Morning Report: Spending and Incomes rise smartly

Vital Statistics:

	Last	Change
S&P Futures	2462.3	6.5
Eurostoxx Index	374.1	3.1
Oil (WTI)	46.3	0.3
US dollar index	86.1	0.2
10 Year Govt Bond Yield	2.14%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.86

Stocks are up this morning on end-of-month window dressing. Bonds and MBS are flat. 

Personal incomes rose 0.4% in July, while personal spending rose 0.3%. The PCE index (the Fed's preferred measure for inflation) rose 0.1% MOM and 1.4% YOY. Good report for stock bulls in that incomes and spending are rising smartly while low inflation keeps the Fed at bay. The December Fed Funds futures are currently predicting a 36% chance of a rate hike at the December meeting and virtually no chance of a hike at the September meeting. 

Pending Home sales fell again in July, for the fourth time in five months as tight inventory reduced contract activity. Since bottoming 5 years ago, home prices are up 38% while incomes are only up about a third of that. While that would imply home affordability is getting worse, we are still quite affordable (as far as mortgage payment to income ratios) than we have been historically. It turns out that interest rates matter more than prices when it comes to affordability. 

Job cuts rose to 33,825 in August according to the Challenger and Gray Job Cuts report. This is an uptick from July, and a slight uptick on a YOY basis. Retail and construction (surprisingly) were the areas hit. A number in the low 30ks is generally a pretty strong number historically. Don't forget, these are job cut announcements based on press releases. They may never actually happen. 

Initial Jobless Claims were flat at 236,000 last week, which is still an exceptionally strong number. 

The Chicago PMI was unchanged at a strong 58.9 last month. New orders and production rose, while employment contracted. Another possible sign of a slowdown in the labor market? 

Congress may tie Harvey funding to a debt ceiling increase to make it palatable for all parties to vote for it. If there is going to be a fight over spending increases, the wall, and the debt ceiling, it will happen at the end of the year, not now. Note that Harvey's costs will also complicate tax reform. 

Fannie, Fred, and FHA have announced they will offer forbearance for at least 90 days for homeowners in Houston who were affected by Harvey. 

The CFPB has released its planned changes to TRID. These changes go into the Federal Register on October 10, however they are not mandatory until 10/1/18. 

The hits keep coming for Wells. An expanded review of fake accounts increased the estimate to 3.5 million. They are also being sued for charging improper lock extension fees. This will certainly be an obstacle for Republicans who want to argue for loosened financial regulation. For the most part, it seems that any regulatory relief will be directed towards the smaller community banks who have been hit the hardest with increased compliance costs. There is still very little sympathy in Washington for the big money center banks. 

Morning Report: Strong GDP and ADP numbers

Vital Statistics:

	Last	Change
S&P Futures	2448.5	1.5
Eurostoxx Index	368.4	-3.8
Oil (WTI)	46.3	-0.1
US dollar index	85.5	-0.1
10 Year Govt Bond Yield	2.15%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.84

Stocks are higher this morning on some strong economic data. Bonds and MBS are down. 

The economy added 237,000 jobs in August, according to the ADP jobs report. The Street is looking for 180,000 jobs in this Friday's jobs report. In a reversal of recent trends, large businesses are starting to add workers. 

Second quarter GDP was revised upward to 3% from 2.6% as consumer spending increased 3.3%. The GDP price index was unchanged at 1%, which gives the Fed the leeway to maintain an easy monetary policy. 

Mortgage Applications decreased 2.3% last week as purchases fell 3% and refis fell 2%. The 30 year conforming rate fell by a basis point to 4.11%. 

Corporate profits fell in Q2 from 11.5% to 8.1%. 

The FHFA is changing some of the limits for reverse mortgages, after it found that the program amounts to a 7.7 billion a year loss for the government. The borrowing caps will fall, such that a 62 year old would be able to only access 41% of the equity in their property, down from 52%. An 82 year old would only be able to access 51%, down from 60%. Reverse Mortgages are a way for seniors to tap an illiquid asset (their home equity) and turn it into a liquid asset (cash) while still living in their home. They are a great deal for the senior, however they are a money-loser for the taxpayer. 

CoreLogic takes a look at which housing markets are most at risk for a downturn, using its Market Health indicator. This looks at home price appreciation relative to income growth and rental inflation. 8 of the top 10 riskiest markets are in Florida. Note that the highest risk areas are the ones that fell the furthest when the bubble burst. The low risk ones are the areas that didn't really experience the huge peaks and valleys. 

Wells Fargo is being sued over lock extension fees. The suit claims that they charged extension fees when the bank was the reason the lock was blown. 

Morning Report: Risk-off feeling on North Korea missile launch

Vital Statistics:

	Last	Change
S&P Futures	2431.3	-12.5
Eurostoxx Index	367.6	-4.7
Oil (WTI)	46.6	0.0
US dollar index	85.1	-0.1
10 Year Govt Bond Yield	2.11%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.84

Stocks are lower on news that North Korea fired a missile over Japan. Bonds and MBS are up.

