Morning Report – The bubble in bonds 6/2/14

Posted on June 2, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1922.6 1.1 0.06%
Eurostoxx Index 3248.0 3.4 0.11%
Oil (WTI) 102.4 -0.3 -0.27%
LIBOR 0.227 0.000 -0.11%
US Dollar Index (DXY) 80.52 0.147 0.18%
10 Year Govt Bond Yield 2.50% 0.03%
Current Coupon Ginnie Mae TBA 106.6 -0.1
Current Coupon Fannie Mae TBA 105.8 -0.1
BankRate 30 Year Fixed Rate Mortgage 4.15

 

Markets are flattish on no real news. Bonds and MBS are down
More disappointing economic data – the ISM Manufacturing report dropped from 54.9 to 53.2 in May and construction spending rose .2%. Both numbers were below expectations.
We will get the jobs report on Friday, and given the almost contradictory economic data we have been getting, I have no idea what to expect. I could see a 100k print. I could see a 300k print. FWIW, the street is at 215k, with a tick up in the unemployment rate to 6.4%.
Cash deals account for 29% of all sales, according to Bloomberg. Retiring baby boomers are choosing to own homes outright, as opposed to having a mortgage. Historically that number has been closer to 20%, and I have seen cash estimates as high as 40%.
In a related note, QE has rendered many economic risk models (particularly the Fed model for stocks) useless. Old definitions of “cheap” and “expensive” no longer apply in a world of unprecedented central bank stimulus and stubbornly low inflation. When investors start re-defining what “cheap” and “expensive” mean (think internet stocks in 1999), that is a signal that we are in bubble territory.
I would like to tie the two articles together – what sort of bet is buying a house with cash? Well, it is a real estate bet- going long real estate. However, by choosing not to get a mortgage, it is also a bond bullish bet, in a way. Lending is the act of going long bonds. Borrowing is the act of going short bonds. IMO, the baby boom is effectively doubling down on the bond bullish bet. They are making a very questionable bet that central banks around the world can stick the landing and exit this unprecedented stimulus without (a) crashing the bond market and (b) creating inflation. IMO, the risks are all to the downside in the bond market, and instead of buying homes with cash, I would be borrowing as much as I could at 4% interest rates. The baby boom drove the stock market bubble in the late 90s, the residential real estate bubble in the 00s, and are drinking the bond market kool aid now. I don’t think this ends well.

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Morning Report – More mixed economic data 5/30/14

Posted on May 30, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1911.2 2.1 0.11%
Eurostoxx Index 3240.5 -5.7 -0.18%
Oil (WTI) 102.9 0.2 0.19%
LIBOR 0.227 0.000 -0.11%
US Dollar Index (DXY) 80.45 -0.121 -0.15%
10 Year Govt Bond Yield 2.44% 0.00%
Current Coupon Ginnie Mae TBA 106.8 0.0
Current Coupon Fannie Mae TBA 106 0.1
BankRate 30 Year Fixed Rate Mortgage 4.13

 

Markets are down small after some disappointing consumption data this morning. Bonds are taking a breather and are down small.
Personal Incomes rose .3% in April, while spending fell .1%. Inflation remains in check. The income number was in line with Street expectations, while the spending number was not. March’s spending number was revised upward from .9% to 1.0%. University of Michigan Consumer Confidence ticked up slightly to 81.9, although it came in lower than expectations.
The ISM Milwaukee report leaped to 63.5 from 47.3 a month ago, while the Chicago Purchasing Manager’s Index increased from 63 to 65.5. These numbers beat expectations handily. April has had some very divergent economic indicators, with the weak industrial data points to some of these other strong indicators.
Refis dropped to 37% of all closed loans in April, according to Ellie Mae. Average FICOs ticked up a point to 726. Average days to close a loan fell to 39.
With rates falling over the past month or two, where are we going to get a wave of refis? The conventional wisdom is 4% mortgage rates. Remember, however the concept of prepayment burnout, which means that each successive dip in rates has less of an effect on refinance activity, mainly because the pool of people with a refinancable mortgage shrinks. That said, home price appreciation is counteracting that effect as people who were underwater last year and unable to refinance are able to take advantage of it this time around.
More speculation on what is going on in the bond market. Interestingly, according to Commitment of Traders data, speccies are increasing short exposure – the bears are fading the rally, not capitulating. Interestingly, the Fed’s balance sheet actually shrunk over the past week – not by a lot – but still it is surprising. At the end of the day, absent some sort of valid technical explanation of the strength, you have to believe the stock market is telling you one thing and the bond market is telling you another.

