Morning Report - A look at the week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	1861.1	10.7	0.58%
Eurostoxx Index	3178.3	5.9	0.18%
Oil (WTI)	101.6	-0.1	-0.06%
LIBOR	0.231	-0.003	-1.18%
US Dollar Index (DXY)	80.05	-0.124	-0.15%
10 Year Govt Bond Yield	2.76%	0.03%
Current Coupon Ginnie Mae TBA	105.1	-0.2
Current Coupon Fannie Mae TBA	103.8	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.34

Feels like a little end-of-quarter window dressing as the SPUs are up 11 points on no real news. (No, a strong ISM Milwaukee report doesn't count). Bonds are getting hit as well. 

The ISM Milwaukee report jumped from 48.6 in February to 56 in March. New Orders and production rose 19 points. Could this be a weather-related rebound? Perhaps. However, note that we are starting to see other data points (Kansas City Fed) showing that the Midwest may be waking up. 

Lots of important data this week, starting with the ISM and construction spending tomorrow. Then on Friday we get the jobs report. The Street is at 200k nonfarm payrolls, and an unemployment rate of 6.6%. Given the "six months" number thrown out by Janet Yellen, we could start to see the jobs reports begin to matter again for bonds, where a strong reports will be very bearish.

Following on that theme, investors pulled $10.3 billion out of bond ETFs in March, the biggest liquidation since December 2010. If the economy is in fact picking up some steam, then the bond market is about to become a very treacherous place. 

Morning Report - Little to no progress on foreclosure inventory in the Northeast

Vital Statistics:

	Last	Change	Percent
S&P Futures	1844.9	4.3	0.23%
Eurostoxx Index	3153.3	19.6	0.62%
Oil (WTI)	101.8	0.5	0.52%
LIBOR	0.233	0.000	-0.11%
US Dollar Index (DXY)	80.16	0.044	0.05%
10 Year Govt Bond Yield	2.68%	0.00%
Current Coupon Ginnie Mae TBA	105.2	-0.1
Current Coupon Fannie Mae TBA	104.2	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.33

Stock markets in the US are following overseas markets higher. Bonds and MBS are flat

Personal Income and Personal Spending rose .3% month over month in February. January's spending number was revised down. The core personal consumption expenditure growth rate was 1.1% annualized, showing inflation remains tame and gives the Fed leeway to keep interest rates low. For all the talk about "six months" and "considerable time" don't forget that this Fed takes the dual mandate seriously and believes inflation can be too low. If inflation remains around 1%, they will want to pursue policies to push it closer to 2%. The Fed has been trying to create inflation for six years and the numbers remain stubbornly low. 

Note that in response to recent data, Barclays has trimmed its estimate for Q1 GDP to 2% from 2.4%. 

The latest CoreLogic Market Pulse is out, with a couple of good articles. First, it discusses how housing affordability differs between first time homebuyers and buyers with an existing home. Affordability has been declining, but it has been declining more for first time homebuyers, which may partially explain why the first time homebuyer remains on the sidelines. Until they return to the market, we are going to have this sort of abnormal market, IMO. 

Foreclosure inventory is down 31% nationally from a year ago to about 837,000 homes. or about 2.1% of all homes with a mortgage. In states like California, professional investors snapped up the foreclosure inventory and at this point supply is constrained and prices are rising. Not so in the Northeast, where very little progress has been made on the foreclosure inventory, and unsurprisingly prices have barely budged. 

Morning Report - grim Q4 numbers out of the MBA

Vital Statistics:

	Last	Change	Percent
S&P Futures	1841.2	-1.4	-0.08%
Eurostoxx Index	3116.2	-14.0	-0.45%
Oil (WTI)	101.2	1.0	0.96%
LIBOR	0.234	0.000	0.11%
US Dollar Index (DXY)	80.12	0.090	0.11%
10 Year Govt Bond Yield	2.70%	0.01%
Current Coupon Ginnie Mae TBA	105.1	-0.1
Current Coupon Fannie Mae TBA	104.2	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.33

Markets are lower after yesterday's sell off. Bonds and MBS are down small. Initial Jobless claims came in at 311k, lower than expected. 

