Morning Report: Freddie Mac explores what is driving low inventory

Vital Statistics:

	Last	Change
S&P Futures	2473.3	3.0
Eurostoxx Index	379.6	1.3
Oil (WTI)	49.7	0.0
US dollar index	86.2	-0.3
10 Year Govt Bond Yield	2.29%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

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

Pending Home Sales rose 1.5% in June, according to NAR. On a YOY basis, the index is up half a percent. Housing inventory is down 7% YOY. 

Freddie Mac explores the issue of tight inventory and asks why builders aren't adding much supply. The issue largely concerns labor, especially skilled labor. The bust laid off about 1.5 million construction employees, who ended up finding new jobs in different sectors of the economy (especially the energy sector). These people are probably not coming back to the construction sector without some sort of catalyst. Second, young people don't seem all that interested in working construction, and the ones that are cannot pass a drug test. Tighter immigration enforcement and the economy in general have led to a drop in immigrants, who have historically been about 25% of the construction industry. Land costs as a percent of new home costs have been rising as well, which is creating pressure on margins. Land use regulations are also stretching out the time it takes to work through the permitting process. 

Speaking of drug tests, a factory owner in Ohio says they have plenty of jobs, but can't find people who can pass the drug test. 40% of their applicants cannot pass a drug test. 

The Fed plans to unveil soon its recommendation to replace LIBOR. LIBOR had been the benchmark interest rate for all sorts of variable rate products for decades, but had one fatal flaw: it was set based on self-reports from a consortium of investment banks. The problem is that the bank could say it was pricing LIBOR at a rate that it wasn't prepared to actually honor. Since banks have all sorts of products that are pegged to LIBOR, they have an incentive to manipulate the measure in order to get the most favorable mark for their own positions. The group is recommending a broad treasury financing rate based on Treasury repos. This rate will be based on what people are actually paying for financing in the markets, not a survey. There are something lie, $330 trillion of derivatives and loans (everything from mortgages to student loans) that are pegged to LIBOR. 

New documents bolster the case for Fannie Mae shareholders that the government lied when began to sweep all of Fannie's profits. The cover story was that Fannie was in a "death spiral" and this was necessary to hasten the wind-down of their business. The documents show Tim Geithner saying that Fannie will be earning strong revenues and can support the 10% dividend for years into the future. Does that mean shareholders will get anything? They probably shouldn't, as the government maintained a 20% public minority stake only so it didn't have to consolidate Fannie's debt on its own balance sheet. Under any sort of bankruptcy scenario shareholders would have been wiped out. The stock is a litigation lottery ticket. 

Morning Report: More on housing afforability

Vital Statistics:

	Last	Change
S&P Futures	2465.3	-7.0
Eurostoxx Index	378.7	-3.6
Oil (WTI)	49.1	0.0
US dollar index	86.2	-0.3
10 Year Govt Bond Yield	2.30%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

Stocks are lower this morning on overseas weakness. Bonds and MBS are flat. 

The advance estimate for second quarter GDP came in at 2.6%, in line with expectations. This is an increase from the first quarter estimate of 1.2%. Personal consumption increased 2.8%, while the price index increased 1% while the savings rate inched down. This should give the Fed the room to maintain interest rates at this level if they choose to do so.

The employment cost index rose 0.5% in the second quarter and is up 2.2% YOY. Wages and salaries increased 0.5% and benefit costs increased 0.6%. 

Consumer sentiment edged up in July, according to the University of Michigan survey. 

I had some questions yesterday regarding LIBOR and what happens to ARMs once it is gone in 2021? The short answer is that nobody knows for sure. The US will probably migrate to some other repo rate to set short term rates. Perhaps once LIBOR goes away, there will be a LIBOR reference rate which is pegged to whatever short term rate is being used and will move at a constant spread to that rate. 

I was discussing housing affordability a couple days ago and talked about mortgage payments as a function of income over time. I showed that the post bubble days hit 40 year lows (at least) and that we are still well below historical levels. The issue with that analysis is that it ignores the tax effects of the mortgage interest deduction, which really mattered in the late 70s / early 80s when tax rates and interest rates were much higher. Up until the mid 80s, the marginal tax rate for the median income was between 22% and 24%. It has been 15% ever since. Also, when interest rates were much higher, the vast majority of your payments for the first few years went to interest, not principal - in fact when mortgage rates were 17%, 99% of your first year's payment went to interest. Today, that number is much lower, and even ticked below 70% in 2012. Check out the chart below:

That chart also speaks to how much quicker one can build equity simply by paying their mortgage on time. Back in the 70s / 80s, you were probably lucky to have enough home price appreciation and principal paid to cover your closing costs if you moved after a few years. Today, you have both strong home price appreciation and a higher principal payment percentage. This helps emphasize how real estate is a great way to build wealth. 

