Morning Report: Home prices increase by fastest pace in 4 years

Vital Statistics:

	Last	Change
S&P Futures	2758.3	4.3
Eurostoxx Index	375.2	0.2
Oil (WTI)	61.3	0.4
US dollar index	83.6	0.1
10 Year Govt Bond Yield	2.81%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	102.75
30 Year Fixed Rate Mortgage	4.43

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

Initial Jobless Claims fell to 226k last week. We are at levels not seen since the 1960s. 

Import prices rose 0.4% MOM and are up 3.5% YOY. Declining oil prices actually pushed the index lower. A weaker dollar is helping bolster exports, however it also makes imports more expensive. It probably won't make a difference to the Fed, which tends to focus on the Personal Consumption Expenditure metric when formulating monetary policy. 

Manufacturing continues to exhibit strength, according to the Empire State Manufacturing Survey and the Philly Fed. We will see if Larry "King Dollar" Kudlow is able to put a floor under the US dollar, which has been weakening to the benefit of exporters. He is already telling the Fed to "let it rip" regarding the economy. 

The NAHB Homebuilder Sentiment Index fell to 70 in March. 

Homeowner's equity increased 12% (or just about $900 billion) according to CoreLogic. Negative Equity fell by 21% to 2.5 million homes or about 5% of all homes with a mortgage. For LOs, this represents an opportunity: Anyone who did a FHA loan with 3.5% down a few years ago might have built up enough equity to qualify for a conforming mortgage without MI. With higher rates driving down the refi index, there aren't many opportunities out there, so review your past production. 

Home prices increased 8.8% YOY according to Redfin. This is the fastest pace in 4 years. The median home price is $285,700. Home prices are again ahead of incomes, with the median house to median income ratio back at 4.8x, which is about where it peaked during the bubble years. Low inventory is driving this, and homes are moving quickly. The average time on market fell by a week to 53 days. In Seattle, the average home goes to contract in 8 days. 

The House is introducing a bill to rename the CFPB and to have it run by a 5-person board. The new name will be the Financial Product Safety Commission. The bill is bipartisan. Separately, the Senate passed a bill yesterday which eases regulatory requirements for smaller banks. 

In the developing world, a lack of affordable housing is a huge problem. One company's solution: 3D printed houses, which will cost about $4,000 to build. The company will introduce its first community of 3D printed homes next year in El Salvador. 

Morning Report: Wholesale inflation still under control

Vital Statistics:

	Last	Change
S&P Futures	2779.5	6.8
Eurostoxx Index	376.9	1.4
Oil (WTI)	61.1	0.4
US dollar index	83.4	-0.1
10 Year Govt Bond Yield	2.84%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	102.75
30 Year Fixed Rate Mortgage	4.43

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

Inflation at the wholesale level rose 0.2% MOM / 2.8% YOY. Ex-food and energy, they rose 0.2% MOM / 2.7% YOY. The core index (ex food, energy and trade services) rose 0.4% MOM / 2.7% YOY. Overall, the report came in a touch hotter than expectations, but nothing major. In terms of services, hotel demand drove the increase, while goods were impacted by lower energy prices. This report shouldn't have any effect on the Fed's decision next week. 

Retail Sales came in weaker than expected, and this is providing some support for bonds. The headline number was down 0.1%, while the control group was up 0.1%. Census has made some technical changes to the way it measures and calculates the index, so these numbers are going to contain a bit of noise. That said, people who were hoping that tax cuts would propel spending are disappointed this morning, however it might take a month or two to show up in the data. 

Not much of a reaction in the Fed Funds futures, with March futures handicapping a 89% chance of a 25 basis point hike, and the December futures coalescing around a total of 75 basis points this year. 

Mortgage Applications increased 0.9% last week as purchases rose 3% and refis fell 2%. The average contract rate rose 4 basis points to 4.69%, the highest level since January 2014. Refis comprised 40% of all mortgages, the lowest level in almost 10 years. The government share of mortgages increased. 

The leading candidate to replace Gary Cohn is Larry Kudlow, a free-trade, supply-side economist. A veteran of Wall Street and Washington, he recognizes that some saber rattling in trade issues can be a useful negotiating tactic. He also is a regular on TV, which is crucial for selling the Administration's policies to the public. Finally, he is well-liked in Washington, and while Democrats might not agree with him on policy, he doesn't strike a nerve with them. This will be helpful in navigating budgetary decisions. 

10 years ago, Bear Stearns collapsed, pretty much setting the stage for the financial crisis. The public didn't pay attention until Lehman went under. At the end of the day, Bear and Lehman were symptoms, not the disease. The disease was a burst residential real estate bubble. Keep that in mind as the business press will undoubtedly publish a bunch of "Are we at risk for another financial crisis?" articles this week. Residential real estate bubbles are the Hurricane Katrinas of banking, and when they burst, they take down the system with it. We do not have one at the present, and while there is evidence of excessive risk taking in some corners of the market (subprime auto, etc) it simply isn't big enough to dent the economy in a material way. 

Hard to believe, but true. Last night not a single Japanese government bond traded. Between the central bank vacuuming up the supply as a part of QE and Japanese pension funds buying and holding, there is almost no liquidity in the market. Makes the yield curve pretty easy to manipulate, though. Japan has always had a different attitude about markets - it thinks interest rates and stock prices are too important to be determined by a mere market - but it will be interesting to see how the economy gets out from under such determined government support. Ultimately, accurate, unmanipulated interest rates and asset prices are a necessary part of the plumbing for a functioning economy.

Morning Report: Housing starts nosedive

Vital Statistics:

	Last	Change
S&P Futures	2262.0	3.5
Eurostoxx Index	359.6	0.8
Oil (WTI)	51.1	0.2
US dollar index	93.1	-0.1
10 Year Govt Bond Yield	2.58%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.15

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

Housing starts fell 19% in November to an annualized rate of 1.09 million, which was way below estimates. Both single family and multi-fam fell, but multi bore the brunt of it. This is 7% lower than a year ago. Building Permits came in at 1.2 million, which was also below forecasts. Housing starts can be volatile and I wouldn't be surprised to see this number revised upward. 

Despite the low housing starts number, homebuilder sentiment is at highs not seen since the bubble years. This increase was probably due to a post-election bounce, however builders remain cautious and starts are way below historical averages. Perhaps a change in the regulatory environment will change that. "This notable rise in builder sentiment is largely attributable to a post-election bounce, as builders are hopeful that President-elect Trump will follow through on his pledge to cut burdensome regulations that are harming small businesses and housing affordability," said NAHB Chairman Ed Brady, a home builder and developer from Bloomington, Ill. "This is particularly important, given that a recent NAHB study shows that regulatory costs for home building have increased 29 percent in the past five years."

Donald Trump is close to choosing Larry Kudlow for the role of Chief Economist. The focus for economic growth will move from trying to improve demand to trying to improve productivity. Kudlow is a veteran of the Reagan Administration and is a firm believer in supply side economics. He has been historically a very vocal free trader, but will have to soften that approach in this administration.