Pre-open, the 10-year bond is trading at 2.11%, the lowest level of 2017 and we are back at immediate post-election levels. Remember, on the day of the election, the 10 year was trading around 1.83%, so we could still have further to fall in rates. The Great Trump Election Reflation simply isn't going to happen, though the Administration still intends to pivot to tax reform. The trader in me thinks we test the 1.83 level at some point. 

Home prices rose 0.1% MOM and are up 5.7% YOY according to the Case-Shiller Home Price Index. The Case-Shiller index has been lagging the FHFA index, which indicates that there might be some issues at the high end of the market. The FHFA index only looks at homes with a conforming mortgage, so jumbos and all-cash sales are excluded. 

Consumer confidence rose again in August to 122.9. The present situation component of the index hit a 16 year high, as we are back to mid 2001 levels. 

Tax reform won't be a slam dunk, but there could be a possibility for a bipartisan deal. Democrats might be willing to trade a carbon tax for an income tax cut, but that might be too tough of a deal for Republicans to stomach. A repatriation holiday for overseas corporate earnings is another possibility, however Democrats will certainly want some sort of strings attached to the repatriation break to ensure the funds don't simply go to buybacks and dividends, which is what happened last time we did one. Perhaps a deal could be found if there is a stipulation that some percentage of the savings be applied to worker compensation and training. 

A drop in the cap for the mortgage interest deduction is also something being considered, however that is such a politically risky issue that I doubt anyone does anything about it. The main beneficiaries are the wealthy and the upper middle class, and the upper middle class is really the third rail of politics. Liberals may hate the distribution of the benefits, but they probably won't go to the mat for it. Why? It isn't indexed for inflation, so the cap will hit more and more people simply due to home price appreciation. As a practical matter, the cap is declining 6% a year. 

Fannie Mae Chief Economist Doug Duncan looks at the implications of the Fed ending QE. He believes that it will increase MBS spreads, which means that mortgage rates will rise more than you would typically expect when rates rise, and fall less than you would expect when rates fall. FWIW, I think any effect would be minor: it certainly was when QE was actually happening. He also speculates that tapering will affect Fannie Mae and Freddie Mac spreads more than Ginnie spreads due to the differing capital treatment for banks. This means that FHA and VA loans will be relatively more attractive to a borrower than a Fannie or Freddie loan. The GSEs have also been ordered to reduce their balance sheets to a set level, so they won't automatically absorb that lost demand. 

Morning Report: New 30 year mortgage proposal

Vital Statistics:

	Last	Change
S&P Futures	2445.8	3.3
Eurostoxx Index	373.4	-0.7
Oil (WTI)	47.5	-0.4
US dollar index	85.6	-0.1
10 Year Govt Bond Yield	2.17%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.84

Stocks are up this morning after Harvey pounded Houston. Bonds and MBS are up.

About 10% of US gasoline refining capacity is offline due to Harvey. We could see higher gasoline and heating oil prices as a result. 

We have a big week of economic data with GDP, personal spending and incomes, PCE inflation, and the jobs report. The December Fed Funds Futures are pricing in a 61% chance of no change in the Fed Funds rate at the December meeting. 

Janet Yellen and Mario Draghi defended the post-crisis regulatory framework and suggested only "modest" changes to it. Janet Yellen's term expires early next year, and many are wondering who Trump will nominate to replace her (or whether she will be re-nominated). Gary Cohn is the name most mentioned as a replacement. With regards to Dodd-Frank, most of the regulatory changes will probably concern the regulatory burden for smaller community banks and finding a way to give them some relief. A change in the structure of the CFPB would also be a possibility. 

Speaking of the CFPB, there is talk that Director Cordray will be resigning soon in order to run for Governor of Ohio. 

The Fed lays out a proposal for a new type of 30 year fixed rate mortgage - the COFI (cost of funds index) mortgage. It is a 30 year fixed rate mortgage, however it has restrictions on refinancing and equity extraction. Essentially, it is an ARM from the banks' standpoint, and a 30 year fixed from the borrower's standpoint. The payment never changes, however the amount of the payment that goes to principal and interest varies with interest rates. When rates fall, the interest component of the fixed mortgage payment falls as well, and that extra payment is applied to the principal, which creates a reservoir of home equity. When rates rise, the interest component increases, and the home equity component falls. If the reservoir is empty (i.e. no home equity to draw upon), the bank covers it. Essentially the idea would be to replace something that is difficult to hedge (prepayment risk) with something easy to hedge (basically option-like interest rate risk). The added equity build will also limit risk to the government, which still guarantees the credit risk.  Interesting idea, however the industry will probably not like it, as it reduces refinancing opportunities. I suspect these bonds will also be difficult to securitize as well. 

Morning Report: Markets prepare for Janet Yellen

Vital Statistics:

	Last	Change
S&P Futures	2447.5	6.8
Eurostoxx Index	375.7	1.2
Oil (WTI)	47.7	0.3
US dollar index	86.1	-0.1
10 Year Govt Bond Yield	2.20%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.89

Stocks are up this morning as we await Janet Yellen and Mario Draghi speeches in Jackson Hole. Bonds and MBS are flat. 

Janet Yellen will be speaking at 10:00 am EST at Jackson Hole. The markets aren't expecting much in the way of new policy guidance, however given the general illiquidity of the markets, and the fact that it is a Friday during summer, anything that spooks the herd could have outsized effects. 

Durable goods orders slipped 6.8% in July largely due to a drop in aircraft orders. Ex-transportation they were up 0.5% MOM and 5.6% YOY. Capital Goods orders rose 0.4% and are up 3.5% YOY. Capital Goods orders are a good proxy for business capital expenditures, and indicates manufacturing confidence in the future. 

Credit scoring is something we take for granted, however there is competition to the standard Fair Issac model (FICO). VantageScore (created by Fair Issac competitors Transunion, Equifax and Experian) is attempting to become an alternate scoring methodology for Fannie / Fred and FHFA loans. FHFA is worried that allowing new credit scoring methods would create a race to the bottom, where the agencies end up using the one that shines the most favorable light on borrowers. Some feel the FICO methodology, which doesn't distinguish between types of debt, is outdated. Vantagescore uses things like utility and rent payment history, which is useful for people who don't borrow much in the first place and don't have a FICO score. 

The post-election sell-off in bonds is unwinding, and mortgage rates have hit the lows of 2017, matching levels seen just after the election, according to Freddie Mac. The 30 year fixed rate mortgage averaged 3.86% for the week ending August 24, which is the lowest level since November 10, 2016. 

The homeownership rate may have bottomed, and perhaps we are seeing a turnaround for the younger buyers. Below is a chart of the homeownership rate by age cohort, going back to 1994. The youngest age brackets definitely have the most volatility, and they are the most affected by the dearth of starter homes for sale. 

Morning Report: Existing Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2447.0	5.5
Eurostoxx Index	375.8	1.8
Oil (WTI)	47.7	0.3
US dollar index	86.1	0.1
10 Year Govt Bond Yield	2.19%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.89

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

Today starts the Fed conference in Jackson Hole. No major speeches are planned for today, however Janet Yellen speaks tomorrow. There is the possibility of some volatility around then. The big question will be whether Yellen is nominated for another term or will she be replaced when her term expires next year. National Economic Council Chairman Gary Cohn is the name most mentioned as a replacement. Donald Trump criticized the Fed's low interest rate policy while on the campaign trail, but it will be interesting to see if he nominates a hawk. Most politicians prefer doves when push comes to shove. 

Initial Jobless Claims fell to 234k last week. The labor market remains strong as companies hang on to their workers. 

Existing home sales fell 1.3% in July, according to NAR. This is up 2.1% YOY, but is the lowest number of 2017. Lawrence Yun, NAR chief economist, says the second half of the year got off on a somewhat sour note as existing sales in July inched backward. “Buyer interest in most of the country has held up strongly this summer and homes are selling fast, but the negative effect of not enough inventory to choose from and its pressure on overall affordability put the brakes on what should’ve been a higher sales pace,” he said. “Contract activity has mostly trended downward since February and ultimately put a large dent on closings last month.” The median house price was $258,300 which is up 6.2% YOY. Unsold inventory is down to 4.2 month's worth, from 4.8 months a year ago. 

What are the most active real estate markets right now? Colorado Springs, Chicago, and Reno. Least active? San Francisco, where the average house price is now over a million. Much of the Northeast is cold as well. What makes a market active? Access to both good jobs and affordable homes. 

Big money managers are swapping corporate debt for mortgage backed securities, particularly subprime MBS from before the crisis. Corporate debt simply got too expensive, and MBS got too cheap. The supply of subprime MBS has been shrinking however as loans get paid off, and non-agency MBS outstanding are about 25% of what they used to be. For fixed income managers, MBS have outperformed most everything this year. The appetite for MBS paper is encouraging, as it would open up the origination business to more outside-the-box product and allow credit to be extended to borrowers who have been more or less shut out of the market post-crisis. 

A reduction in the mortgage interest deduction is on the table as part of tax reform. The talk is that the cap would drop from $1 million to $600k or so. Toll Brothers CEO Doug Yearley said reducing the MID would be bad policy and would discourage homeownership. Of course Toll is in the McMansion business, so he is talking his book a little. Bob Shiller thinks the effect would be de minimus as it would only affect something like 4% of taxpayers. 

Morning Report: Are we heading into a recession?

