Morning Report: Builders cheap? 9/24/18

Vital Statistics:

Last Change
S&P futures 2928 -5.7
Eurostoxx index 383.56 -0.73
Oil (WTI) 71.89 1.11
10 Year Government Bond Yield 3.09%
30 Year fixed rate mortgage 4.87%

Stocks are lower this morning as oil rallies and China cancels trade talks. Bonds and MBS are down.

We have a lot of important economic data this week, including housing data, GDP, personal income / spending, and also the FOMC meeting. Given how much rates have jumped over the past month, the markets are set up well for a dovish surprise. In other words, if the Fed’s language isn’t as hawkish as people are fearing, we could see a snapback lower in rates. 2s-10s are trading at 26 bps, up from 21 a week ago.

Several strategists think the Fed is going to slow down the pace of normalization if they see the yield curve invert. While inverted yield curves don’t cause recessions, they tend to forecast them. Overseas weakness will play a part here, with Europe and China potentially slowing down. Of course this time is indeed different, as this is the first time the Fed has owned so much of the market. As I have said before, the signal to noise ratio of the yield curve’s slope is pretty lousy right now, and should be taken with a grain of salt.

Economic activity continued to hum along in August, according to the Chicago Fed National Activity Index. Production-related indicators increased, while employment was flat.

NAR notes that the housing market is becoming more balanced (with respect to leverage) between buyers and sellers, however it is still largely a seller’s market. Inventory is nowhere near a balanced level but, it is showing signs of at least bottoming out. 2015-2017 were years of high single-digit reductions in inventory. Affordability issues driven by rising rates and prices are drawing out more sellers, and making buyers more cautious. We are still nowhere near a balanced market, let alone a buyer’s market, but the imbalance may be reversing.

Ultimately, the key to balance is supply, as in homebuilding. Builders have been able to rely upon rising prices to drive growth, however affordability issues are going to make that a harder slog. Ultimately they will have to build more units to exhibit the growth that investors want to see. The age of homes in the US has been increasing for a long time.

age of homes

Note that JP Morgan just downgraded the whole sector, although valuations are close to peak cycle levels. P/E ratios for the big players are in the 8x – 12x range, which is typically where they bottom. The homebuilding sector is very cyclical, which means they will trade at single digit P/E ratios during the boom cycles, and 30x-50x ratios during down cycles. Generally speaking those valuation levels would normally be associated with housing starts in the 1.5 – 2.0 million unit range. This presents something of a conundrum: either investors are wrong about the homebuilders and they are cheap, or the return to normalcy in terms of housing starts is still years away on the horizon.

Wells announced that they will look to cut the workforce by 5% – 10% over the next 3 years, through attrition and displacements. The mortgage business wasn’t mentioned specifically in the press release. The bank is going through a big restructuring, and making an investment in technology, risk management and compliance. USAA announced job cuts as well. The industry is heading into the dreaded Q4 and Q1 and volumes / margins are lousy.

The FHFA is creating a new index that determines housing affordability. Current affordability indices generally use rules of thumb (house prices versus incomes) and generally create a static model of incomes. FHFA’s index will include a pro-forma analysis of what the mortgage will look like 3 years down the road. It is still a work in progress, but it will be interesting to see what an affordability plot looks like over time. Here is one that looks at the typical mortgage payment as a percentage of income (using 20% down and median home prices / incomes). While home prices are high relative to income, rates are still extremely low compared to the 90s, let alone the 80s.

mortgage payment as a percent of income

34 Responses

  1. The Atlantic makes plain what we all know but no one will say…abortion politics trumps all.

    https://www.theatlantic.com/ideas/archive/2018/09/copaken-kavanaugh/571042/

    My rapist promised to pay it forward, this horrible thing he’d just learned about himself. I have no doubt, judging by the admirable life he’s led, he will. And I will keep my promise to him never to reveal his name.

    But you know what? If he were being confirmed for the Supreme Court; if his decision over what would happen to my daughter’s body, should she become inadvertently pregnant, would tip the scales away from Roe; if one of the key aspects of his job as a judge would be to show and to have shown good judgment over the course of his life, you better believe that I, like Ford, would come forward and tell the committee.

