All Things in Moderation

Vital Statistics:

Stocks are higher as close the books on 2018. Bonds and MBS are down small.

Today should be relatively quiet as we have an early close in the bond market and no economic data to speak of. Economic data has been delayed due to the government shutdown, but so far it looks like BLS is still working so we should get the jobs report on Friday.

Pending home sales dropped 0.7% in November, according to NAR. YOY, activity was down 7.7%. Lawrence Yun, NAR chief economist, said the current sales numbers don’t fully take into account other data. “The latest decline in contract signings implies more short-term pullback in the housing sector and does not yet capture the impact of recent favorable conditions of mortgage rates.” The government shutdown is not going to help things going forward, as the inability to get flood insurance will probably affect some 40,000 home sales.

People are looking at 2019 and largely assuming that it will be a carbon copy of 2018 with respect to the mortgage business. That is probably a safe bet, however there is one big difference: if you believe the Fed Funds futures are correct, the Fed is out of the way. For example, Freddie Mac anticipates that the 30 year fixed rate mortgage is going to be 5.1% and originations are going to increase slightly to 1.69MM. When that forecast was made (in August of 2018), people were thinking we would probably have two more hikes in 2019. I suspect that the forecasts for 2019 have yet to factor in a Fed that does nothing further.

Where will rates go, then? I suspect that unless the data changes markedly, they probably go nowhere. If we see a dramatic drop in GDP (say Q1 GDP drops to 1%) then rates are going lower as the yield curve will probably invert. If we see a dramatic jump in inflation (say Q1 core PCE hits 3%) then the Fed might hike again and we should see higher mortgage rates. However, the most likely bet is that they kind of meander around in the mid 4%s for the year.

Where will home prices go? Most forecasts assume that home price appreciation will slow this year, and that is probably a solid bet. Home prices have become largely untethered from incomes again and will probably lack much impetus to move higher unless wages get a strong boost. There is a housing shortage that needs to be addressed, but that doesn’t necessarily mean SFR construction – the needs are at the lower price points, and that means more multi-fam, not necessarily SFR. There is a glut of high priced properties as well.

I suspect that even if rates do move lower, there has been enough prepayment burnout to prevent any sort of meaningful refi boom. Volume is going to have to come from additional products (non-QM etc) and new construction. Volume probably won’t be as bad as 2018, but it won’t be better than 2017 either. Margin compression will probably ease up as competition decreases and marginal players exit the business.

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Vital Statistics:

Stocks are lower this morning after yesterday’s furious rally. Bonds and MBS are up.

Was there any particular catalyst for yesterday’s move in stocks? Not really. Markets don’t go up in a straight line, and they don’t go down in a straight line either. Bonds sold off heavily, but you didn’t see as much action in TBAs. They were down, but not like the 10 year. TBAs have been lagging the move in the bond markets anyway.

Home prices rose 5.5% in October, matching the move we saw in September. The usual suspects saw the biggest increases: Las Vegas, and San Francisco. Phoenix is now showing strength as well. Affordability remains the most pressing issue: “Home prices in most parts of the U.S. rose in October from September and from a year earlier,” says
David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The combination of higher mortgage rates and higher home prices rising faster than incomes and wages means fewer people can afford to buy a house. Fixed rate 30-year mortgages are currently 4.75%, up from 4% one year earlier. Home prices are up 54%, or 40% excluding inflation, since they bottomed in 2012. Reduced affordability is slowing sales of both new and existing single family homes. Sales peaked in November 2017 and have drifted down since then.”

Retail sales were the strongest in 13 years for last week, with same store sales up 7.8%. Since consumption is 70% of the economy, I wouldn’t be surprised to see some strategists bumping up their Q4 GDP estimates.

Note that due to the government shutdown, the Commerce Department won’t be releasing economic numbers. We won’t be able to get tax transcripts out of the IRS, but FHFA should be running normally, so you should be able to get case numbers for FHA loans, and Ginnie Mae securitization markets should function normally.

