Morning Report: NAR predicts 750,000 new homes in 2020

Vital Statistics:

 

Last Change
S&P futures 3078 -12.25
Oil (WTI) 56.72 -0.54
10 year government bond yield 1.95%
30 year fixed rate mortgage 4.04%

 

Stocks are lower this morning on overseas weakness. The bond market is closed for Veteran’s Day.

 

The upcoming week doesn’t have much in the way of data, with the exception of CPI and PPI. Given that the Fed is in a holding patters, these numbers shouldn’t have much of an effect on the bond market unless they are way out of line with expectations. Donald Trump will speak to the NY Economic Club on Tuesday, and investors will be looking for information regarding progress on trade with China. Jerome Powell will speak to Congress on Wednesday and Thursday. And while it will probably not be market-moving, the House will televise impeachment hearings on Wednesday and Friday. So far the markets have ignored the whole kerfuffle.  Unless the Democrats drop something earth-shattering it probably will remain a sideshow. Given the silo-ization of information sources, it will probably turn out that only the converted will be watching the sermon. The consensus seems to be that the House will impeach and the Senate will not convict, with the voting falling strictly down party lines.

 

NAR is predicting that new home sales will jump 11% in 2020 to 750,000 units, the highest since 2007. Existing home sales should increase to 5.56 million units. Median existing home prices are expected to rise in the low 4% range, while new home prices should fall as builders focus on starter homes. While 750,000 may be a large number compared to recent history, it is only at historical averages, which doesn’t really take into account the increasing population.

 

new home sales

 

Consumer credit growth decelerated in September, according to the Fed. Credit card debt fell, although non-revolving debt credit flows dropped as well. The Fed’s Senior Loan Officer Opinion Survey noted that lenders may be tightening standards, which explains the drop in credit card debt.  Note the collateralized loan obligations have been hit recently, which is a potential warning on credit.

 

The early estimates for Q4 GDP are rolling in, and they range anywhere from 0.7% to 2.1%. The Fed estimates are on the low side (surprising since they just cut rates 3 times) and Goldman is out with the 2.1% call. Q4 GDP is going to be all about consumer spending, and so far the consumer confidence numbers are holding up well.

 

 

Morning Report: Yesterday’s bond market sell-off

Vital Statistics:

 

Last Change
S&P futures 3082 -2.25
Oil (WTI) 56.27 -0.94
10 year government bond yield 1.95%
30 year fixed rate mortgage 4.04%

 

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

 

There was no catalyst I can see for why bond yields rose so dramatically yesterday. There wasn’t any economic data (initial jobless claims aren’t market movers) and there was no Fed testimony or anything. The 10 year bond yield rose from 1.81% to 1.97% intraday in what was a complete wash-out for the bond market. If anything, it felt like a major asset allocation trade was happening, where investors sell bonds and buy stocks. Many funds will use a strategy comparing the earnings yield or dividend yield on the S&P 500 versus the yield on government bonds. That said, this was a global phenomenon, as the German Bund and UK bond yields have also been heading lower. It is almost as if we went from fretting about a recession to fretting about inflation. Maybe the China deal caused it, and maybe it was exacerbated by convexity selling, but there really isn’t a good explanation out there of what was going on. You can see the dramatic move intraday yesterday. Note that the move started late in Asian trading before the European markets opened and carried on throughout the day.

 

11-7 bond chart

 

JP Morgan just did a credit risk transfer deal on portfolio of jumbo mortgages. In these sorts of deals, investors get a above market interest rate in exchange for bearing first losses on the portfolio. It works essentially like an insurance policy. This means two things: first, banks may be the first step in taking some of the burden off Fannie and Fred, and second we may see better jumbo pricing as a result.

 

Zillow says that its house-flipping business will generate as much as $1.25 billion in revenues. The company reported a loss last night that beat expectations, and the stock was sent up 9% after hours.

Morning Report: Risk on feel as the US and China strike a trade deal

Vital Statistics:

 

Last Change
S&P futures 3088 12.25
Oil (WTI) 57.27 0.94
10 year government bond yield 1.88%
30 year fixed rate mortgage 3.97%

 

Stocks are higher this morning after the US and China agree to remove tariffs. China also made some high profile arrests to stem the tide of fentanyl coming into the US. The fentanyl issue was a key part of the US’s issues with China. Bonds and MBS are down on the “risk-on” trade.

 

After a dismal start to the year, the luxury end of the market (homes over $1.5 million) rebounded in the third quarter as rates fell. Prices rose 0.3% on average, but they had been falling since 2018. Manhattan was hit particularly hard on the new mansion tax. Florida was the beneficiary as prices rose over 100% in West Palm and some of the other nearby areas. Previously hot markets like San Diego also remained in the losing category. “Because recession fears peaked over the summer, I expected luxury home prices and sales to dip. But it appears that nerves alone weren’t enough to scare off wealthy homebuyers,” said Redfin chief economist Daryl Fairweather. “The U.S. economy grew faster than expected in the third quarter, partly as a result of healthy consumer spending. Those results, along with flat luxury home prices and rising sales, go to show that Americans are basing their spending habits on their own personal financial situation rather than concerns about global economic tensions. For many, that means strong incomes and good employment prospects.”

