Morning Report: Homebuilder earnings report strong order growth

Vital Statistics:

	Last	Change
S&P Futures	2479.0	5.0
Eurostoxx Index	382.4	1.6
Oil (WTI)	48.4	0.5
US dollar index	86.7	0.0
10 Year Govt Bond Yield	2.32%
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 oil rallies. Bonds and MBS are flat.

The FOMC decision is due out at 2:00 pm EST. Be careful locking loans around that time. No change in interest rates is expected, however the language in the statement always has the potential to move markets. You are starting to see some movement in the Dec Fed Funds futures, with the market currently handicapping a 48% chance of no change, 47% of 25 bps and a 5% chance of 50 bps between now and then. Sep futures are stuck at 92% chance of no change and an 8% chance of a 25 basis point hike. 

Mortgage applications rose 0.4% last week as purchases fell 2% and refis increased 3%. Mortgage rates in general fell about 5 basis points during the week. ARM share increased to 6.8%. 

Despite all the consternation in DC, consumer confidence continues to rise. The Consumer Confidence index rose to 121, largely on the strength of the jobs market. The number of people who think jobs are "hard to get" fell to 18%, while those that think jobs are "plentiful" rose to 34%. 

New Home Sales ticked up to 610k in June, which is up 9% on a YOY basis. 

Homebuilder Pulte reported earnings yesterday. Orders were up 12%, and backlog was up 19%. They did warn on gross margins, as wildfires in Canada are pushing up framing lumber prices. Pulte has a national footprint, but it is big in the Midwest, which shows that things are picking up in that part of the country. 

D.R. Horton reported earnings as well. Orders increased 13% and backlog increased 5%. Tight labor markets are affecting margins. D.R. Horton is more exposed to the South and Southwest, and therefore will be more sensitive to what is going on in the oil patch. 

Since the election, the XHB (S&P Homebuilder ETF) has been on a tear, increasing 23% since the election.

The House is expected to use the Congressional Review Act to overturn the CFPB's recent rule on mandatory arbitration. It is expected to fall 100% on partisan lines. In the Senate, all Democrats are expected to vote against overturning it, and there are a few Republicans who are undecided. 

Interesting stat on GNMA servicing portfolios since 2014. Down 25% at major banks, up 15% at smaller banks, doubled at non-banks. GNMA servicing rights have been weighed down by the costs of FHA delinquencies as well as higher than expected prepayment speeds due to the VA IRRL program. The government recently changed the rules for quick IRRL refis, but servicing values have yet to rebound. 

Morning Report: Strong new home sales

Vital Statistics:

	Last	Change
S&P Futures	2375.3	5.3
Eurostoxx Index	387.5	1.4
Oil (WTI)	49.2	0.0
US dollar index	89.5	0.1
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.68
30 Year Fixed Rate Mortgage	3.98

Stocks are higher this morning as it looks like cooler heads are prevailing in the continuing resolution negotiations. Bonds and MBS are down small. 

New home sales increased to an annualized rate of 621k, well above the Street expectations of 587k. New Home Sales is a notoriously volatile number, but it looks like the Spring Selling Season is off to a good start. 

Pulte announced earnings this morning, with a 14% increase in revenues and a 17% increase in earnings. CEO Ryan Marshall had this to say about the spring selling season: “Buyer interest during the spring selling season of 2017 has been high and points to the ongoing strength in recovery for the housing industry. Strong buyer demand continues to be supported by an improving economy and resulting employment and wage gains, high consumer confidence, a low inventory of new and existing homes, and the powerful demographic forces of Millennials and Baby Boomers. Given the strength of our land pipeline and our disciplined investment practices, PulteGroup is well positioned to grow its market presence and improve its financial performance within this operating environment.” Note that gross margins fell by 230 basis points, which shows costs are outpacing price growth. 

In other economic data, consumer confidence slipped in April, but is still strong, while the State Street Investor Confidence Index unexpectedly rose. The Richmond Fed Manufacturing Index improved as well. 

Home price appreciation accelerated in February, according to the FHFA House Price Index. Prices were up 0.8% MOM and are up 6.4% annually. Prices have risen 6.2% annually since bottoming in early 2012. Regionally, the Mountain states had the biggest increase, coming in at 9.5%. Even New England, historically a laggard, increased by 6.5%. The worst area - Mid atlantic - rose 4.6%. 

Meanwhile, the Case-Shiller Home Price Index rose 0.7% MOM and is up 5.9% YOY. 

In politics, Donald Trump seemed to moderate his comments about marrying the wall with funding the government through the end of the fiscal year. Given that Republicans hold all 3 branches of government, why does Trump need Democrats? The reason is the same thing that vexed Obama: The House Freedom Caucus, who won't support anything that doesn't repeal Obamacare or cut spending enough. This gives Chuck Schumer and the Democrats more leverage than they would ordinarily have. Note Congress can play some accounting games to move the deadline back a couple of weeks, so this Friday isn't necessarily a drop-dead date. A government shutdown is probably unlikely, but LOs should be thinking about ordering 4506-Ts if they need them. 

Donald Trump is targeting a corporate tax rate of 15%, which will be unveiled tomorrow. House Speaker Paul Ryan is closer to 20%, and believes that 15% is too low to be revenue-neutral. While even Democrats recognize our corporate taxes are too high, they won't get onboard anything that amounts to a tax cut. Take a look at the chart below. It has our taxes (and our competitors') tax rates from 2000 to 2016. Pretty much everyone has cut taxes except for us. Trump will also reveal a plan for individual income taxes as well. 

Having trouble saving? There's an ap for that. New fintech companies are micro-analyzing an individual's earnings and spending patters, and using credit and savings sweeping to normalize their client's income (think a freelancer or an Uber driver). Some will pay all your bills for you, and others will ensure your checking account doesn't overdraft. Some will extend credit at high rates, however those rates are generally better than payday lenders. 

Another blow for cheap new housing construction. The US is imposing tariffs on Canadian softwood exports in an ongoing trade dispute. Softwood (basically pine) is primarily used for framing in housing, so we could see lumber prices increase further. While "sticks and bricks" are not the main driver of housing construction cost, this doesn't help matters. It is getting to be a problem when the typical starter home is unaffordable to its target market. 

The MBA has rolled out its plan for the GSEs. The idea would be to turn Fannie and Freddie into public utilities and to take steps to open up the market for private mortgage guarantors. They estimate it could take up to 10 years to implement. Note the clock is ticking: As the government continues to sweep all of Fannie's profits to Treasury, their net worth is decreasing.