Morning Report – Existing Home Sales rise 3/23/15

Posted on March 23, 2015 by Brent Nyitray

Markets are flat this morning on no real news. Bonds and MBS are up.

Existing Home Sales rose to an annualized pace of 4.88 million in February, up slightly from 4.82 million in January. Note this is probably a weather-driven number and February is still in the seasonally slow period. The median home price was $202,700 which is up 7.5% year-over-year. Median income is about $55,000 or so, which means the median house price to median income ratio is sitting at 3.68x, which is on the high side. Historically, that ratio has sat in a range of 3.15x – 3.55x. It means that house prices are probably not going to flatten until we start seeing wage inflation.

The Chicago Fed National Activity Index slipped in February as production-related indicators fell. Employment related indicators slipped however were still positive. Poor weather undoubtedly played a role.

The housing reform bill is making its way into the House. This bill, called The Partnership to Strengthen Homeownership Act envisions winding down Fan and Fred, and increasing the role of Ginnie Mae. Private mortgage insurance will bear the first 5% of severity with the government bearing losses beyond that. It sounds like this bill is gaining support of Congressional Republicans as well, however understand this bill is the left’s wish list. The left wants to continue social engineering via the housing market while the right wants to decrease the government’s footprint. The social engineering (aka “affordable housing”) stuff will probably be the biggest sticking point. The plan envisions Ginnie Mae’s 10 basis point guarantee fee will be used for affordable housing goals. Note the government plans to wipe out Fannie and Freddie stockholders, although those two stocks are litigation lottery tickets at this point.

The low price points in urban areas are beginning to decline again. In many urban areas, the suburbs have recovered, while the inner cities remain weak. I wonder how much property in the inner cities was bought by professional investors who are starting to eye the exit. Rental prices continue to rise, but at some point pros will want to monetize these investments. Of course this also demonstrates one of the issues with the CRA: it demands that bankers ignore location when considering the riskiness of the underlying collateral when pricing credit, when location clearly matters.

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Morning Report – Lenders more optimistic about 2015 3/20/15

Posted on March 20, 2015 by Brent Nyitray

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

Slow news day.

There is no economic data this morning and much of the Street will be exiting early ahead of yet another snowstorm.

Now that we no longer can rely on housing equity extraction to fund consumption, the correlation coefficient between spending and wages is higher than ever.  One more reason why the Fed will probably not begin raising rates too aggressively until we start seeing real wage growth. As of now, we are seeing about 2% annual wage growth versus slightly below 2% inflation. So real wages are in fact growing, just not by much.

Mortgage lenders are more optimistic about 2015 than mortgage consumers, according to the Fannie Mae quarterly survey of lender sentiment.

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Morning Report – Stocks and Bonds rally on the FOMC announcement 3/19/15

Posted on March 19, 2015 by Brent Nyitray

Stocks and bonds are lower after yesterday’s furious post-FOMC rally. MBS are flattish.

Initial Jobless Claims rose to 291k from 290k last week. Consumer comfort fell to 51.5 from 54, according to the Bloomberg Consumer Comfort Index. In other economic indicators, the Philly Fed Index was largely flat at 5, while the Index of Leading Economic Indicators was flat at .2%.

The Fed did indeed remove the word “patient” from the FOMC statement. However, they noted that growth moderated, which is unsurprising given the weather in the Northeast. They did take down their economic projections for unemployment, GDP, and inflation. 2015. GDP is now forecasted to be in the 2.3% – 2.7% range, which was revised lower from their 2.6% – 3.0% forecast at the December 2014 meeting. Unemployment was taken down to 5.0% – 5.2% from 5.2% to 5.3% in December, and inflation was taken down to 0.6% to 0.8% from 1.0% to 1.6%.

The dot graph was what got the markets all excited. The Fed is forecasting a flatter trajectory to higher rates than they were in December. In the march dot graph, it looks like the median projection by the members is 50 basis points for a year end Fed Funds rate.

