Morning Report: Don't fear another real estate bubble

Vital Statistics:

	Last	Change	Percent
S&P Futures	2088.0	-6.9	-0.33%
Eurostoxx Index	3031.4	-32.1	-1.05%
Oil (WTI)	48.5	-0.6	-1.22%
LIBOR	0.673	-0.001	-0.15%
US Dollar Index (DXY)	95.38	-0.510	-0.53%
10 Year Govt Bond Yield	1.81%	-0.03%
Current Coupon Ginnie Mae TBA	105.6
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.65

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

Mortgage Applications fell 4.1% last week as purchases fell 4.7% and refis fell 3.9%. Refis ticked up to 54.3% of the total number of loans. 

The ISM Manufacturing report came in better than expected, indicating that the manufacturing economy is expanding, albeit modestly. The ISM services number is much more important, as manufacturing only represents 15% of the economy. It looks like the exporters are getting hit harder than those who mainly focus domestically. Employment was flat month-over-month, however it is in a contracting trend. 

Construction spending fell 1.8% month-over month, however the previous 0.3% print was revised upward to 1.5%. Residential construction fell 1.5% month-over-month, however it is up 8% YOY. 

As we saw from the FHFA House Price index, home prices have recouped their losses from the bubble years. Is it time to start worrying about a new housing bubble? Freddie Mac takes a look at real estate prices relative to incomes, credit scores, inventory, and leverage in the system and concludes that it is not yet time to worry. While house prices are indeed stretched relative to incomes, that figure ignores the effect of interest rates. The overall credit profile for new originations has been strong since the crisis, and while we are beginning to see some credit deterioration in the oil states, it is nothing like 2007-2008. Tight inventory remains a huge issue in terms of pricing, and notwithstanding last week's 617k print on new home sales, new construction is still well below historical levels. Consumers are increasing mortgage debt, however they seem to be using the cash-out refi to pay down credit card debt instead off funding consumption. The froth in the housing market still remains concentrated in the big coastal urban areas like San Francisco and Manhattan, which is driven by foreign demand. 

At the end of the day, bubbles are psychological phenomenons, where investors and lenders both believe an asset is "special" and cannot go down in price. We will probably never see another real estate bubble, but our grandkids might. If anything, the bubble is in sovereign debt, and people will wonder why investors chose to tie up their money for 10 years for negative returns. Purchasing a German Bund yielding 13 basis points over 10 years is in the same category as buying a new construction McMansion in Stockton CA circa 2006 or paying $76 a share for E Toys the day of its $20 IPO in 1999. 

Auto sales are coming in this morning, and it looks like they are coming in weaker than expected. 

Interesting editorial by Clintonite Doug Schoen who says Hillary might not be the Democratic Party nominee. There is talk in the Democratic party about a white knight candidate, like Joe Biden or John Kerry who could enter the race at the convention, and select someone like Elizabeth Warren to be VP.