Vital Statistics:

	Last	Change
S&P Futures	2443.0	-9.8
Eurostoxx Index	374.4	-1.5
Oil (WTI)	47.7	0.3
US dollar index	86.1	0.3
10 Year Govt Bond Yield	2.20%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.89

Stocks are lower this morning after Donald Trump threatened to shut down the government over a wall. Bonds and MBS are up small. 

Mortgage Applications dipped half a percent last week as purchases fell 2% and refis rose 0.3%. The average rate on a 30 year fixed was unchanged, while jumbos dropped 5 basis points. Mortgage rates are back at the lows of November 2016.

New Home Sales slipped to 571,000 in July, which was lower than expectations. 

For all the talk about Millennials wanting to stay in cities, many are beginning to move to the suburbs. I guess it was only a matter of time. That age cohort is now the biggest group in the housing market. They are starting later than previous generations, however and the median age for a first time homebuyer is 33, which has been inching upward for decades. So, for all the handwringing articles about this generation being reluctant to buy houses, it turns out that they are pretty much like every generation before them: preferring to live in urban areas until they get married and have kids. That said, they are largely renters for the moment, as a combination of a dearth of starter homes and high student loan debt keeps them from buying. Eventually builders will realize there is an opportunity in starter homes, but as of now they are remaining lean and are stymied by regulation and a lack of skilled labor. 

Several investment banks are warning that we are approaching the tail end of the expansion and are heading for another recession. They note that global correlations (in other words markets all moving together) has broken down and is back at levels we saw back in 2005. They also cite the fact that companies that beat earnings estimates are not seeing the sort of pop we are used to seeing. We also could be seeing a downturn in profits just as equity valuations reach stretched levels. FWIW, the fact that we are not seeing inflation provides some comfort. Most recessions in the past were driven by an overheating economy (low unemployment, high resource utilization) which caused inflation and tightening from the Fed. We aren't seeing that at all today - in fact the fear is that inflation is too low. The Fed has been increasing rates not to slow the economy, but to eliminate some of the distortions caused by rates sitting at the zero bound. While you can't rule out some sort of black swan event (some sort of shock that comes out of left field) the imbalances that usually precede Fed-driven recessions simply aren't there at the moment, aside from a low unemployment number. 

Morning Report: Are we hitting price exhaustion at the high end of the market?

Vital Statistics:

	Last	Change
S&P Futures	2432.3	4.3
Eurostoxx Index	374.4	1.6
Oil (WTI)	47.4	0.0
US dollar index	86.2	0.3
10 Year Govt Bond Yield	2.21%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.89

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

House prices rose 1.6% in the second quarter and are up 6.6% YOY, according to the FHFA House Price Index. The fastest growth was out West, with Washington up 12.4%. The weakest areas were in the Northeast and Mid-Atlantic, particularly CT. 

Morgan Stanley is warning that stocks and corporate bonds could be vulnerable once the Fed begins to let its portfolio of Treasuries and MBS run off. A committee of investors and banks hypothesized that corporate credit spreads could widen as much as 135 basis points. Will that have the same effect on mortgage backed securities spreads? Quantitative easing itself didn't move in spreads all that much, so I cannot imagine something that will amount to a tiny fraction of that having much impact either. The Fed's balance sheet is now about $4.5 trillion. Pre-crisis it was under $1 trillion. Many market observers think the Fed may never be able to get its balance sheet back down to where it was pre-crisis. 

Tensions with North Korea and fears of a debt ceiling standoff have pushed down the market's assessment of future Fed Funds hikes. The December Fed Funds futures are now predicting a 62% chance of no hike versus a coin toss about a week ago. 

The government plans to try and get some sort of tax reform done this year, however it will be difficult. We are much more likely to see some sort of "tax reform light" which probably won't have a massive impact on the economy in the near term. The first order of business is to fund the government and to get an increase in the debt ceiling. Meanwhile, Bridgewater CEO Ray Dalio is taking off risk due to political polarization and buying gold. 

The DOJ ended the Obama Administration's Operation Choke Point, which was sold as an attempt to prevent banks from funding fraudulent actors, but in reality was just an attempt to prevent banks from doing business with payday lenders, which the Administration opposed on ideological grounds. The idea was to hopefully drive payday lenders out of business by making them unable to find banks to service them. 

Luxury homebuilder Toll Brothers reported earnings this morning, and the stock is down a touch pre-market. Average selling prices fell due to a change in product mix. ASPs for signed contracts were flat and contracts were up 25%. Could we be seeing exhaustion, pricing-wise- at the high end of the market? Perhaps, but Robert Toll, Chairman of the Board said: “We believe our industry has room to run. Single-family housing starts, at 811,000, are still well below the 50-year industry average of 1.02 million units. The home ownership rate is on the rise but also still below historic norms. Interest rates remain low, unemployment is low, and more and more buyers are entering the upscale market. Based on these trends, we believe Toll Brothers is well positioned for future growth.”

