Morning Report: Half of MSAs are overvalued

Vital Statistics:

			Last	Change
S&P futures			2589	14
Eurostoxx index			368.88	-2
Oil (WTI)			63.15	0.14
10 Year Government Bond Yield				2.76%
30 Year fixed rate mortgage				4.41%

Stocks are rebounding after yesterday's bloodbath. Bonds and MBS are down small. 

No economic data today. Neel Kashkari speaks at 9:30 this morning.

The replacement for LIBOR begins trading today, when the New York Fed begins listing its new Secured Overnight Financing Rate. The NY Fed will also publish a couple other rates: the Broad General Collateral Rate and the Tri-party General Collateral Rate. Details can be found here. The appeal of SOFR will be that it is based on arms-length transactions and not quotes from banks that may or may not be real. 

Prepayment speeds collapsed in early 2018 as rates rose, according to Black Knight Financial Services. Prepayment speeds are generally a proxy for refi activity, which has dried up as more of the refi opportunities are out-of-the-money. From this point onward, refi activity will be driven by home price appreciation more than interest rates. As home prices rise, the opportunity will be cash-outs, FHA with MI to conventional without MI, and ARMS into 30 year fixed. As the yield curve flattens, the relative decrease in the monthly initial ARM payment decreases.

Home equity topped $5.4 trillion last quarter and beat the record set in 2005. 75% of that is in mortgages that are out-of-the-money, or below the current 30 year fixed rate mortgage. 

Home Prices rose 1% in February and are up 6.7% YOY, according to CoreLogic. They are forecast to be flat in March and up 4.7% YOY. Much of the torrid growth has been in the West / Mountain states, especially WA, NV, ID, and UT. Affordability has fallen and home price appreciation is expected to slow going forward. About half the MSAs are now overvalued, as home price appreciation and mortgage rates have outstripped income growth. 

Morning Report: Construction boom in 2018?

Vital Statistics:

	Last	Change
S&P Futures	2738.0	-4.5
Eurostoxx Index	398.3	1.0
Oil (WTI)	61.6	0.2
US dollar index	85.9	0.0
10 Year Govt Bond Yield	2.47%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	103.25
30 Year Fixed Rate Mortgage	3.91

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

Should be a relatively quiet week, data-wise. The only potential market moving report will be inflation data on Friday. We will have a lot of Fed-Speak this week however. 

The National Association of Realtors thinks we could be in for a construction boom in 2018. Much of the action will be in non-residential, mainly office building, lodging and logistics. Residential is a mixed bag - we have had a boom in apartment construction, but single family is still weak. The biggest problem for construction is labor, and many construction workers are aging out of the workforce. In 2017, a net 190,000 construction workers entered the job market, which is lower than the three year average of 284,000. This means construction firms are going to need to raise wages. One thing is for sure: if we do in fact see a construction boom in 2018, the Fed's 2018 estimate of 2.5% growth is going to be too low. It also means the Fed will probably raise rates a little faster than expected. 

The Fed Funds futures are currently pricing in a 61% chance of a 25 basis point hike in March. Despite the weak payroll number on Friday, the futures upped their probability of a hike. 

One market-based measure of inflation - the TIPS spread - broke 2% for the first time in 9 months. TIPS (Or Treasury Inflation Protected Securities) increase the principal amount of the note by the annual consumer price inflation number, so they act as a hedge (at least in theory) against inflation. The 2% break-even yield is important as that is the Fed's inflation target. 

Republicans and Democrats are still far apart on a spending deal to keep the government open. Democrats want something done on DACA, while Trump wants funds allocated to a southern border wall. We are still far enough out that much of what we are seeing may just be posturing, but there is a possibility we could be looking at a government shutdown. Loan officers who need 4506-T tax transcripts should keep this in mind. The deadline is January 19. 

Delinquencies rose in November, according to Black Knight Financial Service's November Mortgage Monitor. You generally see an increase in November due to seasonality, but this year also includes the effects from the hurricanes in Texas and Florida. The report also checked in on negative equity. We still have homes more than 15% below their peaks in the areas hit hardest by the housing bubble (inland CA, Las Vegas, Florida, parts of the Northeast). The map below shows the current state of affairs:

Morning Report: Higher rates affecting high FICO refis more than low FICO refis.

Vital Statistics:

	Last	Change
S&P Futures	2373.8	-7.5
Eurostoxx Index	373.6	-1.6
Oil (WTI)	53.2	-0.1
US dollar index	91.5
10 Year Govt Bond Yield	2.48%
Current Coupon Fannie Mae TBA	101.86
Current Coupon Ginnie Mae TBA	103.19
30 Year Fixed Rate Mortgage	4.19

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

Fed Funds futures are now fully pricing in a 25 basis point hike at next week's FOMC meeting. Now that we are in the quiet period, the only market-moving data should be late this week when we get productivity and the jobs report. 