Compare that to the December forecast, where the median was closer to 75 basis points or so.

It looks like the 2016 and the 2017 forecasts are slightly lower as well. These dot graphs are what got the market going (although a major bond rally in Europe yesterday probably contributed to the move). Note the makeup of the FOMC is different now than it was in December, and decidedly more dovish. The flatter trajectory for higher rates clearly calmed the markets. The Fed made no change in its plan to shrink its balance sheet. For the time being, they will continue to re-invest maturing proceeds back into Treasuries and MBS.

Homebuilder Lennar reported good earnings this morning. Revenues were up 21%, while gross margins held up surprisingly well at 23.1%. Average selling prices increased about 3% to 326k, which shows that builders have hit the ceiling on price hikes. Incentives increased slightly. New orders were up 18% in units and 25% in dollar value.

Stuart Miller, Chief Executive Officer of Lennar Corporation, said, “Despite severe weather conditions which constrained production and sales in parts of the country, the housing market continued its slow and steady recovery. Early signals from this year’s spring selling season indicate that the housing market is improving, and disappointing single family starts and permits numbers should rebound shortly. The sizable production deficit of the past years continues to drive demand improvement in spite of the constrained mortgage market.” 

Lennar will hold a conference call this morning around 11:00 am. The stock is up about a buck and quarter (or about 2.5%)

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Morning Report – Fed Day 3/18/15

Posted on March 18, 2015 by Brent Nyitray

Stocks are lower this morning as we await the Fed’s decision at 2:00 pm. Bonds and MBS are higher as worldwide sovereigns mount a ferocious rally. Oil continues its slide, down $1.20 a barrel to $42.26.

While the Street will undoubtedly focus on the removal of the word “patient” from the FOMC statement, Janet Yellen will probably stress that this change in language merely opens the door for a June rate hike, and does not mean they have already decided to do so. The Fed will remain data-dependent and will probably want to see some sort of rebound from the weather-driven weakness of Q1. It is interesting to see the US exit ZIRP when countries like Sweden are implementing NIRP, where the Riksbank cut rates to -0.25%.

Mortgage Applications fell 3.9% last week. Purchases fell 1.5% while refis fell 5.2%. This was the week after the jobs report where interest rates spiked to 2.24% and then slowly came back.

Macroeconomic bellwether FedEx reported better than expected numbers this morning, however it took down 2015 numbers based on dollar strength. This will probably become a bit of a trend as we enter pre-announcement season and the big multinationals take down their full year forecasts. Earnings season is only two weeks away.

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Morning Report – Housing Starts disappoint 3/17/15

Posted on March 17, 2015 by Brent Nyitray

Markets are lower this morning as housing starts disappoint and oil continues to fall. Bonds and MBS are up.

Housing Starts fell to an annualized pace of 897k in February from an upward-adjusted 1.08 million in January. While it is tempting to blame this on the weather (and undoubtedly some of this is due to the weather), you had an 18% drop in the West as well. Building Permits rose to 1.09 million, however from an upward revised 1.06 million. While this is an improvement from the post-bubble years, we are still operating well below historical norms.

Today begins the two-day FOMC meeting. Aside from the word patient, the Street will be focusing on the Fed’s economic projections, particularly inflation. At the December FOMC meeting, the Fed was projecting GDP growth of 2.6% – 3.0%, unemployment of 5.2% to 5.3% and PCE inflation of 1.0% to 1.6%. Given that six of the last seven PPI prints have been negative, it will be interesting to see what the Fed does with their inflation forecasts. If it gets too low, will the Fed hold off raising rates? Certainly the dovish wing of the FOMC will argue for caution.

Great article on the bubblicious tech company valuations. All sorts of games are being played in order to boost the valuations of companies like Uber, AirBnb, Dropbox, etc. Mark Cuban has described the current bubble in these private companies to be bigger than the internet bubble of the late 90s. FWIW, Henry Blodgett (who would know a thing or two about bubble valuations) thinks Uber could go public at $50 – $100 billion in a few years. That makes it worth about the same as Allergan or ConocoPhillips.

