All Things in Moderation

Vital Statistics:

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

Jerome Powell spoke last night and said that the Fed cut rates this year as the economy wasn’t as strong as anticipated. He reiterated that the Fed won’t be making any moves unless things change “materially” in the US economy: “Monetary policy is now well positioned to support a strong labor market and return inflation decisively to our symmetric 2 percent objective. If the outlook changes materially, policy will change as well. At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.”

Home prices rose 1.1% in the third quarter, according to the FHFA House Price Index. They are up 4.9% on a YOY basis. They added an interactive map, so you can drill down to MSA-level home price appreciation. Separately, the Case-Shiller home price index rose 3.2% on an annual basis in September.

Mortgage delinquency rates fell in October, according to Black Knight’s First Look. The Deep South still has the highest delinquency rates, while the West Coast and Mountain states have the lowest levels. Prepay speeds are up 134% on a YOY basis.

Redfin makes its predictions for the 2020 housing market.

• a return of bidding wars
• 30 year fixed rate mortgage stabilizes at 3.8%
• home prices will rise in the Southeast as people get priced out of the cities

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Vital Statistics:

Stocks are higher this morning after China agreed to take more steps to protect US intellectual property. Bonds and MBS are flat.

The upcoming week should be relatively quiet with the Thanksgiving holiday. SIFMA is recommending early closings for Wednesday and Friday. Wednesday will have some important economic data with GDP and personal incomes, but with the Fed on hold, economic data is going to take a backseat. Note Jerome Powell is expected to give a speech tonight after the market close.

The CFPB is taking a look at loan originator compensation, and is thinking about relaxing some of the rigid rules regarding variations in compensation. The biggest issue surrounds state loan programs, which are meant to make a mortgage more affordable and help get people into homes. Most of these programs have strict limits on how much the originator is permitted to make on a loan, and is often well below what the lender will make on normal conforming loans. This rule change will allow loan officers to lower their compensation to make these programs work financially for the lender. The Bureau is also looking at allowing lenders to decrease LO comp on loans where there are errors due to LO mistakes.

The investment community (firms like Blackrock, PIMCO, and Fidelity) are encouraging the Trump Administration to include an explicit government guarantee for Fannie and Freddie loans in its housing reform. The Trump Administration’s plan to privatize the GSEs does not contemplate an explicit government guarantee – and they would like to reduce the size of the government’s footprint in the mortgage market. Note they never had one – the GSEs were “government sponsored” entities, which doesn’t mean “government guaranteed.” Fannie and Fred were always public-private hybrids. Any sort of explicit government guarantee would require legislation, and that is probably going to be almost impossible absent another crisis.

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Vital Statistics:

Stocks are flat this morning after China invited the US for trade talks in Beijing despite the resolution backing Hong Kong. Bonds and MBS are down small.

In economic data, initial jobless claims were flat at 227,000 last week and the Philadelphia Fed manufacturing survey improved.

The CFPB is conducting an assessment of the TRID rule. There doesn’t appear to be any specific issues the CFPB is looking to address, but it is part of the Trump Administration’s push to eliminate unnecessary burdens on business.

Independent mortgage banks had their best quarter in 7 years as pretax production profit rose to 74 basis points from 64 in the prior quarter. “A surge in refinance activity and a healthy purchase market led to robust mortgage volume in the third quarter, pushing up production profits to a high not seen since the fourth quarter of 2012 ($2,256 per loan),” said Marina Walsh, MBA Vice President of Industry Analysis. “The increase in profits was primarily driven by declining production expenses and higher loan balances, which mitigated the effects of lower basis-point revenue.” Interestingly, production revenue and secondary marketing income fell. The purchase share of the market fell from 74% to 60%.

Bold prediction: Within the next two years, we will see the majority of loans go through the entire process without any human involvement. It will be a much more mechanized process.

The minutes from the Fed confirmed the market’s view that the central bank will be out of the picture for a while. They removed the “act as appropriate” language in order to signal that stance. From the minutes:

In describing the monetary policy outlook, they also agreed to remove the “act as appropriate” language and emphasize that the Committee would continue to monitor the implications of incoming information for the economic outlook as it assessed the appropriate path of the target range for the federal funds rate. This change was seen as consistent with the view that the current stance of monetary policy was likely to remain appropriate as long as the economy performed broadly in line with the Committee’s expectations and that policy was not on a preset course and could change if developments emerged that led to a material reassessment of the economic outlook.