Consumer spending has almost fully recovered from the Great Recession, with the February number coming in at $101, the strongest February since 2008. 

Factory orders increased 1.2% in January. Consensus was for a 1.1% increase. 

Over the weekend, the war between Democrats and Trump intensified, with Democrats calling for Attorney General Jeff Sessions to resign and Trump accusing the Obama administration of tapping the phones of Trump Tower. So far, markets are basically ignoring all of this as a sideshow. IMO, markets are sanguine about this simply because the deepening partisanship makes gridlock even more likely, and therefore a lot of the uncertainty is taken off the table. When and if that ever changes, the canary in the coal mine should be the dollar. 

Prepay speeds dropped by 30% in January, according to the Black Knight Financial Services Mortgage Monitor. Delinquencies declined by 4% versus December and are down 17% YOY. That said, foreclosure starts increased largely due to seasonal effects. Note the decline in prepayments was not uniform across the credit spectrum: 720+ FICO prepays declined by 32%, while sub 620 FICO prepays fell by 10%. Even with rates up here, it still makes sense for some borrowers to do cash-out refis in order to consolidate higher interest rate debt like credit cards. 

What should you do if you are upside down on your home? Zillow has you covered. 

Morning Report: Increase in rates has cut refinanceable population in half

Vital Statistics:

	Last	Change
S&P Futures	2209.0	-1.0
Eurostoxx Index	346.3	2.0
Oil (WTI)	50.4	-0.5
US dollar index	91.1	0.0
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.1

Markets are flattish this morning on no real news. Bonds and MBS are up small as global bonds rally on speculation the ECB will continue buying bonds into next September.

Mortgage applications fell 0.7% last week as purchases rose 0.4% and refis fell 1%. 

Job Openings were little changed at 5.5 million last month, according the JOLTs job openings report. Job openings are more or less at the all-time highs of the index, which goes back to 2000. The quits rate is the key to the report: an increasing quits rate foreshadows wage inflation. So far, the quits rate is pretty much stuck at 2.1%. 

Appraisals are coming in light for about 10% - 13% of all contract prices. This is mainly a problem in the hot markets where low inventory is creating bidding wars and buyers overpay. 

Sentiment surveys are partisan to some extent. Prior to the election, Republicans were bearish on the housing market and Democrats were bullish. Now that Donald Trump has won, the parties have switched outlooks. It shows why you should generally take these sentiment surveys with a grain of salt. That said, the fundamentals of the housing market are strong with tight inventory and low rates (despite the Fed being in a tightening cycle). 

Gallup's Job Creation Index ticked up last week to 33, which means the percentage of firms planning to increase hiring minus the percentage of firms planning to cut jobs is 33%. Note that this is based on a telephone survey of workers, who may or may not know what their company's actual plans are. 

The post-election sell-off in the bond market has cut the refinanceable population in half, according to Black Knight Financial Services. The last time the refinanceable population was this small, refis were 37% below last quarter's. The new rules on VA IRRLs will exacerbate that drop in refi volume. Going forward refi volume will be driven more by home price appreciation as people with mortgage rates from they heyday regain the home equity to refinance at today's rates. Also, with the Fed tightening, now is a good time to look at swapping out from an ARM to a 30 year fixed. If the 35 year bull market in bonds is really finally over, locking in a low rate makes sense. 

Mortgage credit availability improved last month according the the MBA. Credit availability increased for all 4 buckets: government, conventional, conforming, and jumbo. While the index has doubled since 2012, it is still at about 20% of the level set during the height of the bubble. It probably won't increase meaningfully until either (a) the private label market returns, or (b) the government and GSEs increase the credit box. 

It is no secret that the real estate sector is still largely done the way it has been for the past 50 years, with agents representing buyers and sellers, along with a largely manual loan process. Now a new firm is looking to use technology to disintermediate realtors. They pay realtors a 1% fee, and the company has just raised $20 million in Series B financing. Its name is Roofstock. It is a niche market - targeting sellers of tenant-occupied properties - however it could catch on. 

Morning Report: Home prices within 1% of peak according to Black Knight

Vital Statistics:

	Last	Change
S&P Futures	2206.0	-58.0
Eurostoxx Index	340.9	-1.6
Oil (WTI)	47.0	0.9
US dollar index	91.7	-0.1
10 Year Govt Bond Yield	2.33%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.14

Investors return to the markets after the Thanksgiving holiday contemplating a re-litigation of the 2016 Presidential election. Bonds and MBS are up. 