Despite the lousy housing starts numbers, homebuilder stocks have been on a tear, rising 31% this year. Part of this was due to corporate tax reform - since homebuilders generally have little to no international exposure, a drop in the statutory rate would boost their earnings the most, compared to someone like Apple who has international entities all over the world. Builders have been struggling with their own issues however, especially a shortage of skilled labor. Many of the skilled laborers who worked in homebuilding during the boom either retired or went to work in different industries. Second, construction materials (aka sticks and bricks) are rising as well, and any sort of trade war with Canada will affect framing lumber prices. One thing to remember about homebuilding is that it is a very cyclical business, and during booms, multiples compress. The average homebuilder P/E is about 11 right now, and during the go-go years, it got down to 8.5. In other words, you could be right on earnings increasing, but wrong on the stock price as it goes nowhere while earnings grow. The other side of that argument is that there is so much pent-up demand for housing right now that a slowdown is simply not on the horizon. 

A new lending firm claims it can cut the closing process down to 8 days, and the borrower never has to speak to a loan officer. The industry average is 43 days. 

Morning Report: Fed "halfway there" in terms of rate hikes

Vital Statistics:

	Last	Change
S&P Futures	2426.8	0.0
Eurostoxx Index	374.1	-0.1
Oil (WTI)	48.7	0.1
US dollar index	86.1	0.0
10 Year Govt Bond Yield	2.18%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.88

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

Very slow news day, as the chatter relates primarily to the eclipse today.

The Chicago Fed National Activity index slipped a bit in July, indicating the economy is growing more or less on its historical trend line. Employment-related indicators were a plus, while consumption related indicators were a drag. 

Not a lot of data this week, but there will be a conference of central bankers at Jackson Hole this week. The subject will be focused on regulation and financial stability so I don't expect much in the way of market moving data. Janet Yellen will speak on Friday. 

San Francisco Fed President John Williams says the "normal" Fed Funds rate should be about 2.5% or so. In other words, we are about halfway there. To put that number in perspective, it used to be in the 5% to 6% range before the financial crisis. 

As we head into September, the debt ceiling fight will take center stage. This has usually been a contentious issue and this time should be no different. Nancy Pelosi is rumored to be demanding some sort of censure for Trump regarding his Charlottesville comments as the price of Democratic Party support. If so, this one could go down to the wire. Remember the last time we had a government shutdown, we were unable to get tax transcripts from the IRS for a couple of weeks. Take this into account and order before the debt ceiling deadline if you can. 

The NY Fed bumped up its estimate for Q3 GDP to 2.1% from 2%. Note the Atlanta Fed is forecasting 3.7% GDP growth. Industrial metals have been on a tear, which is a tell for global growth. 

Nationstar is now officially Mr. Cooper. 

Morning Report: Freddie Mac introduces automated appraisals for purchases

Vital Statistics:

	Last	Change
S&P Futures	2432.0	2.5
Eurostoxx Index	374.0	-2.8
Oil (WTI)	47.2	0.1
US dollar index	86.1	-0.3
10 Year Govt Bond Yield	2.16%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.88

Stocks are higher this morning after yesterday's sell-off. Bonds and MBS are flat. 

There is a risk-off feel to the market as the current situation in Washington DC plus the terror attacks in Spain are causing investors to sell stocks and buy bonds. The post-election low on the 10 year was 2.14%, and we are getting close. Loan officers, maybe take a look at some old refi candidates that might have missed the boat and see if there is interest again. 

Freddie Mac is introducing an automated appraisal alternative for some purchases and refis. "Freddie Mac's automated collateral evaluation (ACE) assesses the need for a traditional appraisal by leveraging proprietary models and using data from multiple listing services and public records as well as a wealth of historical home values to determine collateral risks." ACE has been available for some refis since June, but will also be available for some purchases starting in September. This is one way to alleviate the problem of appraiser shortages. 

Freddie Mac has issued their outlook for the rest of 2017. Highlights include

• Housing starts will remain low, and should come in below 1.24MM (which is the long-term average). 
• Home sales will hit 6.2 million and mortgage rates will stay below 4%.
• House price appreciation will come in at 6.3% for the year.
• Cash sales as a percentage of sales will remain elevated in the high teens. This is lower than the peak of 35%, but higher than the historical average of about 10%. This difference translates into about $172 billion in fewer originations. 

Freddie Mac explains what is going on with the cash sales: "Usually, not many people like to invest a lot of cash into real estate, which is illiquid and has high transaction costs. However, in the current, highly-competitive housing market, a cash offer is an effective way to gain an advantage over other bidders. In a cash sale, the seller doesn't have to worry about the buyer's ability to obtain a mortgage or the chances that an appraisal will come in below the agreed sales price. And each cash sale means one less mortgage origination."

The Canadian real estate bubble will probably not affect the US all that much, however it could have an impact on higher priced properties, especially on the West Coast. Here is a chart comparing the US bubble to the Canadian one:

Note that the Canadian real estate market doesn't have CDO squareds, NINJA loans, pick-a-pay mortgages, or anything like that. Perhaps bubbles are caused by something else - like too much money chasing too few assets... 