    Like

    • If it’s all about Roe, then the simple thing to do is withdraw Kavanaugh’s nomination and send up Amy Coney Barrett.

      Also, this struck me as a reasonable stating of your position on the obligation to be truthful in denials by Vox:

      “The sophisticated conservative counter, however, is that if America is in the grips of a mass hysteria about sexual assault and sexual harassment, a person almost has to lie to survive in today’s mixed-up world.”

      https://www.vox.com/2018/9/24/17894448/brett-kavanaugh-bill-shine-donald-trump

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      • jnc:

        If it’s all about Roe, then the simple thing to do is withdraw Kavanaugh’s nomination and send up Amy Coney Barrett.

        I don’t understand your logic. If it is all about abortion – and it is – it doesn’t matter who is nominated or what they’ve done. The only thing that matters is whether or not they will uphold Roe. And if they won’t, then any and all tactics are fair game. How does withdrawing Kavanaugh and putting up Barrett change that calculus at all?

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        • I think the idea is take out someone who can be easily delayed and replace them with someone harder to delay. I’m not sure Amy Coney Barrett accomplishes this (although she would have been my first choice). They’d have to find a minority woman to even have a chance of altering the Democrat’s tactics, and even then I think that’s a long shot if they feel like all they have to do is delay past November.

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        • What Kevin said. They will have a harder time with Barrett.

          Also if it is really all about Roe, then it will add insult to injury to the left to have a woman write the opinion overturning it.

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        • Nope, Kavanaugh’s the warm up. Barrett’s nuking will make this look like child’s play.

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        • I think it will be harder, generally (it would be better if she weren’t religious or right) but just as easy to delay.

          Not that there won’t be big guns but it will be riskier and potentially more destructive for the democrats if they get super-extra-nuclear.

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        • jnc;

          What Kevin said. They will have a harder time with Barrett.

          What makes you think so? They may not be able to slime her with sexual assault allegations, but that doesn’t mean they won’t slime her with something else.

          In any event, I agree with KW that it would have been a better pick up front. But I also agree with him that it would be a mistake to cave in to their tactics at this point.

          Also if it is really all about Roe…

          Do you think it isn’t?

          …then it will add insult to injury to the left to have a woman write the opinion overturning it.

          Agreed. That is why I think she would have been a better pick up front.

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        • I think they will have a harder time with Barrett, but not that much harder.

          But I think folding in the face of this onslaught has a high cost, both in terms of future confrontations and the midterms.

          If the Republicans want a blue wave is November, the best thing they could do is fold and withdraw the nomination. I think standing their ground (and Kavanaugh standing his ground) is now the best option all around. It may fail, but I don’t see a better strategy at this point.

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        • KW:

          I think they will have a harder time with Barrett, but not that much harder.

          I was listening to The Federalist Radio Hour from yesterday, and they were discussing exactly this, ie whether Trump should have simply nominated Barrett to start with. Interestingly, both Ben Domenech and his guest agreed that a Barrett nomination process would have been even worse than Kavanaugh’s, because the left, especially women on the left, have a unique kind of contempt for other women who don’t toe the line on abortion, and so would ultimately attack Barrett even more viciously than Kavanaugh. It’s not a crazy notion, I don’t think.

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        • I think the reason Kavanaugh is getting nuked versus Gorsuch is that the left perceives him as changing the balance of the court re Roe. Kennedy was part of the 5/4 to maintain it and Kavanaugh is thought to change that to 4/5. If it was Thomas or Alito being replaced I’m not sure the left would go as hard.

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        • McWing;

          I think the reason Kavanaugh is getting nuked versus Gorsuch is that the left perceives him as changing the balance of the court re Roe.

          Agreed. That’s what I said to jnc the other day. Like a cornered animal, the left is most vicious when it thinks its sacred cows are most under threat.

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        • I was just recontextualizing what you said.

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        • “They may not be able to slime her with sexual assault allegations, but that doesn’t mean they won’t slime her with something else.”

          Sure, but it won’t get as much traction as something that is tied into #metoo, especially with the audience that matters, i.e. the two – three Republican senators who might vote no.

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        • Racism accusations get more traction.

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        • Which is why the next nom should be an ethnic minority that is also a woman.

