Morning Report – Increasing employment / decreasing earnings?

Posted on September 10, 2013 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1680.0 10.9 0.65%
Eurostoxx Index 2843.9 45.6 1.63%
Oil (WTI) 107.4 -2.1 -1.96%
LIBOR 0.256 0.000 0.00%
US Dollar Index (DXY) 81.91 0.119 0.15%
10 Year Govt Bond Yield 2.96% 0.05%
Current Coupon Ginnie Mae TBA 103.2 -0.3
Current Coupon Fannie Mae TBA 102.6 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.56
Markets are higher on the possibility of a peaceful resolution to the Syrian crisis. Overnight, Syria has accepted a Russian framework of surrendering chemical weapons to international authorities. This has sent oil down and stock index futures up. Bonds and MBS are weaker
The NFIB Small Business Optimism Index came in at 94, a touch weaker than expected. Interestingly, the plans to increase employment increased 7 percentage points to a net 16%, however, earnings trends fell 13 points to -35%. So profitability is falling, but companies plan to increase headcount anyway? Surprising result. This survey also shows that while things are going well for the big cap S&P 500 names with international exposure, small businesses are still struggling.
Speaking of stock indices and struggling, the Dow Jones Industrial Average is making some changes. Out: Hewlett-Packard, Alcoa, and Bank of America. In: Goldman, Nike, Visa.
Higher interest rates are beginning to dampen people’s expectations for future home price appreciation, according to the latest Fannie Mae Housing Survey. The expected home price appreciation for the next 12 months has fallen to 3.4% in August from 3.9% in May.
The National Association of Homebuilders Improving Markets Index reached a record high in September as a total of 291 metro areas now qualify as improving markets. Here is a map of the improving areas:

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Morning Report – K-deals

Posted on September 9, 2013 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1657.2 3.7 0.22%
Eurostoxx Index 2788.8 -14.6 -0.52%
Oil (WTI) 110.1 -0.4 -0.40%
LIBOR 0.256 -0.001 -0.20%
US Dollar Index (DXY) 81.99 -0.160 -0.19%
10 Year Govt Bond Yield 2.88% -0.05%
Current Coupon Ginnie Mae TBA 103 3.1
Current Coupon Fannie Mae TBA 102.8 0.3
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.6
Slow news day. Markets are higher this morning on no real news. Bonds and MBS are up.
Now that the jobs report is out of the way, the markets will fret about the upcoming FOMC meeting for the next week and a half. The consensus seems to be that the Fed will make at least a symbolic reduction in asset purchases, and it will probably be Treasuries not MBS.
Are K-deals the future of residential loan securitization? Would future securitizations involve subordinate and mezzanine tranches? Essentially, a pool of mortgages would be cut up into a senior guaranteed tranche, which would resemble what we already have now, with Ginnie or GSE MBS. There would be a two additional tranches – a subordinate tranche which would bear the first losses on the pool, and then a mezzanine tranche which would bear losses after the sub piece is wiped out.

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Morning Report – Jobs day

Posted on September 6, 2013 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1659.7 6.7 0.41%
Eurostoxx Index 2779.6 5.4 0.19%
Oil (WTI) 109.1 0.7 0.66%
LIBOR 0.256 -0.002 -0.66%
US Dollar Index (DXY) 82.13 -0.499 -0.60%
10 Year Govt Bond Yield 2.89% -0.10%
Current Coupon Ginnie Mae TBA 103 0.7
Current Coupon Fannie Mae TBA 102.6 1.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.67
Stocks and bonds are higher after a disappointing jobs report. Bond investors were clearly leaning short in a big way going into the report. The 10 year was trading above 3% before the report, but has moved back down to 2.89%
The jobs report was relatively weak, although the headline unemployment number dropped to 7.3% from 7.4%. Payrolls increased 169k, lower than the 180k the Street was looking for. The prior two months were revised down by a total of 74k. The unemployment rate dropped from 7.4% to 7.3%, while the labor force participation rate dropped to 63.2% from 63.4%. For those keeping score at home, the last time the labor force participation rate was that low, “Miss You” by the Rolling Stones was the #1 song on the hit parade. Weekly earnings rose .2% while weekly hours ticked up by 6 minutes. Overall, a disappointing report.
Where does this report leave us with tapering QE? Since the default path is to start tapering, and some of the other reports are showing strength, I would expect the Fed to make at least a symbolic decrease in purchases, probably in Treasuries and not MBS.