Home sales fell 3.5% in July, according to Redfin as tight inventory continues to be a problem. Inventory fell 11%, and many buyers are pulling back from the market, waiting for new inventory. You can see just how much inventory has been falling on a YOY basis below.

Morning Report: FOMC minutes slightly dovish

Vital Statistics:

	Last	Change
S&P Futures	2460.8	-6.5
Eurostoxx Index	378.5	-0.6
Oil (WTI)	46.6	-0.2
US dollar index	86.5	0.2
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.88

Stocks are lower this morning after WalMart missed earnings. Bonds and MBS are up.

The FOMC minutes from the July meeting showed that some member are still worried about inflation being too low, while some are worried about overshooting the inflation target. "Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside. Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored. One participant pointed to the stability of a number of measures of inflation expectations in recent months, but a few others suggested that continuing low inflation expectations may have been a factor putting downward pressure on inflation or that inflation expectations might need to be bolstered in order to ensure their consistency with the Committee’s longer-term inflation objective." This statement was taken as dovish and bonds rallied a few basis points on it. The rest of the minutes were uneventful as nothing much had changed economically from the June meeting. There were a few members who wanted to announce the change in balance sheet policy at this meeting but most wanted to wait. That probably means that we will get no hike and an announcement on balance sheet reduction at the September meeting. We didn't see any reaction in the Fed Funds futures either, with December still a toss-up. 

Initial Jobless Claims fell to 232k last week, which remains near historical lows. The last time we were at similar levels, the population was much smaller and there was a military draft going on. 

Industrial Production rose 0.2% last month, while manufacturing production fell 0.1% Lower auto production drove the decline. Capacity Utilization was unchanged at 76.7%. There is still a lot of slack in manufacturing, which is why capital expenditures have been so low. Separately, the Philly Fed Manufacturing Survey increased. 

Average home sizes grew in the aftermath of the housing boom, as only the luxury end of the sector was working. With Millennials not in a position to buy, aging boomers were the only game in town. From the bottom, average square footage increased from 2388 square feet to 2,622 square feet. However we are seeing this reverse as builders pivot to selling more starter homes. Average and median home size is still above the 2006 peak however. 

Household debt increased in the second quarter to $12.84 trillion, which is up about 15% from the post-bubble trough. Mortgage balances increased, however new origination fell as higher interest rates took a bite out of refis. Auto loans increased, as incredibly easy financing is being used to sell cars these days, and credit card balances increased as well. 90 day delinquencies declined to 1.5% of all mortgage loans outstanding. 

Morning Report: Housing starts disappoint

Vital Statistics:

	Last	Change
S&P Futures	2468.0	4.3
Eurostoxx Index	379.3	2.8
Oil (WTI)	47.7	0.2
US dollar index	86.7	0.1
10 Year Govt Bond Yield	2.28%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.88

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

The big event of the day will be the release of the FOMC minutes at 2:00 pm EST. The Street will be looking for more info on how the Fed plans to wind down its QE portfolio. Investors will also be parsing the statement for clues regarding the Fed's stance on the current status of low inflation. While inflation remains low if measured against the Fed's inflation target, we are starting to see wage inflation. The hawks on the Committee will push to get ahead of that, while the doves (like Yellen) will prefer to let the labor market "run hot" for a while. The minutes will probably not be market-moving, but just be aware if you are locking around that time. 

The minutes will be interesting given the recent GDP forecasts out of the Atlanta Fed, which have Q3 growth coming in at 3.7%, and are predicting a much stronger second half to the year. You could really start to see a battle between the hawks and the doves. The Fed Funds futures contracts are still predicting no move in September and a 50-50 chance of a hike in December. 

Mortgage Applications fell 0.1% last week as purchases fell 2% and refis increased 2%. Mortgage rates continue to tick lower, with the 30 year fixed rate mortgage down to 4.14%, the lowest since November. 

Housing starts disappointed last month, coming in at 1.15 million, down 4.8% MOM and 5.8% YOY. The notoriously volatile multi-family segment drove the decrease, as single family starts were more or less unchanged. The Street was looking for 1.22 million units. Building permits came in at 1.22 million, lower than estimates as well. They were down 4% on a MOM  basis but were up 4% on a YOY basis. 

Where is the growth in housing construction? Texas. Of course Texas didn't really experience the bubble type behavior the way states like California, Arizona, and Florida did. This may be because Texas has more restrictions on cash-out refinances than other states. Here is a chart of where the action is (and is not)

Morning Report: Retail sales come in strong

Vital Statistics:

	Last	Change
S&P Futures	2469.0	5.5
Eurostoxx Index	376.7	0.6
Oil (WTI)	47.2	-0.4
US dollar index	86.6	0.3
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.88

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

Retail Sales came in stronger than expected, with the headline number increasing 0.6% and the control group increasing the same amount. The Street was looking for a 0.3% increase. On a year-over-year basis, sales rose 4.2%. The Atlanta Fed is predicting a big uptick in growth from Q2 to Q3, and retail sales will be a big driver. We are entering the back-to-school shopping season, which is second only to the holiday season in importance for the retail sector. Consumption is about 70% of GDP, so as retail sales go, so goes the economy. 