The final revision to fourth quarter GDP is in - 2.6%. The advance estimate was +3.2%. Personal consumption was up 3.3%, which is a good number. The price index came in at 1.6%, which is still below the target level for the Fed. 

Mortgage banking profits hit a low in Q4. Average per-loan profits fell from $743 in Q3 to $150 in Q4, according to the MBA. This is the lowest level since the MBA began tracking this in 2008.  Loan production expenses increased to $6.959 from $6,368 in the quarter. Loan production expenses are an "all-in" number that includes commissions, overhead, etc. Personnel expenses per loan averaged $4,385 in Q4 vs $4,130 in Q3. Average production volume was $367 million in Q4, down from $391 million in Q3. Secondary marketing income increased by 4 bps. Finally, the productivity rate was 2.0 loans per production employee per month, a decline from 2.5 loans in the third quarter. Lower volume + increased compliance costs = lower profits. And this is in Q4, before all the new rules kicked in. 

Is the distressed REO-to-rental trade getting played out? According to RealtyTrac, we have reached a state of stasis in the distressed real estate arena, with a dwindling supply of homes, institutional investors beginning to balk at the higher prices, a lack of supply of new construction, and an MIA first time homebuyer. All cash sales were 43% of all U.S. residential sales in February. The historical number is closer to 20%. There is an incredible amount of pent-up demand for the first time homebuyer once the economy recovers. That dip in household formation was due to a lousy economy, not fertility rates 25-30 years ago. 

Pending Home Sales dropped .8% month-over-month and 10.2% year-over-year. I'm sure weather played a role in this drop, but it confirms what RealtyTrac is saying above. 

Maxine Waters has proposed a bill to wind down the GSEs and replace it with a system that regulates the mortgage industry like a public utility, where a co-op of lenders would issue MBS guaranteed by the government. I wonder if that would also mean that the government would dictate how much a lender is permitted to make on a loan. She would reduce the private sector's first loss risk to 5% from 10%, and lower the required down payment to 5% (3.5% for first time homebuyers). Naturally, this is a bill the left is going to love because it ensures that "underserved" constituencies continue to be subsidized by other borrowers. This bill has a less than zero chance of ever becoming law, so it is basically just a political marker and nothing more. 

Morning Report - The market continues to give weaker data a pass

Vital Statistics:

	Last	Change	Percent
S&P Futures	1865.7	6.4	0.34%
Eurostoxx Index	3135.4	38.8	1.25%
Oil (WTI)	99.63	0.4	0.44%
LIBOR	0.233	-0.001	-0.43%
US Dollar Index (DXY)	80.1	0.157	0.20%
10 Year Govt Bond Yield	2.74%	0.00%
Current Coupon Ginnie Mae TBA	104.8	-0.1
Current Coupon Fannie Mae TBA	103.9	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.35

Markets are higher this morning in spite of a kind of weak durable goods number. The headline number was better than expectations, but once you strip out air and defense, they actually fell. The market seems to be handing out weather-related "get out of jail free" cards like candy these days. Bonds and MBS are flattish.

Mortgage Applications fell 3.5% last week. Purchases rose 2.8% while refis fell 7.7%. Rates rose 6 basis points which explains the drop. Refis dropped to 53.8% of all loans.

The buy and mod business remains robust, at least in NY, one of the most lender-unfriendly states out there. DQs loans in Northeast judicial states like NY and NJ trade for 60% of BPO, as opposed to California, where it is closer to 80%. Maybe this is what it takes to move the logjam of foreclosed properties in New York. 

Party like its 1999:  Candy Crush is worth $7 billion. Guess all of those annoying facebook push ads must be worth something.

Fed Head Lockhart tries to clarify the "considerable time = six months" comment by saying that six months is a minimum, and it will probably be longer than that. Apparently some market participants were taking Yellen's comments to mean "as soon as April."

Redwood just priced $180 million of top rated jumbo securities paying 4% at 101.30. The REIT had been simply selling loans outright to banks lately given their appetite. 

