Morning Report: Robust Housing Starts 2/16/18

Vital Statistics:

Last Change
S&P Futures 2736.0 2.0
Eurostoxx Index 379.5 3.0
Oil (WTI) 61.4 0.1
US dollar index 82.9 0.2
10 Year Govt Bond Yield 2.88%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.44

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

Housing starts came in at 1.326MM annualized, better than expectations. Building permits hit 1.4 million – a 10 year high. Both numbers beat estimates by about 100k, a sizeable amount. The jump was largely in the volatile multi-family segment however. Single family starts were up about 4% YOY. That said, we are still well under the historical averages for starts, which was about 1.5 million units a year during from the 60s through the 90s and early 00s.

NAR welcomed the housing starts number: “Terrific news on housing starts in January with a solid 10% gain. This rise in single-family housing construction will help tame home price growth, and the increase in multifamily units should continue to help slow rent growth. The large gain in housing starts in the West (10.7%) is especially welcomed, as that region has been facing acute housing shortages. Ultimately, there is still large room for improvement given the fact overall housing inventory is currently near historic lows.” This is from Lawrence Yun, Chief Economist.

Import prices rose 1% MOM and are up 3.6% YOY. Energy prices were a big driver of the increase, however if you pull out energy, import prices were up just under 2% YOY. The dollar has been selling off for about a year now, and that is adding pressure to import prices which will flow through to inflation.

Consumer sentiment improved in early February despite the stock market sell-off. Sentiment came in at about December levels and is at post-recession highs.

Changes may be coming to TRID disclosure. The House passed a measure requiring more detail in how insurance fees are disclosed. The bill would amend language in the Real Estate Settlement Procedures Act (RESPA) to require the itemization of “all actual charges” and not just the itemization of “all charges.” The bill also would amend RESPA to require that ‘‘Charges for any title insurance premium disclosed on [the TRID rule] forms shall be equal to the amount charged for each individual title insurance policy, subject to any discounts as required by State regulation or the title company rate filings.’’. Thus, the bill would not permit the current approach to the disclosure of title insurance premiums under the TRID rule, and would require that the amounts disclosed for title insurance reflect the actual premium charges, including any discounts.

Thinking of relocating? Here is how much you need to make to be able to qualify for a mortgage on the median house in that MSA. The highest? San Jose, where the median home price is 1.3 million and you need to make just under a quarter of a million.

Morning Report: Housing is still highly affordable 1/2/18

Vital Statistics:

Last Change
S&P Futures 2686.3 10.6
Eurostoxx Index 389.2 -0.4
Oil (WTI) 60.1 0.2
US dollar index 86.0 -0.3
10 Year Govt Bond Yield 2.44%
Current Coupon Fannie Mae TBA 102.375
Current Coupon Ginnie Mae TBA 103.25
30 Year Fixed Rate Mortgage 3.92

Stocks are higher to start the year. Bonds and MBS are down.

We will get the FOMC minutes this Wednesday and also the jobs report on Friday. Both have the potential to be market-moving. Other than that, we will get the ISM reports and construction spending.

Home prices continue to increase at a torrid pace, as the CoreLogic House Price Indicator has had its fourth straight month of 6% annual increases.

Given the size of the rebound in the home price indices, we are seeing all sorts of questions about affordability. In the latest issue of the Scotsman Guide, I discuss home prices and affordability questions. The article was written last fall before it looked like we would get any action on tax reform. The mortgage interest deduction will now become irrelevant for most homeowners, but that doesn’t necessarily mean that housing has become less affordable – at least not at the median home price and median income. Regardless, the biggest driver of housing affordability is the mortgage rate, not the house price. Affordability was the worst in the early 80s, when mortgage rates were double digits. The chart below looks at the mortgage payment as a percent of income over time. Note that the mortgage interest deduction moves the curve downward in a more or less linear fashion, and does not make much of a difference in terms of relative affordability.

Morning Report: Home Prices within 1% of peak 11/28/16

Vital Statistics:

Last Change
S&P Futures 2206.0 -58.0
Eurostoxx Index 340.9 -1.6
Oil (WTI) 47.0 0.9
US dollar index 91.7 -0.1
10 Year Govt Bond Yield 2.33%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 4.14

Investors return to the markets after the Thanksgiving holiday contemplating a re-litigation of the 2016 Presidential election. Bonds and MBS are up.

