All Things in Moderation

Vital Statistics:

Stocks are lower on mixed earnings reports. Bonds and MBS are up.

The Fed made no changes to monetary policy, however they did tweak some overnight lending rates. The interest on overnight excess reserves and reverse repo transactions were hiked by 5 basis points to 1.6% and 1.55% respectively. The vote was unanimous. The Fed Funds futures became more dovish, with the Dec futures predicting an 85% chance for a cut of some sort, and a 15% chance of no change. Interesting to see the move in the Fed Funds futures given that the Fed actually tightened slightly by increasing the reverse repo and interest on overnight reserve rates.

GDP rose at 2.1% in the fourth quarter of 2019, a little bit higher than expectations. Consumption growth slipped to 1.8%, while inflation remained broadly in check. The PCE index rose 1.5%, while the core PCE, excluding food and energy rose only 1.3%. Residential construction rose 5.8%. The trade balance moved in the US’s favor, which also helped growth.

Initial Jobless Claims came in at 216,000.

Pending Home Sales decreased 4.8% in December according to NAR. “Mortgage rates are expected to hold under 4% for most of 2020, while net job creation will likely exceed two million,” said Lawrence Yun, NAR’s chief economist. “Due to the shortage of affordable homes, home sales growth will only rise by around 3%,” Yun predicted. “Still, national median home price growth is in no danger of falling due to inventory shortages and will rise by 4%. The new home construction market also looks brighter, with housing starts and new home sales set to rise 6% and 10%, respectively.”

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Vital Statistics:

Stocks are higher as earnings continue to come in. Bonds and MBS are flat.

The Fed is set to announce its decision at 2:00 pm this afternoon. No changes in rate policy are expected, however there might be some news regarding the balance sheet and overnight rates. It probably won’t be market-moving, but just be aware.

Mortgage applications rose 7.2% last week as purchases rose 5% and refis rose 8%. “Mortgage applications continued their strong start to the year, as borrowers acted on the drop in mortgage rates last week. Rates were driven lower by investors’ increased concern about the economic impact from China’s coronavirus outbreak, in addition to existing concerns over trade and other geopolitical risks,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “With the 30-year fixed rate at its lowest level since November 2016, refinances jumped 7.5 percent. Purchase applications grew 2 percent and were 17 percent higher than the same week last year. Thanks to low rates and the healthy job market, purchase activity continues to run stronger than in 2019.” Note that there was an adjustment due to the Martin Luther King holiday.

Pulte reported better than expected earnings yesterday. Revenues were flat, but the 33% increase in new order stood out.  “As demonstrated by our 33% increase in orders, the recovery in housing demand that began earlier this year gained momentum through the fourth quarter as we realized strong sales across all buyer groups,” said Company President and CEO Ryan Marshall. “Strong demand for new homes is benefiting from favorable market dynamics including improved affordability in part due to low mortgage rates, high employment and consumer confidence, and a generally balanced inventory of new homes,” added Marshall. The stock was up about 5% yesterday.

Consumer confidence perked up in January, according to the Conference Board. “Consumer confidence increased in January, following a moderate advance in December, driven primarily by a more positive assessment of the current job market and increased optimism about future job prospects,” said Lynn Franco, Senior Director, Economic Indicators, at The Conference Board. “Optimism about the labor market should continue to support confidence in the short-term and, as a result, consumers will continue driving growth and prevent the economy from slowing in early 2020.”

Strong consumer confidence, better homebuilding numbers and low rates mean that 2020 could be better than people are thinking for the mortgage industry. CNBC polls show that growth is expected to be 2% next year. Seems low if December’s housing starts weren’t a fluke, and judging by what we are hearing from the builders, it might not be. Those hoping for a recession will be encouraged by the inverting yield curve, but in this age of central bank intervention the signal doesn’t carry the weight it used to.

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Vital Statistics:

Stocks are up this morning as the tape exhibits a risk-on feel. Bonds and MBS are down small.

The FOMC meeting begins today. No changes in rates are expected, but market participants will be watching for changes in the interest on overnight reserves and changes in the Fed’s balance sheet.

Durable goods orders rose 2.4%, which was better than expected although the volatile transportation sector accounted for the growth. Ex-transportation they fell 0.1%. Capital expenditures continue to disappoint, falling 0.9%.