Morning Report - Real estate price appreciation is decelerating.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1856.7	7.3	0.39%
Eurostoxx Index	3094.9	42.0	1.37%
Oil (WTI)	100	0.4	0.44%
LIBOR	0.234	-0.001	-0.32%
US Dollar Index (DXY)	80.05	0.111	0.14%
10 Year Govt Bond Yield	2.75%	0.02%
Current Coupon Ginnie Mae TBA	104.8	0.0
Current Coupon Fannie Mae TBA	103.8	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.85

US futures are following European markets higher. Bonds and MBS are down.

Some economic data this morning: New home sales fell 3.3% in Feb to an annualized 440k. Consumer Confidence increased from 78.3 to 82.3, while the Richmond Fed Manufacturing Index fell a point to -7. I suspect weather played a role in the new home sales and Richmond Fed numbers.

The FHFA house Price Index rose .5% in January, a little lower than expected. Case-Shiller rose 13.24% YOY, slightly below expectations. The Black Knight (formerly known as Lender Processing Services) home price index was flat in Jan, but up 8% year over year. They have home prices within 14% of the June 2006 peak. Note that in the Black Knight survey, the Northeastern states (NY, NJ) are starting to wake up.

Charles Plosser was surprised by the market's reaction to the FOMC statement. Punchline: We should be talking about economic conditions, not timelines. FWIW, I was surprised as well. 6 months after the end of tapering (which will presumably happen at the Dec FOMC meeting) puts you at the June FOMC meeting. Since most forecasts have the Fed funds rate increasing sometime in 2015, an early forecast of a June 15 hike doesn't seem all that surprising. A lot can happen in 15 months. Plosser would like to see the Fed Funds rate over 2% for 2015 and over 3% for 2016. 

The American Enterprise Institute has weighed in on Johnson-Crapo (the replacement for the GSEs). Part of the issue is that the affordable housing mandates don't disappear, but are moved underground, to be administered by the FMIC. The difference is that it won't be funded by HUD, it will be funded by a tax on banks, which will ultimately get passed on to borrowers. Others have pointed out that while Johnson Crapo might have issues with the left, it is going to have big issues with the right. FWIW, Dick Bove comes out in defense of the GSEs

Morning Report - The week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	1861.9	4.9	0.26%
Eurostoxx Index	3080.6	-15.9	-0.51%
Oil (WTI)	100.2	0.7	0.69%
LIBOR	0.235	0.002	0.97%
US Dollar Index (DXY)	80.26	0.154	0.19%
10 Year Govt Bond Yield	2.78%	0.03%
Current Coupon Ginnie Mae TBA	104.8	-0.2
Current Coupon Fannie Mae TBA	103.7	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.39

Markets are higher this morning after some good manufacturing data out of Europe and the US. Bonds and MBS are down.

The Chicago Fed National Activity Index rebounded in February to a better-than-expected.14 after a downward-revised -.45 in January. The Markit US Manufacturing PMI came in light. 

We have quite a bit of data this week, with the FHFA Home Price Index, Case-Shiller, and new home sales. On Wed, we get durable goods, Thursday, we get GDP and Personal Income / Spending.

Small cap stocks are back to bubble valuations.

Morning Report - risk spreads back to bubble levels

Vital Statistics:

	Last	Change	Percent
S&P Futures	1869.8	3.7	0.20%
Eurostoxx Index	3093.3	4.4	0.14%
Oil (WTI)	99.25	0.3	0.35%
LIBOR	0.233	-0.001	-0.32%
US Dollar Index (DXY)	80.17	-0.023	-0.03%
10 Year Govt Bond Yield	2.78%	0.01%
Current Coupon Ginnie Mae TBA	104.8	0.0
Current Coupon Fannie Mae TBA	103.6	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.42

Markets are up small on no real news. Bonds and MBS are down small. There is no economic data this morning.