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Morning Report – Terrible revision to Q1 GDP 5/29/14

Posted on May 29, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1911.2 2.1 0.11%
Eurostoxx Index 3240.5 -5.7 -0.18%
Oil (WTI) 102.9 0.2 0.19%
LIBOR 0.227 0.000 -0.11%
US Dollar Index (DXY) 80.45 -0.121 -0.15%
10 Year Govt Bond Yield 2.44% 0.00%
Current Coupon Ginnie Mae TBA 106.8 -0.1
Current Coupon Fannie Mae TBA 106 0.0
BankRate 30 Year Fixed Rate Mortgage 4.13

 

Markets are higher after some mixed economic data. Bonds and MBS continue their rally.
First quarter GDP was revised downward to -1% (the Street was at -.5%). Obviously the Street is happy to accept the weather excuse and give the market a mulligan. Personal consumption rose 3.1%, and initial jobless claims fell to 300k.
Pending Home Sales increased .4% month-over-month, but fell 9.4% year, over year. They rose .5% in the Northeast, 4.7% in the Midwest, fell .7% in the South and fell 2.6% in the West.
What is going on with bond yields? The economic data has been “meh,” not weak, so why are we below 2.45%? Not sure, most explanations feel like justifications, not reasons. It could be nothing, but keep in the back of your mind that the bond market is telling you something, and you’ll find out the reason for the strength later on. For LOs, this is a good time to wake up borrowers that missed out on refinancing last fall, or buyers who were hoping for a better rate.

Freddie Mac has a new housing index (similar to the NAHB’s Improving Market Index) which shows strength in housing markets. They call it the Multi-Indicator Market Index, and it uses 4 indicators to create the index: purchase applications, payment to income rations, percent of borrowers current on their mortgage, and employment. Nationally, the index shows that the recovery has largely stalled. According to Freddie Mac Chief Economist Frank Nothaft: “Less than half of the housing markets MiMi covers are showing an improving trend, whereas at the same time last year more than 90 percent of these same markets were headed in the right direction.” Since we know that delinquencies have been dropping and the job market has been improving, the culprit is purchase applications. Between higher prices and higher mortgage rates, buyers, especially first time homebuyers, are getting sticker shock. That said, the index ignores cash purchases, and you have to take that into account, so the index is undoubtedly overstating the weakness. Here is an example of the index for Miami and the National MiMi:

There were 48,000 completed foreclosures in March 2014, up 5.9% month-over-month but down 10% year-over-year, according to CoreLogic. Approximately 720,000 homes in the U.S. are in some state of foreclosure, compared to 1.1 million a year ago. The foreclosure inventory is largely concentrated in the judicial states of Florida, New York and New Jersey. Over the past year, the number of seriously delinquent homes fell from 2.33 million to 1.86 million.

 

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Morning Report – Luxury building continues to perform well 5/28/14

Posted on May 28, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1908.5 -0.7 -0.04%
Eurostoxx Index 3241.4 -2.9 -0.09%
Oil (WTI) 103.9 -0.3 -0.25%
LIBOR 0.228 -0.002 -0.98%
US Dollar Index (DXY) 80.49 0.139 0.17%
10 Year Govt Bond Yield 2.47% -0.05%
Current Coupon Ginnie Mae TBA 106.8 0.2
Current Coupon Fannie Mae TBA 105.9 0.2
BankRate 30 Year Fixed Rate Mortgage 4.18

 