Here is the chart comparing the gross percentage of income that a mortgage payment consumed over time and also the tax effected percentage: As you can see, it is pretty linear, and we are still in a great position now compared to 30 years ago. 

Morning Report: Fed makes no changes to policy

Vital Statistics:

	Last	Change
S&P Futures	2478.0	5.0
Eurostoxx Index	382.8	0.0
Oil (WTI)	48.4	-0.3
US dollar index	86.3	0.1
10 Year Govt Bond Yield	2.30%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

Stocks are higher after the Fed maintained existing policy yesterday. Bonds and MBS are flat.

As expected, the Fed kept the Fed Funds rate the same. The statement was almost identical to the June statement. The September Fed Funds futures went to a 100% probability of no hike, and the December futures went to a 51% chance of no hike. The Fed said balance sheet reduction will begin "relatively soon." The consensus seems to be that "relatively soon" means September. The Fed Funds futures are hinting that as well, by going to a 0% probability of a rate hike, which means they are betting September will the meeting where tapering is announced. One complicating factor will be the debt ceiling hike, which will be happening around that time. If we get a stand-off, we might see the Fed punt until the December meeting. 

June Durable Goods orders were up big on aircraft. The headline number was an increase of 6.5% MOM and 16% YOY. Ex-transportation, they were up 0.2% MOM and 6.8% YOY. Core capital goods orders (a proxy for business capital expenditures) fell 0.1% and are up 5.6% YOY.

Initial Jobless Claims ticked up to 244k, while the Chicago Fed National Activity Index rebounded to .13. 

The UK banking regulator has decided to kill LIBOR by phasing it out by 2021. 

Freddie Mac changed its guidelines on Home Possible Loans. No gift money until 3% down. 

Morning Report: Homebuilder earnings report strong order growth

Vital Statistics:

	Last	Change
S&P Futures	2479.0	5.0
Eurostoxx Index	382.4	1.6
Oil (WTI)	48.4	0.5
US dollar index	86.7	0.0
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

Stocks are higher this morning as oil rallies. Bonds and MBS are flat.

The FOMC decision is due out at 2:00 pm EST. Be careful locking loans around that time. No change in interest rates is expected, however the language in the statement always has the potential to move markets. You are starting to see some movement in the Dec Fed Funds futures, with the market currently handicapping a 48% chance of no change, 47% of 25 bps and a 5% chance of 50 bps between now and then. Sep futures are stuck at 92% chance of no change and an 8% chance of a 25 basis point hike. 

Mortgage applications rose 0.4% last week as purchases fell 2% and refis increased 3%. Mortgage rates in general fell about 5 basis points during the week. ARM share increased to 6.8%. 

Despite all the consternation in DC, consumer confidence continues to rise. The Consumer Confidence index rose to 121, largely on the strength of the jobs market. The number of people who think jobs are "hard to get" fell to 18%, while those that think jobs are "plentiful" rose to 34%. 

New Home Sales ticked up to 610k in June, which is up 9% on a YOY basis. 

Homebuilder Pulte reported earnings yesterday. Orders were up 12%, and backlog was up 19%. They did warn on gross margins, as wildfires in Canada are pushing up framing lumber prices. Pulte has a national footprint, but it is big in the Midwest, which shows that things are picking up in that part of the country. 

D.R. Horton reported earnings as well. Orders increased 13% and backlog increased 5%. Tight labor markets are affecting margins. D.R. Horton is more exposed to the South and Southwest, and therefore will be more sensitive to what is going on in the oil patch. 

Since the election, the XHB (S&P Homebuilder ETF) has been on a tear, increasing 23% since the election.

The House is expected to use the Congressional Review Act to overturn the CFPB's recent rule on mandatory arbitration. It is expected to fall 100% on partisan lines. In the Senate, all Democrats are expected to vote against overturning it, and there are a few Republicans who are undecided. 

Interesting stat on GNMA servicing portfolios since 2014. Down 25% at major banks, up 15% at smaller banks, doubled at non-banks. GNMA servicing rights have been weighed down by the costs of FHA delinquencies as well as higher than expected prepayment speeds due to the VA IRRL program. The government recently changed the rules for quick IRRL refis, but servicing values have yet to rebound. 

Morning Report: House prices hit new highs. Are we in a bubble?

