Morning Report: Record home price appreciation

Vital Statistics:

S&P futures4,1856.8
Oil (WTI)62.440.57
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.14%

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are flat.

Home prices rose 0.9% MOM and 12.2% YOY in February, according to the FHFA. “Annual house price growth achieved a new record high in February” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “The 12.2 percent gain represents an increase of $35,000 for a median-priced home that sold a year ago at $290,000 in the Enterprises’ data.” Every geographic division reported double-digit annual gains.

The number of loans in forbearance ticked down to 4.49%, according to the MBA. “After two weeks of large declines, the share of loans in forbearance decreased for the eighth straight week,” said MBA Chief Economist Mike Fratantoni. “New forbearance requests increased, and the rate of exits declined. More than 40 percent of borrowers in forbearance extensions have now exceeded the 12-month mark.”

The Biden Administration is aware of the disruptions caused by the 7% cap on investment and second homes. The Administration has not yet formed an opinion on this, but it is at least aware. Bharat Ramamurti, the Deputy Director of the National Economic Council told the MBA: “We’re looking forward to working across the Administration with Congress to grapple with those issues,” Ramamurti said. “And we recognize that the issues you raised with second homes is a shorter-term issue, and all I can say on that is we are aware of it; we will continue to engage on it; and we are happy to work with you and your members on it going forward, and having a conversation with FHFA about it…we appreciate you flagging it for us and we recognize that.” Not a lot to hang your hat on here, and it certainly doesn’t seem to be any sort of front-burner issue.

The market for homes this Spring is the most competitive in years, with the National Association of Realtors announcing an average of 4.8 bids per property. Buyers are reacting by increasing the number of cash offers on a property, and are making larger down payments.

The April FOMC meeting starts today amid concerns that the economy is overheating. A survey of economists reveals the market anticipates no changes to policy this year. IMO, that is probably the case.

Concerns about an overheating economy are overblown IMO, although the inflation data will be giving off some wonky readings as COVID lockdowns last year distort the historical data. COVID-19 also created all sorts of supply chain issues that created shortages. While those price increases are real, they are also temporary. As they say in the commodity markets (which is the driver here) the cure for high prices is high prices. This means that prices increase, commodity producers like miners, farmers, and loggers increase production to take advantage of it, which increases supply and causes prices to fall.

Morning Report: Housing starts climb

Vital Statistics:


  Last Change
S&P futures 3438 16.6
Oil (WTI) 40.92 0.39
10 year government bond yield   0.78%
30 year fixed rate mortgage   2.87%

Stocks are higher as third quarter earnings are turning out to be better than expected. Bonds and MBS are down.


Homebuilder sentiment reached a record in September, according to the NAHB Housing Market Index. Tight supply plus strong demand has created a perfect environment for the builders. Increasing input costs, especially lumber and labor do remain an issue, however lower rates are allowing them to pass on those added costs.


Housing starts increased 2% MOM and 11% YOY to come in at 1.42 million. Building Permits rose to 1.55 million.


Delinquencies are increasing, according to CoreLogic. In July, 6.6% of all loans were 30 days or more delinquent, which was up by 2.8 percentage points compared to a year ago. The 120 day rate rose to 1.4%, which is the highest in 21 years. Note that these are July numbers, and things have probably improved since then.


Market strategist Jim Bianco thinks inflation may be coming sooner than expected. The COVID-19 crisis has restricted supply of many goods, which is causing shortages, which lead to price hikes. “The Fed is like a post in the ground and the market is like a horse tied to that post,” he said. “When that horse gets spooked by something — call it inflation — it could tear the post right out of the ground and run wherever it wants. It will run, and the Fed might have no choice but to follow it.” FWIW, the Fed would be delighted to see a return of inflation, but the global bond markets are “markets” in name only. Central Bankers are in full control of them and the bond vigilantes will struggle to make a dent given the Fed’s daily purchases of Treasuries. Also, if you sell Treasuries, what do you invest in? Bunds at -61 basis points? Japanese government bonds at 2 basis points? Tesla? FWIW, I do see hints of early 70s inflation, where product sizes are shrinking while maintaining the same price, however inflation is more than just what you see at the supermarket.