Green Party candidate Jill Stein is requesting a recount in PA, MI, and WI. Donald Trump took to Twitter to condemn the effort and alleged that "millions" of votes were fraudulent. The Clinton campaign is keeping its distance but will watch to make sure outside players aren't interfering with the process. If she manages to turn all 3 states, then she could win. One question that has come up has been whether Russia could have hacked the voting machines. That possibility looks unlikely. 

Since the election, bank stocks have increased their market caps by $300 billion. The bet is that a roll-back of regulation will increase profits. 

The highlight of the week will be the jobs report on Friday. The Street is looking for 170k jobs added, an unemployment rate of 4.9% and an increase in average hourly earnings of 0.2%. 

The FOMC minutes from the early November meeting were a non-event, and the FOMC is definitely setting the stage for a December hike: "Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon, so long as incoming data provided some further evidence of continued progress toward the Committee's objectives." In fact, a "few" participants wanted a hike at the November meeting. The December FOMC meeting is in two weeks. 

The FHFA raised the conforming limit from 417k to $424k. This was the first increase in 10 years. They also increased the high balance conforming limit to $636k. 

Home Prices rose 0.1% in September and are up 5.4% YOY. Home prices are now within a percent of their peaks from June 2006. 

Black Friday saw more shoppers, but less spending than in the past. About 154 million bought something in a store or online over the weekend, but they only spent about $289 as opposed to $300 a year ago. The National Retail Federation attributed the drop in spending to deep discounts offered by retailers. Black Friday online purchases were up 22% YOY. 

Morning Report: inflation remains below the Fed's target

Vital Statistics:

	Last	Change
S&P Futures	2126.3	2.5
Eurostoxx Index	339.5	-1.3
Oil (WTI)	48.2	-0.6
US dollar index	88.8	0.1
10 Year Govt Bond Yield	1.84%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.62

Markets are up on earnings and merger mania. Bonds and MBS are down.

Personal Incomes rose 0.3% in September, which was a little below expectations. Consumer spending rose 0.5%, which was in line with expectations. Core PCE inflation - the number the Fed uses to measure inflation - rose 1.7% YOY, so we are still below the 2% target. 

The Chicago PMI Index fell to 50.6 from 54.3. 

The FBI re-opened the email investigation on Hillary late Friday night. Democrats are attacking Comey (who just went from hero to goat). This will take until mid-week to be fully reflected in the polls, and the pundits will be watching polls in VA and NC closely. 

IMO, regardless of who wins, gridlock will be the result, unless Democrats sweep. So more of the same. I don't see much of an effect happening in either interest rates or stock prices. The Fed is much more influential than who occupies the WH. 

Home prices are up 0.3% MOM and 5.3% YOY, according to Black Knight Financial Services. The index now stands at $266k, which is 0.7% below the 2006 peak of $268. The report has good state-by-state info, so check it out. 

Banks continue to hoard Treasuries, and are tightening credit to business. Deposit growth is outstripping loan demand, which is the biggest reason. As the US savings rate increases, consumer spending is affected. Part of this is demographics: The baby boom is retiring and will inevitably cut spending, while the Millennials have yet to make any real money and start spending. 

Morning Report: Is the post-Brexit bond rally played out?

Vital Statistics:

	Last	Change
S&P Futures	2128.0	8.0
Eurostoxx Index	324.3	2.1
Oil (WTI)	45.6	0.4
US dollar index	87.1	0.1
10 Year Govt Bond Yield	1.41%
Current Coupon Fannie Mae TBA	104
Current Coupon Ginnie Mae TBA	104.2
BankRate 30 Year Fixed Rate Mortgage	3.57

Stocks are up this morning as overseas markets rally. Bonds and MBS are down. 

Friday's huge payroll print was largely due to seasonal adjustment factors. The unemployment rate rose, hourly earnings barely budged and the labor force participation rate inched up only slightly. The right thing to do is to take May's 11k number and average it in with June's 287k number to get a more realistic run rate.

There isn't much in the way of market-moving data this week - the week after the jobs report is invariably data-light. Earnings season kicks off this week, and the next two weeks will be dominated by bank earnings.

Morgan Stanley is making the call that the post Brexit bond market rally is largely played out. “After having been bullish, we turn neutral on bonds as G4 yields sit at all-time lows,” Morgan Stanley analysts including Matthew Hornbach, the head of global interest-rate strategy in New York, wrote in a report July 8. That said, the increasing amount of negative yielding paper will continue to push up Treasuries in the US, as investors sell bonds yielding nothing to buy bonds yielding something. This will also lower borrowing costs for Corporate America. 

Don't forget the last time bond yields bottomed out (2012) it took mortgage rates another 4 months to bottom out as well. We should probably see a similar effect going this time around. 

Mortgage delinquency rates ticked up in May, according to the latest Black Knight Financial Services Mortgage Monitor. Some of this is apparently seasonally driven. Interesting stat: From 2009-2012, over 80% of borrowers that refinanced a GNMA loan refi'd back into another GNMA product. Post 2013, GN back into GN refis have dropped below 50%. Increasing home equity and higher MI premiums are pushing borrowers out of GN products. 

Could this summer be the best summer for housing yet?  

Morning Report: Conflicting signals in the labor markets

Vital Statistics:

	Last	Change	Percent
S&P Futures	1984.1	-14.4	-0.87%
Eurostoxx Index	3029.0	16.1	0.54%
Oil (WTI)	34.96	0.4	1.13%
LIBOR	0.635	0.003	0.51%
US Dollar Index (DXY)	97.37	-0.224	-0.23%
10 Year Govt Bond Yield	1.82%	-0.09%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.6
BankRate 30 Year Fixed Rate Mortgage	3.70

Stocks are lower this morning on bad export numbers out of China. Bonds and MBS are up.

The US Labor Market Conditions Index fell in February, This is a relatively new index created of 19 different labor market indicators. Not sure what caused the recent drop in the index, as most of the big indicators are positive. Perhaps the disappointing wage growth in the last jobs report is causing it. Certainly the labor market does not seem to be the worst in four years..

Consumer credit rose by $10.5 billion in January, the lowest in a year. Lower levels of credit card debt drove the deceleration. 

Small Business Optimism hit a 2 year low, according to the NFIB. Worryingly, job creation fell for the first time in quite a while, as small businesses shed about .12 workers per firm. The difficulty in finding qualified workers also fell in importance, although it is still elevated. Washington remains the biggest impediment, with taxes and red tape occupying the #1 and #2 concerns for small business. The report summed it up this way: "Overall, a “ho hum” outcome, confirming that the small business sector is not headed up with any strength, just treading water waiting for a good reason to invest in the future."

The big drop in interest rates has bumped up the refinanceable population to 6.7 million borrowers from 5.2 million last month, according to Black Knight Financial Services.   An additional 15 basis point drop in rates would add another 2.1 million borrowers. This data is based on mid-February numbers, with a FHLMC 30 year rate of 3.65%. Just another reason why 2016 might be a little better than expected.

Foreclosure activity continues to fall, according to CoreLogic. Foreclosure inventory is down 21.7% to 456,000 homes, and completed foreclosures fell 16% in January. Serious delinquencies also fell to 1.2 million mortgages, the lowest since 2007. Foreclosure activity is making the home price recovery more durable: “The improvement in distressed properties continues across the country in every state which is contributing to the lack of stock of available homes and resulting price escalation in many markets,” said Anand Nallathambi, president and CEO of CoreLogic. “So far the trend toward lower delinquency and foreclosures has been immune from shocks from such things as the collapse in oil prices attesting to the durability of the housing recovery.”

Morning Report: Short, dull week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	2043.8	-7.4	-0.36%
Eurostoxx Index	3263.3	-21.2	-0.65%
Oil (WTI)	37.07	-1.0	-2.70%
LIBOR	0.603	0.000	0.00%
US Dollar Index (DXY)	97.96	0.115	0.12%
10 Year Govt Bond Yield	2.24%	0.00%
Current Coupon Ginnie Mae TBA	103.9
Current Coupon Fannie Mae TBA	103
BankRate 30 Year Fixed Rate Mortgage	3.91

Stocks are lower on weaker data out of China. Bonds and MBS are flat.

Not a lot of data this week, which will be shortened by the New Year's holiday on Friday. Not sure if we get an early close on Thursday.

2015 will be remembered as the year that nothing worked. Stocks, bonds, and commodities all performed lousy. Jim Bianco explains: “The Fed stimulus lifted all boats, and then the Fed withdrawing the stimulus is holding the boats down,” Bianco said by phone. “If the argument is right that the economy is going into 2016 weak and earnings are negative, those conditions will continue and therefore on the asset allocation level, I don’t expect anything to break out just yet.”

Know what did work in 2015? Real estate. Speaking of which, here are the hottest real estate markets according to NAR. As expected, the Bay Area tops the list, and California urban areas are well represented. Know what didn't work in real estate? The stocks of companies in real estate with names like Stonegate and Nationstar in the dumps. 

94% of young renters eventually want to buy a home, according to the NAR. If wage inflation returns, 2016 could be the year that this pent-up demand for housing begins to be felt in the industry. 

Foreclosure starts are the lowest since 2006, according to Black Knight Financial Services. Fewer than 700,000 active foreclosures remain.