Morning Report: 2018 GDP highest in 12 years

Vital Statistics:

 

Last Change
S&P futures 2788 -6.75
Eurostoxx index 371.36 -1.22
Oil (WTI) 56.82 -0.13
10 year government bond yield 2.67%
30 year fixed rate mortgage 4.34%

 

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

 

Fourth quarter GDP came in at 2.6%, a deceleration from the third quarter reading of 3.4%, but much higher than many in the political economic punditry were predicting. Consumer spending rose 2.8%, while inflation rose 1.6%. Inflation fell from 1.8% in the third quarter. For 2019, GDP came in at 2.9%, the highest reading since 2006.

 

Initial Jobless Claims rose to 225,000 continuing a string of extremely low readings.

 

One of the most politically explosive issues these days concerns wage growth – why it seems to be so low and what can be done about it. Many will misinterpret cherry-picked numbers to make the claim that wages have not increased for 40 years, which is preposterous. That said, wage growth has been running in the high 2s, and with inflation around 2%, that equates to under 1% real wage growth. Modest, but certainly not what you would expect, especially this far into a recovery, especially with unemployment running below 4%. If the numbers don’t appear to comport with common sense, often times there is an issue with the numbers.  That seems to be the case here. It turns out that wage growth is quite a bit higher, and it is due to the measurement problems inherent in the Bureau of Labor Statistic’s calculations. The BLS basically adds up wages paid and divides it by hours worked. If higher paid older workers are exiting, and younger lower paid workers are entering it will depress the averages, and it won’t accurately measure the growth that someone who has stayed in the labor force for the entire year has seen. Take a look at the chart below, where the Fed imputed average wage growth from census data as opposed to the BLS. Wage inflation jumps from 3% to 5%, which makes a lot more sense given the current economic numbers.

 

average hourly earnings vs census

 

Toll Brothers reported an increase in pretax earnings and sales for the first quarter of 2019. Orders declined in a big way however, falling 24% in units and 31% in dollars, driven primarily by weakness in California. Home price appreciation has been moderating in the hotter markets, and it is especially pronounced in the luxury segment, where Toll resides. The cancellation rate jumped to 9.6% from 5.3% a year ago. Tax reform limited the mortgage interest deduction, and the luxury segment is most prominent in high tax states, so those two effects are squeezing demand.

 

Realtor.com predicts this year’s Spring Selling Season could be the weakest in years despite rising inventory. While lower rates have improved conditions compared to late 2018, we are still weaker than early 2018.

Morning Report: No revelations in Humphrey-Hawkins testimony

Vital Statistics:

 

Last Change
S&P futures 2785.75 -5
Eurostoxx index 372.14 -1.55
Oil (WTI) 56.64 1.06
10 year government bond yield 2.63%
30 year fixed rate mortgage 4.34%

 

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

 

Jerome Powell’s Humphrey-Hawkins testimony didn’t really reveal much in the way of new information. Here are his prepared remarks.  The Fed will be patient as it evaluates incoming data: “With our policy rate in the range of neutral, with muted inflation pressures and with some of the downside risks we’ve talked about, this is a good time to be patient and watch and wait and see how the situation evolves.” He didn’t volunteer too much information regarding balance sheet runoff other than to say the Fed is evaluating the timing. For the most part, the bond market didn’t really react much to the testimony other than to rally somewhat on his view that he doesn’t see much in the way of wage-push inflation. The message to the bond market: don’t freak out if you start seeing wage growth with a 3 handle.

 

Home prices rose 1.1% in the fourth quarter, according to the FHFA House Price Index. December was up 0.3% from November. The hot markets of 2017, especially the West Coast markets, have cooled substantially and are now experiencing appreciation more in line with the rest of the country. This chart probably understates the deceleration in the hotter markets, as the index only looks at loans with a conforming mortgage, which means it is only measuring the lower price points, which is where the strength lies. The jumbo market has been struggling.

 

FHFA regional

 

Mortgage Applications increased 5.3% last week as purchases rose 6% and refis rose 5%. Mortgage rates were little changed last week, but as we anticipated, homebuyers are responding favorably to this more stable rate environment,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Purchase applications for both conventional and government loans rose last week, with the government gain led by a 14 percent increase in applications for VA purchase loans.”

 

A Senate Panel voted to advance Mark Calabria to a full vote on the Senate floor. The vote was 13-12, straight along party lines. The industry applauded the appointment.