Vital Statistics:

	Last	Change
S&P Futures	2475.0	7.0
Eurostoxx Index	381.8	2.5
Oil (WTI)	47.2	0.9
US dollar index	86.4	-0.1
10 Year Govt Bond Yield	2.28%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

Stocks are higher this morning as the Fed begins their 2 day FOMC meeting. Bonds and MBS are down. 

House prices rose 0.4% MOM in May, according to the FHFA House Price Index. They are up 6.9% YOY. Home price appreciation is still red-hot on the West Coast, however some of the laggards (Midwest and East Coast) are starting to pick up steam. Meanwhile, the Case-Shiller Home Price Index rose .1% in May and is up 5.7% YOY. Why the difference? The FHFA House Price index only looks at homes with a conforming mortgage, which eliminates the distressed all-cash extremes on the low end, and jumbos on the high end. Certainly out here in the Northeast, the luxury end of the market (aside from trophy properties in the Hamptons and Manhattan) is deader than Elvis. Note that we have more than recouped the losses from the go-go days, at least according to the FHFA House Price Index.

I wanted to spend a little more time discussing housing affordability. If you look at the median house price to median income ratio, we are approaching the highs during the bubble years. We are currently at around 4.4x and historically, that number has been between 3.2 and 3.6x, meaning that house prices are stretched compared to incomes. It makes sense that house prices should be related to incomes in terms of measuring affordability, and also vulnerability do downdrafts. 

However is "median house price" the correct metric to use when determining affordability? It has one major flaw: it ignores interest rates. As car dealerships know, the sticker price is not the metric to sell a car: it is the monthly payment. Can't afford a 30,000 car? Well, what if we go from a 6 year loan to an 8 year loan? Can you now afford that payment? Mortgages aren't really that much different. So, to look at it from that angle, I plotted the typical mortgage payment (80 LTV conforming loan) on the median house and calculated what percentage of median income that payment turned out to be. And when you look at it that way, affordability it still pretty decent, at least compared to historical numbers. The reason why? Interest rates. For almost a decade, mortgage rates were double digits, and that equates to a much bigger payment for the same "median house." It turns out that mortgage payments as a percentage of income are much lower than what they historically have been. 

Now, the one complicating factor is the mortgage interest deduction, which makes housing in the 80s look less affordable than it really was. Taxes were higher, and interest as a percentage of the P&I payment was higher, so the differences are somewhat exaggerated. However, it does appear that buying a house is not as "unaffordable" as the median house price to median income ratio implies. Just remember these graphs when you hear people discussing how high real estate prices are and that we are in another bubble. We aren't. 

Morning Report: Existing Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2468.0	-1.3
Eurostoxx Index	378.9	-1.3
Oil (WTI)	46.1	0.3
US dollar index	86.4	-0.1
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are flat.

The big event this week will be the FOMC meeting on Tuesday and Wednesday. No change in rates is expected, however the language in the statement always has the potential to move markets, so just be aware. We will have some important data, especially in housing, as well as GDP this Friday. No data this morning, however. 

Affordable housing advocates will be spending the week marching and discussing the need for more affordable housing, as well as advocating for no cuts the HUD's budget. The biggest proposed cut to HUD involves the Community Development Block Grant program, which famously funds Meals on Wheels, but is in reality just funds pet projects in various districts, especially in the counties surrounding DC.

The Fed will probably discuss tapering this week, which concerns letting its portfolio of bonds bought during quantitative easing to mature. The European Central Bank is also contemplating doing something similar. While there is concern that tapering will push up longer-term interest rates, these are probably overblown. Certainly QE did not affect mortgage backed spreads much at all, and tapering will be a fraction of what full-blown QE was. 

Existing Home Sales dropped 1.8% in June as tight inventory is driving up prices and affecting affordability. The median home price increased 6.5% to $263,800. This puts the median house price to median income ratio at about 4.4x, which is elevated. That ratio peaked at 4.8x during the bubble, and fell to 3.3x during the bust years. Historically that number has been in the 3.2x-3.6x range, although you have to correct for interest rates, which does affect affordability. You can see the index of home prices versus incomes diverging again.

Total housing inventory fell to 1.96 million units, which represents a 4.3 month supply. A balanced market is usually around 6 month's worth. Affordability concerns also hurt the first time homebuyer, who fell to 32% of sales, down from a 33% the prior month. All cash sales were down to 18% from 22% the year prior. The REO to rental trade might be driving that as professional investors stop buying. In fact, pros should be looking at selling - prices are elevated. 

Morning Report: Wages increasing at the low end of the scale

Vital Statistics:

	Last	Change
S&P Futures	2470.8	-0.8
Eurostoxx Index	382.4	-1.6
Oil (WTI)	46.6	-0.4
US dollar index	86.7	0.2
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are flat this morning on another Summer Friday. Bonds and MBS are flat. 

