Morning Report: Housing starts disappoint 8/16/18

Vital Statistics:

Last Change
S&P futures 2832 11
Eurostoxx index 380.51 0.81
Oil (WTI) 65.03 0.02
10 Year Government Bond Yield 2.87%
30 Year fixed rate mortgage 4.58%

Stocks are higher this morning on a potential that in trade tensions. Bonds and MBS are flat.

Initial Jobless Claims fell to 212k from 215k last week.

Housing starts came in below forecasts for June – rising an anemic 0.9% to 1.17 million. They are down 1.4% on a YOY basis. Most areas showed modest increases, except for the West, which fell substantially. Permits were a little better, rising 1.5% MOM and 4.2% YOY. These numbers echo the drop in homebuilder sentiment, which is being driven by rising construction costs and labor shortages. “The solid economic expansion and firm job market should spur demand for new single-family homes in the months ahead,” NAHB Chief Economist Robert Dietz said in a statement. “Meanwhile, builders continue to monitor how tariffs and the growing threat of a trade war are affecting key building material prices, including lumber. These cost increases, coupled with rising interest rates, are putting upward pressure on home prices and contributing to growing affordability challenges.”

In the wake of the residential real estate bubble, the government has focused on regulatory solutions to fraud in the single family market. However, multifam was largely left alone, and it looks like the government is in the process of investigating an upstate NY developer which has about $1.5 billion in loans backed by the GSEs which may have been made under fraudulent circumstances. Apparently things like tenant income go unverified on these sorts of loans, and it is a systemic problem.

Here are 3 misconceptions about credit scores: First, carrying a balance on revolving credit does not increase your score. Second incomes do not factor in a credit score (they aren’t even tracked) and finally, your spouse’s credit score and your own are completely independent.

The Trump Administration is looking to tweak the Volcker rule in order to give banks a brighter line on what constitutes proprietary trading. The banks are not interested, surprisingly. Currently, the rule says banks need to hold a security for longer than 60 days in order to prove they aren’t proprietary trading. The proposal would track the “available for sale” securities account and test it that way. From the bank’s standpoint, brighter lines are better, but having spent a lot on internal controls to ensure compliance with the new rules, they don’t seem anxious to re-do it.

At the end of the day, market-making is largely dead, having been done in by declining bid-ask spreads, electronic trading, regulations, and declining brokerage fees. It simply is a money-losing business any more. The next crash is going to be an eye-opener when large swaths of the markets simply go no-bid.

Morning Report: Productivity rises 8/15/18

Vital Statistics:

Last Change
S&P futures 2824 -16.5
Eurostoxx index 380.78 -4.14
Oil (WTI) 66.49 -0.55
10 Year Government Bond Yield 2.86%
30 Year fixed rate mortgage 4.58%

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

Kind of a mixed bag with economic data this morning.

Retail Sales came in well above expectations in July, with the headline number rising 0.5%. The control group, which excludes autos, gas, and building materials was up the same amount. While July’s numbers were strong, June’s estimate was revised downward, so expect to see a downward revision on Q2 GDP from the first estimate of 4.1%.

Mortgage Applications fell 2% last week as purchases fell 3% and refis were flat. The typical mortgage rate fell 3 basis points, which helped push refis up to 37.6% of all mortgages.

Productivity increased 2.9% as output increased 4.8% and hours worked increased 1.9%. Compensation costs increased 2%, so with the productivity gain, unit labor costs fell 0.9%. This will certainly make the Fed happy, as higher productivity leads to higher non-inflationary wage growth and higher standards of living. This is the preliminary estimate for the second quarter and will be subject to revision.

Industrial production only managed a 0.1% gain in July, and manufacturing production was up 0.3%. June numbers were revised sharply higher, so that offset the weakness. Capacity Utilization was flat at 78.1%.

Homebuilder confidence slipped last month to the lowest in a year as labor shortages and higher material prices dampen sentiment. “The good news is that builders continue to report strong demand for new housing, fueled by steady job and income growth along with rising household formations,” said NAHB Chairman Randy Noel, a homebuilder from LaPlace, La. “However, they are increasingly focused on growing affordability concerns, stemming from rising construction costs, shortages of skilled labor and a dearth of buildable lots.”

Despite the strong economic news, we are starting to see a bit of a risk-off trade in the structured credit market. Bank of America has gone negative on structured products and agency MBS. This means that mortgage spreads are widening which will either lead to higher mortgage rates or lower profit margins (probably a bit of both). That said, B of A is calling for a flattening of the yield curve, which will offset the wider spreads at least somewhat.

The strong economy is lowering delinquencies, according to CoreLogic. The 30 day + DQ rate fell from 4.5% to 4.2% in May. Seriously delinquent rates are lower overall, except for the hurricane hit states of Florida and Texas. The California wildfires have the potential to goose up DQ rates in the coming months.