Morning Report: Hurricane Florence damage estimates 9/17/18

Vital Statistics:

Last Change
S&P futures 2908.5 -2.9
Eurostoxx index 377.97 0.1
Oil (WTI) 69.63 0.64
10 year government bond yield 3.01%
30 year fixed rate mortgage 4.68%

Stocks are flat on no real news. Bonds and MBS are down.

We should have a quiet week ahead with not much in the way of economic data and no Fed-speak. Bonds have been selling off ahead of the FOMC meeting next week. The Fed Funds futures continue to bump up the chance of a December hike, with the odds now over 80%.

While not market moving, we will get some housing data with builder sentiment tomorrow, housing starts on Wednesday, and existing home sales on Thursday.

Chinese stocks are trading at a 4 year low, partially driven by threats of a trade war. Declining stock markets typically put pressure on real estate prices (asset classes generally correlate on the downside), and China has a bubble on its hands. This has the potential to spill over to the US, at least in the higher priced West Coast markets, which should see an exit of Chinese speculative money. Separately, China is considering declining further trade talks.

Trade talks should continue on NAFTA this week. The biggest effect of NAFTA talks will be on housing costs, particularly lumber prices. Base metals have been weak on trade issues, which should dampen the inflation indices a bit.

Hurricane Florence didn’t pack the punch that people expected, but the flooding has been probably worse. CoreLogic estimates that the insured flood costs will be between 3 and 5 billion. For servicers, this will suck up some cash, as delinquencies will invariably spike and we will be heading into the holiday forbearance period just as these loans go 90 days down. Nonbank servicers should expect to see a spike in advance activity to go along with the normal seasonal spike.

Manufacturing growth moderated in September, according to the Empire State Manufacturing Survey. New Orders and employment were pretty much the same. lists the top 10 suburbs in the US. Most are pretty pricey with respect to incomes, with median price / median income ratios ranging from 3.5x to 7.4x. To put that number in perspective, up until the late 90s, the median home price to median income ratio averaged about 3.2 – 3.6. It peaked at 4.8 in 2006. While median home price to median income ratios are an imperfect measure (since they ignore the effects of interest rates on affordability) they are still a relevant measure of how overpriced an area can be.

Retailers are struggling to hire temps heading into the holiday season. Some decided to start hiring this summer in order to beat the expected shortages, while others are offering higher pay and vacation time. Is the just-in-time employment model about to exhibit its weakness?

Goldman is forecasting growth to slow to 2.6% in 2019 and 1.6% in 2020. Many are now calling for a recession in 2020. The catalyst will be higher interest rates and end of the Trump tax cut “sugar high.” Perhaps the big investment in inventory build we are currently seeing will be the catalyst. Regardless, we don’t seem to have any asset bubbles in the US so we probably aren’t going to be looking at any sort of credit crunch. Overseas, there are issues (Canada, Scandinavia, Australia, China).

Morning Report; Despite strong data, more people are worried about their jobs 8/9/18

Vital Statistics:

Last Change
S&P futures 2859 3.5
Eurostoxx index 389.41 -0.28
Oil (WTI) 67.29 0.35
10 Year Government Bond Yield 2.94%
30 Year fixed rate mortgage 4.58%

Stocks are higher this morning on decent earnings. Bonds and MBS are up.

Very slow news day.

Initial Jobless Claims fell to 213,000 last week, an exceptionally low level. The 4 week average is sitting at 45 year lows.

Inflation at the wholesale level was surprisingly weak in the first of two inflation readings this week. The Producer Price Index was flat MOM and rose 3.3% YOY. Ex-food and energy, it rose 0.1% MOM / 2.7% YOY. Tariffs explain some of it, but freight and packaging costs pushing prices higher too.

Freddie Mac has extended mortgage forbearance measures due to the wildfires in California. Borrowers in FEMA-declared disaster areas may be allowed to suspend mortgage payments without penalty for up to a year. Fannie Mae is expected to do something similar.

Fannie Mae’s Home Purchase Sentiment Index fell in July for the second consecutive month as inventory and affordability issues weighed on homebuyer moods. The net number of respondents who think it is a good time to buy fell by 4 percentage points and the number who think it is a good time to sell fell by 6. Most respondents think mortgage rates and home prices will rise over the next year. One interesting data point: a big jump in the number of people who are worried about their job. The net number of people (% who are concerned less the % who are not concerned) fell by 11 percentage points. This certainly flies in the face of the data out there, and sentiment surveys are usually not very predictive, but it is a surprise.

Morning Report: LEI shows strong growth ahead 7/19/18

Vital Statistics:

Last Change
S&P futures 2808 -8.25
Eurostoxx index 386.86 -18
Oil (WTI) 68.23 -0.53
10 Year Government Bond Yield 2.87%
30 Year fixed rate mortgage 4.51%

Stocks are lower as earnings continue to come in. Bonds and MBS are down.

Initial Jobless Claims fell to 207,000 last week, which is the lowest level since 1969. Despite the tightness of the labor market, wage growth is tough to come by.

I have discussed at length the disconnect between the Northeast and the rest of the country when it comes to the real estate market. It turns out that not only does the real estate market lag, so does mortgage banking. Last year was a rough year for mortgage banking, and the typical profit per loan was about 31 basis points. That varied by region, with the Midwest in the lead at 39 basis points while the Northeast lagged at 8.

The Fed’s Beige Book characterized the economy as strong, and said that labor shortages are beginning to impede growth. Engineers, skilled construction workers, truck drivers, and IT professionals are in short supply. So far increasing input prices are not translating into higher inflation – corporate margins are taking the hit. Residential housing continues to improve ever so slowly, and commercial real estate is flat. Overall, the picture points to a strong economy, with room to run. The lack of pricing pressures gives the Fed the leeway to go slow as they get off the zero bound.

The Conference Board echoed this assessment, with the Index of Leading Economic Indicators increasing 0.5% in June. The LEI is still rising faster than the CEI (basically the future indicators are showing that growth should accelerate) which means we have no sign of a slowdown.

Kathy Kraninger, the Administration’s nominee to run the CFPB, will appear before the Senate Banking Committee today. Little is known about her views on financial regulation. Congressional aides have said that she will have enough support to pass the Committee on a party-line vote. In her prepared remarks, she said she will continue Mick Mulvaney’s work of balancing the need for consumer protection with the need to treat the financial sector fairly. Suffice it to say, having come from OBM, she doesn’t really fit the type of bureaucrat who would normally be tapped to run the CFPB, and that may be the point. If her nomination bogs down, Mick Mulvaney can continue to run the agency.

Interesting stat: 70% of the Millennials who own a home have buyer’s remorse. Many used their retirement savings to fund the down payment, which is generally a bad move. Many first time home buyers completely underestimate closing costs as well. Others underestimated the costs of upkeep, which is around $16,000 a year. I suspect many of these lessons are learned by every generation who buys their first home.

The CoreLogic Mortgage Fraud Risk Index rose 12% in the second quarter compared to a year ago. An increase in borrowers taking on loans for multiple properties (i.e more professional investors) appeared to drive the increase.

Morning Report: Empire State outlook dims 7/16/18

Vital Statistics:

Last Change
S&P futures 2802 -1
Eurostoxx index 383.92 -1.14
Oil (WTI) 69.81 -1.2
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.50%

Markets are flattish as earnings season gets into full swing. Bonds and MBS are flat.

Oil is dropping after US Treasury Secretary Steve Mnuchin said the US could waive some Iranian oil sanctions.

Bank of America reported decent earnings this morning. This is a big week for earnings, with about 200 major companies reporting. The early part of reporting season is generally dominated by the banks.

Jerome Powell will testify in front of Congress on Tuesday and Wednesday. Generally these events don’t yield much in the way of useful info – they are mainly for the benefit of politicians who want to draw attention to some issue that may or may not relate to monetary policy. Expect a lot of questions regarding how a trade war and income inequality will affect growth from Democrats, and expect a lot of questions regarding regulation from Republicans. The prepared remarks are here.

Retail Sales rose 0.5% in June, which was in line with expectations. Ex-autos and gas they rose 0.3% while the control group was flat. May numbers were revised upward. The control group was below expectations, but with the May revisions offset that. Discretionary items (clothing, sporting goods, department stores) declined, which building materials and furnishings rose.

Business Inventories rose 0.4% in May. The inventory-to-sales ratio is down to 1.34 from 1.39 last year.

Business activity in New York State exhibited continued strength in June, according to the New York Fed’s Empire State Manufacturing Survey. While the current conditions index exhibited strength, the outlook has slipped. The survey doesn’t say whether this is being driven by a potential trade war or something else. Planned capital expenditures (a proxy for expansion plans) decreased.

The Atlanta Fed took up their Q2 GDP estimate to 3.9%. Morgan Stanley warns that we are seeing a bit of a sugar rush in the economy courtesy of trade tensions. As companies worry about a potential trade war, they stockpile raw materials and other inputs. This gooses the inventory numbers which makes the current quarter look particularly strong. The problem is that you get a double whammy if the trade war materializes. Activity will drop, and that inventory will be liquidated, both of which will reduce GDP growth. Even if a trade war doesn’t happen, uncertainty could cause companies to pull in their horns. FWIW, I am skeptical of the “uncertainty” argument. Regulatory “uncertainty” out of DC generally causes companies to be cautious. The rest of the clatter is just noise. Certainly investors (judging by the S&P 500) aren’t worried.

One stat to watch: Corporate bond spreads. We are seeing a slight widening in some of the junkier investment grade debt. Baa spreads increased to 200 basis points from 165 in February. While spreads are still tight relative to historic levels, this is something to watch. Years of financial repression have given issuers the upper hand with regards to covenants and some of those chickens will come home to roost in the next recession.

Morning Report: Jamie Dimon discusses the state of affairs 4/5/18

Vital Statistics:

Last Change
S&P futures 2660 13.5
Eurostoxx index 373.93 6.6
Oil (WTI) 63.22 -0.16
10 Year Government Bond Yield 2.81%
30 Year fixed rate mortgage 4.41%

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

Initial Jobless Claims increased to 242k last week. Job cuts also jumped to 60k from 30k according to outplacement firm Challenger, Gray and Christmas. Retailers (probably Toys R Us) drove the increase. This is the biggest jump in 2 years.

JP Morgan CEO Jamie Dimon discusses the state of the economy in his annual letter to shareholders. He argues with normal growth and inflation around 2% (the current state of affairs) historically, we would expect to see short-term rates around 2.5% and the 10 year trading around 4%. He argues that QE (both here and abroad) is what is suppressing the 10 year yield. That will reverse for the Fed this year, and in the near future overseas. There will be some countervailing forces at work, but we are in such uncharted territory that no one knows how it will turn out. Dimon then starts discussing the surprise 1979 rate hike (100 basis points on a Saturday!) and talks about how the Fed Funds rate then opened 200 bps higher that Monday. Just for the record, I want to put this chart out there – interest rate cycles are long. We are probably a generation (or two) from that sort of situation again, at least if historical observations are any guide.

100 years of interest rates

Dimon makes another point in his letter about the state of the financial system. On one hand, it is much more stable and well-capitalized. Money market funds have higher restrictions, and there is much less leverage in the system overall. That said, post-crisis policy has removed the counter-cyclical levers in the financial system. First of all, the Volcker rule has meant less market-making. Investors have noted that it is much harder to trade securities, especially the less liquid ones. In a downturn, expect to see many securities go no-bid. In other words, investors will be stuck riding something down. Second, the newer bright lines means that banks will not be able to use their reserves to step in and lend. In Reminiscences of a Stock Operator, there was a credit crunch and banks were fully lent out to the reserve point. J.P. Morgan exhorts the banks to use their reserves. That is what they are for! And finally, in a swipe at the Obama Administration, the big banks are not going to agree to buy out the failing ones. JP Morgan bought Bear at the height of the crisis, as a favor to the Bush Administration. The Obama Admin then slammed them with fines for all of Bear’s sins.

We aren’t going to see much in the way of inflation without wage growth, and at least one economist (Noah Smith) is arguing that we aren’t seeing any because employers have too much market power. He also argues that minimum wage laws are not job killers, at least in the aggregate, despite what Econ 101 would say. His argument is that if employers do have market power, then they are earning a higher return than they would otherwise accept on their workforce. In other words, you could force them to hike wages, and they still will make enough that it won’t make sense to fire people. He then cites the usual Rx for increasing wages: higher minimum wage laws and more unions. The question is then where employers have market power. Perhaps in one-company towns that could be the case. But en masse? Possible, but not probable.