The Empire State Manufacturing Survey shot ahead again last month, hitting the highest level in 2 years. Meanwhile, inflation remains under control as import prices rose 0.1% last month and are up 1.5% YOY. Business inventories also rose .05%.

The NAHB Housing Market Index rebounded in August to 68, which is getting close to its highs. The NAHB says that labor shortages are worse in July than they were a year ago. In some trades, 3/4 of all builders surveyed report either "serious" or "some sort" of shortage of labor. The last time we saw these sorts of levels was in late 2000, just as the real estate market was heating up. This will limit building and keep home prices well-supported. 

The Despot reported better than expected earnings as homeowners continue to invest in their appreciating homes. They are looking for comparable store sales to increase 5.5% and took up earnings guidance. Note that contractors are using Amazon more and more, so be careful with the stock. 

Down payments are at the lowest levels in 7 years, with the growth mainly occurring in the high single digits are, not at the 3.5% area. It looks like the growth is coming from Fannie and Fred's low downpayment programs, which are wresting share from FHA. Performance on these loans will probably be determined by the continued price appreciation in the US housing markets. While general riskiness is higher than it was 5 years ago, it is nowhere near the risk we had during the go-go years. 

The Trump Administration is trying to pivot to tax reform after the debt ceiling is handled. Both NAR and NAHB have come out against any sort of plan to eliminate the mortgage interest deduction. Trump's plan is to eliminate the deductions for state / local taxes as well as the mortgage interest deduction in exchange for doubling the standard deduction. NAR is warning that this will hit housing prices, however with inventory so tight, I cannot see that happening. FWIW, if you were ever going to eliminate the mortgage interest deduction, now would be the time to do it, since rates are so low. Mortgage interest is around 70% of the first year's mortgage payment today. 30 - 35 years ago, it was above 90%. NAR sees about half the people currently taking a deduction to stop. Of course their tax bill isn't necessarily going up - they will find that taking the standard deduction will be more advantageous than indexing. 

Home sales and prices are slipping in Canada, which has a real estate bubble bigger than the one we had in 2006. Fallout from the Canadian bubble bursting will probably affect pricing in places like Seattle, which has been red-hot for the past couple of years. 

Morning Report: Credit scores and debt service

Vital Statistics:

	Last	Change
S&P Futures	2454.0	14.0
Eurostoxx Index	375.2	3.1
Oil (WTI)	48.7	-0.2
US dollar index	86.2	0.2
10 Year Govt Bond Yield	2.21%
Current Coupon Fannie Mae TBA	103.197
Current Coupon Ginnie Mae TBA	104.068
30 Year Fixed Rate Mortgage	3.92

Stocks are higher this morning as tensions between the US and North Korea seemed to ease a bit over the weekend. Bonds and MBS are down. 

Not a lot of data this week (nor is there any Fed-Speak). The highlight should be housing starts on Wednesday. 

The St. Louis Fed is forecasting 3.7% GDP growth for Q3, while the Atlanta Fed is forecasting 4% growth. Seems surprisingly high, but we will get an idea of how realistic that is when retailers report same store sales for August, which covers the back-to-school shopping season.

These GDP forecasts (if they end up playing out) should boost rates higher over the near term. This will be offset by international tensions (and a general sense of uncertainty in DC) which will pull rates lower. There is no real way to forecast how things will shake out, but just be aware that this push-pull effect should make for increased rate volatility over the near term.

With the Fed on hold until December, the markets are turning to the debt ceiling, which should hit in late September / early October. You are starting to see a tick up in the yields of 3 month T-bills maturing in late September. The debt ceiling has always been a bit of an annual kabuki dance, this time around the unpredictability of things in DC is making traders a little more worried. 

Average credit scores have eclipsed their October 2006 peak, hitting 700 this year. It is interesting to see that US consumer debt levels are at all-time highs, however debt service is at a low. Debt service is one's mortgage, car, installment, and credit card debt as a percentage of income. Check out the charts below:

Consumer credit:

Debt service:

These two charts demonstrate just how much interest rates matter (and why owning a home isn't quite as unaffordable as the home price indices suggest). If you want to see what determines how Fair Issac (of FICO fame) determines your score, here is a handy chart. The single best thing one can do is make timely payments, followed by reducing the amount they owe. 

