All Things in Moderation

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

Earnings season kicks off tonight in the traditional way with Alcoa. This week will be dominated by bank earnings, however we will hear from Lennar and KB Home. Analysts will be focused most on how the slide in oil prices has affected housing markets in Texas. It is probably too early to get a read on the Spring Selling Season, but they may have some anecdotal data. Certainly the precipitous drop in interest rates is a gift that no one expected.

In economic data this week, we have the JOLTs job openings data as well as industrial production. Nothing should be market-moving.

Last week’s FHA announcement caused Ginnie Mae TBAs to underperform Fannie Mae TBAs. At the margin, this means that FHA / VA loans will be somewhat more expensive relative to Fannie Mae loans. The new MI pricing sent fears into the MBS markets that prepayment speeds will pick up. So, for FHA loans the MI may be cheaper, but the rate went up. So it is probably all a wash.

Consumers are still somewhat cautious, according to Fannie Mae in the latest National Housing Survey. While they are tempering their outlook for further home price appreciation, the number of people who believe the economy is on the right track increased 5 percentage points, a big move. Perceptions of credit availability improved, with 52% of respondents believing a mortgage is easy to get versus 44% who believe it would be hard to get. The spread is the biggest in the survey’s history.

Delinquencies ticked up to 6.08% in November, according to the Black Knight Financial Services Mortgage Monitor. That spike could have been caused by technical factors however and might not mean much. The judicial states continue to lead the delinquency league tables. Foreclosure starts fell, however to 73,900, a 35% drop from last year.

Markets are lower after the jobs report. Bonds and MBS are up.

Jobs report data dump:

• Payrolls up 252k (240k expected)
• Two month revision +50k
• Unemployment rate 5.6% (5.7% expected)
• Labor force participation rate 62.7% (back at the lows)
• Average Hourly Earnings -.2% month-over-month (+ .2% expected)

Credit is getting easier in the mortgage market: The mortgage credit availability index ticked up in December

Markets are higher this morning on optimism about further QE in Europe. Bonds and MBS are down.

Initial Jobless Claims came in at 294k, slightly higher than expected, but below the 300k rate. Challenger Job Cuts increased 6.6%, and the Bloomberg Consumer Comfort Index rose to 43.6.

Freddie Mac announced the US 30 year mortgage is at 3.73%, the lowest since May of 2013. Remind me again of why the Fed bought $4 trillion in Treasuries and MBS…

President Obama announced that FHA is lowering fees. The fee for a FHA loan will drop from 1.35% to .85%. Prior to the crisis, the fee was .55%. The hope is that this will jump-start the housing market and entice the first time homebuyer to return. Certainly the value proposition between buying and renting is highly favorable and rents are increasing. Secondly, he will take aim at lender overlays and direct FHA to cut red tape and provide more clarity to lenders. He will give a speech today in Phoenix, and is supposed to address this initiative further.

The FOMC minutes were taken as slightly dovish by the markets. They mentioned Q3 GDP being large, but attributed it to higher than expected government spending which is unlikely to be repeated. They also didn’t address unwinding their book of MBS and Treasuries, which was mentioned at the June FOMC meeting. The Street is still thinking that rates will start going up at the June meeting, however it seems like the forecast for the rate of increases may be slowing – in other words instead of raising the Fed Funds rate 25 bps at each meeting, raising it 25 bps at every other meeting.

Chicago FRB President Charles Evans (a dove) said yesterday that inflation might not hit the Fed’s target until 2018, and that we should probably not increase the Fed Funds rate until 2016. Certainly falling energy prices gives the Fed more room to maneuver. Certainly the Fed is cognizant of 1937, where they increased reserve requirements (a form of tightening) and sent the economy into a tailspin. This was the “recession in the Depression” where the Dow Jones Industrial Average got cut in half over the course of a year. Incidentally, this was also where the “smart money” got carried out. The smart money was short in 1929, but long in 1937. Bernanke was a student of history and is a Great Depression expert. Janet Yellen is very similar to Bernanke, and it seems is willing to risk higher inflation in order to take a 1937 off the table.