KB Home sold $400 million of 5 year senior notes at 4.75%. The proceeds are going to be used to acquire land. I think we can expect to see more bond issuance as companies take advantage of low rates and tight spreads. Bond investors are paying up for paper at the moment, as spreads are about as tight as they have ever been. This means that (a) the bond market is vulnerable to shocks and (b) we could experience some turbulence as rates start rising. Look at the chart below - high yield spreads are back at bubble levels. 

Existing home sales fell yesterday, as professional investors begin to balk at high prices. According to RealtyTrac, institutional investors bought 44,087 properties in Q4, down from a peak of 60,648 in the second quarter of last year. As the labor market improves, we should see a return to a more normal level of cash vs mortgage buyers. 

Morning Report - A considerable time

Vital Statistics:

	Last	Change	Percent
S&P Futures	1848.1	-4.1	-0.22%
Eurostoxx Index	3053.4	-22.9	-0.75%
Oil (WTI)	99.67	-0.7	-0.70%
LIBOR	0.234	0.000	-0.11%
US Dollar Index (DXY)	80.26	0.268	0.34%
10 Year Govt Bond Yield	2.78%	0.01%
Current Coupon Ginnie Mae TBA	104.7	0.0
Current Coupon Fannie Mae TBA	103.6	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.36

Markets are lower after yesterday's FOMC meeting sent rates higher and stock lower. Initial Jobless Claims came in at 320k, lower than expected, but higher than last week. 

In other economic indicators, the Philly Fed Business outlook rebounded in March, and the index of leading economic indicators rose. Existing Home sales were virtually flat at 4.6 million units. The median home price rose to $189,000, a 9% increase year-over-year. The NAR notes that most of the price appreciation is at the higher price points - the lower price points (sub $250k) are actually falling. In fact, most of the price appreciation is in the $1 million + bucket.

Stocks and bonds sold off on the FOMC statement as investors re-calibrated their estimates as to when rates will begin to rise. The 10 year bond sold off about 6 basis points, but the real action was in the 2 year where rates jumped from 34.7 basis points to close at 42 basis points. In the press conference, Yellen threw out the (probably offhand) comment that "a considerable time" could mean "six months" and that was the catalyst for the bond market sell-off. You can read some of the parsing here. As expected, the Fed cut asset purchases by $10 billion a month. They also got rid of the 6.5% unemployment target and went to more qualitative guidance, as expected.

The Fed released their latest economic forecasts - unemployment and GDP were lowered, while inflation was increased. The forecast for when rates would rise shortened a bit, while the expected rate increased. We will have to wait for the minutes to get a better read on what is behind that. 

Homebuilder Lennar is up a couple of percent pre-open after reporting first quarter numbers that beat expectations. Orders increased 10% in units and 25% in dollar value. ASPs rose 18%. and gross margins increased 300 bps. This was the highest first quarter margin in the company's history. The company felt it was still a little too early to predict the strength of the spring selling season, but hopefully they will give some color on the 11:00 am EST conference call. The big question will be whether they can still push through price increases or have we reached the point where it is depressing traffic.

Morning Report - good numbers out of KB Home

Vital Statistics:

	Last	Change	Percent
S&P Futures	1866.7	2.9	0.16%
Eurostoxx Index	3084.8	11.0	0.36%
Oil (WTI)	100.3	0.5	0.55%
LIBOR	0.234	-0.001	-0.43%
US Dollar Index (DXY)	79.43	0.019	0.02%
10 Year Govt Bond Yield	2.69%	0.02%
Current Coupon Ginnie Mae TBA	105.4	-0.1
Current Coupon Fannie Mae TBA	104.3	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.31

Markets are up small on no real news. Bonds and MBS are flat. Mortgage Applications fell 1.2% last week. Later on today we will get the FOMC rate decision. Expect to see another 10 billion reduction in asset purchases and a change in the language regarding the threshold for raising rates. The Fed is expected to de-emphasize a single number (6.5% unemployment) and move to a more holistic threshold. Right now, the futures are forecasting that the first rate hike will be in Q4 next year. Watch to see if that forecast changes after the meeting

Housing starts came in about as expected at 907k. January was revised upward from 808k to 909k. We are still running at pretty much depressed levels. Weather undoubtedly played a part, as starts in the Northeast fell pretty dramatically. Building Permits increased to just over 1 million, but most of the growth was multi-fam, not single fam.

KB Home reported better-than-expected first quarter numbers. Revenues rose 11%,while orders grew 18% and backlog increased 21%. Deliveries were down about 3% in units, and average selling prices rose 12%. Part of the increase in ASPs is due to a strategic change in KB's business so you might not be able to draw many conclusions from that number. Gross margins continue to expand, and their 17.7% margins are the highest since 2006. No comments about traffic in the PR, maybe they will address the Spring selling season at the 11:30 EST conference call.

In a development that could impact rates here, a big Chinese developer has gone belly up and cannot repay $600 million in loans. We have known for some time that China has an epic real estate bubble and that it may finally be bursting. We are seeing a big drop off in commercial building sales, and that combined with a a historic investment rate topping 20% spells trouble. House price to income ratios in China are over 11. In Shanghai and Beijing that number is 23. To put that number in perspective, in Japan's bubble in the 80s, the ratio for Tokyo apartments topped out at 15 times income. In the US, it got to about 5x. Fast growing economies have these episodes (we did in the 1930s, Japan did in the 1990s, and China is having theirs now). 

What will be the spillover when it bursts? The biggest one will be economic - a burgeoning Chinese middle class had been a big component of global demand growth, and that will undoubtedly get depressed. This could be the catalyst that bursts the Canadian real estate bubble, as Chinese money is behind a lot of that as well. The biggest question will be what effect it has on rates in the US. Will Chinese investors dump Treasuries and MBS (remember, in crises, you sell what you can, not necessarily what you want to) or will there be a massive flight to safety which means rates go lower? My gut tells me that rates go lower because commodity price inflation is about to get slammed and China will attempt to export its way out of the predicament. This means even lower inflation in the US. That is something that will worry the Fed. 

Morning Report - Lots of housing data this week

Vital Statistics:

	Last	Change	Percent
S&P Futures	1841.7	8.8	0.48%
Eurostoxx Index	3027.9	23.3	0.77%
Oil (WTI)	98.14	-0.8	-0.76%
LIBOR	0.234	0.000	-0.17%
US Dollar Index (DXY)	79.45	0.000	0.00%
10 Year Govt Bond Yield	2.66%	0.01%
Current Coupon Ginnie Mae TBA	105.8	-0.1
Current Coupon Fannie Mae TBA	104.4	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

Markets are higher this morning on no real news. Bonds and MBS are down on the risk-on trade.

We have lots of housing data this week, starting with the NAHB sentiment numbers later today, housing starts and building permits tomorrow, and existing home sales on Friday. We will also have earnings announcements from Lennar and KB Home. The big things I will be listening for in the earnings announcements will be (a) color on the traffic for the Spring Selling Season, and (b) how much of an increase in ASPs (average selling prices). I think we may be at the point where buyers are balking at higher prices and that means that builders will have to sell more units to move the needle on the top line. This means more sales, and stronger economic growth. A return to normalcy in home construction has been one of the last pieces of the puzzle in this economic recovery. 

95.5% of Crimeans want to join Russia, according to a vote. This referendum certainly ups the ante in the volatile Ukranian situation. The White House has insisted the referendum was illegal and would not be accepted. The EU is meeting today to discuss sanctions.

Some manufacturing economic data this morning:  Industrial Production rose .6%, much higher than expected. Manufacturing Production rose .8%, and capacity utilization ticked up to 78.8%. The New York Fed Empire State Manufacturing Survey showed manufacturing is improving, albeit slowly, in the New York State region. All good numbers - the Industrial Production numbers are subject to variations based on the weather and mining (think fracking), but the manufacturing number is strong too. Definitely positive data. 

Here is the draft of the bipartisan Senate Housing Finance Reform Bill. Fannie and Fred go away and the Federal Mortgage Insurance Corporation is established. Private capital will take the first 10% loss on MBS and then FMIC bears the rest. The HUD affordable housing goals go away, but we still will be in the social engineering business, except it will be lenders paying for it with a 10 basis point fee on all origination. Of course this will simply get passed on to borrowers. The FMIC will get to dole out the funds. 

