Morning Report: Fed Funds forecast and mortgage rates

Vital Statistics:

 

Last Change
S&P futures 2895.75 0.75
Oil (WTI) 51.89 -0.62
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.12%

 

Stocks are flat this morning as we enter Fed week. Bonds and MBS are flat as well.

 

The big event this week will be the FOMC meeting which starts Tuesday. Given the disconnect between the market’s perception of the road ahead and the Fed’s prior forecast, something has to give. FWIW, the market is now assigning a 20% chance they will ease by 25 basis points at this meeting. By the December meeting, the market is forecasting the FOMC will cut rates either 2 or 3 times!

 

fed funds futures dec 19

 

Compare that to the March 2019 dot plot, which showed most members of the FOMC thought rates would be unchanged for the year and about 1/4 of the members wanted to see a rate hike:

 

dot plot Mar 2019

If the Fed Funds futures are correct and we are looking at a 1.5% Fed Funds rate, where will mortgage rates go? If history is any guide, probably nowhere. The last time the Fed Funds rate was around 1.5% (late Dec 2017), the 30 year fixed rate mortgage (according to the MBA) was in the low 4% range, in other words, right about here.  Long term rates have already priced in the move. MBA 30 year FRM chart:

 

MBA mortgage rate

 

Quicken Loans settled with the DOJ over false claims allegations regarding FHA origination going back to 2015. The case was dismissed and Quicken settled for $32.5 million with no admission of guilt. Quicken fought the case the entire way, and eventually narrowed it down to a tiny fraction of what the Obama Administration wanted. Quicken Vice Chairman Bill Emerson said: “I think the current HUD administration realized how faulty the previous administration’s tactics were, and frankly, as we’ve said before, we viewed them as extortionist tactics and we just could not go along with that,” Emerson said. “We know we didn’t do anything wrong and so we continued to fight, and if that somehow caused the new administration to evaluate it differently, then great.”

 

Ed Demarco discusses the ways that private capital can be drawn back into the mortgage market. First, the CFPB’s ATR and QM rules need to change to bring down the allowable DTI ratios on Fannie and Freddie loans to that of the rest of the market. This is known as the QM patch, which basically says that any loans that meet F&F criteria meet the ability to repay test. The problem is that the QM laws specify a max DTI ratio of 43% and the GSEs allow up to 50%. This gives Fan and Fred a huge advantage over other lenders. The second issue revolves around the SEC and refining the data definitions in the registration rules. Third, Fan and Fred have all sorts of mortgage performance data that is unavailable to the broader market, and leveling the playing field would mean allowing other participants to see that data. Note however that DeMarco is only looking at the issue from the standpoint of originators. Buyers of private label securities have other issues that are still unresolved, especially when the issuer of the bonds also retains servicing. There is a conflict of interest issue that must be resolved as well. I discussed this about a year ago in Housing Wire.

 

Profitability improved for independent mortgage bankers in the fist quarter of 2019. Average revenue per loan came in at $9584, while average cost per loan was $9,299, or a net gain of $285 per loan, compared to a loss of $200 a loan in the fourth quarter. It looks like mortgage bankers reported a loss in the first quarter of 2018 as well.

Open Thread 6/14

I have added this thread in lieu of a recent Morning Report.

Morning Report: Payrolls disappoint

Vital Statistics:

 

Last Change
S&P futures 2819 14.35
Oil (WTI) 53.02 -0.46
10 year government bond yield 2.12%
30 year fixed rate mortgage 4.13%

 

Stocks are higher this morning after yesterday’s rally continued overnight. Bonds and MBS are flat.

 

Fed Chairman Jerome Powell said yesterday that the central bank was monitoring the trade tensions between China and the US and would “act appropriately” to maintain the economic expansion. Investors took this to mean that the Fed would probably cut rates this year. The stock market had its best day in 5 months, and bonds sold off a touch, although lower rates should be supported by low overseas yields and the prospect of a rate cut.

 

Donald Trump announced that he would institute tariffs on Mexican goods if the country didn’t do more to curb illegal immigration into the US. This new front in the trade war was the catalyst to push the 10 year below 2.1%. Yesterday, Republican senators warned that there was not support for tariffs in the Senate.

 

Mortgage Applications increased 1.5% last week as purchases fell 2% and refis increased 6%. “Mortgage rates dropped to their lowest level since the first week of 2018, driven by increasing concerns regarding the ongoing trade tensions with China and Mexico,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Some borrowers, particularly those with larger loans, jumped on the opportunity to refinance, bringing the index and average refinance loan size to their highest levels since early April. Additionally, refinances for FHA and VA loans jumped by 11 percent.”

