Morning Report: Housing starts disappoint 8/16/17

Vital Statistics:

Last Change
S&P Futures 2468.0 4.3
Eurostoxx Index 379.3 2.8
Oil (WTI) 47.7 0.2
US dollar index 86.7 0.1
10 Year Govt Bond Yield 2.28%
Current Coupon Fannie Mae TBA 103.09
Current Coupon Ginnie Mae TBA 103.97
30 Year Fixed Rate Mortgage 3.88

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

The big event of the day will be the release of the FOMC minutes at 2:00 pm EST. The Street will be looking for more info on how the Fed plans to wind down its QE portfolio. Investors will also be parsing the statement for clues regarding the Fed’s stance on the current status of low inflation. While inflation remains low if measured against the Fed’s inflation target, we are starting to see wage inflation. The hawks on the Committee will push to get ahead of that, while the doves (like Yellen) will prefer to let the labor market “run hot” for a while. The minutes will probably not be market-moving, but just be aware if you are locking around that time.

The minutes will be interesting given the recent GDP forecasts out of the Atlanta Fed, which have Q3 growth coming in at 3.7%, and are predicting a much stronger second half to the year. You could really start to see a battle between the hawks and the doves. The Fed Funds futures contracts are still predicting no move in September and a 50-50 chance of a hike in December.

Mortgage Applications fell 0.1% last week as purchases fell 2% and refis increased 2%. Mortgage rates continue to tick lower, with the 30 year fixed rate mortgage down to 4.14%, the lowest since November.

Housing starts disappointed last month, coming in at 1.15 million, down 4.8% MOM and 5.8% YOY. The notoriously volatile multi-family segment drove the decrease, as single family starts were more or less unchanged. The Street was looking for 1.22 million units. Building permits came in at 1.22 million, lower than estimates as well. They were down 4% on a MOM  basis but were up 4% on a YOY basis.

Where is the growth in housing construction? Texas. Of course Texas didn’t really experience the bubble type behavior the way states like California, Arizona, and Florida did. This may be because Texas has more restrictions on cash-out refinances than other states. Here is a chart of where the action is (and is not)

Morning Report: Retail sales come in strong 8/15/17

Vital Statistics:

Last Change
S&P Futures 2469.0 5.5
Eurostoxx Index 376.7 0.6
Oil (WTI) 47.2 -0.4
US dollar index 86.6 0.3
10 Year Govt Bond Yield 2.25%
Current Coupon Fannie Mae TBA 103.09
Current Coupon Ginnie Mae TBA 103.97
30 Year Fixed Rate Mortgage 3.88

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

Retail Sales came in stronger than expected, with the headline number increasing 0.6% and the control group increasing the same amount. The Street was looking for a 0.3% increase. On a year-over-year basis, sales rose 4.2%. The Atlanta Fed is predicting a big uptick in growth from Q2 to Q3, and retail sales will be a big driver. We are entering the back-to-school shopping season, which is second only to the holiday season in importance for the retail sector. Consumption is about 70% of GDP, so as retail sales go, so goes the economy.

The Empire State Manufacturing Survey shot ahead again last month, hitting the highest level in 2 years. Meanwhile, inflation remains under control as import prices rose 0.1% last month and are up 1.5% YOY. Business inventories also rose .05%.

The NAHB Housing Market Index rebounded in August to 68, which is getting close to its highs. The NAHB says that labor shortages are worse in July than they were a year ago. In some trades, 3/4 of all builders surveyed report either “serious” or “some sort” of shortage of labor. The last time we saw these sorts of levels was in late 2000, just as the real estate market was heating up. This will limit building and keep home prices well-supported.

The Despot reported better than expected earnings as homeowners continue to invest in their appreciating homes. They are looking for comparable store sales to increase 5.5% and took up earnings guidance. Note that contractors are using Amazon more and more, so be careful with the stock.

Down payments are at the lowest levels in 7 years, with the growth mainly occurring in the high single digits are, not at the 3.5% area. It looks like the growth is coming from Fannie and Fred’s low downpayment programs, which are wresting share from FHA. Performance on these loans will probably be determined by the continued price appreciation in the US housing markets. While general riskiness is higher than it was 5 years ago, it is nowhere near the risk we had during the go-go years.