Morning Report - Happy Pi Day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1838.4	-1.3	-0.07%
Eurostoxx Index	3068.2	2.8	0.09%
Oil (WTI)	98.16	0.2	0.17%
LIBOR	0.233	-0.001	-0.32%
US Dollar Index (DXY)	79.38	-0.228	-0.29%
10 Year Govt Bond Yield	2.74%	0.01%
Current Coupon Ginnie Mae TBA	105.6	0.0
Current Coupon Fannie Mae TBA	104.1	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.34

Markets are flattish after the Producer Price Index came in lower than expected. Bonds and MBS are up.

A paper out of Estonia is reporting that a Russian invasion of Ukraine is imminent.

Inflation remains muted at the wholesale level, with the Producer Price Index coming in at -.1% month-over-month and .9% on a year-over-year basis. While the Fed prefers to look at the PCE (Personal Consumption Expenditures) when measuring inflation, the other measures do get consideration. This shows inflation well below the Fed's comfort zone, which is another reason why they are backing off that 6.5% unemployment target. The last thing the Fed needs is a bond market sell-off when we get to that threshold. 

Foreclosure activity decreased 10% in February, to the lowest level in more than 7 years, according to RealtyTrac. They mention the issue of zombie foreclosures, where a vacant house in the foreclosure process sits for a long period of time and is not maintained. This is a natural for the 203k business. The average is 20% zombie foreclosures, however in some cities it is closer to 33%. The biggest states: Florida, Illinois, New York, New Jersey, and Ohio. 

Morning Report - More on GSE reform

Vital Statistics:

	Last	Change	Percent
S&P Futures	1871.8	4.1	0.22%
Eurostoxx Index	3068.2	2.8	0.09%
Oil (WTI)	98.16	0.2	0.17%
LIBOR	0.233	-0.001	-0.32%
US Dollar Index (DXY)	79.38	-0.228	-0.29%
10 Year Govt Bond Yield	2.74%	0.01%
Current Coupon Ginnie Mae TBA	105.6	-0.2
Current Coupon Fannie Mae TBA	104.1	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.34

Markets are up this morning after some decent economic news. Bonds and MBS are down.

Retail Sales increased .3% in February, which was better than the .2% estimate. January was revised downward. Blame the weather. Initial Jobless Claims came in at 315k, lower than expected, and import prices rose .9%.

We are still waiting for more clarity on the Johnson-Crapo bill which will eliminate the GSEs. Cantor Fitzgerald made a great point, though - Fan and Fred are huge MBS dealers, and what happens to the TBA market when they go away? The GSEs are the backbone of the TBA market, and if they go away, how will the market function? Liquidity risk is real, and if liquidity dries up in a market that will get priced in. If investors lower their bids for mortgage backed securities to take this into account, it means higher mortgage rates. As it stands, the GSEs are still probably going nowhere as they are shoveling money to Treasury and the "protect the taxpayer / lower the government footprint" crowd will probably fight the affordable housing advocates to a draw. 

Speaking of politics, it looks like the individual mandate in obamacare has been pruned again. Now if you lost your insurance and consider the plans under obamacare to be unaffordable, you are excused from having to purchase insurance. Given that the Administration imagined we would greet obamacare with a chorus of hosannas, it is interesting to watch them try and reduce the footprint of the bill ahead of the midterm elections. Immigration reform is also on the back burner as the right cannot reconcile the pro-business / pro-immigration wing with the party base who wants less immigration. The left is pushing this hard because it senses an opportunity to split the Republican party, but Republicans aren't really playing along because immigration reform simply isn't a high priority item for them to begin with. 

CoreLogic has an interesting piece on whether home prices are undervalued or overvalued relative to incomes. In their view, home prices overshot on the upside, overshot on the downside and are likely to remain undervalued until income growth picks up.