Negative equity fell by $10.2 billion, or 10.3% in the third quarter, according to CoreLogic. 19% of residential mortgages have less than 20% equity, and 2.6% of mortgages have less than 5% equity. Negative equity has been a drag on economic growth in a number of ways – first, it dampens consumer spending, but more importantly, it creates friction in the system, making it difficult for people to leave areas where there are few opportunities and go to where there are more opportunities. Think of unemployed auto workers in the Rust Belt who would gladly take jobs in the energy patch if they could sell their home in Ohio and move to North Dakota.

Markets are higher this morning as world equity markets recover and global bond markets take a breather. Bonds and MBS are down

Mortgage Applications rose 11.1% last week, with purchases rising 4.5% and refis increasing 16%. The refi index is bouncing back from a highly depressed Christmas week level, so don’t break out the champagne quite yet. That said, the last time rates were around here, home prices were a lot lower. Cash out refis to pay down credit card debt and HELOCs will be attractive to many borrowers.

Was yesterday’s intraday low of 1.88% on the 10 year a capitulation low? Not sure yet. Remember, the action is being driven by European economic weakness and the prospect of more QE at the ECB. We are just being taken along for the ride. Which means that this gift may be fleeting.

From the recent ISM and factory order data, it looks like things slowed down a bit in December. Do not look for another 5% print on Q4 GDP – most strategists are looking at a growth rate in the mid 2s.

The ADP employment survey reports that 241k jobs were created in December, more or less in line with the Street expectations for Friday’s payroll number. I am hearing anecdotally that the normal seasonal (post-holiday) layoffs are not happening this year as employers hold on to people in anticipation of growth. Remember, the number to watch on Friday is average weekly earnings – that is the most important number.

CoreLogic is forecasting home sales will increase 9% in 2015, housing starts will increase 14% and home price appreciation will moderate…The big story? Employment growth in the Millennial age cohort, which will herald the return of the first time homebuyer.

Markets are lower this morning as oil and the euro continue to slide. Bonds and MBS are up.

The NY ISM came in at 70.8, a very strong number. We are also getting December vehicle sales this morning, and the generally look strong.

This promises to be an eventful week, with the FOMC minutes on Wednesday and the jobs report on Friday. It will be interesting to see how the Fed viewed 3Q GDP at 5% – is this a temporary blip, or the beginning of a more robust recovery. Note the Fed did not change its 2015 GDP estimate, which is still in the range of 2.6% to 3.0%. I would be interested to see their internal forecast for the price of oil, but that won’t be released.

The other focus will be on the Fed’s MBS portfolio: If I were the Fed, I would be very reluctant to continue to purchase MBS at these levels. While QE is officially done, the Fed is still re-investing funds from maturing MBS back into the market. With prepayment speeds picking up, it seems like the Fed has a golden opportunity to shrink its balance sheet with a minimum of disruption to the capital markets.

Chart: Federal Reserve Bank Total Assets 2006 – Present:

While the drop in oil is a good thing for the US, it does pose some risks to the financial system, as emerging market distressed debt continues to get smoked. The banking system is much better capitalized now than it was in 2008 or even the late 90s, when the Asian Tiger crisis threw the markets for a loop. This is already pushing down interest rates worldwide (the flight to quality), so keep in mind the push-pull dynamic happening with US rates – in an economic vacuum, US rates would be much higher due to the recovery, but international worries and relative value trades are pulling them lower. One possible dark cloud – during the Asian Tiger Crisis, the Fed cut rates help ease the pain in the financial system. They don’t have that option this time.

Markets are lower this morning on overseas weakness. Bonds and MBS are up.

House prices rose .76% month-over-month in October (up 4.5%) year-over-year according to Case-Shiller. Prices are back to their Autumn 2004 levels.

Americans spent about 5% more on rent last year, driven by a 2% increase in the number of renters and a 3% increase in prices. Zillow is predicting that rents will increase by 3.5% next year, while housing prices will increase by 2.5%. Note that the homeownership rate fell to 64.4% in Q3, the lowest since the mid 1990s. Is this number simply a return to normalcy, or are we going to see the homeownership rate increase? Certainly, policy makes a difference, and the government is back in the business of encouraging home ownership. So don’t be surprised to start hearing talk about another secular uptrend in housing…