Morning Report: Inflation returning

Vital Statistics:

	Last	Change
S&P Futures	2137.5	15.0
Eurostoxx Index	342.3	5.0
Oil (WTI)	50.4	0.4
US dollar index	88.1	-0.2
10 Year Govt Bond Yield	1.78%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Stocks are higher this morning on no real news. Bonds and MBS are down. 

It looks like the Fed has made some progress in getting inflation up to its goal of 2%. The Consumer Price Index came in at 0.3% MOM. Ex-food and energy it is up 2.2% on a YOY basis. The Fed doesn't really look at CPI all that much - it prefers the Personal Consumption Expenditure Index - but it looks like we are moving further away from the deflation ledge that central bankers fear. 

What drove the increase in the core index? Owner-equivalent rent, which is a proxy for real estate prices. It rose 0.4%, which is the highest reading since 2006.

What does increasing inflation mean for the mortgage business? Assuming higher inflation translates into wage inflation, you should see a pick-up in the purchase business as Millennials get jobs / raises. On the other hand, the refi business is going to take a hit. 

One Texas builder is focusing on the entry-level homebuyer and using USDA loans to help make the sale. LGI Homes, based in Houston, is marketing to people in apartment complexes with flyers discussing the monthly payment they could have if they bought. These are largely properties in the exurbs around Dallas and Houston, where lower land acquisition costs translate into lower average selling prices. ASPs for LGI are below 200k, while ASPs for new homes in general is over $350k. LGI reports seeing the steadiest demand in entry-level. 

Sentiment for the builders is high in general. The NAHB Housing Market Index fell 2 points in October, from its record in September. 

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