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        • That person will be smeared as being a Tranny phobe. See how this works? It’s smears all the way down.

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        • That person will be smeared as being a Tranny phone. See how this works? It’s smears all the way down.

          I don’t think that would be treated seriously by Grassley. Or that they’ll hold up confirmations because something happened or might have 30 years ago.

          Not saying they won’t do it (of course, they probably will) but the easiest softball the Trump admin can throw them is a straight white guy. The more diversity checkboxes the next nom checks, the harder it will be for the strategy to work. The more absurd and obvious their smears are, the tougher climb they are going to have.

          Which I think they know. Of course, in a situation like this, it doesn’t matter: they aren’t trying to win the fight by winning, but by running out the clock. No matter who was nominated, they’d do their best to nuke that person. Because right now all they have to do is delay until after November.

          Should their blue wave not materialize, then they face trouble.

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      • If it’s all about Roe, then the simple thing to do is withdraw Kavanaugh’s nomination and send up Amy Coney Barrett.

        Should have done her in the first place. Now it’s getting kind of late if they want to beat the midterms.

        From a long-term perspective, I’m not sure the response should be to surrender to these sorts of tactics. Just generally.

        For the GOP, I think it’s a bad idea going into the midterms to confirm to your less-than-enthusiastic supporters that the minute a dirty trick is played on you, you give up and go home.

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        • KW:

          From a long-term perspective, I’m not sure the response should be to surrender to these sorts of tactics. Just generally.

          I totally agree.

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      • “The sophisticated conservative counter, however, is that if America is in the grips of a mass hysteria about sexual assault and sexual harassment, a person almost has to lie to survive in today’s mixed-up world.”

        True as far as it goes, but it should also be said that when the other side can lie with impunity, insisting on 100% truth-telling and transparency is a recipe to get beaten to death by a cudgel. Attempts at full disclosure (a sort of, “Yes, well I did drink a lot and was quite the ladies man at 17, and I ran into her at a party once, but I never did what she described”) will immediately be turned on the speaker as weapons. And sharper weapons than a full-throated absolute denial can be, even if the flat denial is not 100% accurate.

        “I picked her up, threw her on the bed, she was laughing, my skull-and-bones ring may have gotten caught on her shirt or something, but it was a game . . . ” would be viewed as a confession of rape and also a desire to drive through the streets setting bums on fire for fun.

        Like

        • This is an interesting reread in retrospect.

          https://www.gq.com/story/kennedy-ted-senator-profile

          Should all of Dodd & Kennedy’s legislation be retroactively invalidated as a remedy?

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        • jnc:

          This is an interesting reread in retrospect.

          Indeed. This is just another reason to think that the substance of the charge against Kavanaugh simply doesn’t matter. If this kind of behavior from a 57 year old Senator didn’t disqualify Kennedy from sitting in judgment of SCOTUS nominees as part of the judiciary committee, then the alleged behavior of a 17 year old Brett Kavanaugh shouldn’t disqualify him from sitting on SCOTUS.

          Liked by 1 person

        • Washington and Jefferson were slave owners.

          I think it’s time we invalidated the constitution.

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        • KW:

          I think it’s time we invalidated the constitution.

          I think you mean officially invalidated it, no? It was effectively invalidated by SCOTUS long ago.

          Liked by 1 person

        • You also clearly don’t want Dodd legislating on financial markets with allegations like that out there either.

          And of course there’s Frank’s scandals from the 1980’s.

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        • You make a good point! I think the only thing that will solve this is an FBI investigation.

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        • I think you mean officially invalidated it, no? It was effectively invalidated by SCOTUS long ago.

          Well, duh, officially. Then the SCOTUS becomes our official legislative branch and by now they will all be nominated by the governor of California. For the good of everybody, we should be led by the most progressive and justice-minded state in the country!

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  2. Democrats may have their own Ed Whelan:

    “He told Politico on Monday that his client would go public within 48 hours in an on-camera interview.”

    https://www.vox.com/policy-and-politics/2018/9/24/17896136/michael-avenatti-email-brett-kavanaugh-devils-triangle

    Liked by 1 person

  3. Jesus.

    Like

  4. They think this will get them laid.

    Hypergamy is against them.

    Like

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