Morning Report: Housing inventory and entry level homes

Vital Statistics:

	Last	Change
S&P Futures	2839.5	-14.0
Eurostoxx Index	397.5	-2.3
Oil (WTI)	65.0	-0.6
US dollar index	83.1	-0.3
10 Year Govt Bond Yield	2.71%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.19

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

The FOMC meeting starts today. This will be Janet Yellen's last hurrah, and that will probably dominate the news more than whatever decision they make. 

Consumer Confidence improved in January, according to the Conference Board. Confidence is at levels not seen since the late 90s. 

Home price appreciation continues its torrid pace, according to the Case-Shiller Home Price Index. The housing market is partying like it is 2005, with the usual suspects (San Diego, LA, Lost Wages) leading the charge. Case-Shiller Chief Economist David Blitzer had this to say about home price appreciation: “Home prices continue to rise three times faster than the rate of inflation... Given slow population and income growth since the financial crisis, demand is not the primary factor in rising home prices. Construction costs, as measured by National Income and Product Accounts, recovered after the financial crisis, increasing between 2% and 4% annually, but do not explain all of the home price gains. From 2010 to the latest month of data, the construction of single family homes slowed, with single family home starts averaging 632,000 annually. This is less than the annual rate during the 2007-2009 financial crisis of 698,000, which is far less than the long-term average of slightly more than one million annually from 1959 to 2000 and 1.5 million during the 2001-2006 boom years. Without more supply, home prices may continue to substantially outpace inflation.”

The lack of supply is puzzling, however part of what has pushed demand higher has been affordability due to decreasing interest rates and increasing wages. Home price unadjusted for inflation are back to bubble levels, however when you take into account inflation, they are not. As I argued before, affordability is a function of interest rates as much as it is about home prices. Borrowers focus on the monthly payment, not necessarily the sticker price. As far as the lack of supply, I think a lot of this is standard post-bubble psychology, where lenders and builders become more risk-averse (and often overcorrect to the other direction). Yes, regulation does play a role here, however post-bubble recoveries generally are weaker than normal because of this change in psychology. Eventually fear of being caught with too much inventory translates into fear of missing out. Despite years of below-average inventory, we aren't there yet. 

The outlook for housing this year remains similar to what we have seen for the past several years - tight inventory constraints will keep sales down while rising interest rates will affect affordability. The bottleneck is tightest at the lower price points - where the first time homebuyer is most likely to be found. The latest NAR exiting home sales report has supply overall around 3.2 month's worth. At the entry level, it is even tighter: in the price range of $125k - $250K, it is probably around 2.7 months or so. Unsurprisingly, we are seeing the biggest price appreciation in that segment as well. Here is a chart of inventory over time: We are at levels last seen during the bubble years:

Tonight Donald Trump will give his State of the Union Speech in front of Congress. The focus will be a $1.5 trillion infrastructure plan. Part of the plan will include a process for streamlining the approval process. Gary Cohn had this to say on CNBC: "He's going to talk about a trillion and a half dollars of investment, but more importantly, he's going to talk about streamlining the approval process on infrastructure," Cohn said. "Right now, we have an infrastructure approval process that takes seven to 10 years to build relatively simple roads. We need to streamline that to less than two years." 

I talked about the Mick Mulvaney memo to CFPB staffers and how they intend to end regulation by enforcement action, which was the MO of the Obama / Cordray regime. The Labor Department is also ending another Obama policy of refusing to give guidance to companies that ask for it. This is yet another example of the regulatory environment taking a less adversarial approach to the private sector, and this should translate into a stronger economy and mitigate some of the risk aversion I alluded to earlier. 

Tax reform is translating into more business spending headlines. Exxon-Mobil plans to add another $35 billion to its previous $15 billion expansion, and Pfizer plans to invest $5 billion. Given that capacity utilization is still historically low, this is somewhat surprising. Eventually, these newfound animal spirits have to affect the homebuilders, right? 

Years of central bank manipulation of the risk free rate has created a slew of questionable investments. Remember the PIIGS? (Portugal, Ireland, Italy, Greece, and Spain - the high yielding Euro states with massive budget issues?) Portugal has lower yields than the US right now. The Japanese Central Bank has been directly buying Japanese equities. If there is one "black swan" out there right now, it is the mal-investment that has been driven by central banks pushing yields to the floor in order to support asset prices.