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Morning Report – All we need is a little patience 3/16/15

Posted on March 16, 2015 by Brent Nyitray

Markets are higher as oil continues to fall. Bonds and MBS are up small.

Industrial production rose .1%, lower than expectations, however that was probably due to the weather. Capacity Utilization fell to 78.9%, which was negative as well. Weather probably had a lot to do with the disappointing numbers, but January’s numbers were revised downward in a big way, with industrial production being revised to -0.3% from 0.2% and capacity utilization revised from 79.4% to 79.1%.

Homebuilder Sentiment fell to 53 in March from 55 in February.

This week is all about the word “patient.” The FOMC meets Tuesday and Wednesday and the Street will be keying on the word “patient” – in the context of “The Fed can be patient in waiting to raise rates. Janet Yellen characterized patient to mean “two more FOMC meetings.” In other words, if the word is gone from the statement, the market will take it to mean the Fed is moving in June. Given this is a March meeting, we will have updated projections for GDP, unemployment, and inflation as well as a press conference.

The biggest issue facing the Fed is wage growth. Why are we not seeing wage growth with unemployment pushing “full employment?” It is a vexing question. The answer is that we have a huge reservoir of people who are considered not part of the labor force, but want to be. As these people return to the labor force, wage inflation will remain low until these people are all employed. Mark Zandi of Moody’s believes that this will take about a year, and by this time next year, we will start seeing wage inflation.

US Treasuries are getting a bid courtesy of the Japanese, who are selling JGBs to pick up yield wherever they can. US debt probably provides the best value out there.

OT: Shameless Plug: Did you know financial professionals rock? This one does. Check out my entry for the Jamtrackcentral 2015 guitar solo contest and give me a like. I appreciate it.

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Morning Report – 2015 could be the best year for housing since 2007 3/13/15

Posted on March 13, 2015 by Brent Nyitray

Markets are lower this morning on no real news. Bonds andMBS are flattish.

Inflation at the wholesale level remains nowhere to be found, as the Producer Price Index fell .5%. You can’t blame this on oil, as the index fell .5% ex-food and energy. Six out of the last seven months have been negative on the headline number.

Consumer sentiment fell to 91.2 from 95.4 in February, according the University of Michigan. Current conditions are down, but expectations fell quite a bit. Does a lot of snow make people depressed?

Freddie Mac is saying that 2015 could be the best year for housing since 2007. Given the carnage in housing over the past 8 years, that is like discussing the best season for the Detroit Lions under Matt Millen. They are forecasting housing starts of 1.18 million, mortgage originations of $1.3 trillion (of which 40% are refis), and home sales of 5.6 million.

The NYT has a good article on parsing the Fed’s language. Next week we will get the FOMC decision, and everyone will be looking for the presence of absence of the word “patient.” (In the context of “the Fed can be patient in raising interest rates.). If that word is removed, the market will take it to mean the Fed will hike rates at its June FOMC meeting. For LOs with borrowers who are floating, let them know that next Wed could be a big day in the bond market.

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Morning Report – Retail Sales Fall 3/12/15

Posted on March 12, 2015 by Brent Nyitray

Stocks are higher this morning after the big US banks passed their stress tests and raised dividends / buybacks. Bonds and MBS are up.

Retail Sales fell .6% in February. Ex autos and gas, they fell .2%. Poor weather on the East Coast and the West Coast port strike undoubtedly affected these numbers. The port strike is causing retailers to be light on spring inventory, particularly apparel.

Initial Jobless Claims fell to 289k from 320k the week. Import Prices rose .4% in Feb, but are down 9.4% year-over-year. The Bloomberg Consumer Comfort Index rose to 43.3, and business inventories were flat in January.

Are we starting to feel the economic effects of the stronger dollar? Exporters are beginning to cite dollar strength for weakness in their overseas operations.