Home prices rose 0.5% MOM and 2.6% YOY according to the Case-Shiller home price index.

New home sales were roughly flat with November, but are up 23% on a year-over-year basis. For the year, new home sales came in at 681,000, up 10% from 2018. As you can see from the chart below, we are back towards historical norms, but given the increase in population, that isn’t enough.

Homebuilder D.R. Horton reported Q1 earnings that impressed the Street, with earnings up 53% and revenues up 14%. Orders were up 19% in units and 22% in dollar volume. The cancellation rate fell to 20% from 24%. The stock was up 2% in what was otherwise a putrid tape.

Black Rock’s bond strategist sees bond yields falling another 10 – 15 basis points, as uncertainty over coronavirus and the election seeps into the market. If the virus gets materially worse, and travel and business becomes curtailed, then we could be looking at 1.3% on the 10 year.

The CFPB has issued a statement on how it intends to police abusive behavior by lenders. The Bureau has decided that the definition of abusive behavior is too vague, and that uncertainty is having a negative effect on consumers by driving overly-cautious behavior in lenders. The money quote:

First, consistent with the priority it accords to the prevention of harm, the Bureau intends to focus on citing conduct as abusive in supervision or challenging conduct as abusive in enforcement if the Bureau concludes that the harms to consumers from the conduct outweigh its benefits to consumers. Second, the Bureau will generally avoid challenging conduct as abusive that relies on all or nearly all of the same facts that the Bureau alleges are unfair or deceptive. Where the Bureau nevertheless decides to include an alleged abusiveness violation, the Bureau intends to plead such claims in a manner designed to clearly demonstrate the nexus between the cited facts and the Bureau’s legal analysis of the claim. In its supervision activity, the Bureau similarly intends to provide more clarity as to the specific factual basis for determining that a covered person has violated the abusiveness standard. Third, the Bureau generally does not intend to seek certain types of monetary relief for abusiveness violations where the covered person was making a good-faith effort to comply with the abusiveness standard.

The MBA has more analysis of the change here.

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Vital Statistics:

Stocks are lower this morning as the Asian Coronavirus spreads. Bonds and MBS are up.

The upcoming week will have quite a bit of data – new home sales, the first pass at Q4 GDP, and personal incomes / spending. We will also have the FOMC meeting on Tuesday and Wednesday. The current consensus is that the Fed won’t make any changes in policy.

As a general rule, when you get big moves in the 10 year bond yield, it takes a while for the MBS market to catch up. This means that you can see the CNBC talking heads discussing how much lower rates are, then run a scenario and come away disappointed. We are seeing something similar this morning, where the 10 year bond is up over half a point, while the Fannie Mae 3.5s are flat. Even the Fannie 2.5s are only up 3/16. That said, this is a good opportunity to wake up your borrowers who might have missed an opportunity to refinance.

Fair Issac (the company behind the FICO score) is making changes to its credit scoring model. The change will focus more on payment history and consumer debt changes and less on overall debt such as student loans or a large mortgage. As a general rule, installment debt is less of a factor than revolving debt (i.e. credit cards).

Global real estate markets are cooling down. “Across 23 countries, an index of inflation-adjusted home prices compiled by the Federal Reserve Bank of Dallas grew 1.8% in the third quarter of 2019 from a year earlier, down from a recent peak of 4.3% in 2016, according to an Oxford Economics analysis. In 18 large economies, world-wide residential investment dropped on a year-over-year basis for four consecutive quarters through September, the longest stretch of declines since the 2008-09 crisis, according to Oxford Economics’ analysis of national accounts.” Foreign asset demand seems to be the driver, and it has become more correlated with other asset classes, particularly stocks. For the US, the effects will probably be concentrated primarily in markets like New York City and the pricey West Coast markets.

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Stocks are lower on overseas market weakness. Bonds and MBS are up after the European Central Bank left rates unchanged.

Existing home sales rose 3.6% in December, according to NAR. The seasonally adjusted annual rate of 5.54 million was up 11% from a year ago. Lawrence Yun, NAR’s chief economist, said home sales fluctuated a great deal last year. “I view 2019 as a neutral year for housing in terms of sales,” Yun said. “Home sellers are positioned well, but prospective buyers aren’t as fortunate. Low inventory remains a problem, with first-time buyers affected the most.” The median home price came in at $274,500, up 7.8% from a year ago. Total housing inventory sat at 1.4 million units, down 14.5% from November and about 8% from a year ago. At current levels, this represents about 3 months worth of inventory.

