All Things in Moderation

Vital Statistics:

Markets are higher this morning after a positive jobs report. Payrolls increased by 236k in Feb, higher than the 165k forecast. January was revised down. The unemployment rate fell to 7.7% from 7.9%, however the labor force participation rate fell as well, which means that number isn’t as great as it initially appears.  Bonds are getting clocked, with the 10-year solidly above 2% again. MBS are down as well.

The rally in the stock market and rebounding house prices has returned US wealth to its pre-crash levels. Of course the main driver has been the stock market, not real estate, so don’t expect this to get us back to pre-crisis levels of consumer spending.  Still, its a start.

The Fed has released the results of its stress tests for the banks. The stress test is a scenario of 12.1% unemployment, a 50% drop in the stock market, and a 20% drop in real estate.  They predict that Tier I capital would fall from 11.1% to 7.7%, which is still above minimum standards.  

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Markets are slightly higher after initial jobless claims came in lower than expected at 340k. Productivity fell as unit labor costs increased at a faster clip than expected. The ECB kept rates unchanged. Bonds and MBS are lower.

The Fed released the Beige Book yesterday, a sort of 10,000 – foot view of the economy. The words “modest” and “moderate” were used a lot. Residential Construction increased in most districts with the exception of Kansas City. Low inventories were squeezing prices higher in most districts. Banks reported that credit standards are beginning to loosen, and that very few mortgages are being held on their balance sheets. 

The CoreLogic Home Price index increased 9.7% in January, the biggest increase since April 2006. Excluding distressed sales, they increased 9.0%. They anticipate a similar gain of 9.7% YOY for Feb, with a .3% month on month drop. This year’s seasonal slowdown has barely registered, which portends well for the summer selling season. Only Illinois and Delaware failed to report gains. 

Now that the sequestration crisis is out of the way, it looks like the threat of a government shutdown late this month has gone away as well.  The House passed a bill to fund the government through the rest of the year at sequestration levels. The Senate will make its own tweaks to soften some of the spending cuts, but there is a bipartisan optimism that we won’t have a shutdown. Separately, the President met with Congressional leaders in an attempt to figure out if there is room for a grand bargain on a package of tax increases and entitlement cuts. Lest the market think the all-clear has passed, we still have the debt ceiling to deal with in late summer.

The Mortgage Bankers Association responded to FHFA Head Ed DeMarco’s plan to rationalize and eventually replace the GSEs. “Proposals of this magnitude need a transparent process to engage with stakeholders, articulate objectives and demonstrate that stakeholder concerns have been evaluated and addressed… The Administration, Congress, and regulators need to engage with other stakeholders to move the ball forward.  Until this happens, the uncertainty in the markets will persist and a full recovery of the housing market will remain elusive.”  The Obama administration still regulates from the ivory tower and refuses to consult with the private sector.  It happened in Dodd-Frank and it is happening again. I guess the concern over regulatory capture is a valid concern, but remaking the financial sector or the real estate markets without input from the people who actually do this stuff for a living is bound to have major unintended consequences.

One of the bigger issues regarding the new framework involves how to handle Federal guarantees.  The government believes it has been underpricing (in other words, G-fees are too low) and it wants to increase them so they approach the pricing for PMI. One side effect is that the mortgage insurers, once given up for dead, are back. 

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Party like its 1999. Markets are stronger after the Dow set a record high yesterday. The S&P 500 has about 40 points left to hit a record as well. NASDAQ, well.. about another 60% needed there. No real market-moving news this morning.  Mortgage applications rose 14.8% last week as rates fell. Bonds and MBS are victims of the “risk on” trade and are moving lower. 

The ADP February Employment Report estimated jobs increased by 198k last month, higher than the Street estimate of 170k. This probably means the street estimate for non-farm payrolls scheduled to be released on Friday is low at 160k. The increase was mainly in services. On the good-producing side, construction drove the increase. Coupled with the consumption numbers we have seen, it appears that the real economy is taking the Jan 1 tax increases in stride. Perhaps the sequester will end up being a nonevent as well.

Altos is forecasting home prices will rise 10% in 2013, which puts them at the high end of estimates. They cite three big indicators all pointing to higher prices:  First, the percent of homes with price reductions is falling, and below a normal market.  A normal reading is 38%, which makes sense – you overprice and if no one bites, you go lower.  A weak market would have price reductions in the 40% – 50% range, while a hot market would have about 15%.  We are currently at 28%, somewhere between “normal” and “hot.”  Blame professional investors and low inventory. Second, the price of newly-listed properties is on the upswing.  Third, median days on the market is falling.  Quickly. 

So what happened to this massive glut of supply that was supposed to hit the market?  Well, first of all, new home construction has been anemic. Yes, housing starts have been increasing at a pretty good clip, but we are still not cracking a million per year pace, and 1.5 million a year has been the historical norm. Second, now that prices are increasing, many homeowners who are under no pressure to sell are deciding to hang on a little longer. Finally, the government is doing everything it can to stimulate demand (through FHA lending, QE, etc) and decrease supply (through HARP, HAMP, and other refi programs to keep people in their homes). So far, 2013 is shaping up to be a year of high-ish price appreciation in the context of restricted supply.

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Stocks are higher this morning on no real news. China re-affirmed its growth target of 7.5% GDP. European ministers opened the way for looser budget policies after the Italian election results. In spite of that, Euro sovereigns are generally stronger this morning. Generally, the market has a “risk on” feel to it, and bonds / MBS are lower.

Acting FHFA Chairman Ed Demarco laid out the plan for dealing with the GSEs. Fannie and Fred would be merged, slowly dissolved and a new entity would take their place. The new entity would be owned and funded by Fan and Fred, but would have its own CEO and Chairman and be in a physically separate location. Left undecided is exactly what role the government will have in the mortgage market. The government seems to be leaning in the direction of focusing on low income / VA products, and acting as a re-insurer.  That said, it is up to Congress to figure out what the the exact role will be. The securitization arm could be nationalized, turned into a utility, or privatized.

The GSEs owe the government something like $120B and it is estimated that it would take another $200 – $250 billion to capitalize them enough so that they could stand on their own.  The government is in a pickle on this one. On one hand, if the government nationalizes Fan and Fred, all of their debt becomes sovereign debt, with the attendant effects on our debt / gdp ratios. On the other hand, there is no way to raise $350B in the private markets. And the chances of getting a $350B appropriation for the GSEs in this Congress is probably too much to ask as well.  Given that the government backs 90% of all new mortgages it is probably safe to say they won’t make any major changes until private financing takes some of the load. 

Ex Fed Chairman Paul Volcker is warning that removing the central bank stimulus will be difficult and the temptation will be to stay too long.  “You can make a mistake and go too quick, but the much more frequent mistake is you go too slow, because its never popular to take the so-called punch bowl away or to weaken the liquor.” Of course after the equity bubble burst, the Fed kept the punch bowl out so long that the real estate market went on a 5 year bender and then wrapped the car around a tree. Almost on cue, Janet Yellen, as the good co-dependent / enabling wife, is out there saying that the “potential costs of asset purchases definitely need to be monitored over time and she did not see any that would cause me to advocate a curtailment.” Meanwhile, the stock market is approaching all-time highs, the VIX is at 14, and S&P 500 earnings have been dropping every quarter since Q212…

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Markets are flattish after 4Q GDP was revised upward, but less than forecast.  4Q GDP has been revised upward to + .1% from -.1%.  Initial Jobless Claims came in at 344k. NAPM Milwaukee came in BTE at 56.5. Bonds and MBS are up on the news. 

The US GDP number was disappointing (the Street was at + .5%) and a drop in defense spending was a big factor.  Don’t forget 3Q GDP came in at + 3.1%, well in excess of the current 1.5% trend.  The government’s fiscal year ends in September, and there is a “use-it-or-lose-it” dynamic that goes on.  In other words, if an agency doesn’t spend their entire budget, it will be cut next year.  So even if they don’t actually need to spend the money, they will. The net effect is that government spending tends to accelerate in Q3 and then fall in Q1. You can see this in Table 1 of the official press release.  Punch line:  Take both 3Q and 4Q GDP numbers with a grain of salt. Of course, there is a battle royale going on between the right and the left about how to frame this whole issue as everyone deals with the sequester, which makes the signal to noise ratio miniscule.

Tidbits from the Bernank’s House Testimony yesterday:  A “significant majority” of the FOMC is supportive of current policy.  The Fed would prefer that US fiscal solutions be less front-loaded. They note some progress in the labor market and haven’t seen any significant problems in market functioning. He also gave some insight into the planned exit strategy:  to let the assets run off and then drain reserves.  He said it is a “reasonable guess” that unemployment will get to 6% by 2016.

It is getting easier to raise money in the housing market. There should be an uptick in IPOs for homebuilders this year as there is still a chasm between ease of financing in the private and public markets.  While yield pigs will jump on bond issues from the recently dead, non-public entities still struggle to get access to construction loans. The homebuilders are pretty rich at the moment, sporting P/Es around 30 or so.

Jack Lew was confirmed as Treasury Secretary.  His job will be the pit bull defending government spending and pushing for tax hikes. How this affects the dollar I have no idea. 

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Markets are flattish this morning on no real news. Italian Sovereign Yields are slightly lower after the sell-off of the last two days.  Mortgage Applications fell 3.8% last week. Durable Orders dropped 5%, which was a disappointment, but most of that looks to be due to Boeing and their battery problem.  Strip out Boeing, and orders were up 6.3%, which is a signal that businesses are starting to spend on CAPEX.  Fed Chairman Bernake will address the House Financial Services Committee today.  Bonds and MBS are rallying. For those that follow technicals, it looks like the 10 year has broken out of its bear trend of the last 4 months. 

