Morning Report: Existing Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2340.3	-2.0
Eurostoxx Index	373.1	-2.6
Oil (WTI)	47.5	-0.7
US dollar index	90.2
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	102.09
Current Coupon Ginnie Mae TBA	103.39
30 Year Fixed Rate Mortgage	4.21

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

Mortgage Applications fell 2.7% last week as purchases fell 2% and refis fell 3%. Mortgage rates were more or less unchanged on the week. 

Existing home sales fell 3.7% YOY to 5.48 million in February, according to NAR. Low inventory and lower affordability offset the increased foot traffic. The median price rose 7.7% YOY to $228,400. Inventory represented a 3.8 month supply, which was an uptick from January, but is still lower YOY. Days on market dropped to 45 days from 50 in January and 59 a year ago. 42% of the homes sold in February were on the market less than a month. 

Home prices were flat on a month-over-month basis and are up 5.7% YOY, according to the FHFA House Price Index. The mountain states had the highest home price appreciation, while the northeast lagged. 

The story in the markets is that stocks and bonds are beginning to give back the Trump reflation trade, where bonds sold off and stocks rallied on the prospect of fiscal stimulus out of Washington. Donald Trump is getting a lesson in the limitations of the bully pulpit as health care reform appears to be stalling. Repealing and replacing Obamacare is the "pay for" for fiscal stimulus and tax reform, so if it doesn't happen then part of the basis for the post-Trump stock market rally is in jeopardy. Meanwhile, Neil Gorsuch seems to be sailing through his Senate Confirmation hearings, albeit with a little kvetching from the usual suspects. 

Punch line on Washington: health care reform is supposed to go to the House this week. If it passes, that is good for stocks and bad for bonds. If it fails, it is bad for stocks and good for bonds (in other words, if it fails, interest rates are probably heading lower). FWIW, a couple big market technicians (Ralph Acampora and Dennis Gartman) went bearish yesterday as the S&P 500 broke below the post-election uptrend. 

As anyone shopping for a home can tell you, it's slim pickings out there. We are seeing the biggest squeeze in the starter home category. It appears that part of the problem is a lack of confidence to move up to the next category. People in starter homes are staying put, which is keeping homes off the market. 

One potential issue for tax reform is affordable housing construction, which relies on tax credits to entice investors to put up money. If the corporate tax rate falls from 35% to 20% - 25%, then the value of those tax credits decreases. Affordable housing has always been a money-loser for developers and landlords, so tax incentives are used to paper them over. They used to be called tax shelters back in the day. Apparently the value of the credits (which actually trade) has dropped by 10% - 20% since Election Day. This is going to make life more difficult for Ben Carson and HUD.

Dealing with Fannie and Freddie is not an immediate priority, at least not for this year. Staffers are now starting from scratch to come up with a plan. One possibility is to end the profit sweep for the GSEs and let them retain that profit in order to build up their capital, which would take a decade or more. This would not require a legislative fix: Under the 2008 law, HUD Secretary Mel Watt has the authority to make that change. Note that Fannie is expected to pay $10 billion to the government for its fourth quarter gains. 

The Cleveland Fed takes a look at wage growth and posits that the huge capital for labor swap that has been in place since the end of the 20th century could be taking a breather. 

Interesting story in the FT about commodity trading advisors and how they are using momentum-trading strategies to put the old "portfolio insurance" wine in a new bottle. Portfolio insurance was a technique developed in the 1970s, which was largely credited with causing the Crash of 1987. These new strategies are similar, and use algorithms to follow the momentum of the markets, which would potentially add selling pressure to crashes. In the brave new world we live in, there are no longer market makers and specialists that take the other side of the trade, and we could see selling in a vacuum. The next market crash, investors may find out the downside of sub penny bid-ask spreads and commissions.