Morning Report: New home sales drop

Vital Statistics:

	Last	Change
S&P Futures	2294.5	0.5
Eurostoxx Index	367.7	1.1
Oil (WTI)	53.1	0.3
US dollar index	91.2	0.4
10 Year Govt Bond Yield	2.53%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.16

Stocks are flattish as earnings roll in. Bonds and MBS are down small. 

New Home sales fell pretty dramatically in December, to an annualized pace of 536k from November's revised 598k number. New home sales is a notoriously volatile number, so don't read too much into it. The 3 month moving average has been pretty steady for the past 6 months. The median sales price was $322k (up about 7.8%) and the average sales price was $384k (up 7.2%). There were about 259,000 units for sale at the end of December, which represents a 5.8 month supply at the current rate. Sales were flat in the West, rose in the Northeast, and fell in the Midwest and South. 

Initial Jobless Claims rose last week to 259k from 239k the week before. 

The Chicago Fed National Activity Index improved in December to .14 from -33 the month before. This is a meta-index of about 85 different variables, some of which lag quite a bit. The 3 month moving average was still negative however. Production related indices drove the increase, while consumption and housing became somewhat less negative. Employment was flat. 

The Index of Leading Economic Indicators improved to 0.5% in December versus 0.1% in November. 

At 2:00 PM EST, I will be participating in Housing Wire's 2017 outlook webinar, where I will discuss the Fed, interest rates, and why fears of further hikes in mortgage rates might be overblown. Here is the link to the webinar. Other subjects include the regulatory environment in Washington DC as well as the latest developments in mortgage insurance premiums. Registration is free. 

Despite the change in MIP, Washington might be coming to a consensus that tight credit in the housing market is a problem and it might be time to roll back some of the more restrictive regulatory policies and begin to encourage homeownership. Now that the housing market is back to record highs, liberals want to see more lending to lower credit / income borrowers and are realizing that bashing the banks isn't the best way to go about it. On the other side of the aisle, conservatives are becoming more accepting of government social engineering via the housing market and want to see housing starts rebound to some semblance of normalcy. Of course the elephant in the room is the mortgage interest deduction, which could become a casualty of tax reform. 

What Dow 20,000 means for mortgage rates. Punch line: not much. It is indicative of the current "risk-on" mentality of investors, where they sell safer assets like Treasuries to buy stocks. At the margin, this does push up interest rates, however that doesn't necessarily mean mortgage rates move up in lockstep. Note that Dow 20,000 doesn't have nearly the hype associated with it as Dow 10,000 had. That is the difference between the tail end of a secular bull market and the tail end of a secular bear market. It took the Dow roughly 17 years to double between 10,000 and 20,000. During the 80s-90s stock bull market, the Dow quintupled from 1982-1999. Dow 10,000 was the age of stock split beepers, "poof IPOs," and companies that found they could double their multiple by adding ".com" to their corporate moniker. This time around, investors are more jaded. 

One strategist expects the Fed to begin a rapid-fire 25 basis point every quarter starting in late 2017. The consensus is that the Fed would really like to see the Fed Funds rate at 3%, which it considers a "normal" level. Much depends on what we get out of Washington and whether we get some sort of major fiscal stimulus. Aside from fiscal policy, wage inflation is probably going to be the biggest driver. 

Here are the hottest markets in real estate according to Realtor.com. Some markets are what you would expect to see (like San Francisco) while others are surprises (Fort Wayne, IN). As usual, California dominated the list with 8 of the top 10 markets. California's housing crunch is creating pushback against laws intended to discourage development.