Morning Report: Tough times in mortgage banking

Vital Statistics:

			Last	Change
S&P futures			2840	0.75
Eurostoxx index			388.33	-0.84
Oil (WTI)			69.29	0.8
10 Year Government Bond Yield				2.95%
30 Year fixed rate mortgage				4.58%

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

The week after the jobs report is invariably data-light and this week is no exception. We will get inflation data on Thursday and Friday and JOLTS data tomorrow and that is about it. 

Everyone knows that 2018 has been an awful year for mortgage banking. How bad is it? Check out the graph below courtesy of Garrett Macauley:

The one thing that jumped out at me (aside from the -8 basis points this year) is how little the industry made during the bubble years. Is it as simple as saying the mortgage business lives and dies on the refinance business and even in great purchase markets (like 04-06) mortgage banking is a marginal activity at best? 

If you are tired of hearing predictions of an inverted yield curve, check this out. Jamie Dimon thinks the 10 year bond yield should be 4% right now, and is saying that 5% is a possibility. "I think rates should be 4 percent today," Dimon said from the gala, according to Bloomberg News. "You better be prepared to deal with rates 5 percent or higher - it's a higher probability than most people think." While it is impossible to rule that forecast out, take a look at the chart below: Interest rate cycles are long and during periods of low inflation they just don't move around all that dramatically.  It took rates 20 years (1946 - 1966) to go from 2% to 5%. What was inflation in 1966? 5%. With the core CPI sitting at 2%, a 5 handle on inflation seems pretty unlikely. Not saying it is impossible - lots of differences between the mid 20th century and today - but.... 

Chinese buying has been supporting prices in some big West Coast markets, and it is drying up. While trade war concerns are probably playing a role, we are seeing declines in other global real estate markets, like London and Vancouver. This is a signal that the issue is probably internal to China, which has a real estate bubble of its own. The government has issued regulations limiting the purchase of foreign property, and seems worried about the currency. If the Chinese real estate bubble bursts, expect to see more selling in West Coast markets because that will be the only way for Chinese investors to raise cash.