 

Fannie Mae is out with their housing forecasts for 2020. They anticipate the 30 year fixed rate mortgage will continue to fall, hitting 3.5% by the end of 2020, and home prices will rise about 4%. Interestingly, they do not anticipate any sort of pickup in housing starts – in fact they anticipate they will be flat with 2019. Despite the drop in rates, they anticipate origination volumes will fall to 1.86 trillion from 2.04 trillion as the refinance share of the market falls from 37% to 31%.

 

New York Fed President John Williams said that the FOMC sees no reason to cut interest rates further: “The three rate cuts we did were very effective at managing the risks” slowing global growth and trade uncertainty present to the U.S. economy, New York Fed President John Williams said at a Wall Street Journal event in New York. Chicago Fed President Charles Evans echoed the same sentiment.

 

Finally, we know that gathering strength in the US economy is helping push rates higher. It is important to note that rising rates is not simply a US phenomenon. US Treasuries don’t trade in a vacuum – they are always going to be subject to moves in overseas rates. For now, the key overseas interest rate to watch is the yield on the German Bund, which has increased by 45 basis points since early September. The Bund still has a negative yield, but it is now -27 basis points after bottoming at -72 basis points 2 months ago.

 

bund

Morning Report: Brookings frets about the non-bank sector

Vital Statistics:

 

Last Change
S&P futures 3074 4.25
Oil (WTI) 56.97 -0.24
10 year government bond yield 1.83%
30 year fixed rate mortgage 3.97%

 

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

 

Mortgage Applications fell 0.1% last week as purchases decreased 3% and refis increased 2%. “U.S. Treasury yields once again exhibited some intraweek volatility before declining sharply toward the end of the week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “As a result, mortgage rates decreased, with the 30-year fixed rate falling below 4 percent again. In response to the lower rates, refinance applications climbed 2 percent, as homeowners with larger loan balances helped to keep the average refinance loan size elevated. Purchase applications fell slightly last week but remained almost 7 percent higher than a year ago.”

 

Job openings ticked down in September, according to the JOLTS survey. The quits rate fell to 2.3%, although it was lowest (1.7%) in the Northeast. The rest of the country was in the mid-2s. The Fed keeps a close eye on the quits rate as often presages an increase in wage growth. Construction job openings remain elevated, as does the quits rate for the sector.

 

construction labor market

 

The ISM non-manufacturing survey came in much better than expectations. Business is “brisk” and a shortgage of workers remains one of the biggest headaches. Whatever late-summer fears about an impending recession or business slowdown appear to have abated.

 

Productivity fell in the third quarter, according to BLS, as output increased 2.1% and hours worked increased 2.4%. Unit labor costs rose 3.3%, reflecting a 3.6% increase in compensation and the 0.3% drop in productivity. Manufacturing has been a weak spot, as decreasing demand has lowered output.

 

PennyMac has filed an antitrust lawsuit against Black Knight alleging that “Black Knight uses its market-dominating LoanSphere® MSP mortgage loan servicing system to engage in unfair business tactics that both entrap its licensees and create barriers to entry that stifle competition.” Basically Pennymac developed their own servicing infrastructure and Black Knight is suing them. Separately, Black Knight reported better than expected earnings this morning.

 

The government is getting worried about shadow banks (read independent mortgage bankers) and their market share in the mortgage origination business. Independent mortgage banks were the subject of a Brookings paper which points out they are vulnerable to financial shocks given that they rely on short-term funding in the money markets to fund their business. Note this isn’t only an origination issue – it is a servicing issue and the revolves around advances. For FHA and VA servicing these advances can spin out of control. This is probably what is behind the government’s recent moves to curb the use of the False Claims Act, which basically drove the big banks out of the FHA /  VA business. Nonbanks currently originate 90% of all GNMA loans.

 

nonbank share

Morning Report: Bonds adjust to the prospect of no further rate cuts

Vital Statistics:

 

Last Change
S&P futures 3083 7.25
Oil (WTI) 56.97 0.64
10 year government bond yield 1.84%
30 year fixed rate mortgage 3.92%

 

Stocks are higher this morning after Chinese President Xi Jinping committed to lowering tariffs and institutional transaction costs. Bonds and MBS are down.

 

The markets expect to see some sort of phase 1 trade deal with China in the coming weeks. The Wall Street Journal is reporting that China and the US are considering rolling back some tariffs. Separately, the Chinese central bank lowered rates to deal with a liquidity crunch.

