Morning Report: REO-to-Rental trade exit?

Vital Statistics:

 

Last Change
S&P futures 2706 1
Eurostoxx index 359.39 -0.56
Oil (WTI) 55.07 0.02
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.40%

 

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

 

The upcoming week will be data-light, as is typical the first week of every month. Jerome Powell speaks on Wednesday, and that is about it. Productivity and costs on Wed could be interesting, but there just isn’t going to be much to move bonds.

 

The money for the government runs out on Feb 15 and we are back to a possible shutdown. Judging by the jobs report, it doesn’t appear the government shutdown had much (if any) effect on the overall economy. If we have another shutdown, we should probably see the same old situation of the inability to process VOEs for Federal employees, but that is it.

 

Rental prices for 1 bedroom apartments fell a couple of percent last year. Not sure about the methodology for the study, but it does comport with several other studies that show rental prices falling, at least in luxury areas. For the real estate sector, this is probably good news. One of the best post-crisis trades has been the REO-to-Rental trade, where professional investors and hedge funds purchased distressed foreclosures, fixed them up and rented them out. Cap rates in the aftermath of the crisis were high single digits, which were super attractive given the 0% interest rate environment. Tack on home price appreciation and you have a phenomenal trade. Unfortunately, phenomenal trades rarely stay that way, and between rising mortgage rates and falling rents, cap rates are getting squeezed, and it might be time for some of these investors to exit the trade. Ultimately that means we should see a lot more starter homes for sale which will alleviate the inventory problem we are currently experiencing.

 

Bill Gross is retiring from money management. The Bond King ruled the Great Bond Bull Market of 1982 – 2016 and is stepping out as we head into what should be a decades-long secular bear market in bonds.

 

Fannie and Fred will be released from Federal conservatorship subject to tight market-share restrictions under a new plan released by Senate Republicans. Fan and Fred would retain their role as mortgage guarantors, and would be subject to competition. “We must expeditiously fix our flawed housing finance system,” Crapo, an Idaho Republican, said in a statement. “My priorities are to establish stronger levels of taxpayer protection, preserve the 30-year fixed-rate mortgage, increase competition among mortgage guarantors and promote access to affordable housing.” That is a tall order and pretty much forecloses any sort of radical change of the housing finance system. If the social engineering aspect (affordable housing) and the subsidies (30 year fixed rate mortgage) will remain, we are pretty much looking at the same system we had pre-bubble. The model that seems to have gained the most traction is putting the government in the second-loss position, with PMI taking the first loss position. It would represent a bit of a step of re-introducing free market economics in what is one of the most nationalized housing finance systems on earth.

18 Responses

  1. super bowl ratings down 5% from last year.

    who won the virtue signalling bowl?

    Like

    • I actually liked the Andy Warhol Burger King ad along with the Amazon Alexa ad. I thought it was CGI originally until I Googled it.

      Pity they didn’t go with the Warhol quote as part of the ad.

      “What’s great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest. You can be watching TV and see Coca-Cola, and you know that the President drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke, too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking. All the Cokes are the same and all the Cokes are good. Liz Taylor knows it, the President knows it, the bum knows it, and you know it.”

      https://deadline.com/2019/02/super-bow-ads-andy-warhol-handmaids-tale-washington-post-colin-colin-kaepernick-video-1202548695/

      Like

  2. Perfection.

    Cuomo said he and his administration are blameless. He said the continued exodus of residents from the state and a temporary millionaire’s tax created in 2009 to contend with the Great Recession (but which he’s extended since then) are not contributing factors.

    https://www.newsday.com/news/region-state/state-budget-revenue-decline-1.26892647

    You’d think some of these effected residents would lobby their legislators about trading the reinstatement of the deduction for something Trump wants. I wonder if there’s anything that Trump would be willing to do that over?

    Like

    • Good thing they figured this out now before someone passed a 70% marginal income tax rate.

      Like

    • Can’t read that article (net nanny acts as an ad blocker, so sites that want to be white listed to read, I can’t).

      But found a version on AOL and love this line from that article:

      But the main subject of Cuomo’s finger-pointing was the outflow of wealthy New York residents to warmer states (where they own winter homes) in an effort to escape both the cold weather and harsher tax policies that President Trump and the Republican congress have enacted.

      The press is bitching about Trump’s “harsher” tax policies. It was a policy that taxed the rich. What the frack are they complaining about? Harsher. These people are all waffles!

      Like

      • KW – I think that Cuomo was blaming the limitations imposed on deductions as they apply to homes, which negatively impacted Scott and Brent. I have not read his remarks, but that is the only logical explanation.

        Like

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