The Trump Administration is trying to pivot to tax reform after the debt ceiling is handled. Both NAR and NAHB have come out against any sort of plan to eliminate the mortgage interest deduction. Trump’s plan is to eliminate the deductions for state / local taxes as well as the mortgage interest deduction in exchange for doubling the standard deduction. NAR is warning that this will hit housing prices, however with inventory so tight, I cannot see that happening. FWIW, if you were ever going to eliminate the mortgage interest deduction, now would be the time to do it, since rates are so low. Mortgage interest is around 70% of the first year’s mortgage payment today. 30 – 35 years ago, it was above 90%. NAR sees about half the people currently taking a deduction to stop. Of course their tax bill isn’t necessarily going up – they will find that taking the standard deduction will be more advantageous than indexing.

Home sales and prices are slipping in Canada, which has a real estate bubble bigger than the one we had in 2006. Fallout from the Canadian bubble bursting will probably affect pricing in places like Seattle, which has been red-hot for the past couple of years.

Morning Report: Credit scores and debt service 8/14/17

Vital Statistics:

Last Change
S&P Futures 2454.0 14.0
Eurostoxx Index 375.2 3.1
Oil (WTI) 48.7 -0.2
US dollar index 86.2 0.2
10 Year Govt Bond Yield 2.21%
Current Coupon Fannie Mae TBA 103.197
Current Coupon Ginnie Mae TBA 104.068
30 Year Fixed Rate Mortgage 3.92

Stocks are higher this morning as tensions between the US and North Korea seemed to ease a bit over the weekend. Bonds and MBS are down.

Not a lot of data this week (nor is there any Fed-Speak). The highlight should be housing starts on Wednesday.

The St. Louis Fed is forecasting 3.7% GDP growth for Q3, while the Atlanta Fed is forecasting 4% growth. Seems surprisingly high, but we will get an idea of how realistic that is when retailers report same store sales for August, which covers the back-to-school shopping season.

These GDP forecasts (if they end up playing out) should boost rates higher over the near term. This will be offset by international tensions (and a general sense of uncertainty in DC) which will pull rates lower. There is no real way to forecast how things will shake out, but just be aware that this push-pull effect should make for increased rate volatility over the near term.

With the Fed on hold until December, the markets are turning to the debt ceiling, which should hit in late September / early October. You are starting to see a tick up in the yields of 3 month T-bills maturing in late September. The debt ceiling has always been a bit of an annual kabuki dance, this time around the unpredictability of things in DC is making traders a little more worried.

Average credit scores have eclipsed their October 2006 peak, hitting 700 this year. It is interesting to see that US consumer debt levels are at all-time highs, however debt service is at a low. Debt service is one’s mortgage, car, installment, and credit card debt as a percentage of income. Check out the charts below:

Consumer credit:

consumer credit

Debt service:

debt service

These two charts demonstrate just how much interest rates matter (and why owning a home isn’t quite as unaffordable as the home price indices suggest). If you want to see what determines how Fair Issac (of FICO fame) determines your score, here is a handy chart. The single best thing one can do is make timely payments, followed by reducing the amount they owe.

credut scores

Morning Report: Neel Kashkari to business: stop whining 8/8/17

Vital Statistics:

Last Change
S&P Futures 2474.0 -3.3
Eurostoxx Index 381.1 -0.9
Oil (WTI) 49.4 0.0
US dollar index 86.2 -0.1
10 Year Govt Bond Yield 2.26%
Current Coupon Fannie Mae TBA 103.197
Current Coupon Ginnie Mae TBA 104.068
30 Year Fixed Rate Mortgage 3.92

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

Job openings increased by 461,000 to hit 6.2 million in June, according to the JOLTS job openings report. The quits rate was steady at 2.1% (or about 3.1 million people). The quits rate is an important number to the Fed and often signals impending wage growth. The quits rate was the lowest in the Northeast, at 1.7% while the highest in the South at 2.5%.

Small business optimism increased in July, according to the NFIB. Small business continues to hire, adding .21 workers on average over the past several months. Finding qualified workers remains a problem, and 87% of those trying to hire found few or no qualified applicants. Apparently drug use remains a big issue – getting workers who can pass a drug test can be difficult. Regarding the political environment in DC, while there has been no movement on anything legislatively, there have also been no new regulations put in place, and we are seeing some regulations from the Obama administration reversed, which is having a positive effect on sentiment.