Markets are flattish on no real news. Bonds continue their rally, with the 10-year bond trading at 2.47%. MBS are up as well.
Mortgage Applications fell 1.2% last week, as purchases fell 1.1% and refis fell 1.4%. The 10 year bond yield fell a basis point over the week. Refis were 52% of all loans, and ARMs are now 18.5% of the total dollar amount of loans (though only 8.4% of units, so these are mainly jumbos).
Obama has nominated San Antonio Mayor Julian Castro to lead HUD. This is more or less a political appointment, as Castro is viewed as a rising star in the Democratic Party. His confirmation in the Senate should be smooth, and the nomination should not imply any major policy changes out of HUD.
Homebuilder Toll Brothers reported second quarter numbers this morning, and it looks like things are still going swimmingly on the luxury end of things. Revenues rose 53% as deliveries increased 67% in dollar terms and 36% in unit terms. Remember, Toll Brother bought Shapell Homes, so these aren’t necessarily apples-to-apples comparisons. ASPs increased 22% (!) on a year-over-year basis to $706,000. Shapell’s footprint is affluent Coastal California, so that accounts for some of the big jump in ASPs – most other builders are reporting increases in the 9% – 12% range.
Toll CEO Douglas Yearley had this to say: “Demand over the past year has been solid, although relatively flat, compared to the strong growth we initially experienced beginning in 2011, coming off the bottom of this housing cycle. We note that last cycle’s recovery, in the early 1990s, began with a period of rapid acceleration, followed by leveling, before further upward momentum. We believe that we are in a similar leveling period in the early stages of the housing recovery with significant pent-up demand building.”
That said, the Fed is still worried about housing, as the sector continues to grow as expected. Unfortunately, the Fed doesn’t have a lot of levers to deal with the underlying issues: low household formation and tight credit. Again, all real estate is local, and the problems are mainly in the Northeast, which is still dealing with a large shadow inventory of foreclosures. In areas where this has been dealt with already (California), there is a tremendous amount of building.

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Morning Report – a tale of two real estate indices 5/27/14

Posted on May 27, 2014 by Brent Nyitray

Vital Statistics:

 

  Last Change Percent
S&P Futures  1904.4 7.5 0.40%
Eurostoxx Index 3241.0 0.6 0.02%
Oil (WTI) 104.3 0.0 -0.04%
LIBOR 0.23 0.001 0.22%
US Dollar Index (DXY) 80.33 -0.065 -0.08%
10 Year Govt Bond Yield 2.54% 0.01%  
Current Coupon Ginnie Mae TBA 106.4 0.0  
Current Coupon Fannie Mae TBA 105.5 0.0  
BankRate 30 Year Fixed Rate Mortgage 4.16    

 

Markets are higher this morning after some good economic data. Bonds are surprisingly up. 
 
Durable Goods orders rose .8% in April and March was revised upward from 2.6% to 3.6%. The Street was looking for a drop of .7%. That said, ex-defense orders were down .8%. Ex-transportation, durable goods orders were up .1%. 
 
In other data, the Markit Purchasing Managers Index came in at 58.6, a strong number. Consumer Confidence rose to 83 in May, and the Richmond Fed Manufacturing Index was flat at 7. I think we got more economic data this morning than we got all of last week.
 
We have a couple of real estate indices this morning as well. The first is the FHFA Home Price Index, which rose .7% in March. According to FHFA, prices are back to July 2015 levels and we are within about 6% of the previous peak. We have a tremendous dispersion of strength between regions, where the Pacific division is up 18% over the past 5 years, while New England is down a couple of percent. 
 

 

 
 
The Case-Shiller index rose 1.24% for March. Prices are back to mid-2004 levels, according to the index, and are still about 20% off their peak in 2006.
 

 

So, according to FHFA, we are within 6% of the peak and prices are at mid 2005 levels and according to Case-Shiller, we are within 20% of the peak and prices are at mid 2004 levels. Who is right? The answer is both. Case-Shiller is a broad-based index, while FHFA is narrower. The FHFA index only looks at homes with a conforming mortgage, which means it excludes jumbos and cash sales, which have been historically distressed properties, although that is changing.

 

 

Mohammed El-Arian weighs in on what is going on in the bond market. Speculators are net short Treasuries in a big way, and pension funds are redeploying stock market gains into the bond market. That makes for a tight market. You could almost feel the stops getting triggered a couple of weeks ago when we broke out of our 2.6% – 2.8% trading range:

 

 

 

Always-thoughtful Gary Shilling talks about how a financial crisis in China could be the catalyst for a massive “risk-off” trade, which would mean the rally in bonds could last longer than people think. Note that mortgage REITs (one of the biggest investors in mortgage backed securities) are leaning that way.