What I find interesting is that when I look at median income to median house price, I see that we have bounced back out of the range again. Historically, the median income to median house price ratio was in the range of 3.2 - 3.5x. Right now, the median house price (according to NAR) is 188,900, and median income is about $51k, which puts the ratio at 3.7x. In all honesty, I take that number with a grain of salt because the existing home sale repeat methodology method overemphasized prices in hot markets. This means that home prices may be soaring in California, and if most of the transactions are in California, the index will reflect that. If there are few transactions in the rest of the country, the index will de-emphasize them. So until the markets really clear, especially in the judicial states, the ratio may be somewhat misleading.

Morning Report - Preparing for life after Fan and Fred

Vital Statistics:

	Last	Change	Percent
S&P Futures	1860.0	-5.2	-0.28%
Eurostoxx Index	3052.9	-39.6	-1.28%
Oil (WTI)	98.3	-1.7	-1.73%
LIBOR	0.234	0.001	0.34%
US Dollar Index (DXY)	79.66	-0.073	-0.09%
10 Year Govt Bond Yield	2.74%	-0.03%
Current Coupon Ginnie Mae TBA	105.6	0.1
Current Coupon Fannie Mae TBA	104	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.35

Markets are weaker this morning on no real news, except for general concerns about overseas economic growth. Bonds and MBS are up

Mortgage Applications fell 2.1% last week as purchases fell .5% and refis fell 3.1%. Mortgage rates rose five bps last week, according to the MBA. Refi activity dropped to 56.7% of all mortgages.

The Senate Banking Committee released the broad outlines of a plan that revamp the nation's housing finance system and they plan on releasing more details in the coming days. The biggest change is that the government moves into a re-insurance role with private capital bearing the first 10% severity risk. It also eliminates the affordable housing mandates out of Fannie and Fred, but requires a fund paid for with industry fees that would go toward ensuring affordable housing. The government's continued presence would maintain the 30 year fixed rate mortgage, which Americans consider their birthright. 

The government's big problem is that Fannie and Fred had historically undercharged for their insurance product. In order to attract (or "crowd in") private capital, they have to price as if they have no government backing or subsidy. Ex FHFA Chairman Ed DeMarco raised g-fees, which Mel Watt has put on hold. If they charge too little for insurance, you won't see private capital enter the market, and if they charge too much, the industry and affordable housing advocates begin to complain. The government really has to walk a fine line with this. 

The stocks of Fannie and Fred got clobbered yesterday, and are down big pre-market. That said, Fannie Mae still sports a  $23 billion market cap, which IMO is a hefty price for what is simply a litigation lottery ticket at this point.

Bill Gross has been scaling out of MBS. The PIMCO Total Return Fund cut its holdings of MBS from 36% to 29%. Bill has also been shortening duration, taking the fund's effective duration from 5.1 years to 4.7 years. This means Bill is piling into shorter-dated, lower return bonds, which is a bet you would make if you think interest rates are going up faster / quicker than the market consensus. Bill has been making bullish statements in the press on bonds, so this is yet one more instance of Bill talking his book. Don't pay attention to what Bill says, watch what he does. 

The Fed is close to ditching its 6.5% unemployment threshold for considering a rate rise and will substitute less granular language in its FOMC statement next week. This is interesting because Yellen had come out very much in favor of more communication out of the Fed, not less. The problem of course is that the unemployment rate has been falling, but the jobs market is still weaker than the headline numbers suggest. They want to de-emphasize the 6.5% numerical target and embrace a more holistic view of the labor market that includes the labor force participation rate, underemployment rate, etc - factors that can't be captured if you simply focus on the unemployment rate. 

Morning Report - Sentiment remains in hibernation

Vital Statistics:

	Last	Change	Percent
S&P Futures	1878.7	1.5	0.08%
Eurostoxx Index	3094.6	1.8	0.06%
Oil (WTI)	100.7	-0.4	-0.43%
LIBOR	0.233	-0.001	-0.45%
US Dollar Index (DXY)	79.85	0.081	0.10%
10 Year Govt Bond Yield	2.78%	0.00%
Current Coupon Ginnie Mae TBA	105.7	0.0
Current Coupon Fannie Mae TBA	104.3	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.36

Markets are flattish this morning on no real news. Bonds and MBS are unchd.

