Morning Report: Rate hike "fairly soon" according to the FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2364.8	3.8
Eurostoxx Index	373.6	0.2
Oil (WTI)	54.7	1.1
US dollar index	90.8
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.045
Current Coupon Ginnie Mae TBA	103.17
30 Year Fixed Rate Mortgage	4.14

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

Initial Jobless Claims rose slightly to 344,000 last week. 

Economic activity took a step back in January, according to the Chicago Fed National Activity Index. The 3 month moving average is basically just below zero, which indicates the economy is growing more or less at its historical trend.

The FOMC minutes didn't really have much of an impact on the markets yesterday. The money quote: "In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased." On the other side of the coin, the Committee worried about downside risks to the economy due to the stronger dollar, uncertainty about US fiscal policy, and potential overseas weakness. So overall, the minutes were taken to be generally dovish, but not enough to move markets.

Despite that "fairly soon" language, the Fed funds futures didn't really move, and are still pricing in about a 33% chance of a hike in March. Dennis Lockhart, speaking this morning, clarified that statement, saying that "fairly soon" means "in the next 3 meetings." Incidentally, Mohammed El Arian thinks the markets are underpricing this risk and he thinks it is a 50-50 chance of a rate hike next month.

The minutes did discuss housing briefly: "Recent indicators of activity in the housing sector were generally positive. Starts and permits for single-family housing and sales of existing homes rose moderately in the fourth quarter, and real residential investment bounced back after two quarterly declines. A couple of participants commented that supply constraints might be holding back new homebuilding. In addition, a few participants noted that prospects for residential investment would also depend on whether household formation picked up and how housing market activity responded to the recent rise in mortgage interest rates." The supply constraints alluded to probably refer to land, although skilled workers are also an issue. The rise in interest rates probably isn't large enough to affect purchase decisions - a lack of inventory, which is driving up prices matters more. A lack of affordable starter homes is probably a big factor in the depressed household formation rate. although jobs and student loan debt are the main drivers. 

We are becoming a nation of renters and landlords, as the percentage of buyers who don't plan to live in the house rose to 37% last year. This is really just the inverse to the falling homeownership rate. These new buyers may be potential landlord, or they could be flippers. Despite Blackstone's deal with Fannie Mae to acquire rental properties, Wall Street is generally exiting the mass rental business as it figures the easy home appreciation money has already been made.

House prices rose 1.5% in the fourth quarter, and are up 6.2% YOY according to the FHFA House Price Index. The Mountain division led the pack while the Mid-Atlantic division brought up the rear. Since bottoming out in early 2012, the index has posted a 6.2% annual growth rate.

Delinquencies fell in January, according to the Black Knight Financial Services First Look report. Total DQ rates fell to 4.25%, which is down almost 4% MOM and 16% YOY. Foreclosure starts did tick up on a MOM basis, but there is a seasonal aspect to that. 

A Reuters poll of housing economists shows that they are somewhat critical of deregulation in housing. ""Moving to ease back on those regulations now, when the market is already recovering and house prices are rising, would only increase the risk of another dangerous bubble forming," said Capital Economics property economist Matthew Pointon." FWIW, I think that fear is overblown, I don't see another bubble in housing as a possibility. Bubbles are rare psychological phenomena in an asset class, where both investors and bankers view an asset as "special" and dismiss the risk that it can decline in price. This causes both parties to take excessive risks - borrowers lever up too much, and bankers chase yield. Credit is still historically tight in the housing market, and the proposed changes to Dodd-Frank generally fall under small bank regulatory relief, providing better guidance such that banks can determine what regulators consider proprietary trading versus market-making, and making some changes to the CFPB. These changes won't bring back the no-no loans or pick-a-pay loans of 2006, and won't lead people to believe that house prices only go from the bottom left corner of the chart to the top right hand corner. To put everything in perspective, take a look at the mortgage credit availability index below. The difference between the bubble days and today couldn't be more stark. 

The analysts also are predicting a 4.4% mortgage rate by the end of the year. According to the latest MBA mortgage applications report, the average rate is 4.36%, so we are pretty much already there.