Morning Report - Risk off?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1540.5	-13.1	-0.84%
Eurostoxx Index	2682.2	-43.6	-1.60%
Oil (WTI)	92.52	-0.9	-1.00%
LIBOR	0.28	0.000	0.00%
US Dollar Index (DXY)	82.68	0.419	0.51%
10 Year Govt Bond Yield	1.94%	-0.05%
RPX Composite Real Estate Index	192.8	-0.8

Markets are sharply lower this morning on the news of Cyprus's banking crisis. The fear is that financial contagion could spread the to other sovereigns who have been given a bit of a reprieve from the bond vigilantes. You are seeing a bit of a widening in the PIIGS this morning, but nothing dramatic. Needless to say, the 10 year is benefiting from the flight to quality trade and is trading comfortably below 2%.  MBS are up as well.

This week will have some important economic data points, with Housing starts to be released tomorrow. The Street is at 915k. The FOMC meeting starts Tuesday, with the decision to be announced Wed afternoon. Notwithstanding the Cyprus situation, investors will be looking for clues as to when the Fed ends QE. With the Fed dominating the MBS and Treasury markets, "me-too" traders may find the exit much more narrower than they imagined. The FHFA House Price Index comes out on Thursday, along with existing home sales and leading economic indicators.

This month's CoreLogic Market Pulse discusses the mortgage market in transition, as we move from a market dominated by serial refinances to one driven more by purchase activity. Assuming that the Cyprus situation doesn't trigger another Euro crisis, we can probably say we have seen the bottom of interest rates for this cycle (and maybe for a generation or two).  The good news is that purchase activity will be replacing refi activity; the bad news is that it will take longer to ramp up than refis, which can turn on a dime.

The key to the return of the purchase market is the first-time homebuyer, who has been dormant since 2007.  Household formation has been depressed since the crisis began and is only now beginning to turn around. Unfortunately, it looks like most of these people are becoming renters. Unless you qualify for a FHA mortgage, it is very difficult to get financing these days without a sizeable down payment. Institutional investors have picked up some of the slack, with their market share purchases increasing to 27% from 16% two years ago in places like Phoenix. These properties are most likely going to rentals. Institutional investors like Blackrock have raised billions for this activity since real estate bottomed over a year ago. I suspect they are going to find that the activity less profitable than they modeled and this demand will turn to supply as they ring the register on some of these properties.

Relative to incomes, real estate is the cheapest since the 1970s and the late 90s.  RTWT.  Lots of good stuff in this issue.

Over the past few months, the back up in rates has been quite dramatic, with the 10-year going from 1.6% to over 2%. How has this affected mortgage rates?  It turns out that MBS / Treasury spreads have stayed relatively consistent since last November. Note: These are the yields on the mortgage backed securities, not borrowing rates.