The NFIB Small Business Optimism Report showed sentiment took a hit in February, falling from 94.1 to 91.4. January's big hiring plans seem to have been reversed. Aside from a plan to increase capital expenditures, there is not a lot to hang your hat on in this report. Small business sentiment remains firmly mired at recessionary levels, which is astounding when you consider the S&P 500 is at record levels.

Future expectations of home price appreciation took a step upward in February, according to Fannie Mae. Homeowners expect to see 3.2% home price appreciation over the next 12 months, which was a step up from January's 2% reading. 56% expect mortgage rates will increase over the next 12 months, while 33% expect them to be flat. 

And finally, given the theme of sentiment, economic confidence is waning, according to Gallup. This probably doesn't bode well for retail sales data coming out on Thursday. It is possible that weather is impacting this number, as it seems to have been blamed for everything else, but it is a bad omen for a 2H acceleration, which everyone seems to be forecasting. 

Morning Report - Slow news week

Vital Statistics:

	Last	Change	Percent
S&P Futures	1875.0	-3.1	-0.17%
Eurostoxx Index	3104.7	9.4	0.30%
Oil (WTI)	101.4	-1.2	-1.17%
LIBOR	0.234	-0.001	-0.55%
US Dollar Index (DXY)	79.74	0.024	0.03%
10 Year Govt Bond Yield	2.78%	0.00%
Current Coupon Ginnie Mae TBA	105.5	0.0
Current Coupon Fannie Mae TBA	104.2	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.37

Markets are lower on no real news. Bonds and MBS are flattish.

We have a data-light week coming up, with nothing today, and then a few reports that aren't really market moving. The biggest one will probably be retail sales on Thursday.

Man Bites Dog:  CFPB is guilty of discrimination under the disparate impact theory.

The NAHB Leading Markets index shows that 59 out of 350 metro areas returned to or exceeded their last normal levels of economic and housing activity. This index is based on housing and jobs activity. Overall, the nation is running at 87% of normal economic and housing activity. 

Professional Investors have been driving up the price of housing in some areas to unaffordable levels. We are seeing that happen in South Florida, and probably Southern California as well. Which begs the question: What is their exit strategy? 

Morning Report - Decent jobs report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1886.3	10.0	0.53%
Eurostoxx Index	3146.7	2.2	0.07%
Oil (WTI)	102.1	0.5	0.49%
LIBOR	0.236	0.001	0.23%
US Dollar Index (DXY)	79.75	0.090	0.11%
10 Year Govt Bond Yield	2.80%	0.06%
Current Coupon Ginnie Mae TBA	105.7	0.0
Current Coupon Fannie Mae TBA	104.1	-0.3
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.39

Markets are higher after a stronger-than-expected jobs report. Bonds and MBS are getting slammed.

Data Dump from the jobs report

• Feb payrolls up 175k (149k exp)
• Two month revision 25k
• Unemployment rate ticks up to 6.7% 
• Average Hourly earnings up .4% (.2% expected)
• Average weekly hours dropped to 34.2
• Labor force participation rate steady at 63%

The tick up in the unemployment rate means that discouraged workers are beginning to start looking for jobs again. Overall, it was a decent report. It won't change the Fed's posture by any means, but it shows the labor market is gradually becoming more balanced.

Yesterday, we got the household net worth numbers out of the Fed. Net worth increased almost 4% quarter-over-quarter and 14% year-over-year. This shows a lot of the Great American Deleveraging is behind us. 

One thing to keep in mind however, is that this increase in net worth has been driven primarily by asset price inflation. If you look at aggregate household debt over the same period, it has fallen, but not dramatically.

What this shows is that it is imperative that the Fed stick the landing with respect to exiting QE and normalizing interest rates. If asset prices (houses, stocks) fall as rates increase, it will undo a lot of the progress that has been made, and will probably be recessionary.