Morning Report: No surprises in the FOMC minutes

Vital Statistics:

			Last	Change
S&P futures			2858	-2.75
Eurostoxx index			384.09	0.07
Oil (WTI)			67.46	-0.4
10 Year Government Bond Yield				2.81%
30 Year fixed rate mortgage				4.58%

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

The FOMC minutes didn't offer anything too surprising. Most participants said it would be appropriate to raise rates soon, which wasn't a surprise - the Fed Funds futures have a Sep hike as pretty much a sure thing. They worried about how trade could be a downside risk to the economy, especially if it affects business sentiment, investment and employment. They mentioned that in the "not too distant future" monetary policy will no longer be viewed as accomodative. This statement seems to hint that rate hikes should wind up next year, provided inflation remains around these levels. Note that the head of the Dallas Fed suggested that the tightening cycle might be done once we get 75 - 100 basis points higher on the Fed Funds rate.  Bonds didn't react to the minutes at all, and the Fed Funds futures didn't budge either. 

There wasn't much talk about reducing the size of the balance sheet, which is more or less on autopilot right now. As the yield curve flattens, you would think the Fed would consider getting more aggressive on the balance sheet unwind. Maybe not on the mortgage backed securities side, but on the Treasury side. If credit is still widely available and the demand is there, why not? If the ducks are quacking, feed 'em. 

Central Bankers are meeting in Jackson Hole today. There usually isn't much in the way of market-moving statements out of these things, but just be aware. 

Initial Jobless Claims fell to 210,000 last week. We are bumping around levels not seen since 1969. When you consider the fact that the US population was only 200 MM back then (compared to 325 MM today), it is even more impressive. It certainly has economists scratching their heads. 

Home prices rose 0.2% in June and 1.1% for the second quarter, according to the FHFA House Price Index. The second quarter's pace was the slowest increase in 4 years, which shows that higher interest rates are beginning to have an effect on prices. Prices did rise in all 50 states and 99 out of 100 MSAs. 5 states (NV, ID, DC, UT, and WA) had double digit increases. The Las Vegas MSA had the biggest increase - almost 19%. The laggards were CT, AK, ND, LA, and WV. 

Heidi Heitkamp, a moderate Democrat from North Dakota says she will not support Kathy Kraninger to run the CFPB. She said she was inclined to vote yes, however she is concerned about Kraninger's experience in consumer protection and also felt she "lacked empathy" for consumers and didn't believe in the Bureau's mission. Heitkamp has been supportive of regulatory relief, which means she was a gettable vote. Kraninger's nomination looks largely to fall along partisan lines now. 

New Home Sales fell 1.7% MOM to 627,000, which was below the Street estimate of 649,000. It is up 12.8% on a YOY basis however. The new home inventory situation is getting more balanced, with 5.9 month's worth of supply. As always, the question is whether that inventory represents the oversupplied luxury market or the undersupplied starter market. 

Morning Report: States with the biggest changes in construction employment

Vital Statistics:

			Last	Change
S&P futures			2820.75	8.75
Eurostoxx index			388.15	3.27
Oil (WTI)			68.28	0.39
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.56%

Stocks are higher this morning after China instituted measures to stimulate the economy. Bonds and MBS are flat. 

Bonds sold off hard (yields rose) in response to news out of Japan that their central bank would adjust their interest rate target for the 10 year bond. The Japanese Central bank targets 0% for the yield on their 10 year, and some market participants believe it would be about 30 basis points if it was allowed to float freely. Japanese yields rose the most in 2 years, dragging Euro yields and US yields with them. Remember this whenever you read these articles in the press about the slope of the yield curve and the forecast for a recession. The yield curve is so manipulated by central banks globally that it is hard to draw any conclusions from prices. 

Manufacturing activity increased in July, according the Markit Flash PMI, but we are seeing price pressures - in fact pricing pressures were the highest on record (going back to 2009). Input prices (fuel, staff and metals) drove the increase, although the root cause is mainly tariff-driven. Meanwhile, the Richmond Fed Manufacturing Survey was flat but solidly expansionary. 

Foreclosure starts fell to 43,500 in June, which is the lowest number in 17 years. Active foreclosures fell below 300,000 for the first time in 12 years. Total delinquencies edged up, but are down on a YOY basis. The foreclosure crisis is about wrapped up, although the judicial states (especially NY and NJ) still have inventory to clear. 

House prices rose 0.2% MOM and 6.4% YOY according to the FHFA House Price Index. Prices are still rising at an unsustainable pace in the West and Mountain regions, although the West Coast is decelerating. The Middle Atlantic (which includes NY and NJ) is bringing up the rear. 