The Trump Administration expressed confidence in Jerome Powell, and said that he is safe. There is a precedent for the President showing Fed Chairmen the door – Jimmy Carter dumped G. William Miller after a year on the job, though he kicked him upstairs to Treasury and nominated Paul Volcker.

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Vital Statistics:

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

Not a lot of news to work with, but most of the business press is fixated on the stock market sell-off and trying to craft a narrative that him (or the government shutdown) is behind it. This is nonsense. There is a sea change in the market’s perception that the Fed has overshot, and you can see it the chart below, which shows the expected Fed Funds rate for a year from now.

Right now, the central tendency is that there will be no more rate hikes in 2019. But take a close look at the implied probabilities today and compare them to where they were a month ago. At the end of November, the markets figured there was a 23% chance that there would be no further changes, a 37% chance of one more hike, and a 25% chance of two more hikes. Look at the probabilities now: 59% chance the Fed does nothing in 2019, a 17% probability they hike 25 basis points, and a 19% probability the next move is a rate cut. That is a tremendous change in market perception in just under a month, and THAT is what is driving the markets. Not the government shutdown. Not Trump jawboning Powell about interest rates, especially since the markets are saying that Trump is right. Hard for the business press to massage that point.

FWIW, the Atlanta Fed is predicting Q4 GDP to come in at 2.7%. If there is a recession coming in 2019, today’s numbers sure are not signalling one.

There is concern in the economy that housing is slowing down, but in all honesty, housing never really recovered all that much, at least as far as building is concerned. We still have such a deficit between supply and demand that any fears of another 2008 – style market collapse are misplaced. Bottom line: the US taxpayer has been bearing the credit risk of 90% of all new origination over the past 10 years. The banking system does not have the mortgage credit risk issues it did during the bubble days – the private label mortgage market does not have the footprint it did a decade ago.

There is fear of a drop in global demand, and that is what the declines in commodity prices are saying. The Chinese economy is living on borrowed time, as they have a massive real estate bubble that will burst at some point. Europe continues to muddle through, and Japan’s start-stop economy is beginning to hiccup again. Fears of a global economic slowdown are a valid fear, however the punch line from that is ultimately lower global interest rates, which is a plus for the US, not a negative.

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Vital Statistics:

Markets are lower this morning ahead of what will be a 4 day weekend for most. Bonds and MBS are flat.

Hopes for a deal to avoid a government shutdown were dealt a blow yesterday when President Trump said he would veto any budget that does not include funding for the wall. The Wall is a political non-starter for Democrats, which means we have a problem in the Senate. That said, unless Santa needs FAA approval for his Christmas Eve run, I suspect not too many people are going to notice if the government shuts down over the weekend.

Separately, Trump abruptly announced a withdrawal from Syria, and General Mattis has retired in protest.

The VA adopted new policies regarding refinancing and the required net tangible benefit to veterans. The biggest change will concern seasoning of loans before refinancing. A loan is considered seasoned after 6 monthly payments have been made, or 210 days since the first payment. Under previous guidance, loans which did not meet these requirements were ineligible for traditional Ginnie Mae pooling. Now they are uninsurable.

We have some economic data out this morning. The third revision to Q3 GDP was unchanged at 3.5%, while consumption was taken down very slightly from 3.6% to 3.5%. Durable Goods orders rose 0.8%, while the Index of Leading Economic indicators came in stronger than expected. October’s LEI were revised downward however. Economic growth definitely is slowing from its midyear pace, and Q4 forecasts are around 3%.

Home Affordability hit a 10 year low, as rising rates and home prices are not being offset quickly enough by rising wages. “Home affordability is getting worse nationwide,” says Daren Blomquist, senior vice president at ATTOM. But buyers shouldn’t lose hope. “We’re going to hit an affordability tipping point in 2019, where it becomes more affordable to buy. Buyers will have more inventory to choose from and they will be running against fewer multiple-offer situations.” Of course all real estate is local, and not all areas are overvalued or undervalued. You can see that big parts of FL, TX and the Pacific Northwest are overvalued, while the Midwest remains affordable. The chart is courtesy of CoreLogic.