Morning Report: Neel Kashkari to business: stop whining

Vital Statistics:

	Last	Change
S&P Futures	2474.0	-3.3
Eurostoxx Index	381.1	-0.9
Oil (WTI)	49.4	0.0
US dollar index	86.2	-0.1
10 Year Govt Bond Yield	2.26%
Current Coupon Fannie Mae TBA	103.197
Current Coupon Ginnie Mae TBA	104.068
30 Year Fixed Rate Mortgage	3.92

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

Job openings increased by 461,000 to hit 6.2 million in June, according to the JOLTS job openings report. The quits rate was steady at 2.1% (or about 3.1 million people). The quits rate is an important number to the Fed and often signals impending wage growth. The quits rate was the lowest in the Northeast, at 1.7% while the highest in the South at 2.5%. 

Small business optimism increased in July, according to the NFIB. Small business continues to hire, adding .21 workers on average over the past several months. Finding qualified workers remains a problem, and 87% of those trying to hire found few or no qualified applicants. Apparently drug use remains a big issue - getting workers who can pass a drug test can be difficult. Regarding the political environment in DC, while there has been no movement on anything legislatively, there have also been no new regulations put in place, and we are seeing some regulations from the Obama administration reversed, which is having a positive effect on sentiment. 

Minneapolis Fed Head Neel Kashkari spoke yesterday of the tight labor market and dismissed the idea that there is a labor shortage. "Are you really struggling to find workers? If so, the proof for me is you are raising wages. If you are not raising wages, then it just sounds like whining," he said. While Kashkari is definitely the dove on the committee, if that sentiment is any indication of the rest of the FOMC, they will be content to nudge up the Fed Funds rate at their current cautious pace until they see wage growth. 

China is trying to take away the punch bowl and reduce overseas investment, in an effort to prevent them from experiencing a bust similar to Japan's in the late 80s. I guess they see parallels between Mitsubishi paying $2 billion for the Rockefeller Center, which ended up going bankrupt a few years later. While I think they are barking up the wrong tree here (industrial policy and a residential real estate bubble are the real issues) it will have some knock-on effects perhaps in our markets. The Chinese withdrawal is probably going to hit the Canadian residential real estate market hard, and you are already seeing transactions dry up in Toronto. Chinese money will be most felt in the ultra-expensive urban areas like Seattle, New York City, and San Francisco. If China does in fact go through a Depression, they will probably try and export their way out of it, which means less inflation in the US, and lower interest rates, at the margin. 

The Fannie Mae Home Purchase Sentiment Index ticked off of record highs last month as high prices and tight inventory led to a record low of people saying now is a good time to buy. Granted, the index only goes back to 2012, but it does show how high prices are scaring buyers away. Those that say it is a good time to sell also saw a big decrease, which was the main driver of the reading. That is surprising since you would think that tight inventory + demand would equal a great seller's market. Not sure what would be causing that. 

Delinquency rates are improving for the industry according to the latest CoreLogic Loan Performance Insight Report. 30 day + DQs fell to 4.5% in May, which is down 0.8% from last year. The number in foreclosure fell 0.3% to 0.7%. About the only place you are seeing increases in delinquency are the fracking areas (South Dakota, Louisiana, some parts of Texas) which have been affected by falling oil prices. 

Morning Report: Why hasn't there been better wage growth?

Vital Statistics:

	Last	Change
S&P Futures	2474.5	2.8
Eurostoxx Index	381.6	-0.9
Oil (WTI)	49.0	-0.6
US dollar index	86.3	0.0
10 Year Govt Bond Yield	2.27%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.94

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

Should be a relatively dull week after the employment report. Not much in the way of data but we do have Fed-speak almost every day. 

Last Friday's jobs report didn't have much of an impact on the Fed Funds futures. They are forecasting a 99% chance of no hike at the September meeting, while the December meeting is being priced as a coin toss. The consensus seems to be that the September meeting will usher in the next steps in reducing the size of the Fed's balance sheet. 

The jobs report prompted a lot of articles asking about wage growth and why we aren't seeing it. The usual explanations include low productivity, lack of bargaining power on the part of workers, and the untapped reservoir of the long-term unemployed. IMO maybe the answer IS inflation - at 1.5% PCE growth, maybe 1% real wage growth is about the best we can hope for. We are seeing wage inflation in pockets (especially skilled labor and construction) however unskilled labor is still competing with technology which unfortunately keeps getting better and cheaper. Also, note that wage and job growth has been uneven geographically. 

The post-election spike in interest rates pushed down prepayment speeds and refis earlier this year. Now that interest rates have corrected some of that move, we are seeing them increase again, according the Black Knight Financial Services. The January and February numbers were the most depressed, which reflects the increase in the 10 year to 2.6% post-election. 

Wells Fargo has admitted that the fake account scandal could be bigger than previously thought. Meanwhile, Trump administration is taking a look at the Obama-era settlements where banks were forced to donate to third party activist groups as part of their settlement. 

Why are Treasury investors buying them at what will probably turn out to be a negative yield after taxes and inflation? Because the alternative (of losing more in the stock market).