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Morning Report – Very little construction in the Northeast 5/23/14

Posted on May 23, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1890.5 0.3 0.02%
Eurostoxx Index 3191.9 4.3 0.13%
Oil (WTI) 104.1 0.3 0.31%
LIBOR 0.229 0.002 0.97%
US Dollar Index (DXY) 80.37 0.112 0.14%
10 Year Govt Bond Yield 2.53% -0.02%
Current Coupon Ginnie Mae TBA 106.4 0.0
Current Coupon Fannie Mae TBA 105.6 0.1
BankRate 30 Year Fixed Rate Mortgage 4.17

 

Markets are flattish this morning on no real news. Bonds and MBS are down. Today should be dull as most of the Street will probably be on the L.I.E. by noon. Bonds close early today.
New Home Sales came in at 433k, an increase from the upward-revised 407k the month before. The vast majority of the new homes are in the South, with 235k. The Northeast is deader than Elvis with only 22k new home sales. (look below for an explanation why). The Midwest and the West had 84k and 92k new sales respectively. Inventory was still low, with 5.3 months’ supply. The median price dropped from $281,700 to $275,800.
A new article out of the New York Fed addresses the hollowing out of the middle class. At least it New York, the jobs lost in the Great Recession have been in middle-skill jobs, like teachers, construction, admin support. Those jobs have not come back. The buckets where jobs are growing have been in the higher-skilled jobs like engineers, financial analysts, etc as well as low-skilled jobs like retail, food service, etc. This is IMO partly the fault of New York State’s extremely borrower-friendly (creditor unfriendly) foreclosure laws. While states like California have worked through their foreclosure inventory and are now building, there is virtually no new construction in New York State. In California, Texas, etc where there is building going on, construction workers are in high demand and wages are increasing. Yet another case of good intentions smacking into the law of unintended consequences.
Does judicial review of foreclosures create deadweight losses? The Federal Reserve Bank of Cleveland asks that question. Anecdotally, I see the effects in New York State, where may homes sit vacant while the foreclosure wends its way through the courts. While there may be a useful part of this, where we ensure we don’t throw people out on the street, many of these foreclosures are vacant. At that point, letting a vacant house sit does no one any good.
Finally, I discuss housing reform, monetary policy, and the homebuilding sector with Louis Amaya on Capital Markets Today. Lots of housing wonky goodness.

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Morning Report – Out: Tapering. In: Normalization 5/22/14

Posted on May 22, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1886.0 1.1 0.06%
Eurostoxx Index 3178.4 -8.7 -0.27%
Oil (WTI) 103.9 -0.2 -0.18%
LIBOR 0.227 0.000 -0.09%
US Dollar Index (DXY) 80.17 0.076 0.09%
10 Year Govt Bond Yield 2.54% 0.00%
Current Coupon Ginnie Mae TBA 106.5 0.0
Current Coupon Fannie Mae TBA 105.6 0.0
BankRate 30 Year Fixed Rate Mortgage 4.17

 

Markets are flattish after retailers Best Buy and Sears missed earnings estimates. Bonds and MBS are flat.
We finally got some economic data this morning, starting with the Chicago Fed National Activity Index, which came in below expectations. Initial Jobless Claims rose from 298k to 326k. The Markit May preliminary PMI came in at 56.2, a little better than expectations and consumer comfort remained on the low side. Finally, the Index of Leading Economic Indicators fell to .4%
Existing home sales increased to a 4.65 million rate in April, which was an increase from the prior month, but below street expectations. As anyone in the mortgage business can tell you, it is tough out there. Housing continues to punch below its weight and sales continue to be at depressed levels. On the bright side, between 40% and 50% of these transactions are all cash, compared to 20% historically. So, there is a lot of potential business out there, but we need the first time homebuyer to step up.

