Morning Report: FOMC meeting begins

Vital Statistics:

 

Last Change
S&P futures 2940 -2.9
Eurostoxx index 390.26 -0.72
Oil (WTI) 64.46 1.2
10 year government bond yield 2.53%
30 year fixed rate mortgage 4.18%

 

Stocks are lower this morning after Google missed earnings last night. Bonds and MBS are down.

 

The FOMC begins its 2 day meeting this morning. The result should be announced tomorrow at 2:00 pm. No changes are expected in policy.

 

The employment cost index rose 0.7% in Q1, driven by a 0.7% increase in wages and a 0.7% increase in benefit costs. On an annualized basis wages and salaries increased 2.9% and benefits increased 2.6%.

 

Home Price Appreciation continues to slow, according to the Case-Shiller Home Price index. The index increased 4% YOY, compared to 4.2% in the previous month. “The pace of increases for home prices continues to slow,” says David M. Blitzer, Managing Director
and Chairman of the Index Committee at S&P Dow Jones Indices. “Homes began their climb in 2012 and accelerated until late 2013 when annual increases reached double digits. Subsequently, increases slowed until now when the National Index is up 4% in the last 12 months. Sales of existing single family homes have recovered since 2010 and reached their peak one year ago in February 2018. Home sales drifted down over the last year except for a one-month pop in February 2019. Sales of new homes, housing starts, and residential investment had similar weak trajectories over the last year. Mortgage
rates are down one-half to three-quarters of a percentage point since late 2018.

 

“The largest year-over-year price increase is 9.7% in Las Vegas; last year, the largest gain was 12.7% in Seattle. Regional patterns are shifting. The three California cities of Los Angeles, San Francisco and San Diego have the three slowest price increases over the last year. Chicago, New York and Cleveland saw only slightly larger prices increases than California. Prices generally rose faster in inland cities than on either the coasts or the Great Lakes. Aside from Las Vegas, Phoenix, and Tampa, which saw the fastest gains, Atlanta, Denver, and Minneapolis all saw prices rise more than 4% — twice the rate of
inflation.”

 

 

Morning Report: First quarter GDP comes in stronger than expected

Vital Statistics:

 

Last Change
S&P futures 2939 -3.25
Eurostoxx index 390.26 -0.72
Oil (WTI) 63.11 -0.18
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.23%

 

Stocks are flattish as we end the month of April. Bonds and MBS are flat.

 

We have a decent amount of data this week, along with a Fed meeting. The biggest news will be the jobs report on Friday, although we will get income / spending data and the ISM.

 

Q1 GDP came in at a much higher than expected 3.2% versus the 2.3% growth that was expected. Even better, the inflation rate came in much lower than expected, which should mean the Fed is out of the way. The 10 year bond yield traded below 2.5% for the first time in 2 months, despite having the strongest Q1 growth in 4 years. Note that consumption didn’t drive the increase in growth (it only came in at 1.2%) – the growth was driven by exports  – which at a minimum should end the talking point that Trump’s trade wars are alienating our trading partners.

 

GDP

 

The immediate market reaction was subdued. The 10 year bond yield drifted lower, stocks were flat, and the Fed Funds futures didn’t change all that much – still predicting a 1/3 chance of no moves this year and a 2/3 chance of a rate cut.

 

In terms of the individual components, the trade numbers were affected by both an increase in exports (3.7%) and a drop in imports (-3.7%). Durable goods consumption fell 5.3%, which is probably related. Residential continues to be a persistent weak spot (-2.8%), and a bit of a head-scratcher given the sheer lack of inventory. Increased investment was driven by an increase in intellectual property (8.6%), which offset a decrease in building (-0.8%).

 

Housing’s contribution to GDP has been shrinking since the late 80s. The financial crisis caused it to fall from about 18% to 15%, and in the past decade it has been more or less stuck there. It looks like housing is again beginning to decline as a percent of GDP, and it is now below 15%. If housing can get back to at least normalcy, that should provide a good bump for GDP growth.

 

housing GDP

 

Personal Incomes rose 0.1% in March, which was below expectations. Consumption surprised to the upside. Inflation remains tame, with the headline PCE number up .1% MOM / 1.5% YOY and the core up 0.2% / 1.6% YOY.