Green Party candidate Jill Stein is requesting a recount in PA, MI, and WI. Donald Trump took to Twitter to condemn the effort and alleged that “millions” of votes were fraudulent. The Clinton campaign is keeping its distance but will watch to make sure outside players aren’t interfering with the process. If she manages to turn all 3 states, then she could win. One question that has come up has been whether Russia could have hacked the voting machines. That possibility looks unlikely.

Since the election, bank stocks have increased their market caps by $300 billion. The bet is that a roll-back of regulation will increase profits.

The highlight of the week will be the jobs report on Friday. The Street is looking for 170k jobs added, an unemployment rate of 4.9% and an increase in average hourly earnings of 0.2%.

The FOMC minutes from the early November meeting were a non-event, and the FOMC is definitely setting the stage for a December hike: “Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon, so long as incoming data provided some further evidence of continued progress toward the Committee’s objectives.” In fact, a “few” participants wanted a hike at the November meeting. The December FOMC meeting is in two weeks.

The FHFA raised the conforming limit from 417k to $424k. This was the first increase in 10 years. They also increased the high balance conforming limit to $636k.

Home Prices rose 0.1% in September and are up 5.4% YOY. Home prices are now within a percent of their peaks from June 2006.

Black Friday saw more shoppers, but less spending than in the past. About 154 million bought something in a store or online over the weekend, but they only spent about $289 as opposed to $300 a year ago. The National Retail Federation attributed the drop in spending to deep discounts offered by retailers. Black Friday online purchases were up 22% YOY.

Morning Report: RIP the mortgage interest deduction? 10/10/16

Vital Statistics:

Last Change
S&P Futures 2158.0 12.0
Eurostoxx Index 341.2 1.6
Oil (WTI) 50.6 0.8
US dollar index 87.6 -0.2
10 Year Govt Bond Yield 1.72%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.54

Bonds are closed today, but overseas bond markets are weaker. Stocks are up.

No economic data today. The week after the jobs report is typically data light to begin with, and there really isn’t anything market-moving this week, except for may the PPI on Friday.

Dave Stevens of the MBA raised the issue of eliminating the mortgage interest deduction, albeit with the caveat that it be done in the context of tax reform, with lowering rates and eliminating deductions. He wasn’t advocating eliminating it in a vacuum.

If Donald Trump wins, tax reform is a definite possibility. If Hillary wins, will she be more like her husband, willing to deal with Republicans to get something done, or will she be more like Obama, where both sides had hardened positions? If you were going to eliminate the mortgage interest deduction, it will certainly make housing less affordable and would have a dampening effect on home price appreciation. That said, with rates as low as they are, interest payments as a percentage of your mortgage payment are at all-time lows. So if you wanted to eliminate it at the time when it causes the least amount of pain, now is the time to do it.

Republicans will never support eliminating deductions without cutting rates, and the historical bargain between right and left (Democrats trading increased taxes and spending for increased defense spending) might not work this time around. Believing in that trade was what got us the sequester, where Obama found his bluff called, as Republicans tolerated lower defense spending in exchange for lower discretionary spending. Given the general war fatigue of the American voter, Republicans are probably not going to be willing to trade increases in defense spending for more social spending, and certainly not for tax increases.

Punch line: the mortgage interest deduction probably isn’t going anywhere.

That said, the US subsidizes the residential real estate market six ways to Sunday, with the mortgage interest deduction, the 30 year fixed rate mortgage (try finding that anywhere else on the planet), taxpayer backing of almost all new origination, and the cornucopia of subsidies for affordable housing. Not to mention the central bank targeting of mortgage rates and real estate prices. And the powers that be still scratch their heads wondering why we had a real estate bubble…

Mortgage credit availability improved in September, according to the MBA.

Morning Report: Pending home sales fall on tight inventory 9/29/16

Vital Statistics:

Last Change
S&P Futures 2159.0 -4.0
Eurostoxx Index 344.3 2.0
Oil (WTI) 47.1 0.0
US dollar index 86.5 0.4
10 Year Govt Bond Yield 1.59%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.47

Stocks are lower this morning as oil rallies. Bonds and MBS are down small.

Initial Jobless Claims came in at 254k, which is at a 43 year low. When you take into account population growth, that number is astounding. The last time jobless claims were around these levels, we had just ended the draft for the Vietnam War.

The third revision for Q2 GDP came in at 1.4%, which was an increase from the second estimate of 1.1%. Non-residential fixed investment and consumption drove the upward revision. The Personal Consumption Expenditure Index (the Fed’s preferred measure of inflation) came in at 2%, spot on with their target. Gross Domestic Income fell 0.2%, which is a disappointment.

Consumer Comfort ticked up last week, according to the Bloomberg Consumer Comfort Index.

Pending Home Sales dropped 2.4% in August, according to the NAR. Lawrence Yun, NAR chief economist, says suffering supply levels have taken the wind out of the momentum the housing market experienced earlier this year. “Contract activity slackened throughout the country in August except for in the Northeast, where higher inventory totals are giving home shoppers greater options and better success signing a contract,” he said. “In most other areas, an increased number of prospective buyers appear to be either wavering at the steeper home prices pushed up by inventory shortages or disheartened by the competition for the miniscule number of affordable listings.”

Immigrants are much more educated today than they were a couple of decades ago. That is creating issues in the housing market. Traditionally, low-skilled immigrants were builders of housing. Today many are arriving with college degrees, and therefore they are much more likely to be buyers of housing. This partially explains why inventory is tight and why it is hard to find skilled labor.

Corporate profits fell 1.7% YOY in the second quarter. This is the third consecutive drop, which is a worrisome stat for the stock market, especially as the Fed begins to take away the punch bowl.

Separately, are rising incomes helping to alleviate the problem of affordability? The drop in GDI didn’t help. The ultimate issue will revolve around the long-term unemployed. Do they come back into the workforce or stay out? If they come back, wage inflation will be modest until that reservoir is used up. Ultimately that is better for the economy long-term. If they stay out, it will depress consumption and will probably start pushing up wages for those that do have jobs. Watch the quits rate on the JOLTS job openings. That will be the tell.

Morning Report: The hottest real estate markets are cooling off 9/28/16

Vital Statistics:

Last Change
S&P Futures 2153.5 1.0
Eurostoxx Index 343.1 3.0
Oil (WTI) 45.2 0.5
US dollar index 86.3 -0.2
10 Year Govt Bond Yield 1.56%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.47

Stocks are flat this morning on no real news. Bonds and MBS are flat as well.

We have a lot of Fed-Speak today, with Neel Kashkari, Janet Yellen, and James Bullard speaking this morning. Charles Evans, Loretta Mester, and Esther George speak this afternoon. There is the possibility that some of them could say something market-moving so be careful with your locks.

Mortgage Applications fell 0.7% last week as purchases rose 1% and refis fell 2%.

Durable Goods orders were flat month-over-month and down 1.3% YOY. Ex-transportation, they fell on a MOM and YOY basis. Capital Goods orders (a proxy for business capital investment) is also down for the year, although it was up on a MOM basis. July’s numbers were revised downward, so this report is nothing to write home about.

Despite the gloom in the corporate sector, consumer confidence rose and is at post-crisis highs. This is probably being driven by the stronger labor market. We aren’t seeing these numbers flow through to actual sales at the retailers though. The Back-To-School shopping season was a disappointment.

The hottest real estate markets are beginning to cool off, as high prices and low inventory are putting off buyers. Many of these markets have long surpassed their bubble peaks and are hitting new highs. Given that incomes have not recovered, these price levels may be unsupportable, especially as the Fed hikes interest rates and mortgages become more expensive.

The latest CoreLogic Market Pulse looks at some of the overvalued markets based on price to income ratios and price to rent ratios. Unsurprisingly, there are pockets of overvaluation in CA, NY, FL, and TX, while the Midwest remains undervalued. The chart is below:


The article also goes on to say that we aren’t in a housing bubble. This is true, as bubbles are largely psychological phenomenons where investors and lenders consider an asset “special” and believe it can only go up in price. The last residential real estate bubble (aside from the mid 00s) was in the 1920s. Residential real estate bubbles are rare and I doubt any of us will see another on in the US in our lives. That said, we have residential real estate bubbles in lots of countries overseas (especially China, Norway, and Canada), which will be a damper on global growth when they burst.

During the debates, Donald Trump went after the Fed, calling them “political” for not raising interest rates. Politicians have always jawboned the Fed, but this has to be the first time I have heard a politician complain that the Fed is keeping rates too low. Usually, politicians are calling for the Fed to not raise rates because they are worried about a recession. At least one economist thinks Janet Yellen would resign if Trump wins.