 

Both Zillow and Redfin have models to value homes – which one is more accurate? It turns out that if you look at listed homes, Redfin is the winner, with an error rate of 1.8%. However, for homes off the market, it rises to 6%. Zillow, who doesn’t break out on the market / off the market for its error estimates comes in around 4%. FWIW, appraisers consider an error range of 4% about accurate. Note though that these are median error rates. In newer subdivisions, where square footage and lot sizes are similar, the estimates will be pretty predictive of final sales prices. As the properties become more diverse the error ranges increase. Note that in MSAs like Chicago, the median error is 4%, but over 40% of all home sales are not within 5% of the final sales price.

Morning Report: Housing starts disappoint

Vital Statistics:

 

Last Change
S&P futures 2791.5 -5
Eurostoxx index 371.78 -0.4
Oil (WTI) 55.5 0.03
10 year government bond yield 2.66%
30 year fixed rate mortgage 4.35%

 

Stocks are lower this morning on overseas tensions between India and Pakistan. Bonds and MBS are flat.

 

Jerome Powell heads to Capitol Hill today for his first day of Humphrey-Hawkins testimony. While this events are ostensibly to allow Congress to question the Fed about monetary policy, they are really nothing more than a posturing exercise for politicians to hop on their respective ideological hobby-horses. Expect Democrats to focus like a laser on income inequality, too big to fail banks, and fair lending. Expect Republicans to focus on inflation worries, banking regulation, and the return of the bond vigilantes. The markets will be listening for information on balance sheet reduction and further hikes this year. This probably won’t be market-moving.

 

Housing starts fell to a seasonally-adjusted annual rate of 1.08 million, a double-digit percentage drop on both a month-over-month and annual basis. As a general rule, winter housing starts numbers can be volatile due to the weather, however this is simply an awful number. The street was looking for 1.25 million, which is still a depressed number. Remember, between 1959 and 2002, we averaged 1.5 million housing starts a year. The last time we saw that sort of building was 2006.

 

housing starts

 

The Home Despot reported fourth quarter earnings this morning, and forecasted weaker-than-expected comparable sales. Part of this is a technical aspect of their accounting conventions, but it does speak to weakness in home improvement spending.

 

Economic activity slowed in January, according to the Chicago Fed National Activity Index. Production-related indicators drove the decline. How much of this was temporary due to tariff issues / government shutdown remain to be seen. Employment remained positive.

 

More sellers are cutting prices this winter in order to move their homes, according to Redfin. 21% of home sellers are reporting a price decrease, which is a post-crisis high. “Many sellers listed their homes late last year just as rising prices and mortgage rates were starting to price out their core pool of potential buyers,” said Las Vegas Redfin agent Jennifer Brockman. “Meanwhile, some buyers are starting to think that waiting to purchase a home could pay off, especially as listing inventory continues to rise. In this new market reality, buyers may have negotiating power now that they won’t have in the spring and summer.”

 

redfin price drop

Morning Report: Trade fears ease

Vital Statistics:

 

Last Change
S&P futures 2803 12.3
Eurostoxx index 371.62 0.39
Oil (WTI) 56.98 -0.31
10 year government bond yield 2.67%
30 year fixed rate mortgage 4.43%

 

Stocks are higher this morning on overseas strength. Bonds and MBS are flat.

 

The upcoming week should be relatively uneventful. Fed Head Jerome Powell heads to Capitol Hill for his Humphrey-Hawkins testimony, where Democrats will try and get him to say that income inequality is the number one problem in the economy, while Republicans will try and get him to say that raising taxes and regulation is bad for the economy. We will also get GDP on Thursday. It looks like the jobs report won’t be out this week.

 

Trump is considering an extension of the March 1 deadline for a trade agreement with China. On March 1, tariffs were set to increase on a number of number of Chinese goods. While this doesn’t take the trade threat off the table with respect to the markets, it does help calm things down. Note that the news was treated with gusto overseas – the Shangai Composite was up 5.6%.

 

Existing home sales fell 1.2% in January according to NAR. On an annual basis, they are down 8.5%. The seasonally-adjusted annual rate of 4.94 million is the lowest since November 2015. The median existing sales price rose only 2.8% to 247,800, which is much lower than we have been seeing in the home price indices like CoreLogic, Case-Shiller or FHFA. While home price appreciation is definitely slowing, this number probably speaks more to type of home being sold – more sales at the lower price points. Inventory is rising – hitting 1.59 million units. however that represents only a 3.9 month supply at current sales levels, which is well below what is considered a balanced market of 6 – 6.5 months.

