing of VA IRRRLs are creating problems for some VA loans that were originated prior to the law change. These loans are not eligible for Ginnie Mae multi-issuer pools, which effectively “orphans” them. As a result, these loans are going to be illiquid and will probably trade at scratch and dent levels, exposing some originators to big losses.

Morning Report: New Home Sales fall 7/25/18

Vital Statistics:

Last Change
S&P futures 2816 -4
Eurostoxx index 387.12 -1.06
Oil (WTI) 68.52 0
10 Year Government Bond Yield 2.94%
30 Year fixed rate mortgage 4.61%

Stocks are lower this morning after lousy earnings out of the automakers. Bonds and MBS are flat.

Donald Trump tweeted contradictory statements about trade yesterday, both extolling the virtues of tariffs and also telling Europe that he is ready to end all tariffs if they are. He is also planning to use taxpayer money to help offset the negative effects of Chinese retaliatory tariffs on American farmers. This is New Deal type stuff and I have to imagine that Congress is contemplating legislation to take control of tariffs back from the Executive Branch. When tariffs were going down overall worldwide, it may have made sense to allow the President to lower them without involving the legislative branch, but the unintended consequence was that it allows the President to conduct a trade war unilaterally.

New Home Sales fell 5% on a MOM basis, but were up 2% on a YOY basis to a seasonally-adjusted annual level of 631,000. The Street was looking for something around 680,000. New Home Sales is a notoriously volatile estimate so that number could be revised upward next month. For sale inventory came in at 301,000 which represents a 5.7 month supply.

Mortgage Applications fell 0.2% last week as purchases fell 1% and refis rose 1%.

Flagstar reported earnings yesterday. EPS and revenues rose, however there are some acquisition-related effects happening (not Stearns though). Mortgage origination volume fell by 1.5% and gain on sale fell by 6 basis points. Flagstar appears to be taking share, at least judging by those numbers. Most other banks are reporting sizeable volume drops.

With home prices back above peak bubble levels, the question of affordability invariably comes up. CoreLogic crunched the numbers and it turns out that if you adjust for inflation, the median mortgage payment (P&I) on the median house is much lower than the peak years. This is being driven by the drop in rates. Of the top 10 MSAs, only San Francisco and Denver were higher than the peak. Compared to pre-bubble years (2002), they are higher.

Redfin notes that some of the least affordable MSAs are starting to see an increase in inventory. Homes for sale rose 35% in Portland, 12% in San Jose, and 24% in Seattle. Whether that inventory buildup remains enough to slow the double-digit home price appreciation in those markets remains to be seen. We are heading into the seasonally slow period, and as a general rule home prices decline in Fall and Winter. Overall, home prices rose 5.7% which is the smallest increase since late 2016. Inventory levels still declined on a YOY basis.

Chinese investors were net sellers of US commercial property in the second quarter for the first time in a decade. Pressure from Beijing is the catalyst, although China has a real estate bubble of their own to deal with. Chinese money was also behind some of the activity in the big West Coast MSAs, and it will be interesting to see if that dumps some supply on the market to balance it out.

Morning Report: Home prices continue to rise 7/24/18

Vital Statistics:

Last Change
S&P futures 2820.75 8.75
Eurostoxx index 388.15 3.27
Oil (WTI) 68.28 0.39
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.56%

Stocks are higher this morning after China instituted measures to stimulate the economy. Bonds and MBS are flat.

Bonds sold off hard (yields rose) in response to news out of Japan that their central bank would adjust their interest rate target for the 10 year bond. The Japanese Central bank targets 0% for the yield on their 10 year, and some market participants believe it would be about 30 basis points if it was allowed to float freely. Japanese yields rose the most in 2 years, dragging Euro yields and US yields with them. Remember this whenever you read these articles in the press about the slope of the yield curve and the forecast for a recession. The yield curve is so manipulated by central banks globally that it is hard to draw any conclusions from prices.

Manufacturing activity increased in July, according the Markit Flash PMI, but we are seeing price pressures – in fact pricing pressures were the highest on record (going back to 2009). Input prices (fuel, staff and metals) drove the increase, although the root cause is mainly tariff-driven. Meanwhile, the Richmond Fed Manufacturing Survey was flat but solidly expansionary.

Foreclosure starts fell to 43,500 in June, which is the lowest number in 17 years. Active foreclosures fell below 300,000 for the first time in 12 years. Total delinquencies edged up, but are down on a YOY basis. The foreclosure crisis is about wrapped up, although the judicial states (especially NY and NJ) still have inventory to clear.

House prices rose 0.2% MOM and 6.4% YOY according to the FHFA House Price Index. Prices are still rising at an unsustainable pace in the West and Mountain regions, although the West Coast is decelerating. The Middle Atlantic (which includes NY and NJ) is bringing up the rear.

The West and the South lead the country in job gains and increases in construction employment. The states where construction employment is increasing the fastest? AZ and MI. AZ fits in with the rest of its neighbors, while MI stands out compared to neighbors like OH and IN. There are a few states decreasing construction employment – OK, SC, and NJ.

Morning Report: Existing home sales fall 7/23/18

Vital Statistics:

Last Change
S&P futures 2798.25 -2
Eurostoxx index 384.88 -0.74
Oil (WTI) 68.98 0.72
10 Year Government Bond Yield 2.89%
30 Year fixed rate mortgage 4.51%

Stocks are flattish this morning as earnings continue to come in. Bond and MBS are down.

This should generally be a quiet week with regards to market-moving data, although we will get the first estimate of Q2 GDP on Friday. Aside from that, we do get some real estate data with existing home sales today and the FHFA House Price Index tomorrow.

Existing home sales fell 0.6% in June, according to NAR. They are down 2.2% on a YOY basis. Blame low inventory. Lawrence Yun, NAR chief economist, says closings inched backwards in June and fell on an annual basis for the fourth straight month. “There continues to be a mismatch since the spring between the growing level of homebuyer demand in most of the country in relation to the actual pace of home sales, which are declining,” he said. “The root cause is without a doubt the severe housing shortage that is not releasing its grip on the nation’s housing market. What is for sale in most areas is going under contract very fast and in many cases, has multiple offers. This dynamic is keeping home price growth elevated, pricing out would-be buyers and ultimately slowing sales.”

Other stats from the report:

  • median home price 276,900 (up 5.2%)
  • Inventory 1.95 MM homes (4.3 month’s worth)
  • Days on market 26 days (down from 28 last year)
  • First time buyers 31% of sales
  • All-cash transactions 22% (up from 18% last year)
  • Sales rose in the Northeast and Midwest, fell in the South and West

Manufacturing activity picked up in June, according to the Chicago Fed National Activity Index. May’s abrupt downturn appears to have been a spurious data point, and not an indication of a change in trend. Employment and production-related indicators drove the increase in the index. So far, we aren’t seeing trade issues reflected in the production indices, however there is the possibility that manufacturers are stockpiling inventory and accelerating some production ahead of sanctions which is masking the effect. That said, we would expect to see a drop in the employment indicators, which isn’t happening.

Liquidity in the bond market is starting to dry up, at least if you measure by bid/ask spreads. Dodd-Frank rules were intended to curb proprietary trading but not market-making. Markets continued to function after the law was implemented, which gave some comfort to regulators that they were on the right track. Now that QE is ending, some of the market structure problems are getting exposed. Banks are less involved in market making and we are seeing bid / ask spreads increase in many markets. This is so far largely a European problem, however an anecdote from one fund who had trouble unwinding an Italian bond position is worrisome. They had a position in Italian sovereign debt and had trouble getting bids larger than $10 million, which is a miniscule trade – especially for G7 sovereign debt. So far it hasn’t had a huge effect in the US, but this is something to watch, especially the next time we get a credit crunch. Investors may find entire swaths of the bond market go no-bid, which will include the ETFs linked to these bonds. Tight bid-ask spreads and regulations might be good news for investors and taxpayers in normal times, but they aren’t free.

Despite the issues in the Euro bond markets, stress in the financial system did decrease slightly last month, according to the St. Louis Fed. Historically we are at very low levels, however the Fed is still employing extraordinary measures to support the market, so the past isn’t really all that comparable.

Interesting concept for real estate investors: Now there are a couple of online platforms that allow people to bid on single-family rental properties on line. Not sure what the fee is to transact, but the company also helps connect the investor with a mortgage lender and a property manager.

CFPB nominee Kathy Kraninger took a lot of heat from Democrats on Friday regarding her role in the Trump Administration’s border family separation policies. Not sure how much OMB (her current role) has in DOJ and DHS policy making but Democrats spent a lot of time on the issue. There is a lot of concern that she doesn’t have the financial regulatory background to run the agency, however her nomination does allow the Administration to reset the clock on Mulvaney’s tenure and he gets to stay if she doesn’t get confirmed by the Senate. Either way, the CFPB is getting reined in.

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