Morning Report: Existing Home sales still muted

Vital Statistics:

	Last	Change
S&P Futures	2565.8	5.3
Eurostoxx Index	390.2	1.1
Oil (WTI)	51.0	-0.3
US dollar index	86.7	0.2
10 Year Govt Bond Yield	2.35%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.9

Stocks are higher after the Senate passed a budget resolution which allows tax reform to go forward. Bonds and MBS are down. 

Existing Home Sales increased 0.7% in September, according to the National Association of Realtors. This is down 1.5% YOY. September's number was only slightly higher than August, which was the lowest reading in a year. The median home price rose 4.2% to 245,100. Inventory is still a big problem, down YOY at 4.2 month's worth from 4.5 a year ago. The first time homebuyer was 29% of sales, which was a drop. There is a complete dearth of listings at the low end of the market. 

The Senate passed a budget resolution last night on party lines (with Rand Paul voting against) which allows tax reform to go forward on a simple majority. There are still a couple of differences between what the House and Senate are willing to accept. The House wants to see revenue-neutral tax reform, while the Senate is willing to accept an increase in the deficit. The House version includes spending cuts to offset the tax cuts, while the Senate version envisions additional revenue from allowing more oil production in Alaska. They hope to have a deal by the end of the year. 

General Electric missed earnings badly this morning, however this appears to be a bit of a kitchen sink release for the new CEO. Regardless, the stock is down 6% this morning. GE historically has been a bellwether for the entire stock market, but today the FAANGs run the show. 

The next Fed nominee is reportedly a horse race between Jerome Powell and John Taylor. Trump is expected to make his announcement in the next couple of weeks. Insiders say that Powell is the favorite of the two. Both nominees are more hawkish than Janet Yellen, which means rates will go up faster and higher, at least at the margin. In all honesty, the practical differences between Yellen and these nominees is not all that large. It probably won't make any difference to the economy. 

The increasing digitization of real estate transactions has increased the risk of fraud. Scammers are issuing emailed instructions to change wire transfer destinations on closing day. The best step buyers can take is simply to be aware of the potential for fraud and to verify everything, especially changes in wiring instructions. 

The latest CoreLogic Market Pulse takes a look at the effects of the hurricanes on local real estate markets. They estimate that 70% of the flood damage in the Houston area is uninsured. This will be a nightmare for loan servicers. Separately, Black Knight Financial Services is seeing about a 9% jump in past-due mortgages due to the hurricanes. In fact, September had the first year-on-year increase in delinquencies since 2010. 

Morning Report - Greece defaults

Stocks are up smartly this morning on stronger economic data and the prospect of a solution in Greece. Bonds and MBS are down.

Mortgage Applications fell 4.7% last week as interest rates spiked on the strong personal spending data. Purchase applications fell 4.1% while refis dropped 5.2%. The average 30 year fixed rate mortgage rose to 4.26%.

The ADP employment survey reported that 237k jobs were created in June, higher than the 218k forecast. The Street is forecasting a rise of 230k for the jobs report tomorrow. Challenger job cuts rose to 44k.

Fed St. Louis President James Bullard spoke last night and said the Fed should consider raising rates at the Sep meeting given the strength of the latest economic data.

Vehicle sales will be coming in all day. Early returns are disappointing.

Construction spending rose .8% in May, beating the .5% estimate. Residential construction rose .3%.

The ISM Manufacturing Index rose in June from 52.8 to 53.5. A reading over 50 indicates expansion. This is good news as the decline in oil prices had depressed activity in the oil patch. New orders and employment drove the increase. The 53.5 reading would typically correspond to a GDP growth rate of 3.3%.

Last night, Greece became the first advanced economy to officially default on an IMF loan. Most Greek banks are out of money, and pensioners who are used to getting 600 euros for the month are being given less than a quarter of that - about 120 euros. ATM deposits are being limited to 60 euros a day. The first snap poll of Greek citizens has pretty convincingly rejected the EU's offer - 53% "no", 33% yes.

Greece has told Europe that the latest offer comprises the basis of a compromise. The Europeans are going to wait until the results of the referendum are out on July 5. If the voters say "no" to the European demands, Greece will have no other option than to print its own currency to pay workers and pensioners. IMO, a Greek exit will be bond bullish, as it will probably force a policy response out of the ECB and that means more QE.

While home prices still remain affordable compared to the bubble years, low inventory has pushed up the price / rent ratio. We are back to late 2003 levels. On a nominal (in other words, non-inflation adjusted basis), prices are approaching peak levels, but on an inflation adjusted basis, they still have a ways to go. Of course wage inflation remains muted, so that will act as a drag on home price appreciation, or at least affordability.

The latest CoreLogic Market Pulse is out, and it has some good stuff on the state of the housing economy. They discuss the most overvalued housing markets, and find 4 are in Texas. Not sure how their index works, but there you go. The other ones are Washington DC (duh), Miami FL (huh?) and Charleston SC (huh?). Overall, prices nationwide appear reasonable and sustainable, with many localities still recovering from the collapse. 

Morning Report - Risk off?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1540.5	-13.1	-0.84%
Eurostoxx Index	2682.2	-43.6	-1.60%
Oil (WTI)	92.52	-0.9	-1.00%
LIBOR	0.28	0.000	0.00%
US Dollar Index (DXY)	82.68	0.419	0.51%
10 Year Govt Bond Yield	1.94%	-0.05%
RPX Composite Real Estate Index	192.8	-0.8

Markets are sharply lower this morning on the news of Cyprus's banking crisis. The fear is that financial contagion could spread the to other sovereigns who have been given a bit of a reprieve from the bond vigilantes. You are seeing a bit of a widening in the PIIGS this morning, but nothing dramatic. Needless to say, the 10 year is benefiting from the flight to quality trade and is trading comfortably below 2%.  MBS are up as well.

This week will have some important economic data points, with Housing starts to be released tomorrow. The Street is at 915k. The FOMC meeting starts Tuesday, with the decision to be announced Wed afternoon. Notwithstanding the Cyprus situation, investors will be looking for clues as to when the Fed ends QE. With the Fed dominating the MBS and Treasury markets, "me-too" traders may find the exit much more narrower than they imagined. The FHFA House Price Index comes out on Thursday, along with existing home sales and leading economic indicators.

This month's CoreLogic Market Pulse discusses the mortgage market in transition, as we move from a market dominated by serial refinances to one driven more by purchase activity. Assuming that the Cyprus situation doesn't trigger another Euro crisis, we can probably say we have seen the bottom of interest rates for this cycle (and maybe for a generation or two).  The good news is that purchase activity will be replacing refi activity; the bad news is that it will take longer to ramp up than refis, which can turn on a dime.

The key to the return of the purchase market is the first-time homebuyer, who has been dormant since 2007.  Household formation has been depressed since the crisis began and is only now beginning to turn around. Unfortunately, it looks like most of these people are becoming renters. Unless you qualify for a FHA mortgage, it is very difficult to get financing these days without a sizeable down payment. Institutional investors have picked up some of the slack, with their market share purchases increasing to 27% from 16% two years ago in places like Phoenix. These properties are most likely going to rentals. Institutional investors like Blackrock have raised billions for this activity since real estate bottomed over a year ago. I suspect they are going to find that the activity less profitable than they modeled and this demand will turn to supply as they ring the register on some of these properties.

Relative to incomes, real estate is the cheapest since the 1970s and the late 90s.  RTWT.  Lots of good stuff in this issue.

Over the past few months, the back up in rates has been quite dramatic, with the 10-year going from 1.6% to over 2%. How has this affected mortgage rates?  It turns out that MBS / Treasury spreads have stayed relatively consistent since last November. Note: These are the yields on the mortgage backed securities, not borrowing rates.

Morning Report - CoreLogic Market Pulse

Vital Statistics:

	Last	Change	Percent
S&P Futures	1518.8	2.6	0.17%
Eurostoxx Index	2656.9	8.1	0.30%
Oil (WTI)	97.85	0.3	0.35%
LIBOR	0.29	-0.002	-0.68%
US Dollar Index (DXY)	79.98	-0.125	-0.16%
10 Year Govt Bond Yield	2.00%	0.02%
RPX Composite Real Estate Index	193.5	0.3

Markets are up slightly after retail sales came in as expected. Ex auto and gas, they disappointed. However, there was some fear that the Jan 1 tax hikes would curtail consumer spending.  At least this data point shows it hasn't.  Although to be fair, a +.1% increase is nothing to write home about. Mortgage applications fell.

CoreLogic's latest Market Pulse previews 2013. They predict that the refi boom is over, but it will be some time before the purchase market comes back. They note that 2012 census data indicates that household formations increased by 1 million, which is getting back to normalcy.  As I have said before, there is a lot of pent-up demand here, as the low household formation numbers of the last 5 years have been driven by economic weakness, not demographics. They do forecast that margins may get compressed as lenders fight over a declining amount of activity. That said, you can't turn a refi shop into a purchase shop overnight. They also do an interesting analysis of the expected effect of QM loans. Near term, it will probably increase the profile of the GSEs.  Longer term, it will greatly increase performance characteristics.  Anyway, lots of good stuff in here.  RTWT.

27% of borrowers who refi are shortening their terms, according to Freddie Mac.  Cash-out refis account for just 16% of refinances, while cash in refis have jumped to 39%.  Ironic that consumers are getting more conservative when the Fed is using every tool in its toolbox to get consumers to do the exact opposite.

Looks like the sequestration cuts are going to happen.

Morning Report: Hotel California Monetary Policy

Vital Statistics:

	Last	Change	Percent
S&P Futures	1412.1	0.1	0.01%
Eurostoxx Index	2628.7	1.1	0.04%
Oil (WTI)	86.4	0.5	0.59%
LIBOR	0.308	0.000	0.00%
US Dollar Index (DXY)	79.91	-0.023	-0.03%
10 Year Govt Bond Yield	1.71%	-0.02%
RPX Composite Real Estate Index	191.6	0.4

Stock index futures are flat after a benign CPI report.  Of course the Fed explicitly told us that until unemployment drops below 6.5%, they do not care what inflation does. Industrial Production rebounded in November, and Capacity Utilization rose. Bonds and MBS are up small.

Markit's flash Purchasing Manager's Index is generally upbeat and shows US manufacturing rebounding in December after reaching post-crisis lows in Aug and Sep. There has been some concern that Q4's GDP numbers have been goosed by an inventory build, which means we are borrowing growth from next quarter.  FWIW, the report does not bear that out as it shows inventories are falling. The report notes employment is picking up in the manufacturing sector as well.

CoreLogic's December Market Pulse is reasonably optimistic on housing.  Punch Line:  Residential Real Estate is finally contributing to economic growth instead of being a drag. While residential real estate is not a massive driver of the economy, it usually is the first to recover after a recession and makes its largest contributions early in the economic cycle. It is the piece of the puzzle that allows us to shift from first to second gear.

The Man With A Tan - Angelo Mozilo has no regrets about how he ran Countrywide and only agreed to a $67.5 million settlement to protect his children.  (BTW, it looks like Bank of America paid the lion's share of that) You can read his entire deposition here.

Great perspective on the history of banking from my favorite financial author, Jim Grant. "You can have the fear of God or the socialization of risk, but you cannot have both."

Interview with Dallas Fed President Richard Fisher on the Fed's "Hotel California" monetary policy.  He lays out the argument that the problem with the economy is not monetary policy, it is regulatory uncertainty out of Washington. He also notes that we are reaching the point of diminishing returns.