 

Payrolls only increased by 27k last month according to the ADP Employment Report. Small firms reduced payrolls by 52,000 last month, and it looks like the majority of that was in construction. Manufacturing fell by 3,000 which might be tariff related. The service sector increased employment by 71,000 and large employers increased by 68,000. Street expectations are for a 185,000 increase in payrolls for Friday’s jobs report. Now that the Fed is out of the way, the wage growth number is no longer the focus.

Morning Report: Overseas yields hit a record low

Vital Statistics:

 

Last Change
S&P futures 2759.6 9.65
Oil (WTI) 52.61 -0.84
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.13%

 

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

 

We are seeing lots of articles tying trade to rate cuts. IMO, I think the business press and politicians overestimate the effects of trade sometimes, but there is no doubt that there is a sea change in opinion. The markets are pricing in a 96% chance of a rate cut this year. Only 1 month ago, they were pricing in a 53% chance of no movement at all. Compare the forecast now versus May 3. Amazing how much sentiment has changed. The central tendency is now for 2 rate cuts (although the markets expect the Fed to hold steady at the June meeting in a couple of weeks).

 

fed funds futures

 

Is trade the driver of the change in sentiment? It plays a part, no doubt. But, the yield curve inversion has more to do with general economic malaise especially in Europe. The  German Bund (Germany’s 10 year bond) has hit a record low yield of -21 basis points. This is a big deal, and is the real culprit behind the drop in US Treasury rates. Relative value trading (in other words managers selling Bunds which pay nothing for Treasuries which pay something) is pulling US rates lower, which has inverted the yield curve. An inverted yield curve occurs when short term rates (like the 1 month T-bill) are higher than long term rates like the 10 year. The 1 month T-bill pays 2.35% while the 10 year pays 2.11%. Historically, an inverted yield curve has been a recessionary indicator, but that probably isn’t what is going on right now. I certainly don’t think the Fed imagines a recession is imminent or even a decent possibility – we will get an idea however when they release their economic projections at the June FOMC meeting.  That said, the markets see two rate cuts this year, and the dot plot will be an interesting view.  Strange to think that the Fed tightened to fight nonexistent inflation and will ease to fight a nonexistent recession, but here we are….

 

Home prices rose 1% MOM and 3.6% YOY in April, according to CoreLogic. They do see home price appreciation picking back up over the next year, and are forecasting a 4.7% increase over the next year.

Morning Report: Rates keep falling.

Vital Statistics:

 

Last Change
S&P futures 2746 -5
Oil (WTI) 54.23 0.76
10 year government bond yield 2.12%
30 year fixed rate mortgage 4.18%

 

Stocks are lower as trade fears dominate the market’s mood. Bonds and MBS are up (yields down). The 10 year hit 2.07% in the overnight session.

 

On the open, it is looking like mortgage backed securities are lagging the move in Treasuries. Prepayment speed worries are behind it. It may take a couple of days for mortgage rates to catch up.

 

The upcoming week will have a slew of important economic data, with construction spending, the ISM numbers and the jobs report on Friday. Productivity and costs will be another key number, although the Fed is more worried about a slowdown than an acceleration of inflation. After that, the Fed goes into their quiet period ahead of the FOMC meeting in two weeks.

 

Housing affordability is at its strongest in about a year, according to Black Knight Financial. The annual rate of housing inflation fell below the 25 year average of home price appreciation for the first time since 2012. 22% of median income was required to purchase the average house, which is will below the historical average of around 25%. Most of that has to do with lower interest rates, but slowing home price appreciation and rising incomes have been the drivers there.

 

According to Sentier Research, the median income in March of 2019 was $64,016. NAR has the median home price at $267,300. This puts the median house price to median income ratio at just under 4.2x. This is still elevated compared to historical numbers, but low interest rates offset the high multiple.

 

Affordability issues are driving a new business model for builders in some high-cost areas: build to rent. Toll Brothers is going to spend something like $60 million in a joint venture to build rental properties. “Renting by choice” is one of the new consumer trends, and it may not be going anywhere. The plan is to stick rental properties in planned communities that are more or less identical to neighboring properties. Why would people choose to rent? If they are worried about another housing bubble, they shouldn’t. That isn’t going to happen again for a long, long time. If they believe they need a 20% down payment, then the industry has an education job to do. If they are doing it because they want the freedom to move easily, that will probably change once they have kids.

 

Construction spending was flat in April, according to the Census Bureau. Residential was down 0.6% MOM and 11.2% YOY.

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