Morning Report: The hot real estate markets are cooling off

Vital Statistics:

	Last	Change
S&P Futures	2153.5	1.0
Eurostoxx Index	343.1	3.0
Oil (WTI)	45.2	0.5
US dollar index	86.3	-0.2
10 Year Govt Bond Yield	1.56%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.47

Stocks are flat this morning on no real news. Bonds and MBS are flat as well.

We have a lot of Fed-Speak today, with Neel Kashkari, Janet Yellen, and James Bullard speaking this morning. Charles Evans, Loretta Mester, and Esther George speak this afternoon. There is the possibility that some of them could say something market-moving so be careful with your locks. 

Mortgage Applications fell 0.7% last week as purchases rose 1% and refis fell 2%. 

Durable Goods orders were flat month-over-month and down 1.3% YOY. Ex-transportation, they fell on a MOM and YOY basis. Capital Goods orders (a proxy for business capital investment) is also down for the year, although it was up on a MOM basis. July's numbers were revised downward, so this report is nothing to write home about. 

Despite the gloom in the corporate sector, consumer confidence rose and is at post-crisis highs. This is probably being driven by the stronger labor market. We aren't seeing these numbers flow through to actual sales at the retailers though. The Back-To-School shopping season was a disappointment. 

The hottest real estate markets are beginning to cool off, as high prices and low inventory are putting off buyers. Many of these markets have long surpassed their bubble peaks and are hitting new highs. Given that incomes have not recovered, these price levels may be unsupportable, especially as the Fed hikes interest rates and mortgages become more expensive. 

The latest CoreLogic Market Pulse looks at some of the overvalued markets based on price to income ratios and price to rent ratios. Unsurprisingly, there are pockets of overvaluation in CA, NY, FL, and TX, while the Midwest remains undervalued. The chart is below:

The article also goes on to say that we aren't in a housing bubble. This is true, as bubbles are largely psychological phenomenons where investors and lenders consider an asset "special" and believe it can only go up in price. The last residential real estate bubble (aside from the mid 00s) was in the 1920s. Residential real estate bubbles are rare and I doubt any of us will see another on in the US in our lives. That said, we have residential real estate bubbles in lots of countries overseas (especially China, Norway, and Canada), which will be a damper on global growth when they burst. 

During the debates, Donald Trump went after the Fed, calling them "political" for not raising interest rates. Politicians have always jawboned the Fed, but this has to be the first time I have heard a politician complain that the Fed is keeping rates too low. Usually, politicians are calling for the Fed to not raise rates because they are worried about a recession. At least one economist thinks Janet Yellen would resign if Trump wins.