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Vital Statistics:

Stocks are higher this morning after the Fed hiked rates. Bonds and MBS are flat.

As expected, the Fed hiked rates 25 basis points yesterday. The vote was unanimous, and the statement was pretty bland. The forecasts were tweaked slightly, but nothing major. The biggest change was in the dot plot, which basically removed one tightening from 2019’s forecast. The left plot is September, while the right one is December. Note that the dispersion has decreased as well.

Bonds took the tightening favorably, while stocks used it as an excuse to sell off. The initial head fake in the bond market was intense, with 2.86% printing before falling below 2.80 and eventually to 2.76%. MBS spreads widened considerably before settling in. The press conference was uneventful, with Powell dodging questions about Trump and the Central Bank’s independence while stressing that the economy is extremely strong right now and it made sense to raise rates. He also said that the Fed Funds rate is now at the lower end of the neutral range and the Fed has no intentions of deviating from its pace of balance sheet reduction.

Existing home sales rose 1.9% in November, for a second straight month. Lawrence Yun, NAR’s chief economist, says two consecutive months of increases is a welcomed sign for the market. “The market conditions in November were mixed, with good signs of stabilizing home sales compared to recent months, though down significantly from one year ago. Rising inventory is clearly taming home price appreciation.” The median home price rose 4.2% to $257,700, while inventory fell to 1.74 million. This represents a 3.9 month supply, which is well below what would be considered an equilibrium market. “A marked shift is occurring in the West region, with much lower sales and very soft price growth,” says Yun. “It is also the West region where consumers have expressed the weakest sentiment about home buying, largely due to lack of affordable housing inventory.” I wonder if Chinese money is exiting the area as their economy slows and you start seeing credit issues there. Finally, days on market rose to 42 and the first time homebuyer accounted for 33% of sales.

The Senate passed a stopgap spending measure which would fund the government through February. No word on whether the House will go along, but it certainly looks like any sort of shutdown over the holiday period isn’t going to happen.

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Vital Statistics:

Stocks are higher this morning ahead of the FOMC decision. Bonds and MBS are flat.

The FOMC decision will be announced at 2:00 pm EST. While the actual decision will be important, the focus will be on the dot plot, which will feed 2019 forecasts. The Fed Funds futures have been a bit more dovish than the previous Fed forecasts, so the market will be expecting a bit of a downward shift in forecasts. The Fed will also release its forecasts for GDP, unemployment, and inflation as well. The Fed has been consistently low in its GDP estimates and consistently high in its inflation and unemployment forecasts since 2016, which is the mirror image of its pre-2016 forecasts. Powell will have a press conference after the release, so the 2:00 pm – 3:00 pm EST timeframe could see some market volatility.

Speaking of inflation, we are in some ways going back to the 1970s. Manufacturers (especially in food) are coming up with ways to raise prices while not “officially” raising prices, by offering new products. For example, Nabisco’s new “thin” Oreos cost almost double per ounce than traditional Oreos. We saw this in the 1970s, when potato chip bags were mainly air, and companies would keep packaging sizes (and costs) the same while reducing the amount in the package.

Housing starts came in at 1.26 million, a bit higher than what the Street was looking for. Building permits rose 1.33 million, which was an upside surprise as well. The increases were driven by multi-fam, which can be extremely volatile. SFR was more or less unchanged.

Mortgage applications fell 5.8% last week despite a big drop in rates. Purchases fell 2% while refis fell 7%. We are in the seasonally slow period, so seasonal adjustments can lead to surprising results. Perhaps the volatility in the stock market was leaving people on the sidelines, but it appears lower rates didn’t have an impact.