Should be a dull day as much of the mortgage business is at the Western Secondary conference, there is no data or Fed-Speak, and the rest of the Street will be on the LIE by noon. 

What states still have the highest foreclosure issues? New Jersey is the worst, with 1% of all homes in some state of foreclosure. They are followed by DE. MD, IL, CT, NV, FL, SC, OH, and NM. Note there isn't a lot of overlap between these areas and the best places to start a business. 

Republicans in Congress plan to use the Congressional Review Act to overturn the Obama-era CFPB ruling that eliminates mandatory arbitration. The left wanted to overturn mandatory arbitration in order to make it easier to use class-action lawsuits to attack what it considers bad corporate behavior. The right worries that it will restrict credit, and amount to nothing more than a sop to the trial lawyers lobby. 

Are we beginning to see the stirrings of wage inflation" Certainly at the low end of the wage scale we are. We are also starting to see wage inflation at the high end, where there are shortages of skilled labor. The middle is still lumbering along at 2.5% wage growth or so - better than inflation, but not all that satisfying. Especially since rental costs are outpacing inflation due to tightness in the real estate market. I have said this before: getting housing starts up fixed two major problems: lack of middle class jobs and a tight real estate market. Both would go a long way towards making the economy feel better. 

Further to the above, Axios has a cool moving graph that demonstrates the malaise in the jobs market over the past decade. It plots the number of jobs on the vertical axis and wages on the horizontal axis. You can see in some professions where both the number and the wages have been falling. 

Morning Report: What is the shape of the yield curve telling us?

Vital Statistics:

	Last	Change
S&P Futures	2475.8	4.3
Eurostoxx Index	387.3	1.8
Oil (WTI)	47.4	0.3
US dollar index	87.2	0.2
10 Year Govt Bond Yield	2.26%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are up this morning as global central banks remain easy. Bonds and MBS are up small. 

The Index of Leading Economic Indicators jumped 0.6% in June, which is forecasting an acceleration in the economy going forward. 

Initial Jobless claims fell to 233k, which is a 9 week low. The last time we were at similar levels was the early 1970s, when the Vietnam War was still raging. I have plotted initial jobless claims (left axis) versus wage inflation (right axis). You can see the inverse correlation, and it also suggests that with claims this low, we should be seeing wage inflation. Of course inflation has an influence as well, and the late 60s / 70s were characterized by inflation. However, pressures seem to be building, and we are seeing wage inflation at the lowest end of the spectrum - low wage workers. 

Bill Gross looks at the shape of the yield curve and warns investors not to read too much into it, since the curve is being manipulated by central bankers worldwide. The chart below shows the difference in yield between the 10 year bond and the 3 month T-bill. That difference has historically been somewhat predictive of recessions, especially when it has inverted. While the current spread is nowhere near zero, the trend is certainly heading that way. Does that mean a recession is imminent? His point is that we are really in an apples-to-oranges comparison with QE. Global central bank buying of sovereign debt is pushing that spread downward, and the relevant question is where would the yield curve be without the Fed's (and other global central banks') buying? 

He does make the point that Corporate America is more leveraged than before, however with rates so low, the debt service (actual interest paid) is much less than it was historically. You see that in households too. Total debt has risen past the old highs, however the debt service (interest paid as a percent of disposable income) is close to the lows. 

The NYC luxury real estate market is soft, and many luxury sellers in Greenwich, CT are pulling the plug on sales. Of the homes in this market ($4.5 million+) days on market was 319, up by over 100 days. Some sellers have had to cut their price by 60% to entice a buyer. FWIW, I see very little building in this area of the country - only a handful of spec homes have been built, and they haven't sold yet. 

Morning Report: Housing starts rebound

Vital Statistics:

	Last	Change
S&P Futures	2459.5	1.8
Eurostoxx Index	384.1	1.5
Oil (WTI)	46.5	0.0
US dollar index	86.9	-0.4
10 Year Govt Bond Yield	2.27%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are higher this morning as the ECB starts its two day meeting. Bonds and MBS are flat.

Bonds staged a strong rally yesterday after the Senate was unable to repeal and replace Obamacare. Obamacare repeal was to be the source of funds for infrastructure spend and tax reform, and this failure largely means the rest of the Trump reflation trade is pretty much dead.

Mortgage applications rose by 6.3% last week as purchases rose 1% and refis rose 13%. Treasury yields fell last week on dovish comments by Janet Yellen. 