NAR is optimistic about 2020: “NAR is expecting 2020 to be a great year for housing,” said NAR President Vince Malta, broker at Malta & Co., Inc., in San Francisco, California. “Our leadership team is hard at work to secure policies that will keep our housing market moving in the right direction, like promoting infrastructure reform, strengthening fair housing protections and ensuring mortgage capital remains available to responsible, mortgage-ready Americans.”

ATTOM data solutions said home sellers realized a price gain of $65,500 on the typical home sale, which represents a 34% return on investment. “The nation’s housing boom kept roaring along in 2019 as prices hit a new record, returning ever-higher profits to home sellers and posing ever-greater challenges for buyers seeking bargains. In short, it was a great year to be a seller,” ATTOM Chief Product Officer Todd Teta said. “But there were signs that the market was losing some steam last year, as profits and profit margins increased at the slowest pace since 2011. While low mortgage rates are propping up prices, the declining progress suggests some uncertainty going into the 2020 buying season.”

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Vital Statistics:

Stocks are higher this morning on strong earnings out of IBM. Bonds and MBS are flat.

Home prices rose 0.2% MOM / 4.9% YOY according to the FHFA House Price Index. We are seeing growth pick up in New England and the Middle Atlantic, which have been laggards since the bubble burst.

Mortgage applications fell by 1.2% last week as both purchases and refis fell slightly. “Mortgage applications dipped slightly last week after two weeks of healthy increases, but even with a slight decline, the total pace of applications remains at an elevated level,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The purchase market has started 2020 on a strong note, running 8 percent higher than the same week a year ago. Refinance applications remained near the highest level since October 2019, as the 30-year fixed rate was unchanged at 3.87 percent, while the 15-year fixed rate decreased to its lowest level since November 2016.”

Kathy Kraninger of the CFPB apparently sent a letter to Congress last week discussing the “QM patch” and recommending that regulators move away from debt-to-income ratios and use alternative measures as a way to determine ability to re-pay. The CFPB indicated that it does intend to extend the QM patch for a short while as the industry adapts to the new rules. The QM patch (which allows loans with DTIs over 43% to qualify for safe harbor provided they are saleable to Fannie and Fred) is set to expire in January 2021. The MBA made a statement on the proposal: “MBA appreciates CFPB Director Kathy Kraninger’s intention to temporarily extend the GSE patch and move away from the use of a standalone debt-to-income ratio,” Broeksmit said. “MBA has urged the Bureau to eliminate the use of DTI ratios as a standalone threshold in the QM definition, which would also remove the need to use the rigid, outdated Appendix Q methodology for calculating borrower income and debt. We look forward to working with the Bureau, and other stakeholders, on the proposed rule.”

Fannie Mae is out with a prediction that 2020 will be a good year for housing. Given Friday’s 1.6 million housing starts number, 2019 ended on a strong note – the highest in 13 years. While we have become accustomed to housing starts around 1.3 million since the bust, that is well below normalcy. In booms, it is not unusual to top 2 million. Fannie took up their GDP estimate a hair from 2.3% to 2.4%. In addition, they expect rates to remain stable. Origination volume is expected to moderate about 5% to $2.06 trillion, with purchase volume increasing 8% and refi volume falling 25%. Note that Realtor.com thinks there is a 4 million unit shortage right now.

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

Housing starts hit a 13 year high, rising to a seasonally-adjusted annual rate of 1.6 million. This is up 17% from November and 41% above a year ago. The caveat: the uncertainty around this number is pretty high, so it might get revised downward next month. That said, we have heard from the builders that they are seeing high traffic and no seasonal slowdown. Housing has been the missing link from the post-crisis recovery, and there clearly is unsatisfied demand. If this is the year we finally see homebuilding begin to meet demand, then current GDP estimates for 2020 are way too low. Note Larry Kudlow just laid a marker: GDP growth will hit 3% this year. Compare this to the current estimates of 1.2% – 2%.

It should be a relatively quiet week, although Davos is going on, which means lots of CNBC interviews in the snow. The theme seems to be environmental this year. We don’t have much in economic data (nothing market-moving at least) and no Fed-Speak. We will get some housing data, with the FHFA House Price index and NAR’s existing home sales report tomorrow.