Translation: We aren’t moving in December. Note the Fed Funds futures agree with that assessment, although they are predicting more cuts in 2020. FWIW, the Fed generally tires to avoid modifying policy in the months leading up to an election for fear of appearing political. That said, the March futures are pricing in about a 25% chance of a cut.

Is the REO-to-Rental trade finally done? Blackstone has finally exited its entire position in Invitation Homes, which it created in the aftermath of the financial crisis. Invitation was one of the first to buy up distressed properties and rehab them to rent. Turns out Blackstone tripled its money on the trade.

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Vital Statistics:

Stocks are lower this morning as tensions increase between China and the US over Hong Kong. Bonds and MBS are up.

The Senate passed a resolution last night supporting democracy for Hong Kong and urging China to not use violence to suppress the demonstrations. This will undoubtedly complicate trade negotiations, and will push the markets to more of a “risk-off” (stocks down, bonds up) posture. Bond yields are lower this morning, with the 10 year trading at 1.74%.

Mortgage Applications decreased by 2.2% last week on a seasonally adjusted basis as purchases rose 6.7% and refis fell 7.7%. Veteran’s Day influenced the numbers. “U.S. and China trade anxieties and protests in Hong Kong pulled U.S. Treasuries lower last week, and the 30-year fixed mortgage rate followed the same path, dipping below 4 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite lower rates, mortgage applications decreased 2.2 percent, driven by an 8 percent slide in refinance activity. Rates have stayed in the same narrow range of around 4 percent since July, so we may be starting to see the expected slowdown in refinancing as the pool of eligible homeowners shrinks.”

The retailers are announcing earnings and the markets are looking for indications of how this year’s holiday shopping season will shake out. Target and WalMart both announced strong earnings and took up their Q4 guidance. These two stocks are a bellwether for John Q Public’s spending habits.

The FOMC minutes will be out at 2:00 pm today. The minutes usually aren’t market-moving, but given the somewhat abrupt change in the Fed’s posture there is always the possibility that we could see some action. Just be aware when locking around that time.

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Vital Statistics:

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

Housing starts came in a little light, at 1.31 million but the big news was the permits number, which rose to 1.46 million. This is up almost 15% compared to October 2018 and is the highest print since the bubble years. The action was in the Northeast and the South. Completions were up big as well, coming in at 1.26 million, which is up double digits compared to last month and a year ago.

The MBA reported that applications for new home purchases increased by 9% from September and by 31.5% from a year ago. “The new home sales market continues to be strong and was reinforced by October’s increase in applications for new home purchases,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “At an annual pace of 791,000 units, our estimate of new sales has reached its highest level since the inception of our survey in 2012. Home builder sentiment remains close to 18-month highs, and housing starts and permits have increased for four straight months. These are promising signs for the housing market, as the rise in new and existing housing supply has led to slower home-price growth and improving affordability.”

While a couple data points don’t necessarily indicate a trend yet, we might finally start seeing new home construction begin to meet the pent-up demand out there. And if this is finally happening, GDP forecasts are probably too low.

The Home Despot reported disappointing third quarter earnings and lowered FY 2019 guidance. Comp store sales were up, but tariffs are taking a bite out of earnings. The stock is down 5% pre-open.

Home prices rose 5.4% in October, according to Redfin. “Low mortgage rates are propping up homebuyer demand and juicing prices, said Redfin chief economist Daryl Fairweather. “However, home sales have been slow to grow since there are so few homes for sale and not many new listings hitting the market, especially affordable ones. The market is split: It’s a seller’s market for moderately priced homes, but a buyer’s market for pricier homes.” 

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Vital Statistics:

Stocks are flattish this morning as violence continues in Hong Kong. Bonds and MBS are flat as well.

Optimism for a trade deal with China waxes and wanes, and we had some conflicting reports this weekend. CNBC said that the government was disappointed in Trump’s reluctance to roll back tariffs, while the Chinese state media company said Beijing and Washington had constructive talks over the weekend.

The upcoming week has some real-estate related data with housing starts and existing home sales, but nothing much market moving. We will get the FOMC minutes on Wednesday, but the sense in the market is that the Fed is on hold for a while, and probably through the election.