 

New FHFA Director Mark Calabria has an ambitious agenda for housing reform, including solving problems with servicing, fixing the QM patch, and eventually releasing the GSEs from conservatorship. He is emphatic that he does not want to see the mortgage market return to the pre-2008 days.

Morning Report: Hamptons real estate is for sale

Vital Statistics:

 

Last Change
S&P futures 2931.75 0.7
Eurostoxx index 390.26 -0.72
Oil (WTI) 66.21 0.32
10 year government bond yield 2.53%
30 year fixed rate mortgage 4.23%

 

Stocks are lower after 3M missed earnings. Bonds and MBS are flat as well. We will get Amazon.com and Ford after the close.

 

Durable Goods orders came in way higher than expected for March – increasing 2.7% versus expectations of 0.8%. Much of this was transportation-related. Ex transports, they rose 0.4%, which still beat the 0.2% forecast. Nondefense capital expenditures rose 1.3%, again better than the 1.2% expectation. We might see some estimates for Q1 GDP get taken up on these numbers.

 

Initial Jobless Claims rose 38k to 230,000. This is the highest print in a while, but it is too early to get a read on whether the labor market is changing. FWIW, organized labor has been scoring some victories lately as worker shortages have given them the upper hand.

 

Homebuilder D.R. Horton disappointed the street with their earnings this morning. Homebuilding revenue increased 8% YOY and homes closed increased 10% in units. Forward guidance was the issue as its revenue forecast came in light despite the sales estimate coming more or less as expected. The stock is down about 4% pre-open.

 

More problems with luxury real estate: a glut of inventory in the Hamptons. There are 869 homes for sale in the tony NYC summer vacation location, which is the highest since at last 2012. This seems to mirror the glut of luxury homes in Fairfield County CT as the market seems to be finally meeting its day of reckoning, which was pushed off in the immediate aftermath of the financial crisis. Most people had the wherewithall to wait out the market, hoping for a recovery that never really came. Now, they are getting impatient and it looks like this sector of the market will finally clear.

 

hamptons

 

Fed pick Steven Moore is in hot water, not for his ideology (though left econ has been piling on), but for calling Cleveland OH and Cincinnati OH “armpits” of America. This is probably a non-controversial opinion to most non-Ohians, but Sherrod Brown (D-OH) thinks this should disqualify him. Note the Washington post is miffed about some humor columns that he wrote in the past too. Herman Cain has withdrawn his application, and it looks like Moore might be on the ropes as well.

Morning Report: New home sales surprise to the upside

Vital Statistics:

 

Last Change
S&P futures 2937.5 -0.5
Eurostoxx index 391.52 0.39
Oil (WTI) 65.92 -0.36
10 year government bond yield 2.54%
30 year fixed rate mortgage 4.34%

 

Stocks are flat as we await earnings from heavyweights like Facebook, Microsoft and Caterpillar. Bonds and MBS are up.

 

New Home Sales surprised to the upside, coming in at 692,000, indicating that lower mortgage rates are helping sales. The most interesting number in the report was the median price of $302,000, which is down 10% from a year ago. This indicates that builders are concentrating on the lower price points, or at least that is where the sales are concentrated. Still, a 10% drop in median home prices is an eye-popping number.

 

new home sales

 

Mortgage applications fell 7% last week as purchases fell 4% and refis fell 11%. Rates were up 2 basis points for the week, however the week included the Good Friday holiday so there might be some noise in there as well. “The 30-year fixed mortgage rate has risen 10 basis points in three weeks, and is now at its highest level in over a month,” said MBA Chief Economist Mike Fratantoni. “Borrowers remain extremely sensitive to rate changes, which is why there has been a 28 percent drop in refinance applications over this three-week period. Purchase activity also declined, but remains almost 3 percent higher than a year ago. Borrowing costs have recently drifted higher because of ebbing geopolitical concerns, as well as signs of strengthening in the U.S. economy, including the recent data pointing to robust retail sales.”