Housing starts rose to 1.22MM and building permits rose to 1.25 million. Starts were up 8.3% MOM and 2.1% YOY. Activity rebounded in the Northeast and the Midwest while falling in the South. The West was unchanged. This is a strong rebound after a terrible May. Tariffs on framing lumber are increasing home construction costs, just as the first time buyer re-enters the housing market. Historically starts have averaged around 1.5 million a year, which largely explains the current housing shortage. In reality, we should be closer to 2 million a year, which is typical for a post-recession rebound. 

CNBC discusses the pros and cons of a 30 year mortgage versus a 15 year mortgage. Yes, the payments on a 30 year will be lower, but the interest paid over the life of the loan will be much higher. One thing worth remembering: you tend to get a decent drop in rate for moving from a conforming 30 year to a 15 year. That pickup is much, much smaller on a FHA or VA loan, due to the illiquidity of 15 year TBA. The one thing the article doesn't really touch on is inflation. US Treasuries are priced as if inflation is never, ever coming back - if you are buying Treasuries at 2.27%, you are really betting that "this time is different," which are the 4 most dangerous words in investing. If you can borrow money for 30 years at under 4%, you will almost assuredly see inflation running hotter than that at some point during the mortgage's life. The world's central bankers are on a mission to create inflation. Eventually they will succeed. 

Morning Report: Obamacare repeal and Trump reflation trade dead

Vital Statistics:

	Last	Change
S&P Futures	2456.5	-2.0
Eurostoxx Index	383.9	-3.0
Oil (WTI)	46.0	0.0
US dollar index	87.0	-0.4
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are lower this morning after healthcare reform fails. Bonds and MBS are up small. 

We are in the summer doldrums, with not much in the way of news or movement. Monday was so dull it felt like a 3 day weekend in the markets. 

Obamacare repeal (and the lower spending that ensued) was going to be the source of funds for infrastructure spend and tax reform. So that pretty much sticks a fork in the Trump reflation trade. This should send rates lower, at the margin. Don't forget the 10 year was trading below 1.9% before the election. Economists now see an even risk of overshooting and undershooting their GDP forecasts, the highest since the election.

The Fed Funds futures aren't really reacting to the news yet, with September futures pricing in only an 8% chance of a hike and the Dec futures pricing in a 47% chance of a hike. 

The Senate is considering a last-ditch attempt to simply repeal Obamacare without a replacement and then try and create a healthcare plan from scratch. 

Import prices fell 0.2% in June and are up 1.5% YOY. Export prices are down 0.2% as well and up 0.6% YOY. 

Homebuilder confidence slipped in July, according to the NAHB. “Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas. “This is hurting housing affordability even as consumer interest in the new-home market remains strong.”

The House Appropriations Committee approved a bill to reform the CFPB. The biggest change will be to bring the agency under the normal appropriations umbrella, although there will be language regarding payday lending and mandatory arbitration. 

Morning Report: Retail sales disappoint

Vital Statistics:

	Last	Change
S&P Futures	2457.0	2.0
Eurostoxx Index	387.2	0.4
Oil (WTI)	46.5	0.0
US dollar index	87.3	-0.1
10 Year Govt Bond Yield	2.30%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.59
30 Year Fixed Rate Mortgage	3.96

Stocks are higher this morning after a strong GDP report out of China. Bonds and MBS are up.

There isn't much in the way of market-moving events this week with a sparse economic calendar and the Fed is in the quiet period ahead of their FOMC meeting next week.

Inflation at the consumer level remains below the Fed's target as the consumer price index was flat MOM and up 1.6% YOY. Ex-food and energy, it was up 0.1% MOM and 1.7% YOY. 

Retail sales disappointed, falling 0.2% MOM. The prior month was revised upward however from a drop of 0.3% to a drop of 0.1%. The Street was looking for 0.1% gain. The control group fell 0.1% versus expectations of a 0.4% gain. 

Industrial production rose 0.4% MOM while manufacturing production rose 0.2% and capacity utilization ticked up to 76.6%. Improvements in the mining sector accounted for the rise. 

Business inventories rose 0.3% as autos increased. Inventory will amount to a slight positive in the Q2 GDP report. The inventory-to-sales ratio is at 1.38, which is elevated compared to historical norms and would ordinarily be associated with a downturn in the economy. 

The Empire State Manufacturing Survey fell to 9.8 last month, but is still reasonably strong. 

Earnings season gets into full gear this week, with a lot of the big banks reporting. 

Wells Fargo reported better-than-expected earnings last week. The stock was down about 2% on the news, despite the earnings beat as improvements in credit quality were offset by high expenses. Mortgage origination was down 11% YOY to $56 billion, while applications fell 13% and the size of their pipeline fell 28%. Nonconforming loans rose by $7.3 billion, while second mortgages fell. Mortgage banking revenues fell 19%, however which indicates margin compression. 