 

There isn’t much data this week (as is typical after the jobs report) however we do have a lot of Fed-Speak so, we could see some movement in the bond markets as we adjust to the pause. For those keeping score at home, the December Fed Funds futures are signalling only a 5% chance of another rate cut this year. A month ago, they were handicapping a 44% chance of another cut.

 

fed funds futures

 

Home prices rose 3.5% YOY according to CoreLogic. By their models, 36% of the top 100 MSAs are overvalued (including the NYC area), while 23% were undervalued and 41% were fairly valued. Their model compares housing values to disposable incomes to come up with a valuation score. They are forecasting home price appreciation to accelerate to 5.6% over next year. Note that Realtor.com said that listing prices rose 4.3% in October to a high of 312,000.

 

Corelogic overvalued

 

About 0.6% of all originations went DQ within 6 months, according to Black Knight Financial Services. While this is much lower than the pre-bubble years, it has been steadily increasing since the housing market bottomed. The concentration is primarily in first time homebuyers. Foreclosures remain under control, at levels last seen in 2005.

Morning Report: Decent jobs report

Vital Statistics:

 

Last Change
S&P futures 3049 13.25
Oil (WTI) 54.82 0.64
10 year government bond yield 1.71%
30 year fixed rate mortgage 3.92%

 

Stocks are higher after a decent jobs report. Bonds and MBS are up small.

 

Jobs report data dump:

  • Payrolls up 128,000 versus 90,000 expected
  • Unemployment rate 6.3%
  • Manufacturing payrolls – 36,000
  • Labor force participation rate 63.3%
  • Average hourly earnings up 0.2% MOM / 3.0% YOY

Overall a pretty decent report. Payrolls were depressed by the GM strike (about 46,000 workers), however the labor force participation rate ticked up and the employment-population ratio was flat at 61%. The two month revision was up 95,000 as well – September payrolls were revised upward by 44,000 and the August number was revised upward by 51,000. So, if you add back the GM strikers, and take into account the revisions, August’s number becomes 219,000, September becomes 180,000, and October becomes 174,000. Certainly nothing that would indicate any sort of major slowdown in the US economy.

 

Pennymac reported good numbers last night, with originations increasing to $35 billion in the last quarter. This was up 44% from Q2 and almost double last year. As expected, they took a hit on MSR valuations as rates fell, but they got a lot of that back on their hedges. Good times abound in origination business.

 

TRI Pointe reported numbers that beat the street, however revenues declined, as did average sales prices. That said, margins are increasing which is good news for the building sector. The S&P Homebuilder ETF (XHB) is up 54% so far this year.

Morning Report: The Fed cuts rates and then goes into a holding pattern.

Vital Statistics:

 

Last Change
S&P futures 3042 -5.25
Oil (WTI) 54.42 -0.64
10 year government bond yield 1.73%
30 year fixed rate mortgage 4.02%

 

Stocks are lower this morning after the Fed cut rates. Bonds and MBS are up.

 

As expected, the Fed cut rates by 25 basis points yesterday, and Jerome Powell said that “the current stance of policy is expected to remain appropriate” as long as the labor market remains strong and the economy continues to expand moderately. They also removed the language that said the Fed would “act as appropriate” to maintain the current expansion. This was the “pause” language that the markets were looking for. The vote was 8-2, with two members voting to maintain the current Fed Funds target. For some reason, the pause language put some starch in the bond market, which has sent rates lower by about 12 basis points. The December Fed Funds futures are currently handicapping a 20% chance of another 25 basis point cut. FWIW, Morgan Stanley is out with a call saying the Fed is on hold through 2020. As a general rule, the Fed tries to stay out of the picture as much as it can during an election year, so that call may end up being correct.

 

Personal Incomes and spending increased 0.3% and 0.2% respectively, which was lower than August’s torrid pace. On an annual basis, incomes rose 3.8% and consumption increased 4.4%, both strong numbers and well ahead of the weaker-than-expected inflation readings. The PCE price index (which is the Fed’s preferred inflation measure) was flat in September, and up 1.3% YOY. Ex-food and energy the PCE index was flat and up 1.7% annually. Separately, the employment cost index rose 0.7% in the third quarter and was up 2.8% YOY. Note that wages increased 0.9%, which is a quite strong number.

 

The Urban Institute has panned the Administration’s plan to reduce the GSE footprint in the mortgage market. Their point is that the government guarantee for Fannie MBS is so important that it will be hard for other entities to compete, unless the guarantee fee is set higher than the credit risk dictates. They also claim that it will reduce credit and slow down the economy.

 

The overall share of GDP attributable to housing increased to 14.6% in yesterday’s GDP report. Residential fixed investment (homebuilding, remodeling, etc) increased to 3.11%, while housing services, which is mainly rent, was about 11.5% of the economy. Historically, residential fixed investment has been closer to 5% and rent has been closer to 12% – 13%. In other words, housing is still punching below its weight economically, although it may be turning around. This represents a huge potential boost to GDP once things return to normalcy.

 

housing GDP

 

 

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