The Bernank spoke in front of the Senate Banking Committee yesterday and seemed to tamp down speculation that the Fed intended to end QE any time soon. Remember the December minutes seemed to indicate that there was a consensus forming that purchases of MBS and Treasuries would end sometime this year.  This accounts for the 15 basis point rally we have seen in the 10 year over the past few days. He also urged the government to find a way to kick the sequester can down the road and replace it with more gradual cuts, while at the same time playing down the “fiscal armageddon” predictions.  

Bernake assured the Committee that the Fed was monitoring the unintended consequences of low interest rates and said that the risks of new bubbles were offset by companies using low interest rates to lock in low borrowing costs for a long period. Almost on cue, Bloomberg has a story regarding this exact issue, where the yield pigs are feasting on junk bonds, which “trade like dot coms.” As an aside, Radian (remember them?  the mortgage insurer left for dead in the depths of the crisis?) They just priced a convert deal, 2 1/4s up 25. Its raining money out there..

Jamie Dimon said yesterday that banks are accumulating more capital than regulators require and will not know what to do with it in two years.  “Lend it” is the obvious answer, but if you can lock up long term capital in the bond market for less than your dividend yield, what are you going to do as a CFO?  

The jumbo market is coming back. While still nowhere near pre-crisis levels, jumbo origination is up 60% from last year. While still hard to get, the loans are priced aggressively, at about a 23 basis point spread to conventionals.  A pick up in jumbo activity may well foreshadow the return of the private label market.

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Markets are higher after yesterday’s bloodbath.  Yesterday’s sell-off was blamed on Italian election results which caused a 32 bp sell-off in Italian sovereigns.  They have traded another 50 basis points wider this morning. The Bernank will testify before the Senate Banking Committee today.  Bonds are higher, continuing yesterday’s furious rally. The 10-year has tightened by 13 basis points and is trading at 1.87%.  MBS are flat.

The S&P Case-Schiller index of home prices rose 6.8% YOY and .88% MOM in December. The only MSA with negative growth was New York.  Separately, FHFA reported that prices increased .6% MOM in December. They note that while the foreclosure pipeline is still high, the actual number of homes available for sale is very low and falling. 

Altos has a piece on why inventory is so low. First, they cite low housing starts. From 1957 – 2002, we averaged 1.5 million units a year.  Since the bubble burst, we have been hitting around 700k. Quickly ramping up housing construction is difficult. Second, there is psychological effect of sellers who now see the light at the end of the tunnel.  Prices are rising again, and they are hoping to get out flat. Finally, the government has emphatically sided with home owners over home buyers. They are pulling out all the stops to keep inventory off the market through foreclosure mitigation and refinance opportunities for underwater homeowners.  This has the net effect of restricting supply, which is good for existing homeowners, but not so much for first time homebuyers who want in. The net result:  2013 home price appreciation should be very strong. 

In confirmation of the above, the Despot reported a 13.9% increase in 4Q sales, with comps up 7%. While they attribute some of the growth to Sandy repairs, they mainly cite the improving residential real estate market. 

In a sign that the refi boom may be over, JP Morgan plans on cutting headcount in mortgage banking by 13k – 15k in an effort to cut $3B in expenses by the end of 2014. They see cutting 3,000 – 4,000 jobs in consumer banking this year, almost entirely by attrition.  The hits keep coming….

Bob Corker is saying the ball is in the White House’s court in order to confirm CFPB acting Chairman Richard Cordray.  A January court decision that Obama’s recess appointments to the NLRB were unconstitutional is giving Republicans a chance to press for changes to CFPB in order to bring more of it under Congressional control.  They are arguing for a 5 member bipartisan board, and for the budget to be subject to the normal appropriations process. 

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Markets have a risk on feel this morning on no real news.  Elections are being held in Italy, with Bersani on track to win. Italian sovereign yields have tightened 20 basis points in response. Bonds and MBS are down.

Sequester week. Bob Woodward had a column over the weekend that said, WH protestations aside, that the sequester was Obama and Lew’s idea in the first place. The WH is releasing all sorts of gloom and doom scenarios about what will happen if sequestration happens. Republicans seem to be content to allow the cuts to happen. FWIW, I do not believe the markets care one way or the other about the impending sequester. 

The Chicago Fed National Activity Index showed growth moderated in January, falling to -.32 from a revised +.25 the previous month. Production related indicators explain most of the weakness, although employment and consumption also were negative contributors. The 3 month moving average is still in positive territory, indicating that economic growth continues to be moderately above trend.

The Bernank will be testifying in front of Congress this week. These things tend to be partisan dog-and-pony shows where the questioners are more interested in getting the Fed Chairman to validate their worldview than they are in seeking actual answers.  Democrats will undoubtedly be pushing for Bernake to say that sequestration will be an economic nightmare, while Republicans will be pushing for him to say that spending and the debt pose a problem. Democrats will also be looking for support for raising the minimum wage. Republicans will probably want to drill down a bit on the end of QE. 

The Bipartisan Policy Center has released a report on the future of housing and the GSEs. With the government guaranteeing 90% of all mortgages these days, there is a push in Washington to get the private sector more involved. They envision phasing out Fan and Fred and replacing them with a “public guarantor,” who has a re-insurance role, stepping in only when private insurers are unable to make good on the loan. They also propose that the government get involved with providing affordable rental housing. 

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Markets are flattish on no real news. The Empire State Manufacturing Survey showed improvement in NY State for the first time in months. Bonds and MBS are flat.

Elizabeth Warren is fighting to keep the CFPB from being accountable to Congress. Senate Republicans are pushing to have the Bureau subject to annual appropriations and installing a 5 member board to increase transparency and accountability. Liberals are pushing for a straight up and down vote on Richard Cordray, who was installed through a recess appointment. 

Dr. Cowbell was on Bloomberg TV this morning pushing for the Fed continue ZIRP as long as possible, in order to sustain the US housing recovery.  He blames Japan’s lost decade on premature tightening by the Bank of Japan. He made is usual push for infrastructure spending and said we don’t have a debt problem. Of course the Fed is keeping the bond vigilantes at bay. Can they do so forever? 

Freddie Mac has released their 2013 Economic and Housing Market Outlook. Like Krugman, they note the nascent strength in housing and estimate that it could add .5% to GDP this year.  They see the 30 year fixed rate mortgage at 4% by Q413, with unemployment at 7.5% and housing starts at 1 million. They forecast that originations will fall by 15% this year as refis drop from a 75% share to a 40% share.  

Senate Democrats unveiled a plan to delay the sequester by replacing the non-defense discretionary spending cuts with tax increases and maintaining defense cuts. Of course it has zero chance of going anywhere –  it is more of a demagoguing opportunity for the President and an attempt to give the Heisman to an idea that was his to begin with.  It is increasingly looking like there will not be a deal on the sequester, so it will either (a) happen, (b) get delayed for a year, or (c) happen and then get fixed in the continuing resolution. 

Note:  The MR will be spotty next week as I will be on the Left Coast.

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Markets are weaker this morning in spite of better than expected initial jobless claims and couple of new mergers (Berkshire Hathaway buying Heinz, and US Airways / American Airlines). The Eurozone economy weakened. Bonds and MBS are flat.

In the State of the Union, President Obama referred to “overlapping regulations” and called for streamlining the mortgage process.  The housing industry is hoping that means that the Qualified Residential Mortgage rule (promulgated by the banking regulators) and the Qualified Mortgage Rule (promulgated by CFPB) will become consistent with each other.  The sticking point is that the QRM rule is much more strict than the QM rule (QRM: 20% down, 36% DTI), vs QM (43% DTI). Bankers and consumer groups hope to have the down payment rule removed, and would ultimately like to see the QRM rule to match the QM rule.  It seems that there is some bipartisan consensus on this.

Speaking of the SOTU, Obama’s agenda drew little support from Republicans, who “called it dead in the water.”  John Boehner objected that his plan raises the price of employment and noted that when you increase the cost of something, you get less of it.  Mitch McConnell referred to it as “liberal boilerplate that any Democratic lawmaker could have given at any time in recent memory.”  John Thune noted that Obama would have a hard time getting Democrats to go along with portions of it.  Six Senate Democrats seeking re-election next year in states that supported Mitt Romney are going to be hard pressed to vote fore new tax revenues beyond what has already been approved.  At the end of the day, it will depend on whether Obama chooses to demagogue or deal. On the minimum wage, one Republican said it would have a chance if it was accompanied by a business package of tax credits and expensing rules to help small business.  Paul Ryan noted that Obama chose not to politicize immigration reform, which means that something can be done there.

Sen Tom Coburn, R-OK says the sequestration cuts are going to happen. I still think it is much ado about nothing.  Some facts:

Spending Side:

• Total Sequestration cuts:  $85 billion
• Requested increase in the budget from FY12 – FY13: $75 billion
• Net change in spending: ~ $10B (or about 6 basis points of GDP)

St Louis Fed Head James Bullard gave an upbeat presentation at Arkansas State University, noting that the Euro sovereign debt crisis seems to have calmed down and that some of the uncertainty in the US economy has been dissipating. The most important news came with the Q&A with reporters – he is not ready to call for an end to QE, and would defer any decision-making until this summer to see if the economy continues to improve. 

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