Morning Report: Small Business optimism soars 8/14/18

Vital Statistics:

Last Change
S&P futures 2833 7.5
Eurostoxx index 385.12 0.21
Oil (WTI) 67.99 0.79
10 Year Government Bond Yield 2.88%
30 Year fixed rate mortgage 4.58%

Stocks are higher this morning after the Turkish Lira rallied 6%. Bonds and MBS are flat.

Import prices were flat in July but were up just under 5% on a YOY basis. This was pretty much all driven by oil prices which are inherently volatile and self-correcting.

Small business optimism is near record highs according to the NFIB. Availability of workers remains a big concern, and we are seeing record levels of compensation increases. Note that many of these comp increases are planned, so there will be a 9 month lag before it shows up in the government data. Credit availability is a non-problem. The biggest headache for small business is availability / quality of labor, not the cost of labor. I don’t know that we have cost-push labor inflation quite yet, but if that is the case, then it won’t be good for mortgage rates as it will primarily affect the long end of the curve.

HUD is electing to discontinue the Obama Administration’s controversial interpretation of the AFFH rule from the 60s, which means it no longer will be suing towns to force them to change their zoning codes to allow multi-family housing. HUD will focus on eliminating regulatory impediments to building more housing, and will tie grants to measures which increase building. In other words, The Obama Admin used a stick approach, while the Trump Admin will use a carrot approach.

Home prices rose 0.7% MOM and 6.8% YOY in June according to CoreLogic. They are forecast to rise 5% over the next year. Sales in the red-hot markets are down double digits as affordability issues and lack of inventory crimp activity.

The Despot reported better than expected earnings as homeowners choose to fix up their existing place instead of trying to move in a tight real estate market. Better weather helped the company rebound from their sales miss in the first quarter.

Morning Report: Turkey situation deteriorates 8/13/18

Vital Statistics:

Last Change
S&P futures 2836 -0.55
Eurostoxx index 384.89 -0.96
Oil (WTI) 67.37 -0.26
10 Year Government Bond Yield 2.88%
30 Year fixed rate mortgage 4.58%

Stocks are lower as the Turkey situation snowballs to other emerging markets. Bonds and MBS are up on the flight to quality trade.

Financial markets are being driven by the situation in Turkey, with the Turkish Lira continuing to depreciate. This has spread to other emerging markets currencies like the South African Rand. The Chinese currency has hit the lowest level in a year, which is bound to increase trade tensions with the US. There is the potential for this to affect the balance sheets of some European banks, however the US will be pretty much insulated from it. The most likely effect is that it will cause a flight to quality to the US dollar which will keep a lid on interest rates.

The Turkish crisis hasn’t affected the Sep Fed Funds futures, which are handicapping a 94% of a hike, but they have tempered the probability of a follow-on hike in December. It isn’t a dramatic move, but we have slipped from 66% to 61%.

We won’t have much in the way of market-moving data this week – retail sales on Wednesday will be the only one that matters. We will also get housing starts on Thursday. Other than that, it should be a dull week.

Ben Carson is changing the way HUD encourages multifamily real estate development. The Obama HUD used the stick approach – suing local governments to force them to change their zoning rules, based on demographic analysis. The Carson HUD will use the carrot approach – tying grants to changes in zoning restrictions.

Conventional financing accounted for 69% of all financing last year. Of the non-conventional types of financing, FHA loans led with 12%, followed by cash with 10% and VA with 4%.

Elon Musk clarified his tweet regarding taking Tesla private. He decided to use Twitter in order to notify the public of his intention to take the company private. Most companies file an 8-K with the SEC and do a press release, but Elon decided to use Twitter. Second, his “funding secured” comment was based on a conversation with the Saudi Sovereign Wealth Fund who asked if Tesla was interested in selling to the fund. Musk then looked at the assets of the fund, concluded they had the money, and then tweeted that funding was secured. One thing is for sure, if this deal ever happens, the background section of the proxy statement is going to make for some entertaining reading.

Morning Report: Home ages climb

Vital Statistics:

Last Change
S&P futures 2842 -11.5
Eurostoxx index 386.37 -3.68
Oil (WTI) 67.28 0.48
10 Year Government Bond Yield 2.90%
30 Year fixed rate mortgage 4.58%

Stocks are lower this morning on overseas weakness. Bonds and MBS are up on the risk-off trade.

Inflation at the consumer level remains under control, with the Consumer Price Index rising 0.2% MOM and 2.9% YOY. Stripping out food and energy, it rose 0.2% / 2.4%. A big driver of the increase was shelter, adding 0.3%. Food rose slightly while energy declined.

The EU and the US are scheduled to meet to discuss ways to bring down tariffs. The US would like to see more soybean and energy exports to the Continent, and is hoping to derail a potential pipeline of natural gas from Russia to Germany.