The Fed said the US financial system “appears resilient” in its semiannual report on financial stability. “The current combination of very low credit spreads and high levels of indebtedness among risky nonfinancial corporates, including through leveraged loans, merits heightened vigilance,” Fed Governor Lael Brainard said in a prepared statement. “Over the medium term, the low-for-long environment and the associated incentives to reach for yield and take on additional debt could increase financial vulnerabilities.” They were also critical of cryptocurrencies, warning they could destabilize the system if implemented without regulation and oversight. Wasn’t the whole point of cryptocurrencies to have a medium of exchange that is beyond the reach of governments?

Predictions for 2020:  Rates will remain low, with Fannie Mae predicting the 30 year fixed rate mortgage will end up in a tight range around 3.5% – 3.6%. Home price appreciation will re-accelerate, with home prices rising 5.6% next year versus 3.5% this year. Inventory will remain tight, however especially at the lower price points. “While historically low rates increase buying power and make it more likely for potential buyers to attain their homeownership dream, they also increase the risk of a long-run housing supply shortage, which we predict will continue through 2020 and possibly intensify,” Kushi says. “As first-time buyers lock-in these historically amazing rates and existing owners refinance—in droves in recent months, everyone will stay put and not sell. Where’s the incentive?”

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Vital Statistics:

Stocks are up this morning on optimism for a trade deal. Bonds and MBS are flat.

Retail Sales increased 0.3% MOM and 3.1% YOY. in October. The control group, which strips out the volatile auto, gas, and building materials sectors) increased 0.3%. Apparel and big-ticket items like furniture and appliances were weak, however. Regardless, it is looking like this year’s holiday shopping season will be strong.

Dallas Fed President Robert Kaplan doesn’t see a recession in 2020 as strong consumer spending and a robust labor market provide a strong foundation to keep the economy going. Numerous Fed speakers – Powell, Williams, Kaplan, Clarida – have all expressed comfort with the current level of interest rates. As a general rule, the central bank is loath to do anything during an election year for fear of appearing political and wanting to help one candidate or another. This is especially true when one of the candidates is trying to influence Fed policy publicly. This means we probably won’t see any further action out of the FOMC until 2021. Long-term rates (and mortgage rates) will therefore be more influenced by overseas rates and any sort of inflation surprises in the US. FWIW, I think the Fed is exactly where they want to be, with a positively sloped yield curve, decent growth and tame inflation.

Mortgage delinquencies fell to a 25 year low, according to the MBA. The rate for 1 – 4 unit DQs fell to 3.97% in the third quarter, which was down 59 bps from the second quarter and 50 bps from a year ago. “Mortgage delinquencies decreased in the third quarter across all loan types – conventional, VA, and in particular, FHA,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “The FHA delinquency rate dropped 100 basis points, as weather-related disruptions from the spring waned. The labor market remains healthy and economic growth has been stronger than anticipated. These two factors have contributed to the lowest level of overall delinquencies in almost 25 years.”

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Vital Statistics:

Stocks are lower this morning after overseas weakness due to the protests in Hong Kong. Bonds and MBS are up.

Jerome Powell will testify in front of Congress at 11:00 am today. It probably won’t be market-moving, but you never know. With the Fed in a holding pattern and the 2020 election coming up, the central bank will probably fade into the background.

Inflation at the consumer level increased 0.4% MOM in October and 1.8% YOY, driven by increasing housing and medical costs. The core number (ex-food and energy) was up 0.2% MOM and 2.3% YOY. We will get wholesale inflation numbers tomorrow.

Mortgage applications increased 10% last week as purchases rose 5% and refis increased 13%. “Mortgage applications increased to their highest level in over a month, as both purchase and refinance activity rose despite another climb in mortgage rates,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Positive data on consumer sentiment and growing optimism surrounding the U.S. and China trade dispute, were behind last week’s rise in the 30-year fixed mortgage rate to 4.03 percent. Refinance applications jumped 13 percent to the highest level in five weeks, as conventional, FHA and VA refinances all posted weekly gains. With rates still in the 4 percent range, we continue to expect to see moderate growth in refinance activity in the final weeks of 2020.”

Bidding wars for real estate have hit a 10 year low, driven by flattening prices on the Left Coast. Nationally, the percentage of houses with bidding wars fell to 10.1%, a drop from 38% a year ago. This was almost certainly driven by home price appreciation failing to keep up with wage inflation, along with rising interest rates. San Francisco was probably affected by a disappointing IPO market. The supply / demand imbalance is still there however, so if interest rates remain at these levels, we could see bidding wars return when the spring selling season hits.

Google is getting into the banking business by offering checking accounts. As if Google doesn’t already know enough about us…

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