Morning Report: New Home Sales fall 9/26/16

Vital Statistics:

Last Change
S&P Futures 2149.0 -9.0
Eurostoxx Index 340.6 -5.0
Oil (WTI) 45.0 0.5
US dollar index 86.4 -0.2
10 Year Govt Bond Yield 1.60%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.49

Markets are lower this morning on no real news. Bonds and MBS are down

Home prices rose 0.5% MOM and are up 5.8% YOY, according to the FHFA House Price Index. Home price appreciation is the highest in the West and Mountain states, while the Northeast and Middle Atlantic are bringing up the rear.

Existing Home Sales fell 0.9% in August as tight inventory depressed transactions. The median home price was just over $240,000 which was a 5.1% YOY increase. Housing inventory was down to just over 2 million homes, which is a 4.6 month supply. First time homebuyers accounted for 31% of sales. Strong job growth and low mortgage rates are pumping up demand, but builders remain reticent.

The Index of Leading Economic Indicators fell 0.2% last month, lower than expectations.

New Home Sales came in at an annualized rate of 609k, a little better than expected, but below last month’s 659k pace. The median sales price of new houses sold in August 2016 was $284,000; the average sales price was $353,600. The seasonally adjusted estimate of new houses for sale at the end of August was 235,000. This represents a supply of 4.6 months at the current sales rate.

Central Banks are dumping Treasuries, which is putting pressure on bonds, even thought the latest economic data is on the weak side. US investors (especially bond funds) are on the other side of the trade. This is also a warning to investors to take a look at their bond funds and determine how much interest rate risk they are bearing.

Minneapolis Fed Head Neel Kashkari did a Twitter Q&A about monetary policy. He is worried more about deflation than inflation and doesn’t see a bubble in housing.

Tonight, candidates Hillary Clinton and Donald Trump will have their first debate. The latest poll numbers show a dead heat, and a Trump lead when third party candidates are included. Note that the debate will be up against Monday night football, so all the post-debate polls will skew female which will be more favorable for Hillary than Trump.

Morning Report: New home sales rise 8/24/16

Vital Statistics:

Last Change
S&P Futures 2186.0 1.0
Eurostoxx Index 345.6 2.0
Oil (WTI) 46.8 -1.7
US dollar index 85.8 0.1
10 Year Govt Bond Yield 1.55%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.5

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

Bonds have been in a tight trading range over the past couple of weeks. On Friday, Janet Yellen will speak in Jackson Hole.

Existing home sales dropped 3% YOY in July as tight inventory remains an issue. The median home price increased 5.3% YOY to 244k. Unsold inventory is at 4.7 months, an uptick from June. The first time homebuyer accounted for 32% of sales compared to 28% last year. Appraisal-related issues are increasing as demand is overwhelming the already reduced supply of appraisers.

New home sales increased over 12% in July to a 654,000 annual rate. The median home price fell 5.1% month-over-month to $294,600. The median home price is down about half a percent YOY. Softness in the luxury space might be driving this as well as a move to focus more on starter homes. Supply is still tight at about 4.3 month’s worth so you can’t say it is a glut. Regardless of what is going on in pricing, the number is an encouraging sign for the economy.

You aren’t seeing softness in pricing at Toll Brothers. Their ASPs rose 16% in the third quarter YOY. Toll has been emphasizing luxury urban condo construction, which may explain part of the huge increase. Revenues increased 24% and net income rose 54%. Yet what are they doing with their capital? Buying back stock, to the tune of $97 million worth in the third quarter. If business is that good, why?

Mortgage Applications fell 2.1% last week as purchases fell .3% and refis fell 3%.

The FHFA House Price Index rose 0.2% MOM and is up 5.6% YOY. Home prices rose in every state except for Vermont. The Pacific Northwest and mountain states had the highest price appreciation, while the Northeast and Mid Atlantic continue to bring up the rear. In fact, the worst MSA was the Stamford-Bridgeport MSA which saw prices decline 3%. The FHFA index only looks at houses with a conforming mortgage, so it excludes jumbos and cash sales.

McMansions are not holding their resale value the way they used to. This may help explain the drop in the median sales price for new homes. The premiums are lower for new houses.

There is an old saying that if you spend some time on a website and can’t figure out what the product is, you are the product. This is especially true with Facebook. Ever wonder how facebook classifies you politically? You can find out here. This determines the political ads you see.

Politically Correct Bedtime Stories–The Three Little Pigs

Once there were three little pigs who lived together in mutual respect and in harmony with their environment. Using materials that were indigenous to the area, they each built a beautiful house. One pig built a house of straw, one a house of sticks, and one a house of dung, clay, and creeper vines shaped into bricks and baked in a small kiln. When they were finished, the pigs were satisfied with their work and settled back to live in peace and self-determination (NB: Sounds positively Libertarian, doesn’t it?)