 

December durable goods orders rose 1.2%, while November was revised upward to 1%. This report contains only December data, as Census catches up after the January government shutdown. New orders for non-defense capital goods (a good proxy for business capital expenditures) increased 3.7%.  In other economic data, initial jobless claims fell to 216k, while the index of leading economic indicators fell to -0.1%. The Philly Fed manufacturing index fell as well. In response to recent data, the Atlanta Fed GDP tracking model has taken down its Q4 estimate to 1.4%

 

TIAA bank is getting out of the retail bricks and mortar business and is selling their retail mortgage ops to US Bank to focus 100% on consumer direct and correspondent.

 

M&T Bank just bought a $13 billion MSR portfolio. This is a surprising move given that the capital treatment for MSRs (how much regulatory capital they are required to set aside) is more than the value of the MSRs themselves. Of course regulatory capital issues don’t necessarily determine investment decisions by themselves, but this is an interesting move.

Morning Report: Homebuilder sentiment improves

Vital Statistics:

 

Last Change
S&P futures 2783.25 -3
Eurostoxx index 370.68 -0.04
Oil (WTI) 56.9 0.81
10 year government bond yield 2.67%
30 year fixed rate mortgage 4.43%

 

Stocks are flattish on no major news. Bonds and MBS are flat as well.

 

Homebuilder sentiment improved markedly in February according to the NAHB / Wells Fargo Homebuilder Sentiment Index. Expectations for future sales drove the increase. The index touched a 3 year low in late 2018, so things are still disappointing compared to 2016-2017, but well above historical numbers. Challenges remain for the building industry however. “The five-point jump on the six-month sales expectation for the HMI is due to mortgage interest rates dropping from about 5% in November to 4.4% this week,” Dietz continued. “However, affordability remains a critical issue. Rising costs stemming from excessive regulations, a dearth of buildable lots, a persistent labor shortage and tariffs on lumber and other key building materials continue to make it increasingly difficult to produce housing at affordable price points.”

 

The FOMC minutes didn’t really contain much in the way of new information. They see the balance sheet reduction ending sooner than anticipated, which means the Fed will no longer have a $800 billion balance sheet like it had pre-crisis – it will now probably be in the $3 – $4 trillion range. Second, there is uncertainty whether there will be more hikes in 2019. The Fed Funds futures have been predicting no further hikes this year for several months now, so perhaps this is simply the members catching up with what the markets are saying. Note Cleveland Fed President Loretta Mester thinks we may need to still hike rates this year and end tapering.

 

MBA mortgage applications increased 3.6% from the previous week as refis increased 6% and purchases increased 2%.  Rates actually increased by 8 basis points to 4.56%. While refi activity has been increasing from the dismal levels at the end of 2018, they are still well below historically anemic. A combination of prepayment burnout and rising rates are driving the decrease. Going forward, home price appreciation, not interest rates will be the impetus for refinance activity as cash-outs will inevitably rise to pay off credit card debt and FHA borrowers with sufficient equity will want to refinance into conventional loans with no MI.

 

Chart: MBA Refinance index 1998 = Present

MBA refinance index

 

Move over Rocket Mortgage, here comes mello smartloan, which is loanDepot’s new 100% digital mortgage loan experience. They claim this loan can reduce time to close by 75%.

Morning Report: Shareholder activism and the banks

Vital Statistics:

 

Last Change
S&P futures 2767 -7
Eurostoxx index 368.05 -1.73
Oil (WTI) 56.06 0.47
10 year government bond yield 2.66%
30 year fixed rate mortgage 4.43%

 

Stocks are lower as investors return from a 3 day weekend. Bonds and MBS are flat.

 

We don’t have much in the way of economic data this week – the highlight will be existing home sales on Thursday and the FOMC minutes on Wednesday. Other than that, it should be a quiet week.

 

Industrial Production in January fell by 0.6%, while manufacturing production fell by 0.9%. Capacity Utilization fell to 78.2%, down from 78.8% the prior month. Volatile vehicle production largely accounted for the decrease. Note that December’s numbers were strong, which means the average for the two months was a modest gain.

 

Due to the government shutdown, Q4 GDP numbers have been delayed until Feb 28. Right now, the consensus seems to be for a high 1% / low 2% print – a definite slowdown from Q3, which would put 2018 annual growth around 2.8%. These forecasts are from Merrill, Goldman, and the NY / Atlanta Fed. Holiday retail sales disappointed, and some of the industrial data showed a slowdown as 2018 ended.