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Morning Report – Deeply underwater homes down 14.5% year over year 09/05/13

Posted on September 5, 2013 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1655.4 2.0 0.12%
Eurostoxx Index 2764.4 6.1 0.22%
Oil (WTI) 107.8 0.6 0.56%
LIBOR 0.258 -0.001 -0.35%
US Dollar Index (DXY) 82.18 0.012 0.01%
10 Year Govt Bond Yield 2.92% 0.03%
Current Coupon Ginnie Mae TBA 103.1 -0.5
Current Coupon Fannie Mae TBA 102 -0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.56
Markets are higher this morning after the ADP jobs report predicted 176 private sector jobs were created in August and initial jobless claims came in at 323k. Productivity was higher, while unit labor costs fell. Bonds and MBS are down small.
RealtyTrac is reporting that 10.7 million homeowners are deeply underwater (LTV > 125%), which represents 23% of properties with a mortgage. This number is down from 12.5 million (or 28%) a year ago. Another 8.3 million are in the 90 – 110 LTV range, and if real estate prices continue their recent appreciation, this could bring the supply / demand dynamics back into equilibrium as these homes gain equity and become available for sale. Lack of inventory has been a problem in the market and has been distorting some of the repeat-sales indices as professionals and cash buyers compete for the few homes that are available. Needless to say, this is welcome news for originators as it would boost purchase activity as refis dry up.
Washington Post has a quick and dirty on what a Summers Fed would look like. Punch line: not a lot different than a Bernanke Fed, at least as far as policy is concerned. So far, it looks like Summers is Obama’s first choice.
Yesterday’s Fed Beige Book didn’t have much new to say. Eight districts reported moderate growth while 5 reported modest growth. Residential real estate activity increased moderately, while lending activity was mixed. Lending standards were largely unchanged, while credit quality improved. Hiring and wages increased modestly.

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Morning Report – House prices within 18% of peak 09/04/13

Posted on September 4, 2013 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1637.0 -2.1 -0.13%
Eurostoxx Index 2727.4 -25.9 -0.94%
Oil (WTI) 107.8 -0.8 -0.73%
LIBOR 0.259 -0.001 -0.19%
US Dollar Index (DXY) 82.29 -0.073 -0.09%
10 Year Govt Bond Yield 2.86% 0.00%
Current Coupon Ginnie Mae TBA 103.6 0.0
Current Coupon Fannie Mae TBA 102.8 0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.54
Should be a slow day with not much economic data and the Jewish holiday. Mortgage applications rose 1.3% last week. bonds and MBS are flat
Construction spending rose .6% last month and is up 5.2% year over year. Residential construction is up .6% month over month and 17.2% year-over-year. We are definitely seeing signs of life in the homebuilding sector, although the first time homebuyer is getting a bit of sticker shock from the higher rates. Pulte noted on their 2Q conference call that buyers at the lower price points (read the first time homebuyer) are backing away a bit. Toll Brothers (which is in the McMansion business) reported that the luxury homebuyer is unfazed by higher rates.
CoreLogic reported that home prices increased 12.4% year over year and and now within 18% of their April 2006 peak. Every state reported a year-over-year increase in prices if you exclude distressed sales. While they predict that August’s increase will be similar to July’s, they anticipate the appreciation to stall as seasonal demand wanes and people start to feel the effects of higher rates. As usual, the hardest hit states are reporting the strongest recoveries.
Yesterday’s ISM report showed strength in manufacturing. While manufacturing isn’t the driver of the economy that it used to be, it still matters quite a lot. The reading of 55.7 corresponds to a GDP growth rate of over 4%. Unfortunately, while manufacturing output is up quite a bit, manufacturing employment is not. Auto sales are up around the 16MM range, which is approaching pre-crisis levels. The average US car is around 11 years old, so we are due for a upgrade cycle. That will be bullish for the economy.

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Morning Report – it is all about Friday’s jobs report 09/03/13

Posted on September 3, 2013 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1645.9 14.6 0.89%
Eurostoxx Index 2766.1 -8.0 -0.29%
Oil (WTI) 107.2 -0.4 -0.38%
LIBOR 0.26 0.000 0.00%
US Dollar Index (DXY) 82.34 0.256 0.31%
10 Year Govt Bond Yield 2.84% 0.05%
Current Coupon Ginnie Mae TBA 104.1 0.0
Current Coupon Fannie Mae TBA 102.8 -0.4
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.47
Markets are stronger after a return from the long Labor Day weekend. While a short week, we will have all sorts of important data, with Friday’s jobs report the most important. Risk-on feel, as stock index futures are rallying and bonds / MBS are getting hit.
Friday’s jobs report will probably answer the September vs December question. If it is strong, the next questions will concern the actual amount and distribution of the cuts. The consensus seems to be that the Fed will reduce purchases by $10 billion a month. Will that be all Treasures, a mix of Treasuries and MBS, or all MBS? While I don’t think there is any chance the Fed will choose to do all MBS, there is a chance they could do all Treasuries. And that would be mortgage-rate positive.
Is the Syrian situation market-moving? It has the potential to be market-moving if it spreads to other countries in the Middle East, but on its own, probably not. Any sort of strike by the US will be limited and no one envisions sending troops in. The only real worry is if it drives oil higher, and that will affect Asia more than us.
The MBA Independent Mortgage Banker Report showed average profit per loan decreased to $1,528 (75 bp) in the second quarter from $1,772 (86 bp) in the first quarter. While overall volume was flat, per-loan production costs continue to rise, and we are seeing pricing pressures.
The jumbo market so far seems to be immune to rising rates.

