Morning Report: Existing Home Sales strongest in 10 years

Vital Statistics:

	Last	Change
S&P Futures	2357.5	-2.5
Eurostoxx Index	373.2	-0.3
Oil (WTI)	54.0	0.6
US dollar index	91.3	.
10 Year Govt Bond Yield	2.40%
Current Coupon Fannie Mae TBA	102.045
Current Coupon Ginnie Mae TBA	103.17
30 Year Fixed Rate Mortgage	4.14

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

Mortgage applications fell 2% last week as purchases fell 3% and refis fell 1%. The rate on a 30 year fixed rate mortgage rose 4 basis points to 4.36%, according to the MBA. 

The year got off to a strong start with existing home sales increasing at an annualized rate of 5.69 million in January, according to NAR. This is up 3.8% from a year ago, and is the strongest reading since Feb 2007. The median home price rose 7% to $228,900. Inventory is down 7% YOY and stands at 3.6 months' worth. Days on market dropped to 50 from 64 a year ago. The first time homebuyer accounted for 33% of sales, which is inching up. Competition is strongest for homes in the low to medium price range. Fannie's deal with Blackstone on single family rentals will probably only make the lower price points even tighter. Still, a good start for the year. If we get some regulatory relief for the smaller banks, we should see more construction for the "mom and pop" builders. 

Toll Brothers reported better than expected numbers this morning, with deliveries flat in dollars but up 12% in units, contracts up 14% in dollars and 22% in units, and backlog was up 19% in dollars and 21% in units. Average selling prices fell to 773,700 from 873,500, but that was due to an acquisition, and a geographic shift to the North and East. The company raised guidance as well for 2017. The stock is up about 6% pre-open. 

We have the potential for some volatility in rates this afternoon with a Fed speech at 1:00 and the FOMC minutes at 2:00 pm. Below is a chart of the current handicapping in the Fed Funds futures market. Looks like about a 30% chance of a March hike, about a 55% chance of a hike by May and a 75% chance of a hike by June. The dot plot from December is forecasting between 2 and 3 25 basis point hikes.

Donald Trump reversed Obama's immigration enforcement policy, which will make it easier to deport people who commit crimes. Obama's policy only deported those that were guilty of violent crimes. Trump will now include those guilty of fraud as well. The policy for "Dreamers" - those who came illegally as children - is unchanged. There are some worries that this will affect the housing market by reducing demand and making the market for construction workers even tighter. It could also tighten credit, as Dreamers are eligible for Fannie, Freddie, and FHA loans. The fear is that any sort of mass-deportation will trigger early defaults, leaving the lender on the hook for a buyback. From the look of it, the change in immigration policy is relatively minor - more for show than an actual substantive change in policy - and there are no mass deportations on the horizon. 

Any sort of increase in deportations will probably make a tight labor market even tighter, which would be inflationary. That is the fear about this afternoon's FOMC minutes. The FOMC statement from Feb 1 removed references to lower energy prices and a strong dollar, which work against inflation. Investors will also be looking to see if there was discussion around shrinking the Fed's balance sheet. This could conceivably affect mortgage pricing, as the biggest buyer of MBS pulls away. That said, spreads didn't do much when the Fed was aggressively buying, so the end of reinvestment probably won't make that big of a difference either. 

Fannie Mae shareholders got slammed yesterday after an appeals court rejected their bid to sue the US government over the "net sweep" dividend change. Fannie Mae stock was down 35% yesterday, while Freddie Mac was down 38%. Fannie stock has been on a wild ride since the election, rising from $1.65 to $4.50 before falling back to $2.71 yesterday. FNMA stock has always been a litigation lottery ticket, and the only reason it exists in the first place is because the government didn't want to have to consolidate Fannie and Freddie debt on its balance sheet so it had to leave 20% outstanding. Fannie Mae's market cap is $15.72 billion, and last year they earned $12.3 billion, which makes their P/E ratio about 1.3x. The Obama administration was adamant that FNMA shareholders should receive nothing – in their view conservatorship is tantamount to bankruptcy and in bankruptcies the common stock gets wiped out.