The West and the South lead the country in job gains and increases in construction employment. The states where construction employment is increasing the fastest? AZ and MI. AZ fits in with the rest of its neighbors, while MI stands out compared to neighbors like OH and IN. There are a few states decreasing construction employment - OK, SC, and NJ. 

Morning Report: 10 year trades below 3% on slightly dovish FOMC minutes

Vital Statistic:

			Last	Change
S&P futures			2726	-4
Eurostoxx index			392.54	-0.07
Oil (WTI)			71	-0.84
10 Year Government Bond Yield				2.98%
30 Year fixed rate mortgage				4.61%

Stocks are lower after Trump threatened more tariffs on autos. Bonds and MBS are up on the dovish FOMC minutes.

Initial Jobless Claims ticked up to 234,000 last week.

Existing home sales fell 2.5% in April, according to NAR. Sales fell to an annualized pace of 5.46 million, down from 5.6 million in March, which was also the Street estimate. Lawrence Yun, NAR chief economist, says this spring’s staggeringly low inventory levels caused existing sales to slump in April. “The root cause of the underperforming sales activity in much of the country so far this year continues to be the utter lack of available listings on the market to meet the strong demand for buying a home,” he said. “Realtors® say the healthy economy and job market are keeping buyers in the market for now even as they face rising mortgage rates. However, inventory shortages are even worse than in recent years, and home prices keep climbing above what many home shoppers are able to afford.”

Other tidbits from the report: the median home price increased 5.3% to $257,900, inventory of 1.8 million homes represents a 4 month supply, days on market fell to 26 days, and the first time homebuyer was 33% of all transactions.

US house prices rose 1.7% in the first quarter, according to the FHFA House Price Index. On a YOY basis, they were up almost 7%. The West Coast continued to lead the pack with high single-digit growth rates, and the Middle Atlantic showed an acceleration of growth. Over the past 5 years, the Middle Atlantic (NY, NJ, PA) has been the slowest appreciating region, growing just over half the rate of the West Coast.

The FOMC minutes were a bit more dovish than expected - the Fed Funds futures are now handicapping a 37% chance of 4 hikes this year, down from the mid 40% yesterday. The FOMC is worried about a trade war with China depressing economic activity. On inflation, they emphasized the symmetry of the inflation goal. "Most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis." Overall, nothing was all that new, just a re-affirmation of symmetry, meaning that the 2% target is not a ceiling.

Dallas Fed Head Robert Kaplan thinks the Fed has about 4 more hikes to go before it is at a "neutral" stance. He also discussed his views of inflation above 2%: "I want to run around 2, and if we got a little bit above it and I thought it would be short-term and not long-term, I could tolerate it"

As anyone who attended the Secondary Conference could tell you, mortgage banking is going through a rough stretch right now. Digitalization of mortgage banking has compressed margins and volumes are down. Even people that want to move are finding a dearth of inventory. What could be the catalyst to turn things around? Buy-side firms ringing the register on the REO-to-rental trade. That would bring back enough purchase activity to allow some of the smaller firms to retrench and get their costs under control. Wishing for falling rates is probably a long shot, although if the 10 year finds a level here, we could see rates come in a little, but probably not enough to bring back refis.

Refi activity is going to be concentrated in two areas: cash out to refinance credit card debt, etc, and FHA refis into conforming once the homeowner has enough equity to get under the 80% LTV threshold and avoid having to pay PMI.

While the mortgage business is going through a rough patch, quarterly profits for banks are spiking (tax reform has some effects here). The banking sector largely sat out the M&A boom that has been common throughout other industries. The US market is still about the least concentrated banking market on the planet. Is it time for some M&A? 

Vital Statistics:

			Last	Change
S&P futures			2682	10.5
Eurostoxx index			383.28	0.1
Oil (WTI)			68.68	0.01
10 Year Government Bond Yield				2.99%
30 Year fixed rate mortgage				4.56%

Stocks are up this morning on strong earnings by Caterpillar. Bonds and MBS are down. 

New Home Sales rose 4% MOM and 8.8% YOY to an annualized pace of 694,000 in March. The median sales price was$337,200 and the inventory of 301,000 represented about 5 month's worth. The number was well above Street estimates, however the confidence interval for this estimate is invariably wide. 

Consumer Confidence improved to 128.8 in April as tax cuts have pushed sentiment to post-recession highs. 

Home price appreciation is accelerating, with the Case-Shiller Home Price index up 6.8% YOY. We saw double-digit annual increases in San Francisco, Seattle, and Las Vegas. 

The FHFA House Price Index reported a bigger increase - 7.2% YOY. The FHFA index only covers conventional loans, so it is a narrower index than Case - Shiller. The increases ranged from 4.8% in the Middle Atlantic to 10.3% in the Pacific.