The new buzzword for the Fed is now “normalization,” which is all honesty is simply a euphemism for “raising rates.” There was nothing earth-shattering in the FOMC minutes yesterday (the bond market barely noticed), but the Fed did muse a bit on how monetary policy will function with a balance sheet the size of Jupiter. People forget that we are truly in uncharted territory here, with a Fed balance sheet of 4.3 trillion in assets vs 900 billion at the beginning of 2008.

The Fed noted the strength in the March industrial data, but did not pick up on the reversal in the April numbers. Even though Q1 GDP growth was below the Fed’s forecast, they chose not to revise their 2014 GDP estimates downward, as they expect a rebound in the second half of the year. Overall, if you look at the trend of the Fed’s forecasts and revisions, GDP, unemployment, and inflation forecasts have been progressively lowered. I almost wonder if the Fed’s economic models were created during an environment where recessions were caused by the classic inflation / inventory buildup cycle and that model is simply irrelevant in this climate, where the recession is caused by a burst asset bubble.
The latest CoreLogic Market Pulse is out, and it has some good articles as usual. They address short sales and the expiration of the Mortgage Debt Forgiveness Relief Act. So far, it looks like the expiration of the tax relief (mortgage debt principal mods are now treated as taxable income, where before they were not) is crimping short sales, exacerbating an already tight inventory situation. Conversely, construction employment is beginning to increase, especially in Florida. I expect construction (especially residential construction) will be the catalyst that sends us from 2% GDP growth to 3% + GDP growth. The homebuilders have been able to report increased revenues primarily by increasing average selling prices. The typical publicly-traded homebuilder was reporting double digit increases in ASPs and high single digit drops in deliveries. Once they hit the ceiling on prices (and traffic patterns suggest we are close), they will simply have to push through volume if they want to report growth. That will begin the virtuous cycle. I was hoping this would be a 2014 event, but it is looking more and more like a 2015 event. CoreLogic also discusses the excuse du jour for weak housing starts – bad weather – and finds that it doesn’t fully explain what has been going on. RTWT.

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Morning Report – Back from the secondary conference 5/21/14

Posted on May 21, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1875.2 7.1 0.38%
Eurostoxx Index 3175.2 11.2 0.35%
Oil (WTI) 103.1 0.8 0.75%
LIBOR 0.227 -0.001 -0.33%
US Dollar Index (DXY) 80.15 0.107 0.13%
10 Year Govt Bond Yield 2.55% 0.04%
Current Coupon Ginnie Mae TBA 106.3 -0.1
Current Coupon Fannie Mae TBA 105.5 -0.1
BankRate 30 Year Fixed Rate Mortgage 4.17

 

Markets are higher this morning on no real news. Bonds and MBS are down. Sorry for the lack of blog posts the last two days, but I was at the MBA Secondary Conference, and there really wasn’t much to talk about anyway. We had no economic data on Monday or Tuesday.
Mortgage applications increased .9% last week. Purchases fell 2.8% while refis increased 3.8%. This is a pretty disappointing number given that the 10 year bond yield fell by 10 basis points and mortgage rates fell 5 – 6 bps. Refis accounted for 52% of loans, and ARMs were 8.1%.
Later on today, we will get the minutes from the April FOMC meeting. I don’t anticipate anything earth-shattering, but I will be interested to see if the big jump in March activity was a one-time event. Certainly some of the April data (industrial production, capacity utilization etc) has been disappointing. I also want to see what they say about housing, especially credit availability.
Speaking of the Fed, there is a lot going on over the next few days, with many speakers, the Stan Fischer confirmation hearings, and the minutes. Hawk Charles Plosser warned that if the economy improves as forecast, the current taper pace may be too slow.
The MBA Secondary Conference ends today, and it seems like the mood was a little brighter than previous years, despite the difficult conditions in the mortgage business. Non-QM loans are being rolled out strictly as a portfolio product for a few lenders, but there is no talk of securitization or anything like that. The first time homebuyer is still a focus for Washington, and non-bank servicers were put on notice that New York State isn’t going away.
Retailer earnings reports are rolling in, and as we have seen, it has been a tale of two markets, with the luxury end (think Tiffany’s) outperforming the discounters (think Target and Wal Mart). In home improvement land, the Home Despot and Lowe’s both missed earnings. Generally, retailers seem to be missing. Tomorrow we will hear from bellwethers Gap and Best Buy. Again, keep in mind that there will be an asterisk with these results as poor weather in the Northeast and the Midwest depressed traffic early in the quarter.