Minneapolis Fed Head Neel Kashkari spoke yesterday of the tight labor market and dismissed the idea that there is a labor shortage. “Are you really struggling to find workers? If so, the proof for me is you are raising wages. If you are not raising wages, then it just sounds like whining,” he said. While Kashkari is definitely the dove on the committee, if that sentiment is any indication of the rest of the FOMC, they will be content to nudge up the Fed Funds rate at their current cautious pace until they see wage growth.

China is trying to take away the punch bowl and reduce overseas investment, in an effort to prevent them from experiencing a bust similar to Japan’s in the late 80s. I guess they see parallels between Mitsubishi paying $2 billion for the Rockefeller Center, which ended up going bankrupt a few years later. While I think they are barking up the wrong tree here (industrial policy and a residential real estate bubble are the real issues) it will have some knock-on effects perhaps in our markets. The Chinese withdrawal is probably going to hit the Canadian residential real estate market hard, and you are already seeing transactions dry up in Toronto. Chinese money will be most felt in the ultra-expensive urban areas like Seattle, New York City, and San Francisco. If China does in fact go through a Depression, they will probably try and export their way out of it, which means less inflation in the US, and lower interest rates, at the margin.

The Fannie Mae Home Purchase Sentiment Index ticked off of record highs last month as high prices and tight inventory led to a record low of people saying now is a good time to buy. Granted, the index only goes back to 2012, but it does show how high prices are scaring buyers away. Those that say it is a good time to sell also saw a big decrease, which was the main driver of the reading. That is surprising since you would think that tight inventory + demand would equal a great seller’s market. Not sure what would be causing that.

Delinquency rates are improving for the industry according to the latest CoreLogic Loan Performance Insight Report. 30 day + DQs fell to 4.5% in May, which is down 0.8% from last year. The number in foreclosure fell 0.3% to 0.7%. About the only place you are seeing increases in delinquency are the fracking areas (South Dakota, Louisiana, some parts of Texas) which have been affected by falling oil prices.

Morning Report: Why hasn’t there been better wage growth? 8/7/17

Vital Statistics:

Last Change
S&P Futures 2474.5 2.8
Eurostoxx Index 381.6 -0.9
Oil (WTI) 49.0 -0.6
US dollar index 86.3 0.0
10 Year Govt Bond Yield 2.27%
Current Coupon Fannie Mae TBA 102.93
Current Coupon Ginnie Mae TBA 103.81
30 Year Fixed Rate Mortgage 3.94

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

Should be a relatively dull week after the employment report. Not much in the way of data but we do have Fed-speak almost every day.

Last Friday’s jobs report didn’t have much of an impact on the Fed Funds futures. They are forecasting a 99% chance of no hike at the September meeting, while the December meeting is being priced as a coin toss. The consensus seems to be that the September meeting will usher in the next steps in reducing the size of the Fed’s balance sheet.

The jobs report prompted a lot of articles asking about wage growth and why we aren’t seeing it. The usual explanations include low productivity, lack of bargaining power on the part of workers, and the untapped reservoir of the long-term unemployed. IMO maybe the answer IS inflation – at 1.5% PCE growth, maybe 1% real wage growth is about the best we can hope for. We are seeing wage inflation in pockets (especially skilled labor and construction) however unskilled labor is still competing with technology which unfortunately keeps getting better and cheaper. Also, note that wage and job growth has been uneven geographically.

The post-election spike in interest rates pushed down prepayment speeds and refis earlier this year. Now that interest rates have corrected some of that move, we are seeing them increase again, according the Black Knight Financial Services. The January and February numbers were the most depressed, which reflects the increase in the 10 year to 2.6% post-election.

Wells Fargo has admitted that the fake account scandal could be bigger than previously thought. Meanwhile, Trump administration is taking a look at the Obama-era settlements where banks were forced to donate to third party activist groups as part of their settlement.

Why are Treasury investors buying them at what will probably turn out to be a negative yield after taxes and inflation? Because the alternative (of losing more in the stock market).