Mortgage banking revenues at JP Morgan and Citi also fell by 26% and 52% respectively. 

Defaults are soaring for subprime auto loans, as the sector has hit new post-crisis highs. While subprime auto loans are not going to have the impact on the economy that subprime mortgages did, this is a tell that all is not necessarily well in consumer-lending land. Despite the aggressive underwriting in auto loans, mortgage credit remains tight as a drum. The auto loan issue is yet another one of the unintended consequences of Fed policy: many of the biggest investors in this sort of paper are pension funds, insurance companies, etc, who have to hit a return bogey and cannot earn enough in government and investment grade paper to meet their actuarial obligations. Many of the state pension funds are solvent only if you squint at the asset return assumptions. 

Mortgage credit eased a touch in June, according the the MBA Mortgage Credit Availability Index. Conforming and non-conforming credit eased while government credit tightened. 

Morning Report: More Yellen testimony today

Vital Statistics:

	Last	Change
S&P Futures	2443.0	3.0
Eurostoxx Index	386.4	1.5
Oil (WTI)	45.5	0.0
US dollar index	87.9	-0.1
10 Year Govt Bond Yield	2.33%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.59
30 Year Fixed Rate Mortgage	4.03

Stocks are flattish as Janet Yellen begins her second day of testimony in front of Congress. Bonds and MBS are flat.

Initial Jobless Claims fell to 247k last week, showing that employers are hanging on to employees.

Inflation still remains in check at the wholesale level, as the producer price index rose only 0.1% in June. Ex-food and energy it rose 1.9% YOY, which is below the Fed's target. Services increased 0.3%, which could indicate wage growth is beginning to happen.

The markets rallied yesterday on Janet Yellen's dovish comments. Fed-Watcher Tim Duy believes the markets have it wrong. His view is that Yellen has spent enough time at the Fed to understand that the longer the Fed waits to address inflation, the more aggressive they will need to be, which increases the risk of a recession. He basically lays out four scenarios:

• Inflation rebounds while unemployment remains steady, which is the base case Fed scenario
• Inflation remains low while unemployment holds steady. This is the market's bet. 
• Inflation rebounds while unemployment goes lower: This would mean a more aggressive Fed in 2018
• Inflation remains low while unemployment goes lower: Difficult for the Fed.

His view is that we see one of the latter two scenarios. FWIW, I think the unemployment rate is a bit of a red herring given that the employment to population ratio is still pretty low. Granted, some of that is demographic (older Boomers retiring) and some of it is discouraged workers, but a 4.5% unemployment rate today doesn't really mean the same thing it meant, say, 20 years ago. I think the mistake people make is that they fail to recognize that recoveries after burst residential real estate bubbles are fundamentally different animals, characterized by low inflation, weak demand, and risk aversion in business. Weak demand and risk aversion are not recipes for inflation. I suspect the second or the fourth scenario is the most likely. IMO, we won't see inflation until we see wage growth, and that has been slow to materialize. 

Angel Oak Advisors priced a $210 million deal of non-prime residential mortgages recently, and it looks like the second quarter may break $1 billion in non-prime RMBS. This is a record since the financial crisis, but is still a shadow of its former self. At one point during the boom, 1/3 of all mortgages were alt-A or subprime. Even if we hit a record for the rest of the year, we probably won't even sniff 5%. In fact, many of the loans being put in these securitizations wouldn't have even been considered non-prime during the bubble years. These loans are non-QM, and mainly consist of two types of  borrowers: self-employed who don't have enough W2 income and borrowers with a credit event in the past who have large down payments. The borrowers in Angel Oak's portfolio are paying between 5% and 9%. 

Why do appraisals sometimes come in low?  Typically, the problem is in apples-to-oranges comps (i.e. not in the neighborhood, or comps that had an issue like asbestos, mold, etc). The other big issue surrounds things that have value, but tend to get short shrift with appraisers: things like a nice finished basement, a good view, nice appliances, etc. Raised ranch homes are often problematic, as the lower level gets completely excluded from the square footage, basically cutting your square footage in half. 

Morning Report: Janet Yellen's dovish comments spark a rally

Vital Statistics:

	Last	Change
S&P Futures	2435.3	11.0
Eurostoxx Index	382.2	3.0
Oil (WTI)	45.7	0.7
US dollar index	88.1	-0.1
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	4.03

Stocks and bonds are sporting their rally caps on Janet Yellen's prepared testimony in front of Congress. 