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Morning Report – House prices still in historical value range 8/30/13

Posted on August 30, 2013 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1637.3 0.6 0.04%
Eurostoxx Index 2737.1 -21.3 -0.77%
Oil (WTI) 107.9 -0.9 -0.83%
LIBOR 0.26 -0.002 -0.65%
US Dollar Index (DXY) 82 0.055 0.07%
10 Year Govt Bond Yield 2.76% 0.00%
Current Coupon Ginnie Mae TBA 104.1 0.3
Current Coupon Fannie Mae TBA 103.3 0.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.47
Markets are flat after disappointing income and spending data. Bonds and MBS are more or less flat. Expect a relatively dull day, trading wise as most of the Street will be on the L.I.E. by noon.
The BEA released July personal income and spending data this morning and it was below expectations. Both rose .1%, below expectations and below June data. Since consumption is 70% of the US economy, these numbers suggest that yesterday’s 2.5% GDP estimate for 2Q was more of a fluke than a change in trend.
Cash purchases accounted for 40% of all sales as volume increased to an estimated 5.5 million pace in July, according to RealtyTrac. The national median sales price was $174,500 in July, up 4% from June and up 6% from a year ago. Median income is estimated to be at $52,100 as of the end of June, putting the median house price to median income ratio at 3.35. Pre-bubble, this ratio tended to oscillate in a range of 3.15 – 3.35, before peaking at 4.48 during the bubble. Even with the increase in house prices over the past year, housing still remains fairly valued compared to historical norms and affordability is quite high due our (still) quite low interest rates.

Budget talks between the WH and Republicans seem to be going nowhere. The President wants to replace the sequester with more taxes, which is a non-starter for Republicans. The two sides seem far apart, but how much of this is just posturing for the various bases. If Republicans dig in their heels on de-funding obamacare and Obama digs in his heels for more taxes, then we could have a problem.

Dr. Cowbell weighs in on the recent QE-withdrawal driven slump in the emerging markets. Unsurprisingly, he concludes that the problem is deregulation, which is surprising given that developed markets all over the world tightened regulation over the financial system half a decade ago. He goes on to discuss how the Asian Tigers rebounded so quickly from the crisis, which he attributes to a drop in their currencies. What is the difference between Japan’s recovery from a deflated asset bubble and, say, Indonesia’s? Hint: One followed his Keynsian prescription to the letter and the other had austerity imposed on it by the IMF.

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Morning Report – 10 year still heavy 8/29/13

Posted on August 29, 2013 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1636.7 4.5 0.28%
Eurostoxx Index 2749.8 7.2 0.26%
Oil (WTI) 109.1 -1.0 -0.92%
LIBOR 0.261 0.001 0.27%
US Dollar Index (DXY) 81.96 0.532 0.65%
10 Year Govt Bond Yield 2.82% 0.05%
Current Coupon Ginnie Mae TBA 103.7 -0.1
Current Coupon Fannie Mae TBA 102.8 -0.3
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.47
Markets are higher this morning after some initial jobless claims came in at 331k and the second estimate for 2Q GDP came in higher than expected. The initial pass at 2Q GDP was 2.2%, while this estimate was 2.5%. We will have a final revision next month.
Between the Syria situation and the emerging markets meltdown you would expect the 10 year to strengthen and it isn’t happening. This speaks to the bearish sentiment surrounding the US bond market. Of course this could change if a big player gets in trouble with Indian exposure or we get into a shooting war in the Middle East and oil soars. But so far, the 10 year isn’t rallying under circumstances where it should. Punch line: if you are floating, you are drawing an inside straight.
Something that I haven’t dwelled on, but could become an issue – the debt ceiling fight. I don’t see a government shutdown in the cards, but the WH wants a clean, no-strings-attached hike in the debt ceiling (which is a rare event and a pretty big demand) and the Republicans want to de-fund obamacare. So, expect a lot of posturing going into October, which is when the government needs to borrow more money.
CoreLogic is reporting that there were 49,000 completed foreclosures in July, down 25% year-over-year. This is still elevated compared to pre-crisis levels, where a 21,000 pace was the norm. We are seeing the remaining shadow inventory concentrated in the judicial states, which explains why prices are rallying in the West and going nowhere in the Northeast.
FHFA is reporting that mortgage interest rates rose 45 basis points in July. These are based on lock data, which is somewhat stale, so the end of July data reflects locks made in mid-to-late June. During this time, the 10 year yield increased about 52 basis points, so it looks like spreads are compressing a bit.
Is it going to be Summers or Yellen? That is the question many market participants are asking. Summers is rumored to be the favorite and is seen as more hawkish than Yellen. As we approach the end of the year, bond investors will probably do well to read the Washington Post as well as the Wall Street Journal. Expect the bond market to become a bit twitchy and begin to react to the latest headlines in this horse race.