There is talk that the Senate might be able to scrape together enough votes for a short term funding bill that will take us into the new year. Trump appears to be softening his stance on the wall, so a deal is a possibility. Otherwise, we are in store for a partial shutdown, whatever that means. No word on how it will or will not affect markets / origination.

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Vital Statistics:

Stock index futures are up after yesterday’s bloodbath. Bonds and MBS are up.

Stocks sold off heavily yesterday as investors begin to fret about next year’s growth. Energy stocks got hammered as oil slipped below $50 a barrel, and some of the healthcare stalwarts continued their slide from last week when Obamacare was ruled unconstitutional. All of this should give the Fed an excuse to do nothing this week, but the reaction if they don’t move could be worse than if they do. FWIW, the Fed funds futures are cheating down the probability of a hike this week. We are at a 71% probability down from 80% last week. Note Donald Trump has been jawboning the Fed to take their foot off the brakes, which adds another dimension to this. The Fed is independent of politics, and if they pass on a hike this week, they run the risk of being accused of being swayed by politics.

Even if the Fed does increase rates tomorrow, there are ways that the sting could be taken out of it. If the dot plot moves markedly lower, that would be taken as dovish and the markets could rally. Conversely, language in the statement regarding financial markets and their forecasts could offset a hike as well. That said, the Fed wants to end its hand-holding of the markets, so they could be opaque on purpose. This meeting has the feeling of a crap shoot. The potential for surprises (and big moves in the financial markets) is much bigger at this meeting than it has been recently. Don’t forget there will be a press release after the meeting, so the potential for market movement will last for an hour after the official release. That said, the press will probably spend the whole time trying to get Powell to say something negative about Trump, so we might not hear anything interesting at all.

Homebuilder confidence slipped 4 points, according to the NAHB Housing Market Index. Affordability issues remain the culprit, and the confidence decreases were most prevalent in the high-income MSAs. The big West Coast / Mountain States markets have been slowing dramatically, although their high single digit / low double digit rates of appreciation were unsustainable in the first place. The withdrawal of foreign speculative money may be behind this, as it appears that China’s real estate bubble is on borrowed time and corporate defaults are on the upswing. The biggest challenge remains the lower price points, where high labor costs and regulatory costs make it difficult to keep the “affordable” in “affordable housing.”

Don’t forget, there is still the threat of a partial government shutdown as Democrats and Trump posture over the wall. It probably won’t affect the mortgage business – if it is a “partial” shutdown, they probably will just shut down a couple monuments in DC to make it visible, but everything else will be fine. During the last major shutdown, Ginnie Mae continued to work as normal, though the IRS did not.

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Vital Statistics:

Stocks are flattish as we head into Fed week. Bonds and MBS are flat.

The Fed will meet on Tuesday and Wednesday, with the official announcement scheduled for 2:00 pm Wednesday. The markets are anticipating a 25 basis point hike, but the action will be in the forecasts and in the dot plot.

We actually do have some interesting data this week with the NAHB Housing market Index later today, housing starts, and existing home sales. We will also get the third revision to Q3 GDP on Friday.

Retail Sales rose 0.2% in November, in line with forecasts, and well below October’s torrid levels. The control group, which strips out volatile food, energy, and building product prices, rose 0.9%, which was well above forecasts. FWIW, the retail sector looks to have a good holiday shopping season.

The NY Fed’s is predicting 2.4% GDP growth for the 4th quarter. While this is a drop from the third quarter’s 3.5% pace, it is still a decent number. Much will hinge on December retail sales. Note that strategists are beginning to worry about 2019, and PIMCO is saying that recession signs are “flashing yellow.” FWIW, while there is a bit of a slowdown in housing, wages are increasing and that should pump consumption. IMO, the business press is talking their ideological book a lot here – they don’t like Trump, so they are generally pessimistic, and that is feeding into their outlook.