But their idyll was soon shattered. One day, along came a big, bad wolf with expansionist ideas. He saw the pigs and grew very hungry, in both a physical and an ideological sense. When the pigs saw the wolf, they ran into the house of straw. The wolf ran up to the house and banged on the door, shouting, “Little pigs, little pigs, let me in!”

The pigs shouted back, “Your gunboat tactics hold no fear for pigs defending their homes and culture.”

Bu the wolf wasn’t to be denied what he thought was his manifest destiny. So he huffed and puffed and blew down the house of straw. The frightened pigs ran to the house of sticks, with the wolf in hot pursuit. Where the house of straw had stood, other wolves bought up the land and started a banana plantation.

At the house of sticks, the wolf again banged on the door and shouted “little pigs, little pigs, let me in!”

The pigs shouted back, “Go to hell, you carnivorous, imperialistic oppressor!”

At this, the wolf chuckled condescendingly. He thought to himself: “They are so childlike in their ways. It will be a shame to see them go, but progress cannot be stopped.”

So the wolf huffed and puffed and blew down the house of sticks. The pigs ran to the house of bricks, with the wolf close at their heels. Where the house of sticks had stood, other wolves built a time-share condo resort complex for vacationing wolves, with each unit a fiberglass reconstruction of the house of sticks, as well as native curio shops, snorkeling, and dolphin shows.

At the house of bricks, the wolf again banged on the door and shouted, “Little pigs, little pigs, let me in!”

This time in response, the pigs sang songs of solidarity and wrote letters of protest to the United Nations.

By now the wolf was getting angry at the pigs’ refusal to see the situation from the carnivore’s point of view. So he huffed and puffed, and huffed and puffed, then grabbed his chest and fell over dead from a massive heart attack brought on from eating too many fatty foods.

The three little pigs rejoiced that justice had triumphed and did a little dance around the corpse of the wolf. Their next step was to liberate their home land. They gathered together a band of other pigs who had been forced off their lands. This new brigade of porcinistas attacked the resort complex with machine guns and rocket launchers and slaughtered the cruel wolf oppressors, sending a clear signal to the rest of the hemisphere not to meddle in their internal affairs. Then the pigs set up a model socialist democracy with free education, universal health care, and affordable housing for everyone.

Please note: The wolf in this story was a metaphorical construct. No actual wolves were harmed in the writing of the story.

From Politically Correct Bedtime Stories © 1994 by James Finn Garner

Morning Report 6/5/12

Vital Statistics:

  Last Change Percent
S&P Futures  1271.0 -2.0 -0.16%
Eurostoxx Index 2076.6 -2.4 -0.11%
Oil (WTI) 83.63 -0.4 -0.42%
LIBOR 0.468 0.001 0.21%
US Dollar Index (DXY) 82.89 0.328 0.40%
10 Year Govt Bond Yield 1.54% 0.02%  
RPX Composite Real Estate Index 177.6 -0.1  

Markets are flat after some disappointing economic data out of Europe. The Eurozone ISM survey came in at 46 and has been below 50 for the past 4 months, indicating a contraction in the manufacturing sector. The  US Non-Manufacturing ISM will be released at 10:00 am, with economists predicting a reading of 53.5. Equity markets seem to be stabilizing, so we are seeing Treasury investors back away from the ledge. MBS are lower as well.

Germany is becoming more amenable to some sort of pan-European banking coordination. Angela Merkel said: “So we will also talk about to what degree one has to bring the systemic banks under specific European supervision to keep national interests from playing too large a role.” This will be easier said than done, as countries tend to get very nationalistic when talking about banks. Good luck getting the French on board.

CSFB is predicting the Fed will continue monetary stimulus, with a continuation of Operation Twist and buying mortgages. I am not sure why Operation Twist needs to be continued – Europe has done more to lower long-term interest rates than the Fed could engineer. There has been speculation that the Fed could do a hybrid of sorts, where it sells short term paper and buys mortgage backed securities directly.

NPR has an article on the future of the American Dream – homeownership. While most of the article discusses the psychological differences between homebuyers during the bubble and homebuyers before the bubble, they have an interesting chart from showing how much cheaper it is to buy than rent. The chart shows ratio of the cost of homeownership vs the cost of renting since 1986.  The costs are now equal, even if you ignore the interest deduction.

Chart:  Rent vs Buy 


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