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Morning Report – Wells cutting staff in mortgage unit 8/22/2013

Posted on August 22, 2013 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1650.4 13.7 0.82%
Eurostoxx Index 2837.6 1.8 0.06%
Oil (WTI) 104.5 -062 -0.61%
LIBOR 0.264 0.001 0.34%
US Dollar Index (DXY) 81.26 0.076 0.09%
10 Year Govt Bond Yield 2.84% 0.03%
Current Coupon Ginnie Mae TBA 102.9 -0.1
Current Coupon Fannie Mae TBA 102 -0.7
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.59
Markets are higher this morning after a few economic numbers suggested strength in the economy. Bonds and MBS are down
Initial Jobless Claims came in at 336k, while the FHFA home price index rose .7% last month. A preliminary ISM number showed manufacturing gaining strength.
The minutes from the FOMC meeting didn’t give any new insights into the Fed’s thinking about tapering. Most of the research pieces seem to think that the Fed is going to start tapering at the September meeting. They are sticking to their story that the economy will start picking up steam in the second half.
As the refi boom ends, banks are cutting workers in the mortgage department. Wells just announced it is laying off 20% of its mortgage production staff, or about 2300 workers. Wells’ business was 70% refis in 1H and it has dropped to 50%.
The Ellie Mae Origination Report shows that purchases are now a bigger percentage of originations than refis. It also looks like credit is beginning to thaw, as the average FICO score for closed loan dropped from 742 to 737 in July. 75% of closed loans had average FICOs above 700 vs 83% a year ago.
MR will be taking a hiatus for the next week as I will be on vacation.

Filed under: Morning Report | 9 Comments »

Morning Report – a tale of two market segments 8/21/13

Posted on August 21, 2013 by Brent Nyitray

Vital Statistics:

 

 

Last

Change

Percent

S&P Futures 

1647.4

-4.7

-0.12%

Eurostoxx Index

2837.6

1.8

0.06%

Oil (WTI)

104.5

-062

-0.61%

LIBOR

0.264

0.001

0.34%

US Dollar Index (DXY)

81.26

0.076

0.09%

10 Year Govt Bond Yield

2.84%

0.03%

  

Current Coupon Ginnie Mae TBA

103.03

-0.6

  

Current Coupon Fannie Mae TBA

102.9

-0.3

  

RPX Composite Real Estate Index

200.7

-0.2

  

BankRate 30 Year Fixed Rate Mortgage

4.56

 

Fed Minutes Day. The Minutes of the last FOMC meeting will be released at 2:00 pm EST, and that has the potential to move the bond markets. At the moment, bonds and MBS are down. 
 
Given the volatility of the bond market lately, getting it wrong means getting it VERY wrong. Probably not a good environment to roll the dice and float.
 
Mortgage applications fell 4.6% last week, which is not s surprise given the back-up in rates. The purchase index was actually up a percent, while the refi index (predictably) hit new lows. Refis as a percent fell to 61.5% of total number of loans.
 
Existing Home sales spiked to 5.39 million in July, a 6.5% increase month-over-month, and 17.2% higher than a year ago. NAR Chief Economist Lawrence Yun says that changes in affordability are beginning to affect the market. As rates rise, the pool of eligible buyers decreases. This is apparent at the low end of the market and especially with the first time homebuyer struggling with student loan debt and unable to meet the DTI requirements.
 
Homebuilder Toll Brothers reported third quarter earnings that missed analyst estimates, but their outlook was good. Toll is in the McMansion business, so it isn’t necessarily representative of the homebuilding market as a whole. In fact, some of the builders at the lower price points – particularly Pulte and Beazer – reported a decrease in orders. They noted an increase in sales volume and pricing power, which is unsurprising since we have underbuilt for the past 10 years. 
 
Punch line: the haves vs the have nots.  If you are a twenty-something looking for a starter home, you are fighting professional cash-only investors for inventory, struggling to meet DTI requirements and are getting sticker shock from high interest rates. However, the luxury end of the market is doing quite well, as Toll’s numbers can attest.

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