Morning Report: Controversial CA housing bill dies in committee

Vital Statistics:

			Last	Change
S&P futures			2716.75	10
Eurostoxx index			380.83	0.06
Oil (WTI)			67.63	1.11
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.44%

Stocks are higher this morning as earnings from the financials continue to pile in. Bonds and MBS are flat. 

Mortgage Applications increased 5% last week as purchases rose 6% and refis rose 4%. The refi share was 37.8%, the lowest in a decade. Purchase activity was up on a YOY basis however. Mortgage rates were generally flat as international tensions and the FOMC minutes dominated the news. 

2017 was a tough year for the mortgage industry, as profits per loan were more or less cut in half, from $1,346 to $711. Revenues per loan were up, as higher loan balances driven by home price appreciation were offset by lower margins due to competitive pressures. Volumes were down 20% overall, and down 9% on a comparable basis. While revenues per loan increased, costs were up more, and productivity fell. 

The IRS's computer system crashed yesterday due to all the last minute e-filers. If you were unable to file yesterday, you are in luck - the IRS gave you an extra day to get it in without penalty.

Most consumers don't rate shop when getting a mortgage. This is a surprise since the savings is actually pretty big: between $1,000 and $2,000 over the life of the loan when getting a single competing quote. It increases to $2,000 - $4,000 when the borrower gets 5 competing quotes. Why more don't do that is a mystery. 

An unprecedented bill (SB 827) allowing the state to overturn local zoning ordinances died in committee yesterday. California has an acute housing shortage, and affordable housing advocates had been pushing hard for a bill that would force cities to accept dense multi-family housing complexes within a half mile of rail stops. The bill's early demise was a blow to affordable housing advocates and environmentalists, who want to reduce the need for driving. 

The IMF is warning that years of 0% nominal interest rates have created risks in the financial system, with valuations of risky assets stretched and some late-stage credit cycle behavior. The subprime auto sector in the US is one case in point, and we have multiple residential real estate bubbles globally, especially in China and Canada. That said, the banking system is much more safe and capitalized now than it was 10 years ago. They warn that investors aren't positioned for a sharp increase in inflation and interest rates over the next several years. Which is probably the right bet - if the Chinese credit and real estate bubble implodes, it will be deflationary, not inflationary. 

A very NYC scene..

Morning Report: Productivity increases in the third quarter

Vital Statistics:

	Last	Change
S&P Futures	2625.0	-3.3
Eurostoxx Index	384.5	-2.3
Oil (WTI)	56.9	-0.8
US dollar index	86.8	0.0
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.625
30 Year Fixed Rate Mortgage	3.88

There is a slight risk-off feel to the market today as stocks are lower and bonds rally.

Mortgage Applications rose 5% last week as purchases rose 2% and refis rose 9%. The average 30 year fixed rate mortgage dropped a basis point to 4.19%.

The economy added 190,000 jobs last month according to the ADP Employment Survey. The Street is looking for 204,000 jobs in this Friday's payroll report. This ADP number is more or less close to the average for the past year. Moody's Chief Economist Mark Zandi is warning that the job market could overheat next year, as he sees the unemployment rate going below 4%. Will that cause the Fed to start hiking rates more aggressively? Perhaps, but until we start seeing broad-based wage inflation and begin to see it flow through to prices the Fed will probably be content to gradually normalize policy and not push the economy into a recession.

Productivity rose 3% in the third quarter, according to BLS, as output increased 4.1% and hours worked increased 1.1%. Generally speaking productivity increases drive wage increases, although that relationship has broken down somewhat over the past 15 years or so. Unit labor costs declined 0.2% as the increase in productivity offset the 2.7% increase in wages. At a recent CEO roundtable, labor costs have taken over regulation as the top concern of Corporate America. Tax reform will probably encourage more capital investment to make workers more productive, and that should translate into wage inflation, although not necessarily into a larger number of workers.

As tax reform gets resolved, the next issue will be funding the government. It won't take many conservatives to balk at funding the government to make Democrats necessary to keep the lights on. Democrats want some sort of immigration deal to go along with voting for a continuing resolution, which will be a non-starter for many Republicans. Don't forget the last time we had a government shutdown, you couldn't get 4506-Ts from the IRS, loan officers, plan accordingly.

Ray Dalio of Bridgewater warns that tax reform will cause an exodus from high tax states like California, New York, New Jersey, and Connecticut. Many big names in the hedge fund business have already relocated to Florida, where there are no state income taxes. Connecticut will be especially vulnerable, as it gets most of its revenue from one county. Meanwhile, NAR and Trulia warn that tax reform will hit property values in these high tax states, and will exacerbate the inventory shortage as it will discourage sellers. As I have said before, it may affect the higher end of the market in these areas, but the sub $750,000 sector should be fine. If anything, it might encourage those that are thinking of buying a million dollar home to lower their price point, which would increase demand in that sector. As a general rule, the multi-million sector in the Northeast has been moribund to begin with, and the multi-million sector in the West has been driven by foreign money and stock market appreciation.

Affordable Housing Advocates are also staunchly opposed to the new tax bill. Many for simple ideological reasons, however tax reform will affect the value of the tax write-offs that act as the incentive to build affordable housing. It will make affordable housing construction less attractive (and may turn it into a money-losing enterprise). Some groups claim that the home price appreciation has been so fast (especially in California) that it is creating a homelessness problem. A lack of affordable housing has been an issue for a long time, and tax reform certainly won't make it less of one.

The hurricanes accounted for 10% of the country's mortgage delinquencies. This is going to be a huge headache for lenders with servicing portfolios in Texas and Florida.

The emergence of fraud and swindles usually signals the top of bubbles. Liar loans and CDO squareds were the bell ringing at the top of the US residential real estate market. It looks like we are getting to see some of this in China as well, which has a residential real estate market of epic proportions. When China's residential real estate bubble finally bursts, it will be a massive battle of wills between Mr. Market and Mr. Big Government. When Japan's bubble burst, the government used all sorts of ham-handed methods to prevent a crash, and I wouldn't be surprised to see China try some of the same things. Once China's bubble bursts, they will export deflation to the world, which will keep inflation in check in the US, however it will also sap global growth. Luckily Japan seems to be picking up at long last (almost 30 years).

Morning Report: Fannie is piloting a new construction loan program

Vital Statistics:

	Last	Change
S&P Futures	2578.8	-12.3
Eurostoxx Index	391.2	-3.2
Oil (WTI)	56.9	0.1
US dollar index	87.8	0.0
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.95

Stocks are lower this morning on overseas weakness. Bond and MBS are down. 

Initial Jobless Claims rose to 239k last week. We are at levels not seen since the Vietnam War. 

Fannie Mae is working on an initiative to increase affordable housing, by increasing access to construction loans. Under the program being considered, lenders will be able to sell construction loans to Fannie Mae on the day construction begins instead of the day construction is completed. This will alleviate the issue of lenders having to hold a construction loan on their books for months and hopefully spur more construction activity. This will probably have only a marginal impact on housing supply, as the supply issue is being driven more by labor and land shortages, as well as regulation.''

Meanwhile, NAR is warning that the GOP tax plan will bring affordable housing construction "to a halt." The Low Income Housing Tax Credit will remain in place, however the private activity bonds used to finance affordable housing construction will be eliminated. Second, as tax rates fall, the value of the tax credits used to encourage affordable housing construction will fall in value. Affordable housing advocates estimate that tax reform will cut affordable housing construction by 2/3.  

Fannie Mae's Home Purchase Sentiment Index fell from its highs in October. "The modest decrease in October's Home Purchase Sentiment Index is driven in large part by decreases in favorable views of the current home-buying and home-selling climates, a shift we expect at this time of year moving out of the summer home-buying season," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Indicators of broader economic and personal financial sentiment remain relatively steady. Overall, these results are consistent with our view that the housing market will continue its slow, upward grind through 2018." Despite the strong employment numbers lately, the survey saw an increase in the number of people worried about their jobs. 

The NYSE just launched FANG futures, which are led by Facebook, Amazon, Netflix, and Google. Definitely a bull market phenomenon - reminds me of stock split beepers, which were advertised in Barrons back in the late 90s. 

Some market watchers are warning that the flattening yield curve is signalling a recession. The favorite metric is the 2s-10s spread or the difference in yield between the 10 year bond and the 2 year bond. While a flattening yield curve is often associated with longer-term economic weakness, it is also associated with Fed tightenings. In fact, the yield curve has flattened in every tightening cycle since 1980. That said, nothing in the data suggests the economy is weakening - if anything the economy is accelerating. The Fed is tightening in order to bring its unusually accommodative policy back to a semblance of normalcy, not to fight inflation (despite what they are saying about it). They are being extremely cautious and are doing everything they can to prevent a Fed-induced recession.

Morning Report: Existing Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2468.0	-1.3
Eurostoxx Index	378.9	-1.3
Oil (WTI)	46.1	0.3
US dollar index	86.4	-0.1
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are flat.

The big event this week will be the FOMC meeting on Tuesday and Wednesday. No change in rates is expected, however the language in the statement always has the potential to move markets, so just be aware. We will have some important data, especially in housing, as well as GDP this Friday. No data this morning, however. 

Affordable housing advocates will be spending the week marching and discussing the need for more affordable housing, as well as advocating for no cuts the HUD's budget. The biggest proposed cut to HUD involves the Community Development Block Grant program, which famously funds Meals on Wheels, but is in reality just funds pet projects in various districts, especially in the counties surrounding DC.

The Fed will probably discuss tapering this week, which concerns letting its portfolio of bonds bought during quantitative easing to mature. The European Central Bank is also contemplating doing something similar. While there is concern that tapering will push up longer-term interest rates, these are probably overblown. Certainly QE did not affect mortgage backed spreads much at all, and tapering will be a fraction of what full-blown QE was. 

Existing Home Sales dropped 1.8% in June as tight inventory is driving up prices and affecting affordability. The median home price increased 6.5% to $263,800. This puts the median house price to median income ratio at about 4.4x, which is elevated. That ratio peaked at 4.8x during the bubble, and fell to 3.3x during the bust years. Historically that number has been in the 3.2x-3.6x range, although you have to correct for interest rates, which does affect affordability. You can see the index of home prices versus incomes diverging again.

Total housing inventory fell to 1.96 million units, which represents a 4.3 month supply. A balanced market is usually around 6 month's worth. Affordability concerns also hurt the first time homebuyer, who fell to 32% of sales, down from a 33% the prior month. All cash sales were down to 18% from 22% the year prior. The REO to rental trade might be driving that as professional investors stop buying. In fact, pros should be looking at selling - prices are elevated.