Job openings fell to 6.8 million in November, according to the JOLTS survey. While this is below the 7 million openings we have become accustomed to, it is still quite elevated and speaks to a robust labor market. The quits rate remained at 2.3%. Job openings fell in manufacturing, which is probably related to Boeing’s 737 woes.

US home sales prices rose 6.9% in December, according to Redfin. Falling interest rates have boosted home affordability, which is translating into higher prices

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Vital Statistics:

Stocks are flattish as we await the China trade deal and earnings season begins in earnest. Bonds and MBS are flat.

Inflation remains under control, and more or less where the Fed would like it. The Consumer Price Index rose 0.2% MOM and 2.3% YOY. Ex-food and energy it rose 0.1% MOM and 2.3% YOY.

JP Morgan reported better than expected earnings this morning driven by higher bond trading revenue. Origination volume increased to $33 billion, up 3% on a sequential basis, which is impressive given the seasonality of the mortgage business. On a YOY basis, it almost doubled. Full year origination volume increased 32% to $105 billion. Servicing took a bite however as prepayment speeds increased. Overall, home lending revenue was down 5% compared to the 4th quarter a year ago as negative servicing valuations offset increased production income. JPM stock is up about a buck pre-open.

Wells reported earnings that missed expectations driven largely by litigation expenses. Mortgage origination volume rose sequentially to $60 billion in the quarter, and servicing was revalued upward from the 3rd quarter. Production income was flat at 1.21%. The stock is down about 3.5% pre-open.

Small business optimism dipped a touch in December, according to the NFIB. “Owners are aggressively moving forward with their business plans, proving that when they’re given relief from the government, they put their money where their mouth is, and they invest, hire, and increase wages,“ said NFIB Chief Economist William Dunkelberg. “What really matters to small business owners are issues directly impacting their bottom lines. Currently, their biggest problem is finding qualified labor, surpassing taxes or regulations.” A net 29% of small businesses reported increasing compensation, an a net 24% plan on increasing comp in the next two months. That said, any sort of profit pressures are coming from weak sales, not increased costs.

Delinquenices hit a 20 year low in October, according to CoreLogic. 30 day DQs fell from 4.1% to 3.7% YOY. The foreclosure rate fell from 0.5% to 0.4%. Separately, CoreLogic reported home prices grew 3.3% in October. “Home price growth builds homeowner equity and reduces the likelihood of a loan entering foreclosure,” said Frank Nothaft, chief economist with CoreLogic. “The national CoreLogic Home Price Index recorded a 3.3% annual rise in values through October 2019, and price growth was the primary driver of the $5,300 average gain in equity reported in the latest CoreLogic Home Equity Report.”

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Stocks are higher this morning as we anticipate a phase 1 trade deal with China this week. Bonds and MBS are flat.

Earnings season kicks off this week with the major banks all reporting. JP Morgan, Wells, and Citi all report tomorrow. We will get inflation data, retail sales and housing starts this week as well. With the Fed on hold for the moment (and probably through the election), economic data will become less of a market-mover unless it is way out the expected range. Neel Kashkari thinks the next move for the Fed could be a rate cut. “If I were to guess the next rate move, my guess (on) the balance of risks, is that it will be down and not up.” The Fed funds futures agree, handicapping a better-than-50% chance that rates will get cut this year.

Iran admitted shooting down an airliner by mistake over the weekend, which has shifted the focus from the US killing a military leader. It looks like there are major protests in Tehran right now. So far, we are not seeing any big effects in the oil market, although North America uses a different benchmark than the rest of the world.

HousingWire lays out some predictions for 2020. One big one refers to recruiting. As of 11/24, originators could officially move from a bank to a non-bank or another state and keep originating mortgages while they wait for the new license. This will almost certainly make recruiting for non-banks easier.

Mortgage credit availability decreased in December by 3.5%, according to the MBA. “Credit availability fell in December after three months of expansion, driven by drops in both conventional and government supply,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Perhaps most noteworthy was a 6 percent drop in government credit supply because of changes to the Veterans Administration loan program, which eliminated loan limits for certain borrowers as of Jan 1, 2020. This likely prompted many investors to remove VA programs in high cost counties from their offerings. There was also a reduction in streamline refinance programs, as slightly higher rates slowed the refinance market at the end of 2019.”

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