The big event of the day will be Janet Yellen's semiannual testimony in front of the House Financial Services Committee. Expect the focus to be on the tightness of the labor market and why we have yet to see any real wage inflation. Both sides will also try and get her to agree with their viewpoints on banking regulation. Here are her prepared remarks. 

The statement that jumped out to me was this: "That expectation is based on our view that the federal funds rate remains somewhat below its neutral level--that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel. Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance." That is a dovish statement, and bonds took off, especially the long end of the yield curve. This sentiment was echoed by Lael Brainard as well.

The Fed Funds futures reacted to the remarks by assigning a 91% probability of no move in September and assigning a 53% chance of no move in Decsember. These are about 9-10 basis points higher than they were last week.

Minneapolis Fed President Neel Kashkari is skeptical that the economy is close to overheating, and he believes that wage growth will happen once labor is scarce. The fact that wages aren't really increasing leads him to believe there is still plenty of slack in the labor market, despite some shortages in certain skills.

Donald Trump Jr. met with a Russian lawyer last year who supposedly had dirt on Hillary Clinton. Turns out the info mainly concerned the Ziffs and was tangentially related to the Clinton Foundation. Interpretation of the gravity of this is predictably falling along partisan lines. PIMCO is warning that this could affect markets since it makes bipartisan consensus less likely in DC, but that ship has sailed. Note stocks went out on their highs yesterday, which indicates the stock market assigns zero import to the latest "bombshell."

Mortgage Applications fell 7.4% last week as purchases fell 3% and refis fell 13%. The index does include an adjustment for the 4th of July holiday, however many people took off on the Monday prior. Interest rates did rise on the back of a European bond sell-off, which hurt production. 

RBS reached a settlement with the FHFA for $5.5 billion related to toxic MBS securities from the go-go days. 

Morning Report: Hiring and quits are rising

Vital Statistics:

	Last	Change
S&P Futures	2422.0	-2.0
Eurostoxx Index	380.1	-1.6
Oil (WTI)	44.1	-0.3
US dollar index	88.4	0.1
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.05

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

Job openings fell slightly in May to 5.7 million, according to the BLS. The number of hires increased by 430k to 5.5 million. The quits rate increased to 2.2 million. The quits rate is a key indicator that carries a lot of weight with the Fed. An increase in the quits rate usually is an indicator of future wage inflation. The quits rate is back to pre-crisis levels.

 

Small business optimism declined in June, according to the NFIB. We are still higher than we were pre-election, but some of the optimism is fading as it looks like tax reform and healthcare reform are not going to happen. Employment-related indicators ticked down, but are still very strong. 85% of all respondents that tried to hire reported that there were few or no candidates with the required experience. Rising compensation will draw more people into the workforce, however that will be a slow process. Note that much of the drop in the labor force participation rate has been due to people aging out. The first big question is whether these people want back into the workforce or are content to stay retired. The second big question is whether ageism will keep these people out. 

Consumers are becoming more optimistic according to the New York Fed. Nearly 35% of all respondents said they are better off now than they were a year ago, and they are less worried about losing their jobs. Consumers also said they expect to spend about 3.3% more in the coming year than they did last year.

Are appraisers going to be replaced by artificial intelligence and / or algorithms like Zillow's Z-estimates? Some people think so. Zillow has been tweaking its model to take into account more than just the comps - now it will include things like interior amenities. This may happen out of necessity: the regulators raised the barriers to entry so high that the pipeline of new people entering the profession is almost nothing (In 2005, 1,200 people entered the profession. Now it is 100). The average age of an appraiser is 58 and there simply isn't a stream of replacements. Freddie Mac is now willing to accept model-generated appraisals for some refis and is asking FHFA for permission to use more. It kind of begs the question of why the government then thinks appraisers need to have so much education and apprenticeship time if it is willing to accept modeled values to begin with. 

Mortgage performance improved last month according to CoreLogic. 4.8% of all mortgages were 30 days down in April compared to 5.3% the year prior. That said, early stage delinquencies (30 - 60 days down) ticked up to 2.2% from 2% the year before. 60-90 day DQs were roughly flat YOY. Some of the drop in performance is coming from the energy-intensive states like Alaska and North Dakota. Now that oil cannot seem to get out of its own way, we may start seeing more trouble in the oil patch. 

The CFPB has released a new rule making it easier for class-action suits against lenders. Financial firms will be restricted in their ability to use mandatory arbitration clauses to protect themselves against lawsuits. Under the Congressional Review Act, Congress has 60 days to overturn the new rule. The OCC has asked the CFPB for their data, and Republican Jeb Hensarling has already come out against it. 