What is the issue with the lack of home construction? Lack of labor. The construction industry has about 250,000 unfilled jobs right now, according to the NAHB. At the peak of the bubble, there were about 5 million people in construction; today that number is closer to 3.8 million. Many of these workers found employment in other industries (especially energy extraction) and aren't about to go back. Immigration restrictions are another headache, as the government estimates that 13% of the construction workforce is working illegally. Finally, the opiod epidemic is particularly problematic in an industry where people are likely to be injured on the job and in pain generally. Ultimately, wages will have to increase to the point to lure a new generation of construction workers out of their climate controlled offices. 

Round numbers always bring out the strategists, and as the 10 year sits close to the 3% level, we are seeing pieces discussing the asset allocation implications. Since the financial crisis, the earnings yield on the S&P 500 has been higher than the 10 year, although the premium is at the lowest level since 2010. One strategist thinks the 1950s are a good analogy for investors, where interest rates gradually rose as the memories of the Great Depression faded and the economy was strong. As an aside, Jim Grant discusses how the big retail investor trade in the 1950s was the leveraged curve flattener, where people would borrow short term money to invest in long-term Treasuries. That trade worked until the bond market crashed in the late 50s and a lot of people got carried out. 

Is demand falling for houses? According to Redfin's Housing Demand Index it is. “Abnormally late winter weather and an early Easter likely delayed homeowners planning to list their homes for sale in March,” said Redfin chief economist Nela Richardson. “While inventory levels are still not nearly high enough to meet strong buyer demand, we do expect new listings to pick up in April and May.”

The House has introduced legislation to end regulation by enforcement by the CFPB. HR 5534 would require the CFPB to provide guidance on its regulations and to establish a framework for monetary penalties. 

Morning Report: House prices rise 6.6% YOY

Vital Statistics:

	Last	Change
S&P Futures	2687.0	5.5
Eurostoxx Index	388.8	0.4
Oil (WTI)	57.5	0.3
US dollar index	86.8	0.0
10 Year Govt Bond Yield	2.49%
Current Coupon Fannie Mae TBA	102.531
Current Coupon Ginnie Mae TBA	103.375
30 Year Fixed Rate Mortgage	3.88

Stocks are up this morning after tax reform is passed. Bonds and MBS are flat.

Hot on the heels of tax reform is legislation to keep the lights on. The House is set to vote on a stopgap measure to keep the government open for another month. This will prevent the Senate from attaching too many things to the bill. It also gives the government some breathing room after the new year to hash out a longer-term funding deal. 

In response to the tax cuts, 5 big corporations (Comcast, AT&T, Boeing, Fifth Third, and Wells Fargo) all announced they were either raising pay or paying bonuses to workers. Could this be the start of broader wage growth? 

House prices rose 0.5% in October, according to the FHFA House Price Index. September's 0.3% increase was revised upward to 0.5%. On a YOY basis, prices rose 6.6% nationally. The East South Central region (TN, KY, MI, and AL) rose 8.2%, which was a particular strong showing. As usual, the West and Mountain states led the charge, while the Upper Midwest and the East Coast brought up the rear.

The final revision for third quarter GDP came in at 3.2%. The prior estimate was 3.3% as consumer spending was revised down a tenth of a percent to 2.2%. The GDP price deflator was unchanged at 2.1%. 

In other economic data, Initial Jobless Claims rose to 245k last week, while the Philly Fed Manufacturing Index rose. The Chicago Fed National Activity Index gave back some of October's hurricane-related gains. The Index of Leading Economic Indicators rose 0.3%. Overall, all of these reports were strong readings and show the economy with some momentum heading into 2018. 

The chickens are coming home to roost for subprime auto lending. Some big private equity firms got into the business, hoping to generate huge returns from auto loans paying in the high single digits. Unfortunately, the default rates have soared for these loans, and auto sales have cooled off and they can't exit the business. No, it isn't a canary in the coal mine for the US economy as a whole. 

Realtor.com weighs in on the hottest and coldest real estate markets of 2017. In the top 20, the hottest are unsurprising - the Bay Area. However there are a few surprises, like Detroit, Fort Wayne, and Stockton.

This reminds me of the late 90s, when companies discovered you could get a multiple by adding .com to your corporate moniker. Long Island Iced Tea company jumps fivefold after renaming itself Long Blockchain and committing to looking for a way to make money in blockchain and fintech. Not that they have any business in it, or expertise, but they will look into the idea. 

Morning Report: Fed maintains rates as expected

Vital Statistics:

	Last	Change
S&P Futures	2504.0	-1.3
Eurostoxx Index	382.6	0.6
Oil (WTI)	50.3	0.8
US dollar index	85.8	0.2
10 Year Govt Bond Yield	2.27%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.85

Stocks are flattish after the FOMC statement contained few surprises. Bonds and MBS are flat as well.

As expected, the Fed made no changes to interest rate policy and left the Fed Funds rate unchanged. They also announced their plan to implement their previously announced reduction in reinvestment in order to shrink their balance sheet. The projections were pretty much the same as they were in June, with the exception of June GDP, which was bumped up a tenth of a percent to 2.4%. Inflation was unchanged at 1.6% and unemployment was unch'd at 4.3%.

The dot plot reduced expected rates in 2018 by 3/16 or about 19 basis points. You can see a side by side comparison of the chart below:

The market reaction to the announcement was a drop in stocks and bonds, with the 10 year yield increasing to 2.27%, up about 3 basis points. The Fed Funds futures took up the probability of a December hike from about 60% to 70%. 

Initial Jobless Claims fell to 259k last week as Texas claims fell, more than offsetting the increase in Florida claims. 

Home prices rose 0.2% MOM and are up 6.3% YOY according to the FHFA House Price Index. We are still seeing strength out West, however New England is beginning to show some strength after lagging for a long time. The farm belt as well as the NY-NJ-PA area are still bringing up the rear. 

The OECD is forecasting that global economic growth will be the fastest since 2011 this year and that growth will accelerate into next year. Ultimately this is good for the US economy, although it won't necessarily mean lower rates. Even if US growth isn't enough to push up bond yields, relative value trading by overseas investors could do the job. 

In other economic news, the Philly Fed index continued its string of strong numbers, while the Index of Leading Economic Indicators posted a strong 0.4% reading. Expect to see a hit to growth however due to hurricanes Irma and Harvey. 

Hurricane Maria, which has just devastated Puerto Rico now moves North close to the Eastern Seaboard. There are still the remnants from Jose just off New England which makes predictions difficult. The East Coast from NC to Maine have at least some risk.  

Home equity increased over 10% YOY, according to CoreLogic. Total home equity reached $8 trillion, which is double the level of 5 years ago. Negative equity decreased by 10%, to 2.8 million homes or 5.4% of all mortgages. 750,000 homes regained positive equity. Even if rates don't go down from here, increasing home equity will create refinance opportunities, especially for cash-outs to refinance credit card debt and refis from FHA to conforming to remove MI requirements. A lot of FHA loans done 4 or 5 years ago now have enough equity to refi into a conforming. 

Morning Report: House prices hit new highs. Are we in a bubble?

Vital Statistics:

	Last	Change
S&P Futures	2475.0	7.0
Eurostoxx Index	381.8	2.5
Oil (WTI)	47.2	0.9
US dollar index	86.4	-0.1
10 Year Govt Bond Yield	2.28%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

Stocks are higher this morning as the Fed begins their 2 day FOMC meeting. Bonds and MBS are down. 

House prices rose 0.4% MOM in May, according to the FHFA House Price Index. They are up 6.9% YOY. Home price appreciation is still red-hot on the West Coast, however some of the laggards (Midwest and East Coast) are starting to pick up steam. Meanwhile, the Case-Shiller Home Price Index rose .1% in May and is up 5.7% YOY. Why the difference? The FHFA House Price index only looks at homes with a conforming mortgage, which eliminates the distressed all-cash extremes on the low end, and jumbos on the high end. Certainly out here in the Northeast, the luxury end of the market (aside from trophy properties in the Hamptons and Manhattan) is deader than Elvis. Note that we have more than recouped the losses from the go-go days, at least according to the FHFA House Price Index.

I wanted to spend a little more time discussing housing affordability. If you look at the median house price to median income ratio, we are approaching the highs during the bubble years. We are currently at around 4.4x and historically, that number has been between 3.2 and 3.6x, meaning that house prices are stretched compared to incomes. It makes sense that house prices should be related to incomes in terms of measuring affordability, and also vulnerability do downdrafts. 

However is "median house price" the correct metric to use when determining affordability? It has one major flaw: it ignores interest rates. As car dealerships know, the sticker price is not the metric to sell a car: it is the monthly payment. Can't afford a 30,000 car? Well, what if we go from a 6 year loan to an 8 year loan? Can you now afford that payment? Mortgages aren't really that much different. So, to look at it from that angle, I plotted the typical mortgage payment (80 LTV conforming loan) on the median house and calculated what percentage of median income that payment turned out to be. And when you look at it that way, affordability it still pretty decent, at least compared to historical numbers. The reason why? Interest rates. For almost a decade, mortgage rates were double digits, and that equates to a much bigger payment for the same "median house." It turns out that mortgage payments as a percentage of income are much lower than what they historically have been. 

Now, the one complicating factor is the mortgage interest deduction, which makes housing in the 80s look less affordable than it really was. Taxes were higher, and interest as a percentage of the P&I payment was higher, so the differences are somewhat exaggerated. However, it does appear that buying a house is not as "unaffordable" as the median house price to median income ratio implies. Just remember these graphs when you hear people discussing how high real estate prices are and that we are in another bubble. We aren't. 

Morning Report: Home price appreciation is accelerating

Vital Statistics:

	Last	Change
S&P Futures	2431.8	-1.8
Eurostoxx Index	387.6	-0.9
Oil (WTI)	42.9	0.4
US dollar index	88.8	-0.1
10 Year Govt Bond Yield	2.15%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.92

Stocks are lower this morning as oil turns into a bear market. Bonds and MBS are up small. 

Initial Jobless Claims rose 3000 last week to 241k, while the index of leading economic indicators rose again. The LEI report noted that pretty much everything is improving, except for housing and the manufacturing workweek. 

Home Prices rose 0.7% in April, according to the FHFA House Price Index. On a YOY basis, they are up 6.8%. As inventory gets tighter, price increases are accelerating, which is a problem as house prices are now pretty stretched versus incomes. The West Coast is still experiencing close to double digit growth, while home price inflation in the Upper Midwest and Northeast lag the rest of the country. 

Some Trump advisors are recommending that Janet Yellen be replaced when her term ends in February. Yellen is a dove, and Trump recently seemed to reverse his pre-election view on interest rates. As a general rule, politicians love dovish Feds, so this is unsurprising. Treasury Secretary Mnuchin says Trump "hasn't given this much thought" since it is so far away. Among the other names being mentioned include Stanford's John Taylor, Columbia's Glenn Hubbard, and former Fed governor Kevin Warsh. 

As rates have fallen, prepayment speeds have increased, which is generally good news for originators, but bad news for those who own servicing. Delinquencies have reversed their calendar-driven April rise as well, according to Black Knight Financial Services. In fact, loans 90 days down or in foreclosure hit a 10 year low. 

The average closing rate for a mortgage inched up in May, according to the Ellie Mae Origination Insight Report. The typical FICO rose a point to 723, with an 80 LTV. The closing rate hit 70.4%. 

What are the priorities for the MBA in the upcoming year?  Removing regulatory barriers to housing, GSE reform, GNMA servicing, and much more. 

Morning Report: Rate hike "fairly soon" according to the FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2364.8	3.8
Eurostoxx Index	373.6	0.2
Oil (WTI)	54.7	1.1
US dollar index	90.8
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.045
Current Coupon Ginnie Mae TBA	103.17
30 Year Fixed Rate Mortgage	4.14

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

Initial Jobless Claims rose slightly to 344,000 last week. 

Economic activity took a step back in January, according to the Chicago Fed National Activity Index. The 3 month moving average is basically just below zero, which indicates the economy is growing more or less at its historical trend.

The FOMC minutes didn't really have much of an impact on the markets yesterday. The money quote: "In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased." On the other side of the coin, the Committee worried about downside risks to the economy due to the stronger dollar, uncertainty about US fiscal policy, and potential overseas weakness. So overall, the minutes were taken to be generally dovish, but not enough to move markets.

Despite that "fairly soon" language, the Fed funds futures didn't really move, and are still pricing in about a 33% chance of a hike in March. Dennis Lockhart, speaking this morning, clarified that statement, saying that "fairly soon" means "in the next 3 meetings." Incidentally, Mohammed El Arian thinks the markets are underpricing this risk and he thinks it is a 50-50 chance of a rate hike next month.

The minutes did discuss housing briefly: "Recent indicators of activity in the housing sector were generally positive. Starts and permits for single-family housing and sales of existing homes rose moderately in the fourth quarter, and real residential investment bounced back after two quarterly declines. A couple of participants commented that supply constraints might be holding back new homebuilding. In addition, a few participants noted that prospects for residential investment would also depend on whether household formation picked up and how housing market activity responded to the recent rise in mortgage interest rates." The supply constraints alluded to probably refer to land, although skilled workers are also an issue. The rise in interest rates probably isn't large enough to affect purchase decisions - a lack of inventory, which is driving up prices matters more. A lack of affordable starter homes is probably a big factor in the depressed household formation rate. although jobs and student loan debt are the main drivers. 

We are becoming a nation of renters and landlords, as the percentage of buyers who don't plan to live in the house rose to 37% last year. This is really just the inverse to the falling homeownership rate. These new buyers may be potential landlord, or they could be flippers. Despite Blackstone's deal with Fannie Mae to acquire rental properties, Wall Street is generally exiting the mass rental business as it figures the easy home appreciation money has already been made.

House prices rose 1.5% in the fourth quarter, and are up 6.2% YOY according to the FHFA House Price Index. The Mountain division led the pack while the Mid-Atlantic division brought up the rear. Since bottoming out in early 2012, the index has posted a 6.2% annual growth rate.

Delinquencies fell in January, according to the Black Knight Financial Services First Look report. Total DQ rates fell to 4.25%, which is down almost 4% MOM and 16% YOY. Foreclosure starts did tick up on a MOM basis, but there is a seasonal aspect to that. 

A Reuters poll of housing economists shows that they are somewhat critical of deregulation in housing. ""Moving to ease back on those regulations now, when the market is already recovering and house prices are rising, would only increase the risk of another dangerous bubble forming," said Capital Economics property economist Matthew Pointon." FWIW, I think that fear is overblown, I don't see another bubble in housing as a possibility. Bubbles are rare psychological phenomena in an asset class, where both investors and bankers view an asset as "special" and dismiss the risk that it can decline in price. This causes both parties to take excessive risks - borrowers lever up too much, and bankers chase yield. Credit is still historically tight in the housing market, and the proposed changes to Dodd-Frank generally fall under small bank regulatory relief, providing better guidance such that banks can determine what regulators consider proprietary trading versus market-making, and making some changes to the CFPB. These changes won't bring back the no-no loans or pick-a-pay loans of 2006, and won't lead people to believe that house prices only go from the bottom left corner of the chart to the top right hand corner. To put everything in perspective, take a look at the mortgage credit availability index below. The difference between the bubble days and today couldn't be more stark. 

The analysts also are predicting a 4.4% mortgage rate by the end of the year. According to the latest MBA mortgage applications report, the average rate is 4.36%, so we are pretty much already there. 

Morning Report: Dow 20,000

Vital Statistics:

	Last	Change
S&P Futures	2284.3	10.0
Eurostoxx Index	366.3	4.4
Oil (WTI)	52.8	-0.4
US dollar index	91.1	0.0
10 Year Govt Bond Yield	2.49%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.16

Global stocks are rallying on no real news. The Dow hit 20,000 this morning (CNBC is probably breaking out the champagne as we speak) Bonds and MBS are down on the "risk on" trade. 

Mortgage applications increased 4% last week as purchases rose 6% and refis rose 0.2%. This is a 7 month high for purchases. 

Home prices increased 0.5% in November, and are up 6.1% YOY, according to the FHFA House Price Index. Geographically, the Pacific and Mountain states continue to lead the way, while the East Coast lags, however prices are decelerating out West and accelerating in the East. Prices have more than recouped the losses from the bubble years and are hitting new highs. 

Further slicing and dicing the home price data, the luxury end of the market continues to lag, while the lower price points are accelerating. This makes sense as the Millennial generation is beginning to reach the family-forming stage and needs starter homes. Starter homes should be a fertile area for the builders over the next decade or so. We are even beginning to see a reduction in the NIMBY-ism in places like California, which face acute housing shortages. 

Treasury Secretary Steve Mnuchin supports an independent central bank and is not a member of the "audit the Fed" crowd. Congressional Republicans have been pushing for more Congressional oversight of monetary policy, however independence from politicians is critical for the Fed to do its job. Politicizing the Fed is a recipe for inflation because no politician likes a recession and sometimes they are necessary to suppress inflation. In fact, the last time Congress got involved with monetary policy was the dual mandate, which requires the Fed to minimize unemployment while controlling inflation. Sounds like a reasonable policy, however in practice it has resulted in asset bubble after asset bubble. 

House flipping is back to bubble-era levels. Home flippers accounted for 6.1% of sales in 2016, the highest level since 2006 when the number hit 7.3% of sales. Scarce inventory is making a good environment for house flipping, with strong home price appreciation. Eventually builders will begin to meet this demand, however for the moment, home price gambling is a big trade in places like Las Vegas. 

Donald Trump met with automotive CEOs yesterday to talk about regulation and bringing jobs back to the US. He cited environmental regulations as a big disincentive to manufacture in the US. Note that there are currently about 300,000 regulations controlling manufacturing in the US. Separately, Trump allowed the permitting process for the Keystone XL and Dakota Access pipelines to begin again. 

Morning Report: Third quarter GDP comes in at 3.5%

Vital Statistics:

	Last	Change
S&P Futures	2259.3	-1.3
Eurostoxx Index	360.1	-0.4
Oil (WTI)	52.2	0.1
US dollar index	93.3	0.1
10 Year Govt Bond Yield	2.57%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.29

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

We have a slew of economic data this morning.

The final revision for third quarter GDP came in at 3.5%. This is the fastest quarterly growth rate in two years. The GDP price index increased 1.4%. The early estimate for the fourth quarter is about 2.2%. The Fed is forecasting 2% growth for 2017.

House prices rose 0.4% MOM and are up 6.2% YOY, according to the FHFA House Price Index. As you can see from the chart below, we are at record highs for the index. Note the FHFA HPI only covers loans with a GSE / government loan, so it excludes the high end and cash sales. 

Durable goods orders fell 4.5% last month. Ex-transportation they increased 0.5%. The core capital goods rate rose 0.9%. The core rate is a good approximation for business capital expenditures. 

Initial Jobless Claims rose to 275k last week. This is a 6 month high, but is still quite low by historical standards. 

Corporate profits rose 4.3% YOY in the third quarter. If we get some sort of corporate tax reform and regulatory relief, they could rise substantially. That is what the rally in the S&P 500 is telling you. 

Economic growth downshifted slightly in November, according to the Chicago Fed National Activity Index. 

President Elect Donald Trump named Carl Icahn to be his adviser on regulatory overhaul. “Under President Obama, America’s business owners have been crippled by over $1 trillion in new regulations and over 750 billion hours dealing with paperwork," Icahn said in a statement released by the Trump transition team. "It’s time to break free of excessive regulation and let our entrepreneurs do what they do best: create jobs and support communities." There will be all sorts of conflict-of-interest issues with the appointment, as Carl owns stock in many companies that are affected by government regulation. 

Refis held steady in November, despite the big increase in rates, according to Ellie Mae. Time to close picked up slightly to 49 days from 48 the month before. Adjustable rate mortgages fell to 3.9%, a new low. 

Morning Repot: Lennar's take on the state of housing

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.1	3.5	0.17%
Eurostoxx Index	2852.4	33.1	1.17%
Oil (WTI)	47.21	1.0	2.16%
LIBOR	0.656	0.002	0.24%
US Dollar Index (DXY)	94.4	-0.169	-0.18%
10 Year Govt Bond Yield	1.71%	-0.01%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.72

Markets are flattish ahead of the Brexit vote tomorrow. Bonds and MBS are down small.

Mortgage Applications rose 2.9% last week as purchases fell 2.4% and refis rose 6.5%. Refis rose to 57.7% of all loans as rates bombed out on the FOMC decision.

The FHFA House Price index rose 0.2% in April, and is up 5.9% year-over-year. Interestingly, New England went from cellar-dweller to the leader in monthly price appreciation. The region is still lagging the most on a YOY basis however. The FHFA index is the only housing price index that has regained all of the losses from the crisis. This is because it concentrates only on houses with a conforming mortgage, so it ignores the all-cash distressed sales and the jumbo space.

Existing home sales rose 1.8% in May to 5.53 million. This is the highest pace since February 2007. The median house price was $239,700 up 4.7% YOY. Total housing inventory is at 2.15 million units, which represents a 4.7 month supply. Inventory is still tight. The first time homebuyer accounted for 30% of all sales, a decrease from last month and last year. Days on market dropped to 32 days, a record.

On Lennar's earnings conference call, CEO Stuart Miller summed up Lennar's view of the housing market. In a way, he also explained why housing starts remain so low. "As we've noted consistently over the past years, the overall housing market has been generally defined by a rather large production deficit that has continued to grow over the past years. While questions have been raised as to the real normalized levels of production that are required to serve the U.S. current population, we believe that production levels in the 1 million to 1.2 million starts per year range are still too low for the needs of American household growth that is now normalizing.While measuring current production levels against historical norms of 1.5 million starts per year might be flawed logic as there may be a new normal, we believe that the very low inventory levels in existing and new homes and the low vacancy rates and high and growing rental rates for apartments indicate that we are in short supply nationally. 

The idea of a "new normal" being somewhere above current production levels (1.2 million units) and the historical average (1.5 million units) is as good an explanation as any. Lennar mentioned on their call that they have been transitioning from the early growth phase of the cycle to the mature phase of the cycle. In other words, they aren't looking for the typical 2 million level of starts you usually see in the recovery from a recession. They do give a good graphic analysis of the supply / demand state of the housing market in this slide from a recent JP Morgan housing conference. 

Notice that the current level of production (sub 1.2 million units is closer to the "housing depression" line than it is to the "normal production" line.. That would make 2009-2012 "nuclear winter." Lennar is making the same bet a lot of other builders are making that multi-fam is the way to go as they see the Millennials happy to rent. Actually, the meta-bet they (and everyone else in the financial markets) are making is that inflation is gone, dead, buried, and never, ever, ever coming back. The only reason why you would lend money to the government for no return is that you think inflation is gone. It truly is a "this time is different" argument, which is the most dangerous argument in all of investing, especially when every central bank on the planet is on a mission to create inflation. Inflation is a debtor's best friend, and if the Millennials can get out from under their student loan debt, we should see a bull rush for new SFR housing. The cautious homebuilders will probably be caught with too little inventory, and will suddenly start bidding against each other for workers, land and materials. That dynamic is how recessions typically end and is the difference between a strong economy and the "meh" economy of the past 8 years. 

KB Home also reported earnings last night. Earnings were better than expected, and they see a return of the first time homebuyer. Note that the current number of first time homebuyers (30%) is well below the historical average of 40%. Average selling prices were up 2%, which is much lower than the other builders. 

Morning Report: Home prices continue to rise

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.6	17.0	0.74%
Eurostoxx Index	2953.7	-25.3	-0.85%
Oil (WTI)	44.74	0.1	0.18%
LIBOR	0.63	0.000	0.00%
US Dollar Index (DXY)	93.98	-0.313	-0.33%
10 Year Govt Bond Yield	1.87%	0.00%
Current Coupon Ginnie Mae TBA	105.7
Current Coupon Fannie Mae TBA	104.9
BankRate 30 Year Fixed Rate Mortgage	3.83

Stocks are higher this morning as emerging markets rally. Bonds and MBS are down.

Mortgage Applications rose 2.3% last week as purchases rose 4.8% and refis rose 0.4%. The average 30 year fixed rate mortgage rose 3 basis points to 3.85%. The average jumbo rate increased 8 basis points to 3.82%. 

Home prices rose 0.7% in March, according to the FHFA House Price Index. “While the overall appreciation rate was robust in the first quarter, home price appreciation was somewhat less widespread than in recent quarters,” said FHFA Supervisory Economist Andrew Leventis. “Twelve states and the District of Columbia saw price declines in the quarter—the most areas to see price depreciation since the fourth quarter of 2013. Although most declines were modest, such declines are notable given the pervasive and extraordinary appreciation we have been observing for many years." Interesting to see prices begin to decline in some states. 

Here is what $550k gets you in San Francisco these days

A US appeals court threw out the $1.27 billion judgement against Bank of America for Countrywide's sins related to the "hustle." The 2nd U.S. Circuit Court of Appeals in New York said the proof at trial was insufficient under federal fraud statutes to establish liability. No comment yet from Manhattan U.S. Attorney Preet Bharara. 

Hillary Clinton is trying to take Donald Trump to task over comments made as the real estate bubble was bursting. Not sure how much traction that is going to get, however she had a conference call with reporters to push the message. Separately, the Republican party is beginning to unite behind Trump.

Morning Report: The problem of the unaffordable starter home.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2049.1	-4.2	-0.21%
Eurostoxx Index	3016.5	-45.5	-1.49%
Oil (WTI)	39.01	0.5	1.43%
LIBOR	0.642	0.002	0.38%
US Dollar Index (DXY)	95.03	-0.860	-0.90%
10 Year Govt Bond Yield	1.89%	-0.02%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.70

Markets are weaker this morning after a terrorist attack in Brussels leaves 35 dead. Bonds and MBS are up.

The FHFA House Price Index rose 0.5% last month. House prices have recouped all of their losses from the housing bust and are making new highs. Note the FHFA House Price Index is the only one showing the losses have been recouped - Case Shiller, and Core Logic have not. 

You can also see the huge geographic disparity between the different regions in the US. The Northeast (which includes New England and the Middle Atlantic) are picking up the rear compared to the other parts of the country. As someone who grew up in the Rust Belt, I am beginning to notice similarities in the Northeast. 

In other economic data, the Richmond Fed Manufacturing Index improved last month, and the Markit US Manufacturing PMI was flat. 

We are well aware there is a problem with the first time homebuyer. They are saddled with large student loan debt, and are under-employed for the most part. The other big issue - low housing inventory is making the starter home unaffordable. When you look at the expensive areas, it gets ridiculous. The mortgage payment for a starter home in San Francisco (admittedly an extreme example) would run someone 110% of median income! I have said it before: the difference between 2% GDP growth and 3% GDP growth is housing. To address the dearth of inventory, we should have a run rate of 2 million starts a year. Yet we remain mired around 1.2 million. It obviously isn't an oversupply issue - it is a credit issue. Yet the consensus seems to be that the financial sector remains "unregulated" and needs to be reined in. You would think politicians would like to see 3% economic growth but apparently they don't.

Over half of US homes are now built in community associations. Issues over the creditor priority HOA claims over mortgages have been an issue in some states, apparently.

More evidence that the cheap labor arbitrage for China is about over.