 

Mortgage delinquencies dropped to an 18 year low, according to the MBA. Fourth quarter DQs fell to 4.06%, which is down from 5.17% a year ago. The foreclosure rate ticked up to .25%. “The overall national mortgage delinquency rate in the fourth quarter was at its lowest level since the first quarter of 2000,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “What’s even more noteworthy, the delinquency rate dropped from the previous quarter and on a year-over-year basis across all loan types and stages of delinquency. With the unemployment rate near a 50-year low, wage growth trending higher and household debt levels relative to disposable incomes at a 35-year low, homeowners are in great shape, and mortgage performance is quite strong.”

 

HomeStreet Bank is greatly reducing its footprint in the mortgage business, and has retained Keefe, Bruyette to sell its retail mortgage operations. MountainView will auction off the MSR portfolio. HomeStreet will not exit mortgages entirely, but it will move to more of a traditional mortgage business built around its bank branches. Interestingly, the divestiture comes after pressure from an activist investor. Banks have historically been pretty immune from shareholder pressure – hostile takeovers in the banking sector are rare events. it will be interesting to see if this starts a trend of shareholder activism in the sector. One of the best trades ever was holding onto the pieces of AT&T when it was broken up by the government in the 1980s. With so many banking giants, I wonder what would happen if, say, Bank of America decided to spin off Merrill Lynch and its mortgage business. Could the 3 parts be worth more than the sum? As the banking sector deals with its first secular bond bear market in 40 years, it may turn out that the strategies that worked in the bull market (consolidation) won’t work in a rising interest rate environment. Note that the Elizabeth Warrens of the world would likely push in this direction as well, which makes it conceivable we could see a return of venerable names like Salomon Brothers or Smith Barney, Chemical Bank, or Manufacturers Hanover.

Morning Report: Mark Calabria to testify in front of the Senate today.

Vital Statistics:

 

Last Change
S&P futures 2757 7
Eurostoxx index 366.36 1.6
Oil (WTI) 54.46 0.56
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.43%

 

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are up.

 

We have some inflation data, with the consumer price index flat MOM and up only 1.6% YOY. Ex-food and energy, the index rose 0.2% MOM and 2.2% YOY. At the wholesale level, the producer price index fell 0.1% and 2% YOY. Ex-food and energy, the index rose 0.2% MOM and 2.5% YOY. Inflation remains under control, despite rising wage pressures which is a bit of a Goldilocks scenario, especially with respect to the Fed.

 

December retail sales were disappointing, falling 1.2%. The control group, which excludes volatile sectors like autos and building materials, fell 1.7%. This data was delayed by the government shutdown – we should be getting Jan numbers tomorrow.

 

Initial Jobless Claims rose to 239,000 last week.

 

It looks like Trump is going to sign the spending deal hashed out in Congress that provides some of the money he requested for the southern wall. He will continue to look for other options to get funding as well. Whether that includes declaring a national emergency to siphon fund from DOD is anyone’s guess.

 

Mark Calabria is set to testify before the Senate today as it considers his nomination to run FHFA, the housing regulator that oversees Fannie and Freddie. Calabria is a libertarian, and has questioned the government’s role in the mortgage market – particularly the support it gives the 30 year fixed rate mortgage, which is a distinctly American product which wouldn’t exist without government subsidies. Calabria has also been critical of the whole mortgage securitization market in general, believing that banks should hold (and service) more of their loans. The vote is expected to fall along party lines, with Republicans voting in favor and Democrats voting against.

 

The 30 year fixed rate mortgage is an anomaly that doesn’t exist anywhere else in the world that I am aware of. In most other countries, mortgages are adjustable rate, and banks hold them without government backstopping the credit. In other words, the borrower bears the interest rate risk, and the bank bears the credit risk. In the US, the lender bears the interest rate risk and the taxpayer bears the credit risk. Calabria has been critical of this product, arguing that it artificially inflates housing values which is a valid criticism. Of course the 30 year fixed rate mortgage isn’t the only subsidy out there – the tax treatment of mortgage interest is another, and flood insurance is another. These programs makes housing more affordable relative to incomes, which means it will be vulnerable to shocks. Does that mean these programs cause bubbles?  Not necessarily, since we have seen housing bubbles in several countries that don’t have these supports.

 

Mortgage delinquencies continue to fall, as the 30 day DQ rate hits the lowest level in 10 years. 30 day DQs fell from 5.2% to 4.1% over the past year, while foreclosures fell from 0.6% to 0.4%. CoreLogic CEO Frank Martell said, “On a national basis, we continue to see strong loan performance. Areas that were impacted by hurricanes or wildfires in 2018 are now seeing relatively large annual gains in the share of mortgages moving into 30-day delinquency. As with previous disasters, this is to be expected and we will see the impacts dissipate over time.”

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