Congress and the President need to get a stopgap budget passed this week, and there is all sorts of partisan posturing over border security. Are we going to get a shutdown? Perhaps. Trump wants something like $5 billion for the border wall, and the Democrats are only willing to spend $1.6 billion in “border security.” For the record, $5 billion is chump change in Washington – so this isn’t about money. The D base loathes Trump and the Wall has become a sort of MacGuffin for partisans on both sides. For originators, if the government shuts down, most government lending will be just fine, but tax transcripts will probably be unavailable.

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Vital Statistics:

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

The consumer price index was flat month-over-month in November, and was up 2.2% on a YOY basis. Ex-food and energy, it was up 0.2% MOM and 2.2% YOY. Inflation remains under control, which gives the Fed an excuse to stand pat next week. The Fed Funds futures are handicapping an 80% chance of another 25 basis point hike.

Mortgage applications increased 1.6% last week as both purchases and refis rose. “Mortgage rates fell across the board last week, driven by a similar slide in Treasuries. Trade fears dominated investors’ concerns, and this was amplified by data released by the U.S. Commerce Department showing a widening trade deficit,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The 30-year fixed mortgage rate decreased 12 basis points over the week back below 5 percent, representing the largest single week drop since 2017.” Refis are still flat on their back.

While the real estate market is cooling overall, the hottest markets like Seattle and Denver are seeing big drops in activity. Denver sales are down 24% and inventory is up 50%. In Seattle, sales are down 20% while inventory is up 135%. I wonder how much of this is Chinese money getting cold feet about the US (and their own) real estate markets.

Donald Trump has officially nominated Mark Calabria to run FHFA when Mel Watt’s term expires in January. The NAHB and the MBA support the nomination, while affordable housing advocates are unhappy. In the past, he has been critical of low downpayment loans, which raises the question of what will happen with Fannie and Freddie’s low downpayment / low FICO programs. He has also been skeptical of the GSE’s affordable housing mandates. He is also on record being critical of securitization itself, regarding it as too pro-cyclical, which means there is too much credit in good times, and when the housing market turns down, it disappears. Finally, he has called for ending the 30 year fixed rate mortgage, which is almost an American birthright and would be impossible to get without the government subsidies.

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Vital Statistics:

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

Donald Trump got into it with Democrats on live TV yesterday over funding for the wall. He said he would be “proud” to do a partial government shutdown in order to obtain funds for border security. “Partial government shutdown” all but screams that this shutdown will be symbolic only – usually the only thing they shut down are the monuments around DC – but that doesn’t always happen. As a general rule, the mortgage market should not be affected, but things like tax transcripts etc could be delayed. This sounds like it is all for show as both parties play to their respective bases.

Inflation at the wholesale level came in a hair above expectations, with the headline producer price index rising 0.1% MOM /  2.5% YOY. Ex-food and energy, the number was 0.3% / 2.7%. The Fed doesn’t necessarily put a lot of stock in the PPI, but it does show that inflation is beginning to creep above the Fed’s target of 2%. Building labor costs (which not only show up in direct wages, but also inputs like transportation) are being offset somewhat by declining commodity prices and strength in the US dollar.

Home prices rose 5.4% YOY in October, according to CoreLogic. “Rising prices and interest rates have reduced home buyer activity and led to a gradual slowing in appreciation. October’s mortgage rates were the highest in seven and a half years, eroding buyer affordability. Despite higher interest rates, many renters view a home purchase as a way to build wealth through home-equity growth, especially in areas where rents are rising quickly. These include the Phoenix, Las Vegas and Orlando metro areas, where the CoreLogic Single-Family Rent Index rose 6 percent or more during the last 12 months.”

CoreLogic estimates that 35% of all MSAs are overvalued, including the NY-NJ-LI area. This is interesting given that this area has barely rebounded off the 2012 lows, and has massively underperformed the rest of the US. This is evidence of the lack of wage growth in this area, primarily driven by secular changes in the financial services industry. Some of this was undoubtedly being driven by 0% interest rates, but a lot of it is technology replacing people.

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