 

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Morning Report – Johnson-Crapo gets out of Committee 5/16/14

Posted on May 16, 2014 by Brent Nyitray

Vital Statistics:

 

  Last Change Percent
S&P Futures  1867.0 -0.3 -0.02%
Eurostoxx Index 3166.2 3.0 0.09%
Oil (WTI) 101.9 0.4 0.36%
LIBOR 0.229 0.003 1.22%
US Dollar Index (DXY) 80.1 0.101 0.13%
10 Year Govt Bond Yield 2.50% 0.01%  
Current Coupon Ginnie Mae TBA 106.4 -0.2  
Current Coupon Fannie Mae TBA 105.4 0.0  
BankRate 30 Year Fixed Rate Mortgage 4.16    

 

Markets are flattish after a better than expected housings starts report. Bonds and MBS are down
 
Housing starts rebounded in April to a annual rate of 1.07 million, an increase of 13.2% month-over-month. Building Permits increased to 1.08 million, an 8% increase. This is still well below the historical average of 1.5 million units a year, and still a dismal number compared to pre-bust levels. 
 
Johnsnon – Crapo (the GSE reform bill) got out of Committee today, with all the liberals voting against it. The liberals dislike the bill because they want affordable housing mandates. Given the lack of support from liberals, Senate Majority Leader Harry Reid is unlikely to bring the bill to the floor. 
 
The National Federation of Independent Business released their small business confidence survey yesterday, showing that confidence is improving, but still below par. The two biggest problems for small business remain taxes and regulations.

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Morning Report – lots of conflicting data 5/15/14

Posted on May 15, 2014 by Brent Nyitray

Morning Report

Last Change Percent
S&P Futures 1881.2 -4.1 -0.22%
Eurostoxx Index 3195.1 -15.4 -0.48%
Oil (WTI) 101.9 -0.5 -0.44%
LIBOR 0.226 0.001 0.22%
US Dollar Index (DXY) 80.23 0.152 0.19%
10 Year Govt Bond Yield 2.51% -0.03%
Current Coupon Ginnie Mae TBA 107 0.3
Current Coupon Fannie Mae TBA 105.6 0.1
BankRate 30 Year Fixed Rate Mortgage 4.17

 

Markets are lower this morning after Wal-Mart missed. Bonds and MBS are up.
Very mixed bag of economic data this morning:
  • Empire Manufacturing 19.01 vs 6 expected (indicates strong economy)
  • Consumer Price Index .3 vs .3 expected (doesn’t tell you anything)
  • Initial Jobless Claims 297k vs 320k expected (great number – indicates strong economy)
  • Industrial Production down .6% vs expectations of flat (lousy number – indicates weakness)
  • Capacity Utilization of 78.6% vs 79.1% (hideous number – indicates weakness)
FWIW, the bond market is taking its cue from the weak industrial numbers and the Wal-Mart miss. Speaking of which – the 10 year bond yield is now pushing 2.5% – LOs if you have any customers who missed their chance to refi last fall, wake them up. The market just let them back in. Don’t look a gift horse in the mouth.

Stonegate Mortgage released their earnings this morning, and they missed on the top line and the bottom line.
Stonegate has been an acquisitive company, so doing apples-to-apples comparisons in order to divine organic growth is difficult. They wrote down their MSR book by $8 million. They have a conference call at 11:00 am (877) 303-5863 if people are interested.. The stock is down a few percent on the open.
FHA is looking for ways to expand credit and has unveiled its “Blueprint for Access.” It is a designed to first time homebuyers, where the borrower goes through a counseling program before buying a home. If they complete the program, they get 50 bps off their upfront FHA mortgage insurance premium and receive a 10 bp reduction in their annual FHA mortgage insurance premium. If they have no serious DQs in their first two years, they get an additional 15 bp reduction in MIP fees. More info will be released in the summer and fall.

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