The Turkish Lira is in freefall, and there is discussion of how that will affect Euro banks, specifically BBVA, BNP Paribas, and Unicredito. Yields on the Turkish 10 year bond have hit 20%. This is causing a flight to quality which is benefiting US bonds. While Turkey is probably not big enough to cause any sort of contagion, it could cause the ECB to go a little slower on policy normalization. Note Trump is stirring the pot, threatening to double tariffs.

Fannie Mae has also announced forbearance policies for borrowers affected by the California wildfires. Borrowers can get up to 12 months forbearance without penalty if they live in FEMA-designated disaster areas.

The average age of a home is 37 years old, according to the American Communities Survey. This really speaks to how weak housing starts have been since the real estate bubble burst. Pre-bubble they averaged 1.5 million a year.

Slower delivery times are beginning to affect manufacturers (and their earnings reports). Ultimately, bottlenecks are usually inflationary. This is also the downside of making supply chains elongated and lean – capacity is maxed so meeting incremental demand requires investment that many firms are reluctant to make. The good news is that demand is strong, but the downside is that this is yet one more inflationary issue. The odd thing is that capacity utilization is sitting at 78%, which is about the historical average.

Morning Report; Despite strong data, more people are worried about their jobs 8/9/18

Vital Statistics:

Last Change
S&P futures 2859 3.5
Eurostoxx index 389.41 -0.28
Oil (WTI) 67.29 0.35
10 Year Government Bond Yield 2.94%
30 Year fixed rate mortgage 4.58%

Stocks are higher this morning on decent earnings. Bonds and MBS are up.

Very slow news day.

Initial Jobless Claims fell to 213,000 last week, an exceptionally low level. The 4 week average is sitting at 45 year lows.

Inflation at the wholesale level was surprisingly weak in the first of two inflation readings this week. The Producer Price Index was flat MOM and rose 3.3% YOY. Ex-food and energy, it rose 0.1% MOM / 2.7% YOY. Tariffs explain some of it, but freight and packaging costs pushing prices higher too.

Freddie Mac has extended mortgage forbearance measures due to the wildfires in California. Borrowers in FEMA-declared disaster areas may be allowed to suspend mortgage payments without penalty for up to a year. Fannie Mae is expected to do something similar.

Fannie Mae’s Home Purchase Sentiment Index fell in July for the second consecutive month as inventory and affordability issues weighed on homebuyer moods. The net number of respondents who think it is a good time to buy fell by 4 percentage points and the number who think it is a good time to sell fell by 6. Most respondents think mortgage rates and home prices will rise over the next year. One interesting data point: a big jump in the number of people who are worried about their job. The net number of people (% who are concerned less the % who are not concerned) fell by 11 percentage points. This certainly flies in the face of the data out there, and sentiment surveys are usually not very predictive, but it is a surprise.

Morning Report: Refinances at 18 year low 8/8/18

Vital Statistics:

Last Change
S&P futures 2857 -2.75
Eurostoxx index 389.8 -0.69
Oil (WTI) 68.41 -0.76
10 Year Government Bond Yield 2.99%
30 Year fixed rate mortgage 4.58%

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

Mortgage applications fell 3% last week as purchases fell 2% and refis fell 5%. Activity overall has fallen to a 19 month low. The refi index has is at an 18 year low.

Mortgage credit availability increased in July, although it tightened for government loans. The MBA’s MCAI increased 1.7%, which is a post-crisis high, but nowhere near what it was during the bubble years.  “Credit availability continued to expand, driven by an increase in conventional credit supply. More than half of the programs added were for jumbo loans, pushing the jumbo index to its fourth straight increase, and to its highest level since we started collecting these data. There was also continued growth in the conforming non-jumbo space, which reached its highest level since October 2013,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. Note that some observers think the MCAI understates how loose credit is, when you look at things like LTV and credit scores.

Separately, US banks eased lending standards for business loans. The report noted increased demand for business loans, and decreased demand for commercial real estate loans. As mortgage lending dries up, banks are competing more for small business loans, although increased liquidity in the secondary market for these loans also helped.

Elon Musk proposed the largest LolBO ever on Twitter yesterday, saying he was thinking of taking Tesla private at $420 a share. He claims he has funding secured, which is quite the statement. Even in this market, raising $71 billion isn’t the easiest thing in the world, especially for a negative cashflow company trading with an EV / EBITDA in the 150s.  Perhaps the price should have tipped people off that this was a joke, but apparently it isn’t.

The NAHB conducted a survey of potential homebuyers, and only 14% are planning to buy a home in the next year. That number was 24% in the fourth quarter of 2017. Of those planning to buy a home, 61% are first time buyers, of which 71% are Millennials. Most are noting that the number of homes for sale with the desired features and price point are smaller than they were 3 months ago.

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