 

The CFPB is becoming a little more creditor-friendly, by giving firms under investigation information about what they did that was wrong. “Consistent with the updated policy, CIDs [civil investigative demands] will provide more information about the potentially applicable provisions of law that may have been violated,” the Bureau said in a news release. “CIDs will also typically specify the business activities subject to the Bureau’s authority. In investigations where determining the extent of the Bureau’s authority over the relevant activity is one of the significant purposes of the investigation, staff may specifically include that issue in the CID in the interests of further transparency.”

 

Flagstar reported a 30% drop in originations in the first quarter, falling from $7.9 million in the first quarter of 2018 to $5.5 million in the first quarter of 2019. On a QOQ basis, originations were down 13% as well. Gain on sale margins rebounded from the fourth quarter, increasing to 72 basis points from 60, although they are down from 77 in the first quarter of last year.

 

The NY Fed asks the question whether tax reform has inhibited home sales. Spoiler alert: it looks like that is the case.

Morning Report: Home price appreciation is slowing

Vital Statistics:

 

Last Change
S&P futures 2910.5 -2
Eurostoxx index 389.7 -0.8
Oil (WTI) 65.66 1.29
10 year government bond yield 2.59%
30 year fixed rate mortgage 4.34%

 

Stocks are flattish this morning as we await earnings from some of the FAANG heavyweights. Bonds and MBS are flat as well.

 

Existing home sales fell 4.9% in March to a seasonally adjusted annualized level of 5.21 million. A decrease was expected since February’s numbers were stronger than expected. On a year-over-year basis, sales are down 5.4%. The median home price rose 3.8% to $254,400, and it looks like home price appreciation is slowing down here as well. Inventory remains the problem, with 1.68 million homes for sale, representing a 3.9 month supply. A balanced market would be closer to 2.6 million homes for sale. In addition, we have a glut at the luxury price points and a shortage at the entry-level price points. Days on market increased YOY to 36 from 30. First time homebuyers represented a third of all transactions. Historically that number has been closer to 40%.

 

Home prices rose 0.3% MOM in February and are up 4.9% YOY, according to the FHFA House Price Index. Note the difference in price appreciation versus the NAR numbers (+4.9% versus +3.8%) – this reflects the fact that the FHFA index excludes jumbos, which is where there real slowdown is being seen, especially in high tax states.  Take a look at the YOY price appreciation comparison regionally and check out the difference between this time last year in home price appreciation on the West Coast.

 

FHFA regional

 

Herman Cain has withdrawn his name from consideration to the Fed. A handful of Republican senators expressed reservations about his nomination, which was probably enough to make his actual confirmation unlikely. The top Democrat in the U.S. Senate, Chuck Schumer, said Cain’s “failure to garner adequate support should not be used as a pathway by Senate Republicans to approve Stephen Moore, who is equally unqualified, and perhaps more political.”

 

The Trump Administration is taking a look at downpayment assistance programs – generally government programs that help borrowers put together their 3.5% down payment for a FHA loan. As you would expect, borrowers who need help scraping together 3.5% are riskier, and indeed the default rates on these mortgages are double those of a traditional FHA mortgage (and FHA DQs are much higher than conventional DQs). HUD promulgated new guidance for downpayment assistance programs last week tightening documentation rules. Ballard Spahr summarizes the new guidance here.

Morning Report: 2019 housing forecasts very similar to 2018 actuals

Vital Statistics:

 

Last Change
S&P futures 2901.75 -8.75
Eurostoxx index 390.46 0.87
Oil (WTI) 65.29 1.29
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.27%

 

Stocks are lower this morning as investors return from the long weekend. Bonds and MBS are flat.

 

There isn’t much in the way of market-moving data this week, although we will get some housing data with existing home sales, the FHFA House Price Index, and New Home Sales.

 

President Trump plans on ending the practice of allowing waivers for countries that import oil from Iran. Oil is up over a buck this morning on the news. China, India, and Turkey are Iran’s biggest customers.

 

The economy looks like it exited the first quarter with a pickup in growth, according to the Chicago Fed National Activity Index. The first quarter has been weak for the past several years, and it looks like that pattern repeated this year. Employment-related indicators drove the improvement in the index.