The trade deficit increased again in February, giving ammo to those who agitate for a trade war. A trade war could have an effect on interest rates. Right now, China sends us ships of stuff (phones, plastic goods, all sorts of things). In return (they aren’t giving it away), they have to take something. Right now, they largely take things like agricultural products. We would prefer it if they bought even more stuff. Since they aren’t, the get US dollars instead, which they then invest in Treasuries and other US assets. If trade decreases with China, they will theoretically buy less Treasuries, and that would mean higher interest rates, at least at the margin. To put this in perspective, the trade deficit with China in February was $29 billion. During QE, the Fed was buying $45 billion in Treasuries and MBS a month. So that isn’t chump change.

It is important to understand that we are in a negotiation phase with China, that many of these things are just proposals. Historically, these things get solved by a meaningless pledge that allows the US to claim victory, but doesn’t really make that much of a difference. As China gets richer, it will undoubtedly purchase more US goods and services. However, the savings rate is sky-high there – which means that consumption is low. They are in building mode.

Ginnie Mae has noted the abuses in VA IRRRLs and is taking action against some lenders. New Day and Nations Lending are no longer eligible to issue securities into multi-issuer pools. They will only be able to issue spec pools, which will trade at a discount.

Morning Report: Here comes Irma 9/6/17

Vital Statistics:

Last Change
S&P Futures 2465.0 5.3
Eurostoxx Index 374.0 0.3
Oil (WTI) 49.2 0.6
US dollar index 85.3 0.0
10 Year Govt Bond Yield 2.07%
Current Coupon Fannie Mae TBA 103.33
Current Coupon Ginnie Mae TBA 104.21
30 Year Fixed Rate Mortgage 3.8

Stocks are up this morning on no real news. Bonds and MBS are up on dovish Fed-speak yesterday.

We had two doves speaking yesterday (Lael Brainard and Neel Kashkari). Brainard suggested that the Fed had more work to do on getting inflation up to its target level, while Kashkari mused that the Fed’s rate hikes may have damaged the economy. Congress will try and get tax reform done this year, however that is probably a long shot. Absent tax reform, it is hard to see how rates don’t gradually drift lower to pre-election levels. Growth is better than 2016, but not that much better.

The ISM Non-manufacturing index (a survey of the services industry) rose in August to 55.3. Business Activity, new orders, and employment drove the increase. We are seeing some positive comments in the construction sector as well.

Mortgage Applications rose 3.3% last week as purchases rose 1% and refis rose 5%. Yesterday, bond yields touched a 2017 low and are back at levels immediately after the election. The 30 year fixed rate mortgage went out yesterday at 3.8%.

Hurricane Irma is expected to hit Florida this weekend and could be a bigger storm than Hurricane Katrina. Between Harvey and Irma (and Jose who is a few days behind Irma) FEMA will run out of money. Irma is going to be much more dangerous than Harvey, which was largely a slow-moving flood event. Expect a quick resolution to the debt ceiling. Nobody is going to be grandstanding over the national debt with this going on.

US economic confidence increased in August, according to Gallup. We are starting to see a small divergence between current conditions and future conditions. For most of these confidence indices, we have been seeing higher future confidence than current confidence. In the Gallup index, future confidence is lower. Not sure if this is a one-off, or the current sturm and drang in Washington DC is beginning to have an effect. Business and consumers have generally been ignoring politics.

Confidence will probably take a hit over the next month as Harvey increases gasoline prices. Hurricane Irma is expected to hit other commodity markets like sugar, orange juice, and natural gas. The consumer confidence indices are generally inversely correlated with the energy indices – in other word, prices and the pump increase and consumer confidence falls.

The commercial mortgage backed securities market is having a good month, with $16 billion in the pipeline for September. The new Dodd-Frank risk retention rules kicked in at the end of last year and issuers are becoming more comfortable with them. Hopefully this will translate into more residential MBS issuance. The private label MBS market remains dormant.

