Morning Report: Starter homes are back

Vital Statistics:

	Last	Change
S&P Futures	2389.5	-5.8
Eurostoxx Index	394.6	-1.9
Oil (WTI)	48.0	0.6
US dollar index	90.6	0.1
10 Year Govt Bond Yield	2.41%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.53
30 Year Fixed Rate Mortgage	4.08

Stocks are lower this morning on lousy retailer earnings. Bonds and MBS are down small. 

Initial Jobless Claims fell to 236,000 last week which is a 28 year low. 

Inflation remains close to the Fed's 2% target, according to the Producer Price Index. The headline number rose 0.5% MOM and is up 2.5% on a YOY basis, but when you strip out food and energy, it is up 1.9% YOY. 

We had some hawkish statements from Boston Fed President Eric Rosengren yesterday, where he urged 3 more hikes this year as the economy is on an "unsustainable pace." His rationale is the unemployment rate at 4.4%, which is below his estimate for full employment at 4.7%. Of course sub 1% GDP growth is probably "sustainable" ad infinitum, and there is no evidence of much in the way of wage growth. He also doesn't think the tapering of MBS buying will affect mortgage rates too much, as long as it is gradual. 

Inflation isn't uniform, of course, and the index that measures it has to take this into account. Here is a chart of different goods and services and their inflation rates over the past 20 years:

The Canadians have a housing bubble on their hands, and the ratings agencies are getting worried. Canada is bedeviled with the same problem in the US of tight supply, although foreign demand is a big factor as well. Prices in Toronto rose 25% last year. Note that Canada's economy is highly dependent on strong commodity prices, and indirectly, Chinese demand. If / when the Canadian real estate bubble bursts, it will probably affect property prices in the Pacific Northwest. 

More evidence that builders are pivoting away from luxury building and towards more starter homes. In Q1, 854,000 new owner households were formed versus 365,000 new renter households. This is the first time new owners exceeded new renters in a decade. Fannie Mae's share of mortgages to first time homebuyers has been steadily increasing. We are seeing an increase in the number of new homes smaller than 2200 square feet. Even McMansion giant Toll Brothers is going smaller. 

FHFA Director Mel Watt is warning that the continuing sweep of Fannie Mae's profits to Treasury is risking confidence in the entity. His proposal is to let Fannie Mae retain their earnings in order to re-build its capital cushion. This is to prevent the GSEs from needing another bailout later on. Note that the Obama administration used Fannie's profits to paper over holes in Obamacare spending.