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.