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Morning Report – Housing affordability still above pre-bubble days 3/11/15

Posted on March 11, 2015 by Brent Nyitray

Stocks are bouncing back after yesterday’s sell-off. Bonds and MBS are down small.

Mortgage Applications fell 1.3% last week. Purchases were up 1.9% while refis fell 2.9%.

Attitudes about the US economy are finally turning around, according to the Fannie Mae National Housing Survey. More people think the economy is on the right track than the wrong track. Also interesting is that consumers sense that mortgages are becoming easier to get.

Inflation remains low, partly because the rally in the dollar is keeping a lid on import prices. Ever since the ECB began the march towards full QE, the dollar has been screaming. The dollar is approaching parity on the Euro – start thinking about that summer vacation in the South of France. Fun fact, when the euro was trading around 86 cents on the dollar, you could stay at the Ritz in Paris for roughly about the price of a good business hotel in Manhattan.

Housing affordability has decreased a bit since the trough of 2012, but still remains well above the pre-bubble years of 2000 – 2002, at least as measured by mortgage payment to income ratio. Pre-bubble, the DTI ratio for the median income and mortgage payment was about 26%. It rose to almost 35% during the bubble, fell to 17.6% in the trough, and is now around 21%. If you look at the chart below, you can see how much interest only and negative amortization loans factored into the bubble years. Pretty amazing to think that almost 1 in 5 mortgages was an IO / neg am during the go-go days of the bubble.

Interesting story about the mess that is Detroit. As downtown begins its gentrification / hipster renaissance, the rest of the city is struggling, and the biggest problem are these sales based on quitclaim deeds, which can leave the buyer with massive liabilities for back taxes.

In February of 2008, Bank of America was added to the Dow Jones Industrial Average, just as the financial sector was beginning its swan dive. At that time, Apple was a $100 billion dollar company. What would have happened to the index if Apple was added instead of Bank of America?

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Morning Report – More evidence of tightening in the labor market 3/10/15

Posted on March 10, 2015 by Brent Nyitray

Markets are lower this morning as commodities fall and the dollar climbs. Bonds and MBS are up as the German Bund hits new highs, with a yield of 26 basis points. German Bund yields are negative through 7 years, as the ECB buys the 5 year at a negative yield.

The continuing rally in European bonds will probably support the US 10 year as global bond managers unload Bunds to the ECB and buy Treasuries instead. The caveat is that inflation has to remain nowhere to be found in the US. Yesterday, Cleveland Fed President Loretta Mester sounded hawkish, saying that at 5.5% unemployment we are close to meeting the Fed’s full employment mandate. Of course this assumes that the current labor force participation rate of 62.8% is the new normal. Color me skeptical – I think a lot of these people who are out of the labor force want to work and will choose to if given the opportunity. This will keep a lid on wage growth.

Job Openings remained around 5 million, according to the JOLTs job report. We are back to early 2001 levels. Hires decreased to 5 million and separations were unch’d at 4.8 million. The quit rate was unchanged at 2%.

Small business optimism rose a hair in February, according to the NFIB to 98 which has been the long-term average of the index, including the Great Recession. It is the third highest reading since 2007. We are seeing more evidence of labor shortages, however, with 53% of the respondents trying to hire, but 47% reported few or no qualified applicants. 29% of all owners reported job openings they cannot fill, which is the highest reading since early 2006. That said, sales fell, which could have been weather-related. 60% reported increased capital expenditures, which is the strongest reading since Oct 2007. Inflation remains nowhere to be found, and it looks like business owners are unable to raise prices.

CFPB Director Richard Cordray appeared before the House yesterday to discuss QM, payday lending, and overdraft protection. The discussion fell along usual partisan lines, with Democrats pushing for more consumer protection, and Republicans worried about limiting consumer choice.

Foreclosures continue to fall, according to CoreLogic. They were down 14.7% month over month and 22% year over year. The seriously delinquent rate of 4% is the lowest since June of 2008. Foreclosure inventory is 549k, down 33% from a year ago.

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