Morning Report: Strong jobs report 8/4/17

Vital Statistics:

Last Change
S&P Futures 2474.5 2.8
Eurostoxx Index 380.7 1.8
Oil (WTI) 48.9 -0.1
US dollar index 86.1 0.0
10 Year Govt Bond Yield 2.26%
Current Coupon Fannie Mae TBA 102.93
Current Coupon Ginnie Mae TBA 103.81
30 Year Fixed Rate Mortgage 3.94

Stocks are higher this morning after the jobs report beat expectations. Bonds and MBS are down.

Jobs report data dump:

  • Payrolls up 209,000
  • Unemployment rate 4.3%
  • Labor force participation rate 62.9%
  • Average hourly earnings up 0.3% MOM / 2.5% YOY

Not a bad report. The Street was looking for 180,000 jobs, so the number was better than expected. Most of the job gains were in professional / business services, healthcare, and restaurants / bars. The two month revision was negligible. Wage growth remains sluggish, which is probably due to the huge shadow inventory of discouraged workers on the sidelines.

Small business owners are the most optimistic in 10 years, according to Gallup. The biggest challenge to small business? Government.

Wow. The Atlanta Fed is forecasting 4% GDP growth in Q3. The rest of the street is around 2.4%.

Morning Report: Gary Cohn for Fed?

Vital Statistics:

Last Change
S&P Futures 2472.5 -1.0
Eurostoxx Index 379.5 -0.2
Oil (WTI) 49.8 0.2
US dollar index 86.0 0.0
10 Year Govt Bond Yield 2.24%
Current Coupon Fannie Mae TBA 102.93
Current Coupon Ginnie Mae TBA 103.81
30 Year Fixed Rate Mortgage 3.94

Global stocks are lower after the Bank of England cut its growth forecast. Bonds and MBS are up.

Initial Jobless Claims fell by 5,000 to 240,000 last week. Employers are holding on to their employees. Separately, Challenger and Gray reported that there were 28,307 announced job cuts in July, which is the lowest level since November last year. 80,000 hiring announcements were also made in July, which is the highest July reading on record.

The ISM non-manufacturing index slipped in June, which appears largely driven by seasonal factors.

Goldman Sachs alum Gary Cohn is reportedly the front-runner to replace Janet Yellen at the Fed when her term expires. He would be the first non-economist to run the Fed since the disastrous tenure of G. William Miller during the Carter Administration.

Fannie Mae reported net income of $3.2 billion in the second quarter. It paid a $2.8 billion dividend to Treasury in June. Fannie is returning to its roots as well: “Fannie Mae has transitioned from a portfolio-focused business to a guaranty-focused business. Income from the company’s guaranty business accounted for more than 75 percent of the company’s net interest income in the first half of 2017. Fannie Mae expects net interest income from the company’s guaranty business to account for an increasing portion of net interest income as its retained mortgage portfolio continues to shrink.” Fannie Mae drew $116B from Treasury during the crisis, and has paid $163B in dividends back. Those dividend payments have been used to shore up Obamacare.

The MBA concludes that its plan for housing going forward will have little impact on consumer borrowing costs. Some of the proposals will lower costs, while others will increase costs. The biggest change would cement the explicit guarantee for GSE MBS by the government. This will push down rates and also increase demand, assuming that bank regulatory capital requirements will treat the new GSE MBS the same as GNMA MBS. In other words, banks can treat GNMA MBS as Treasuries and require no capital against them. FNMA MBS have a 20% hit. On the other side of the coin, there will be additional fees earmarked for affordable housing and possibly increased guaranty fees to protect the taxpayer. There will have to be a debate over how big the credit box will be, and affordable housing types will argue it should be bigger while taxpayer advocates will want it smaller. Overall, MBA thinks it will be a wash when it comes to mortgage pricing.

Luxury home price appreciation outpaced the rest of the market for the first time since 2014, according to Redfin. Much of this was driven by homes being taken off the market. The average luxury home price was 1.79 million, which means we really are talking about the rarified top end of the market. The number of luxury homes on the market fell 9.4% YOY. 1.7% sold above list. The rest of the market averaged $336k and 26% traded above list.

The debt ceiling is looming, and Mitch McConnell and Paul Ryan are advocating for a hike without spending cuts, which is sure to anger many in the GOP.

10 years ago, the Jim Cramer rant that unofficially heralded the start of the financial crisis.

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