All Things in Moderation

Vital Statistics:

Markets are slightly higher as we await the FOMC meeting on Wed. Overseas, Spain sold 3.04 billion euros worth of bills, higher than its 3 billion target. Euro sovereign yields are lower across the board, while US Treasury yields are flattish. MBS are flat. As we head into the end of the quarter, we will start to hear from companies who are going to miss earnings estimates.

Housing starts came in at a seasonally adjusted annual rate of 708k. This was below April, but was 29% over May 2011’s rate. Building Permits, which is a leading indicator for starts came in at 780k. Overall, it shows the housing market is on the mend, although new construction activity is focusing more on multi-family as opposed to single units. Housing’s contribution to GDP growth is back to slightly positive, and it is still well, well below historical averages.

Interestingly, the average housing start number for the past 10 years has been a 1.3 million annual rate.  The average annual rate from 1959 – mid 2002 was around 1.5 million / year. Pre-crisis, housing formation numbers had been running at around 1.2 million / year. This certainly helps explain the nascent demand in multi-fam construction as those people have to live somewhere, but it also suggests that a lot of the overbuilding from the bubble has been worked off.

Chart:  Housing starts 1959-Present

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Vital Statistics:

Markets are weaker this morning on a rise in Spanish bond yields, which are 34 basis points higher to 7.22%.  Over the weekend, the pro-bailout parties won in Greece, and their bond yields are a percentage point lower. US bonds are up half a point, and MBS are up slightly as well. 

Lots of economic data this week regarding housing, with NAHB today, Housing Starts tomorrow, the FOMC on Wed, and existing home sales on Friday. The NAHB index came in at 29, the highest level since May of 2007, as low rates and low prices are creating demand for home builders.  Regionally, the West and the Midwest gained, while the Northeast and the South declined.

Home equity in Q1 rose to $6.7 trillion, the highest level since 2008 as borrowers refi their mortgages and often bring cash to the table to pay down principal. In addition, many borrowers are shortening the terms of their loans. This shows part of the problem with the economy right now, as consumers save (by paying down debt). This will be good for the economy long-term, although it is a headwind now.

In another positive data point for the housing market, we have a bidding war for Rescap, GMAC’s bankrupt housing unit between Fortress and Warren Buffet. For Buffet, there a synergies between Berkadia’s servicing operations, and its Clayton manufactured housing unit. 

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Vital Statistics:

Markets are slightly better on speculation of further stimulus measures out of the world’s central banks. We are seeing a tightening across the board with Euro sovereigns, particularly Greece. The US 10-year is yield is lower as well, with MBS up a few ticks. Today is Triple Witching, with the expiration of options and futures. 

The Empire State Manufacturing Survey came in well below expectations, and dropped precipitously from May’s number based on a steep drop in shipments. Overall, the report suggests that business activity is still expanding (slightly) but optimism is waning. Separately, capacity utilization fell from 79.2% to 79% and industrial production fell .1%. 

Harvard’s Joint Center for Housing Studies released their State of the Nation’s Housing Market Survey yesterday. Punch line: The housing market appears to have turned the corner, however further economic weakness could stall it again. They note that housing construction is finally a positive contributor to GDP.  They also include a chart showing that the relative attractiveness of owning vs renting is as high as it has been since the early 70’s:

As if we didn’t have enough to worry about on the horizon, an ex-Soros advisor warns us about Japan, where he envisions a Japanese government bond default by 2017. The IMF is forecasting the Japanese debt to GDP ratio will increase to 245% by 2014. “The yen and the JGB market are in a bubble,” Fujimaki said. “With the gigantic debt Japan has accumulated, a thin needle, or even a gentle breeze may pop this. Events in Europe can possibly trigger this to blow up.”  While some people bemoan that we are potentially following the European track, Japan is the final stop on the track they propose.

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Vital Statistics:

Markets are weaker after Moody’s downgraded Spain to one notch over junk and initial jobless claims came in higher than expected. The chart suggests that the trend in initial jobless claims may be changing. The CPI remained muted. Bonds and MBS are slightly lower.

FHFA released its annual report to Congress on the state of the GSEs. The average 2011 mortgage in their portfolio is very high quality – Average LTV < 70%, Average FICO in the mid 70s. The worst stuff (the no-doc and IO loans are finally gone).  FHFA characterizes the GSEs as “stabilized” but not “sound.”  Fannie and Fred guarantee roughly $100 billion per month and account for 75% of every mortgage originated in 2011. They owe Treasury $187.5 billion.

The NAHB has listed 80 metro areas in their Improving Market Index for June. To be included in the index, the are must have shown improvements in housing permits, employment, and house prices for at least six consecutive months. This is a drop from May where 100 areas were in the index. Map.

The consensus seems to be that Jamie Dimon did well yesterday, by showing contrition where necessary, yet pushing back when he had to as well. The business press seems to believe the Senators went too easy on Dimon. 

In keeping with the “where is the inventory” thread I have been discussing the past few days, here is another: Private Equity has raised more than $6 billion to buy and rent foreclosed homes, yet have only deployed about $2 billion of it. Analysts are concerned that political pressure out of Washington is delaying the bulk sales. Maybe someone in Washington wants to goose the housing indices a little bit. He may end up being too clever by half – when the ducks are quacking, you gotta feed them or they go away…

Chart:  Initial Jobless Claims:

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