Morning Report - Homebuilder Earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1581.3	7.2	0.46%
Eurostoxx Index	2708.5	6.4	0.24%
Oil (WTI)	91.74	0.3	0.34%
LIBOR	0.276	0.000	0.00%
US Dollar Index (DXY)	82.47	-0.583	-0.70%
10 Year Govt Bond Yield	1.72%	0.01%
Current Coupon Ginnie Mae TBA	106	-0.1
Current Coupon Fannie Mae TBA	104.2	-0.1
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.47

Markets are higher after earnings continue to look decent. Initial Jobless Claims fell, although the data tends to be volatile this time of year. Bonds and MBS are down

Yesterday, the House Financial Services Committee held a hearing on the private label securitization market. Generally speaking the theme centered around regulatory certainty, and that until QRM issues get resolved, the private label market will still be a trickle. Everyone agreed that Fannie and Fred will remain doing what they do for quite some time. Interestingly, Ranking Member Maxine Waters expressed concern about the effects principal mods will have on investors - I wonder if CALPERs and PIMCO had a word with her. If Maxine Waters isn't onboard with principal mods, maybe the whole push is losing momentum. Fun fact that came out of the hearing:  The U.S. government currently bears 50% of the credit risk of the entire mortgage market.

We have had quite a few homebuilders report over the past week, and it is generally a tale of two geographies. The builders that are in the West Coast markets have done great (KBH, MTH, RYL), while the ones with more East Coast exposure (NVR, PHM) are doing better, but nowhere near the others. NVR actually missed estimates and the stock was clobbered for 6% at one point, but it has clawed back its losses with the general strength in the market. Pulte reported this morning and is looking down a quarter. Ryland, which focuses on the first time homebuyer and the second-time move up buyer reported great numbers. Perhaps the long-awaited return of the first-time homebuyer is finally here.

The connection between the first time homebuyer and household formation is something that I have been harping on for a while. CoreLogic talks about it in its latest Market Pulse. Household formation numbers have been depressed ever since 2006, and that has given the illusion that the homebuilders have been building enough starter homes. The problem is that the drop in household formation wasn't due to demographics - it was due to a lousy economy. If a normal run rate is 1 million new households per year, and we average around 600 for five years, that means we have roughly 2 million new households in pent-up demand, along with the normal demand. Of course as the economy improves, many of these households will become renters first, and not first-time homebuyers. But what sort of housing start number will we see in the future to accommodate this demand? Remember, 1.5 million starts is "normalcy." Certainly not the 1 million print we saw last week. Probably closer to 2 million. Think about the homebuilding stocks on double the activity...

Chart Household Formation: