Morning Report: Lousy jobs report

Vital Statistics:

S&P futures4,2059.8
Oil (WTI)64.33-0.37
10 year government bond yield 1.52%
30 year fixed rate mortgage 3.15%

Stocks are flattish this morning after a disappointing jobs report. Bonds and MBS are up.

The economy added 266,000 jobs in April, which was a huge disappointment compared to expectations of about a million. The unemployment rate ticked up to 6.1%. The labor force participation rate increased from 61.5% to 61.7%. Average hourly earnings were up a disappointing 0.3%, however this is due to more lower-paid leisure and hospitality workers getting jobs, which pulls down the average.

The 10-year traded down to 1.48% immediately after the news, but has recovered back above the 1.5% level. Mortgage backed securities are lagging the move, which is typical behavior when the 10 year has a big move one way or the other.

Note that the March payroll number was also revised downward by 146,000 jobs as well. Punch line: this is a lousy report, and the Fed isn’t going to even think about raising rates any time soon.

Apparently Google searches for “when is the housing market going to crash” are up big over the past month.

One of my pet peeves with the business press is the casual way people throw around the term “bubble.” Bubbles are extremely rare events, and housing bubbles happen once or twice a century. For a housing bubble to happen we need everyone – regulators, lenders and borrowers to buy in to the concept that real estate is special and cannot go down in price. Anyone old enough to sign a mortgage doc knows that isn’t the case.

Home prices are up big because we have underbuilt for 15 years and because interest rates are so low. This situation is nothing like 2007 when companies like Washington Mutual were offering negative amortization loans to anyone who could fog a mirror.

We don’t have a housing bubble right now. That said, you could make the argument that we have a sovereign debt bubble, especially overseas where there are still negative yields on the 10-year.

Housing affordability dropped in the first quarter, according to the Wells Fargo / NAHB Housing Opportunity Index. The index compares the typical mortgage payment for a 90 LTV loan at the median house price and calculates how many borrowers would have a 28% front-end DTI or lower. Right now, about 63% of borrowers earning the median income would have a 28 DTI or lower if they bought the median house and put 10% down.

This graph demonstrates how much interest rates play into the calculation. Yes, home prices matter, but they aren’t the only story. People who focus only on prices are missing half the picture.

Rocket was pummeled yesterday on its results and fears of a replay of the Great Pricing War of 2018 between Rocket and crosstown rival United Wholesale. United Wholesale is down 45% year-to-date while Rocket is more or less flat. Fun fact: at current levels, UWMC has a 5.6% dividend yield (at a 31% payout ratio). If you divide Rocket by the $1.11 special dividend it paid in March, you get a 5.8% yield (48% payout ratio). We are getting into REIT territory with these yields. I know mortgage bankers have never gotten love from the Street, but this nuts.

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