Morning Report: Irrational exuberance in the bond market? 8/1/17

Vital Statistics:

Last Change
S&P Futures 2475.5 7.5
Eurostoxx Index 380.1 2.2
Oil (WTI) 49.9 -0.3
US dollar index 85.9 0.1
10 Year Govt Bond Yield 2.32%
Current Coupon Fannie Mae TBA 102.93
Current Coupon Ginnie Mae TBA 103.81
30 Year Fixed Rate Mortgage 3.95

Stocks are higher this morning on overseas strength. Bonds and MBS are down a touch.

Personal income was flat in June, as a drop in interest / dividend income offset an increase in compensation. Inflation remains nowhere to be found as the PCE price index (the Fed’s preferred measure of inflation) was flat MOM and up 1.4% YOY. Ex-food and energy, the numbers ticked up 0.1%.

Home prices rose 1.1% in June and are up 6.7% YOY, according to the CoreLogic Home Price Index. Want to know how tight inventory is? Unsold inventory as a percentage of households stands at 1.9%, which is the lowest in 30 years.

Manufacturing strengthened slightly in June, according to the ISM and PMI manufacturing indices. Construction spending fell 1.3% in June as public construction spending fell. Residential construction was down 0.3% MOM, but is up 9% YOY.

Remember “irrational exhuberance?” That was Alan Greenspan’s warning to investors that there was a stock market bubble. Unfortunately for him, he issued the warning on 12/5/96, about 39 months before the stock market actually peaked. Well, he is back, warning of a bond market bubble. He is warning of an abrupt pop in the bond market, and a return to 1970s stagflation. Color me somewhat skeptical of the abrupt pop in the bond market argument. Below is a chart of interest rates going back to World War 1. As you can see, interest rate cycles are long. Aside from the disastrous Fed hike after the crash of 1929, rates stayed below 4% from 1924 to 1959.

100 years of interest rates

FWIW, the 1970s stagflation was largely due to the oil shocks combined with the guns and butter policies of the Johnson administration coming home to roost. The 1970s came after decades of economic strength, while today we are coming out of a decade of economic weakness. Housing starts averaged 1.75 million units per year for the entire 1970s. Since 2010, we have averaged about half that. During the 1970s, capacity utilization was running close to 83%. Since 2010, it has been 76%. Wage growth is stuck stubbornly at 2.5% growth, and there is still slack in the labor market. I just don’t see the conditions in place for a return to 1970s stagflation.

Financial regulators are working on a rewrite of the Volcker rule, which prohibits FDIC insured banks from proprietary trading. No one is sure what is actually being proposed – it may turn out that the re-write will merely provide some bright lines to separate prop trading from market-making. Between a drop in commissions and cloudy guidance over prop trading, market making has dried up, and liquidity is suffering in many markets as a result. Any changes will have to pass muster with a panoply of regulatory agencies, so this is going to take some time.

Morning Report: Terrible jobs report 10/2/15

Stocks are lower after the jobs report disappointed. Bonds and MBS are up big

Jobs report data dump:

  • Change in nonfarm payrolls +142k vs. +201k expected
  • Two month revision -59k
  • Unemployment rate 5.1% (in line with expectations)
  • Average Hourly earnings 0% month over month +2.2% YOY
  • Labor force participation rate falls to 62.4%

Very disappointing jobs report. No wage growth, and the labor force participation rate has fallen all the way back to Oct 1977 levels, which was the time when Reggie Jackson earned his nickname Mr October.

Stock index futures reversed a strong rally on the news. The 10 year bond yield dropped 12 basis points as well. It certainly looks like the decision to stand pat in September was the right one. For all the Fed’s discussion of October being a “live” FOMC meeting, consider it dead.

In other economic news, factory orders fell 1.7% in August and the ISM New York index fell to 44.5 from 51.1.

Yesterday, the House Financial Services Committee passed a bill to bring a bit of accountability and control to the CFPB. The director will be replaced with a 5 member commission, and there will be an inspector general. The CFPB is currently under the Fed, and gets its funding there. Congress has no say over their operations. This was intentional, to prevent a more conservative Congress from de-fanging the agency.

Finally, it looks like Hurricane Joaquin is going to miss the East Coast.

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