All Things in Moderation

Vital Statistics:

Stocks are lower this morning on overseas weakness and Coronavirus fears. Bonds and MBS are up again.

The 10 year is trading at 1.28%, but MBS are lagging the move. Be patient with rates, as it will take MBS and rate sheets a few days to catch up. The Fed Funds futures are now handicapping a 58% chance of a March rate cut. A week ago it was 9%. What a difference 250 S&P handles makes…

New home sales rose 7.9% MOM in January, and is up 18.6% on a YOY basis. This is the highest level in 12 years. Mild weather and lower interest rates may have been a driver.  Speaking of new home sales, Toll Brothers reported lower than expected earnings, and blamed it on Coronavirus and CA sales.

The second estimate for fourth quarter GDP came in at 2.1%, in line with the advance estimate a month ago. Consumption was a touch below expectations at 1.7%, as was inflation at 1.3%. In other economic data, durable goods orders fell 0.2% which was better than expectations. Ex-transportation, they rose 0.9% and capital goods orders (which are a proxy for capital expenditures) rose 1.1%. Finally, initial jobless claims rose to 219,000 last week.

Interesting on the flight to safety trade – gold is up. bitcoin is not.

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Vital Statistics:

Stocks have stabilized this morning and rates are up a touch from their intra-day all time lows yesterday. At one point, the 10 year Treasury was trading at 1.31%. This morning, Treasuries are down a touch and MBS are flat. For the most part, MBS underperformed Treasuries yesterday.

Mortgage applications rose 1.5% last week as purchases increased 6% and refis fell by 1%. “Last week appears to have been the calm before the storm,” said MBA Chief Economist Mike Fratantoni. “Weaker readings on economic growth caused a slight drop in mortgage rates, bringing them back to their level two weeks ago, but applications overall moved 1.5 percent higher. Refinance applications for conventional loans dropped a bit, but FHA refinances increased more than 22 percent. Purchase volume remained strong, supported both by low rates and the increased pace of construction over the past few months. With housing supply at low levels, new inventory is a positive development for prospective homebuyers.”

The Coronavirus issue has spooked the Fed funds futures market. The futures are now predicting a 1 in 3 chance of a rate cut at the March meeting. Just one  month ago, the March futures were handicapping a 4% chance. Take a look at the December futures, which are now forecasting 2 or 3 cuts this year.

Note that Dallas Fed President said yesterday: “It is still too soon to make a judgment about how it might relate to monetary policy. I still think we are a number of weeks away from being able to make the judgment” whether a rate change is required.” The April futures are already pricing it in.

Coronavirus fears didn’t do much to dampen US consumer confidence, which rose again. Historically consumer confidence has been an inverse of gasoline prices, in other words, when gasoline rises, consumers get salty and vice versa. Oil is now trading below $50 a barrel, and the refineries are beginning to switch from heating oil to gasoline refining. Good news for the summer driving season.

Luxury homebuilder Toll Brothers reported lower than expected earnings this morning and the stock is getting hammered pre-open (down about 9%). Earnings were down big and revenues missed guidance.

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Vital Statistics:

Stocks are higher this morning as coronavirus fears ease. Bonds and MBS are flat.

The 10 year bond yield traded briefly yesterday below the 2016 closing low of 1.37%. So far, that level seems to be holding. The trader in me thinks that any sort of good news on the coronavirus front will send rates back up 10 – 20 basis points. Big moves generally have decent retracements, and the 1.37% seems to be providing technical support. Note that the German Bund is not at record lows and any bounce up in rates there will be felt in the US. While it feels like the path of least resistance is down in rates over the long term, that might not be the case over the next few weeks. Lock accordingly.

Home prices rose 0.4% MOM and 2.9% YOY according to the Case-Shiller Home Price Index. Separately, the FHFA House Price Index rose 0.6% MOM and 5.1% YOY. The FHFA index only looks at homes with conforming mortgages, so it excludes jumbos and distressed.

It looks like economic growth improved in January, according to the Chicago Fed National Activity Index. Note that Goldman and others are taking down Q1 GDP growth estimates based on Coronavirus.

Intuit is buying Credit Karma, which will help the company create a “personalized financial assistant” to help people manage their money. Credit Karma bought Approved, a digital mortgage platform in 2018, and this will be part of the strategy. “We wake up every day trying to help consumers make ends meet. By joining forces with Credit Karma, we can create a personalized financial assistant that will help consumers find the right financial products, put more money in their pockets and provide insights and advice, enabling them to buy the home they’ve always dreamed about, pay for education and take the vacation they’ve always wanted.”

Joe Biden has a housing plan, which includes returning to the Obama-era CFPB practices (presumably regulation by enforcement action), spending $100 billion on affordable housing, and a tax credit of up to $15,000 for first time homebuyers. The plan also includes aid for low-income renters and a task force to combat homelessness.

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Vital Statistics:

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

The FOMC minutes didn’t reveal anything too surprising. The central bank is concerned about coronavirus, and the situation “warranted close watching.” In his Humphrey Hawkins testimony, Jerome Powell said he wanted to see evidence that Chinese disruptions are having a material effect on the US economy that will last. China is idling factories and restricting travel, and companies are now seeing the downside of stretched supply chains. In addition they fretted about persistently low inflation and searched for reasons why it has consistently missed their 2% target to the downside. Basically the message is that if rates are going anywhere, it is down not up.

In other economic news, initial jobless claims came in at 210,000 and the Philadelphia Fed manufacturing survey surged to a robust level of 37.

Mortgage delinquencies are the lowest on record (going back to 2000).  The total 30 day + DQ rate came in at 3.22%, which was down 14% YOY and down 5% on a MOM basis. This is unusual given that DQs often spike early in the year as holiday spending gets the better of people.

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Vital Statistics:

Stocks are lower this morning after Apple warned that revenues will be light in Q1 based on Coronavirus issues. Bonds and MBS are up.

We have a lot of housing data this week, with the NAHB Housing Market Index, housing starts, and existing home sales. We also quite a bit of Fed-speak, but not much in the way of market-moving data.

New home purchase applications started off the year strong, rising 40% from December and 35% from a year ago. “New home applications and sales activity surged in January. This was a continuation of the end of 2019, which saw strong residential construction and increased purchase applications activity,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Even with some global and domestic economic uncertainty, builders have ramped up production in recent months to meet increased homebuyer demand.” Strength in homebuilding may turn out to be the economic surprise of 2020.

Democratic hopeful Michael Bloomberg proposes tightening the regulatory grip on the financial industry, by imposing a 10 basis point financial transaction tax, merging Fannie and Freddie, banning payday lenders. and ending the use of mandatory arbitration. This is interesting since he was critical of Obama-era financial regulation when he was Mayor of NY.

Top fintech names which are changing the housing market.

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Vital Statistics:

Stocks are higher this morning after some strong earnings reports out of the tech sector. Bonds and MBS are flat.

Retail Sales came in at 0.3% as expected.

It looks like Judy Shelton may not make it through the nomination process as the business press gangs up on her and a couple Republicans voice concerns. The issue with Shelton is that she hasn’t rejected the gold standard and she casts doubt that the conventional wisdom of central banking is correct. This may be unfortunate, as global central banks are prone to groupthink. Given the strength of the US economy (strongest labor market in 50 years) why would the Fed be increasing its balance sheet? I wouldn’t be surprises to see her withdraw her name over the long President’s Day weekend.

Inflows to bond funds could hit $1 trillion again in 2020. Investment dollars are flowing to high grade corporate bonds and Treasuries. This wall of money will keep a ceiling on bond yields, and should continue this process of rates slowly grinding lower throughout the year. Good news for the mortgage banking business.

The homeownership rate increased to 65.1% in Q4, the highest in six years. The millennial cohort rate increased by 1.1% to 37.6%. Note that the rental vacancy rate at 6.4% is the lowest in 34 years.

Fannie Mae reported net income of $14.2 billion in 2019. Under an agreement with Treasury, Fannie will be allowed to keep it as they build up their capital to eventually go for sale.

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Vital Statistics:

Stocks are lower this morning on coronavirus fears. Bonds and MBS are up small.

Consumer prices rose 0.1% MOM and 2.5% YOY in January, according to the CPI. Ex-food and energy, they rose 0.2% MOM and 2.3% YOY. The Fed doesn’t really pay too close of attention to the CPI, preferring the Personal Consumption Expenditures data. Regardless, inflation is not at a level to trigger any sort of rate hike.

Initial Jobless Claims came in at 205,000. The labor market continues to roll along.

The percentage of homes that sold above list price fell to a 3 year low in 2019, according to Zillow. On average, 19.5% of homes sold above list in 2019, while 21.5% did in 2018. This seems counter-intuitive given the supply / demand imbalance overall – NAR has existing home supply at roughly 3 months’ worth, well below 6.5 months, which is considered a balanced market. So what is going on? The real estate market is seasonal, and many people try and move during the summer months, which means home prices are negotiated in the late winter / spring. Early 2019 was marked by a continuing Fed tightening regime – we had multiple rate hikes in 2018 as the Fed wanted to get off the zero bound. This raised mortgage rates, which crimped affordability. The Fed only started easing in July, by which time the lion’s share of transactions are over. By the time mortgage rates fell meaningfully, 2019 was already in the books. 2020 should be a lot better, and judging by some of the comments from the builders, the spring selling season started early this year.

Jerome Powell’s Humprey-Hawkins testimony was largely uneventful, and today two of Trump’s Fed nominees head to the Senate for testimony. One of the nominees – Christopher Waller – is uncontroversial and should have no issues. The other one – Judy Shelton – has raised some eyebrows. Shelton has been critical of the Fed’s large balance sheet and its policy of paying interest on reserves. The policy of paying interest on excess reserves restricts credit needlessly, as she characterizes it as “paying banks to do nothing.” She is quite dovish and there are questions over whether she supports the gold standard, which is akin to pitching the idea of bloodletting to the AMA.

While we generally take for granted the idea that the Fed will maintain a larger balance sheet, this chart really puts into perspective how much things have changed. Pre-crisis the Fed had roughly $800 billion in assets. Now it is around $4.3 trillion. Has equity gone up 5x? um, no.

Credit rating agency Fitch is cautioning the CFPB from removing debt-to-income as a measure of a borrower’s ability to pay. The CFPB is considering using a measure like the difference between the borrower’s rate and the normal “market” rate, however Fitch thinks it is incomplete:

“Spread to APOR is a good measure of default risk. However, many factors can affect the price of a loan, some of which may have little to do with the borrower’s repayment capacity; these include liquidity, market movements, or attributes that present a low risk of loss to the lender, for example, a low loan-to-value. Aggressive lending programs could result in borrowers having a low APR but a high DTI and LTV where they cannot afford the loan but the risk of loss to the lender is low.”

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