 

Fannie Mae is forecasting 2.2% GDP for 2019. On one hand, Fannie Mae expects to see growth impacted by the fading effects of the 2018 tax cuts and slowing corporate capital expenditures. On the other hand, they are forecasting a pickup in housing. Falling interest rates have been a pleasant surprise, and refinance activity is expected to be a bit higher than previously forecast. That said, prepayment burnout is pretty high at this point, and home price appreciation is probably going to drive refi activity more than interest rates.

 

“On housing, the recent dip in mortgage rates to their lowest level in over a year – combined with wage gains and home price deceleration – supports our contention that home sales will stabilize in 2019,” Duncan continued. “The greatest impediment to both sales and affordability continues to be on the supply side, as new inventory, particularly among existing homes, is being met quickly by strong demand – as evidenced by the already thin months’ supply hitting a new one-year low.”

 

Grant Thornton believes that a shortage of entry-level homes will be a constraint on the housing industry this year. “The escalating costs of materials have triggered production cuts; recent tariffs on imported materials, like lumber from Canada, have also pushed up costs at the same time that labor shortages have intensified,” Swonk wrote in her report. “The cheap labor – immigrants – that once made new housing affordable has all but disappeared.” They expect the median home price to rise 3.5% this year, compared to 4.8% in 2018. Existing home sales are expected to be unchanged at 5.9 million.

Morning Report: Jamie Dimon throws cold water on the mortgage banking business

Vital Statistics:

 

Last Change
S&P futures 2898.75 -1.5
Eurostoxx index 390.41 0.82
Oil (WTI) 63.91 0.15
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.32%

 

Stocks are lower as we await the Mueller report. Bonds and MBS are up on weak European data.

 

Initial Jobless claims fell to 192,000, yet another sub-200,000 print.

 

Retail sales came in better than expected, rising 1.6% MOM, ahead of the 0.9% Street expectation. Ex autos, they rose 1.2% and ex autos and gas, they rose 0.9%. The economy may well be re-accelerating as we finish the first quarter and enter the second.

 

Special Counsel Robert Mueller will hold a press conference this morning and release a redacted version of the report to Congress before noon. At this point, everyone’s mind is already made up, so this is just a formality. I don’t expect this to be market moving.

 

Bonds will close early today and the markets will be closed tomorrow in observance of Good Friday.

 

Jamie Dimon sounded pessimistic on the mortgage business and blamed regulators during the JP Morgan earnings call.:

“In the early 2000s, bad mortgage laws helped create the Great Recession of 2008. Today, bad mortgage rules are hindering the healthy growth of the U.S. economy. Because there are so many regulators involved in crafting the new rules, coupled with political intervention that isn’t always helpful, it is hard to achieve the much-needed mortgage reform. This has become a critical issue and one reason why banks have been moving away from significant parts of the mortgage business.”

Because of post-crisis capital rules, “owning mortgages becomes hugely unprofitable,” Dimon lamented later in his note. On a call with analysts, he called mortgage servicing – the bookkeeping for regular customer payments – hard. “You got to look at that and ask a lot of questions about whether banks should even be in it,” Dimon said.

If not banks, then, who should be “in it”? “Non-banks are becoming competitors,” Dimon told analysts.

FWIW, Wells Fargo was a bit more constructive on the mortgage banking business, but since they are currently in Elizabeth Warren’s doghouse, it probably makes more sense for them to not poke the bear.

 

Independent mortgage banks and subsidiaries of chartered banks made an average profit of $367 per loan in 2018, down from the $711 they made in 2917, according to the MBA. “Despite a healthy economy in 2018, the mortgage market suffered, as rate hikes hurt refinancing volume and low housing inventories priced some potential homebuyers out of the purchase market,” said Marina Walsh, MBA Vice President of Industry Analysis. “For mortgage companies, there was the perfect storm of lower production revenues combined with rising expenses, which together contributed to the lowest net production income per loan since 2008.” Expenses rose to a study high of $8,278 per loan. Servicing helped pull some firms into the black, as those that retain servicing were more profitable than those that did not. That said, there is probably a size bias at work there as well.

 

Herman Cain might not have the votes in the Senate to get confirmed to the Fed.

%d bloggers like this: