Morning Report - Party like its 1999.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1544.0	6.9	0.45%
Eurostoxx Index	2698.8	15.8	0.59%
Oil (WTI)	90.51	-0.3	-0.34%
LIBOR	0.28	-0.002	-0.53%
US Dollar Index (DXY)	82.2	0.114	0.14%
10 Year Govt Bond Yield	1.94%	0.04%
RPX Composite Real Estate Index	195.2	0.1

Party like its 1999. Markets are stronger after the Dow set a record high yesterday. The S&P 500 has about 40 points left to hit a record as well. NASDAQ, well.. about another 60% needed there. No real market-moving news this morning.  Mortgage applications rose 14.8% last week as rates fell. Bonds and MBS are victims of the "risk on" trade and are moving lower.

The ADP February Employment Report estimated jobs increased by 198k last month, higher than the Street estimate of 170k. This probably means the street estimate for non-farm payrolls scheduled to be released on Friday is low at 160k. The increase was mainly in services. On the good-producing side, construction drove the increase. Coupled with the consumption numbers we have seen, it appears that the real economy is taking the Jan 1 tax increases in stride. Perhaps the sequester will end up being a nonevent as well.

Altos is forecasting home prices will rise 10% in 2013, which puts them at the high end of estimates. They cite three big indicators all pointing to higher prices:  First, the percent of homes with price reductions is falling, and below a normal market.  A normal reading is 38%, which makes sense - you overprice and if no one bites, you go lower.  A weak market would have price reductions in the 40% - 50% range, while a hot market would have about 15%.  We are currently at 28%, somewhere between "normal" and "hot."  Blame professional investors and low inventory. Second, the price of newly-listed properties is on the upswing.  Third, median days on the market is falling.  Quickly.

So what happened to this massive glut of supply that was supposed to hit the market?  Well, first of all, new home construction has been anemic. Yes, housing starts have been increasing at a pretty good clip, but we are still not cracking a million per year pace, and 1.5 million a year has been the historical norm. Second, now that prices are increasing, many homeowners who are under no pressure to sell are deciding to hang on a little longer. Finally, the government is doing everything it can to stimulate demand (through FHA lending, QE, etc) and decrease supply (through HARP, HAMP, and other refi programs to keep people in their homes). So far, 2013 is shaping up to be a year of high-ish price appreciation in the context of restricted supply.

Morning Report - Case Schiller

Vital Statistics:

	Last	Change	Percent
S&P Futures	1490.8	3.6	0.24%
Eurostoxx Index	2586.8	-65.1	-2.45%
Oil (WTI)	92.23	-0.9	-0.95%
LIBOR	0.287	0.000	0.00%
US Dollar Index (DXY)	81.85	0.180	0.22%
10 Year Govt Bond Yield	1.87%	0.01%
RPX Composite Real Estate Index	194.1	-0.5

Markets are higher after yesterday's bloodbath.  Yesterday's sell-off was blamed on Italian election results which caused a 32 bp sell-off in Italian sovereigns.  They have traded another 50 basis points wider this morning. The Bernank will testify before the Senate Banking Committee today.  Bonds are higher, continuing yesterday's furious rally. The 10-year has tightened by 13 basis points and is trading at 1.87%.  MBS are flat.

The S&P Case-Schiller index of home prices rose 6.8% YOY and .88% MOM in December. The only MSA with negative growth was New York.  Separately, FHFA reported that prices increased .6% MOM in December. They note that while the foreclosure pipeline is still high, the actual number of homes available for sale is very low and falling.

Altos has a piece on why inventory is so low. First, they cite low housing starts. From 1957 - 2002, we averaged 1.5 million units a year.  Since the bubble burst, we have been hitting around 700k. Quickly ramping up housing construction is difficult. Second, there is psychological effect of sellers who now see the light at the end of the tunnel.  Prices are rising again, and they are hoping to get out flat. Finally, the government has emphatically sided with home owners over home buyers. They are pulling out all the stops to keep inventory off the market through foreclosure mitigation and refinance opportunities for underwater homeowners.  This has the net effect of restricting supply, which is good for existing homeowners, but not so much for first time homebuyers who want in. The net result:  2013 home price appreciation should be very strong.

In confirmation of the above, the Despot reported a 13.9% increase in 4Q sales, with comps up 7%. While they attribute some of the growth to Sandy repairs, they mainly cite the improving residential real estate market.

In a sign that the refi boom may be over, JP Morgan plans on cutting headcount in mortgage banking by 13k - 15k in an effort to cut $3B in expenses by the end of 2014. They see cutting 3,000 - 4,000 jobs in consumer banking this year, almost entirely by attrition.  The hits keep coming....

Bob Corker is saying the ball is in the White House's court in order to confirm CFPB acting Chairman Richard Cordray.  A January court decision that Obama's recess appointments to the NLRB were unconstitutional is giving Republicans a chance to press for changes to CFPB in order to bring more of it under Congressional control.  They are arguing for a 5 member bipartisan board, and for the budget to be subject to the normal appropriations process.