Morning Report: Slow news week

Vital Statistics:

	Last	Change
S&P Futures	2422.0	-0.5
Eurostoxx Index	381.1	0.0
Oil (WTI)	43.9	-0.4
US dollar index	88.4	0.1
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.05

Stocks and bonds are flattish this morning on no real news. 

The week after the jobs report is usually pretty data-light, and this week is no exception. We will have a lot of Fed Speak however. 

The Labor Market Conditions Index slipped in May, but is still reasonably strong. 

Fannie Mae's Home Purchase Sentiment index matched a record set last February. The number of people who say it is a good time to sell hit a record, which confirms what we already know, that it is a seller's market. Lenders think credit is going to ease somewhat over the next few months. The survey also showed that people are more confident in their personal financial situations and are less worried about losing their jobs. 

Washington has noticed the shortage of appraisers and is looking to find ways to address the issue. While appraisals are not at the top of the list for Dodd-Frank reform, they are beginning to be discussed, along with the role the Federal government has in the business. One of the ideas being considered involves reducing some of the duplicative educational requirements.

Deutsche Bank is warning investors over frothy equity market valuations as the world's central banks reverse course. They note that the ratio of stock market capitalization to GDP is approaching the peaks set in 2000 and 2008. I would counter that central banks worldwide are going from a posture of "ludicrous easing" to "ridiculous easing." Short term real interest rates are still negative in most of the world. In the US, the core inflation rate is anywhere from 1.5% - 2%, depending on what index you use. All US rates are below that range out to 3 years. So, even if the Fed hikes the Fed Funds rate another 50 basis points, we are still in negative territory. So, while you can characterize what the Fed is doing as "tightening," that really only indicates a direction. On a scale of 1 to 10 we are going from 9.9 to 9.8. 

We know that a shortage of skilled construction workers and lots are hampering homebuilding. Now, it looks like sticks and bricks are an issue as well. 21% of the builders surveyed in the NAHB homebuilder survey cite a shortage of framing lumber. The spot price of framing lumber is up about 10% YOY. 

Morning Report: Decent jobs report

Vital Statistics:

	Last	Change
S&P Futures	2415.8	7.3
Eurostoxx Index	379.5	-0.9
Oil (WTI)	44.6	-0.9
US dollar index	88.3	0.1
10 Year Govt Bond Yield	2.38%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.06

Stocks are higher this morning after a decent jobs report. Bonds and MBS are down.

Jobs report data dump:

• Nonfarm payrolls up 222,000
• Unemployment rate 4.4%
• Labor Force Participation rate 62.8%
• Avg weekly earnings up .2% MOM and 2.5% YOY

Overall, it is a decent report. The payroll number was a bit higher than expectations. The wage numbers are certainly nothing to get the Fed worried about inflation, although we still aren't making much headway on bringing the long-term unemployed back into the labor force. Bringing those folks back into the workforce is the key (along with improving housing construction) to improving the economy from "meh" to "boom."

The bifurcation in the employment market between those with jobs and those without is evident in what recruiters are saying: It is the hottest market in memory for some headhunters and things are definitely candidate-driven. Companies have been loath to give raises for over a decade, but they may be forced to in order to attract / retain talent. 

Ray Dalio and Jeffrey Gundlach believe the top is in for the bond market (in other words, rates are going higher) and that stocks are vulnerable. Being short bonds is probably one of the biggest fast-money / wiseguy trade on the Street right now. Note however that notwithstanding the pop in yields over the past week or so, most of these guys are lugging a losing position. 

Federal Reserve Governor Jerome Powell called the current US housing system unsustainable, and pointed directly at Fannie and Fred. Here is the problem: US mortgage rates are artificially low, and that is due to government subsidies. The 30 year fixed rate mortgage is a distinctly American phenomenon. In the US, the taxpayer bears the credit risk and the lender bears the interest rate risk. Loans are guaranteed by the government, which means the lender gets paid even if the borrower stops paying. The 30 year fixed rate means the borrower has no interest rate risk - it doesn't matter where rates go, their rate stays the same. Everywhere else, the lender bears the credit risk and the borrower bears the interest rate risk (because everywhere else the rate floats with interest rates after a certain time period). Without the government backing, no lender would make loans at the rates Fannie and Fred can offer. His point is that real estate prices are based on subsidized borrowing rates and that makes the real estate market more susceptible to downdrafts. Nothing is going to change however - the US residential real estate finance market has been largely the same since the New Deal and there really is no replacement for it. Just remember this any time someone blames 2008 on the "free market." There is nothing, absolutely nothing "free market" about the US residential real estate market. There hasn't been since the Great Depression.