Morning Report: Fed Day

Vital Statistics:

	Last	Change
S&P Futures	2137.0	7.0
Eurostoxx Index	342.9	2.0
Oil (WTI)	44.8	0.8
US dollar index	86.7	-0.2
10 Year Govt Bond Yield	1.69%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.56

Stocks are up this morning after stocks rallied overnight on moves from the Bank of Japan. Bonds and MBS are flat.

The Japanese Central Bank is embarking on a new version of QE: attempting to hold the yield of the 10 year bond precisely at 0%. The BOJ holds something like 40% of all Japanese Government bonds, and between the other players that must hold Japanese government bonds (banks for capital and insurance companies) the central bank has essentially cornered the market in bonds, and can therefore set just about any price it wants. 

The FOMC decision will be out around 2:00 pm today. Bonds could get volatile around then so be careful if you have locks to deal with. The Fed Funds futures have a low 20% chance of a rate hike at today's meeting. Note that this meeting will introduce new economic forecasts and rate forecasts, so there will be a lot that can move markets. Janet Yellen will have a press conference at 2:30 PM EST following the decision. 

Mortgage applications fell 7.3% last week as purchases fell 7% and refis fell 8%. 

Housing starts and building permits fell last week due to lousy weather in the South. Housing starts came in at a 1.14 million annual rate. Single family starts rose while multi-fam (which is much more volatile than SFR) fell. 

KB Home and Lennar both reported earnings that beat estimates, although the orders numbers disappointed. Gross margins fell as land prices increased. Lennar reported weakness in some Texas markets due to the slowdown in the energy patch. 

Housing inventory fell for the fifth straight quarter, according to Trulia. Affordability continues to fall as the percentage of income to buy a home continues to rise. Starter homes now require 38.5% of the typical borrower's income, up from 36.8% in the third quarter last year. Historically, 36% has been a level where the GSEs begin to get concerned. Starter homes represent 23% of the available inventory, which is out of whack with the historical average of about 40%. The high end represents the majority of the inventory out there (which is where we are starting to see softness in pricing). We are starting to see increases in inventory in some of the West Coast markets where supply is the tightest, especially places like San Francisco and San Diego. 

Wells Fargo CEO Joe Stumpf went to Washington yesterday and got scolded by the usual suspects. Although the area affected was retail lending and not mortgages, I am sure the effects will be felt in mortgage banking as well. 

As banks get hammered and tied up in red tape, house flippers who need money fast are turning to crowdfunders. One flipper raised $1 million in 12 hours on crowdfunding sites RealtyShares, LendingHome, PeerStreet and Patch of Land. He is paying 14% for 2.5 year money. You are even seeing builders use this market as banks back away. 

Morning Report: Job openings compared to unemployed back to pre-recession levels

Vital Statistics:

	Last	Change
S&P Futures	2159.0	-12.0
Eurostoxx Index	347.1	-2.0
Oil (WTI)	46.7	-0.9
US dollar index	86.4	0.3
10 Year Govt Bond Yield	1.65%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

Stocks are lower as emerging markets sell off. Bonds and MBS are down.

Risk-off feel today, but bonds aren't rallying. What is going on? Global bond yields are increasing, especially in Japan where the BOJ is taking a breather purchasing bonds. The German Bund is down as well. Some strategists are beginning to sense that the Japanese bond market could be headed lower. So, despite weak US economic data, a global bond sell-off will affect US Treasuries as well. 

Boston Fed President Eric Rosengren is sounding hawkish, which is not his natural home. His argument is that a campaign of slow, steady rate hikes will prolong the expansion more than waiting and then having to move more aggressively. Of course it all comes down to wage growth, which decelerated in the last jobs report.

Barry Ritholz took a look at the the lack of wage growth and comes up with an interesting chart: the ratio of the unemployed to the number of job openings. This ratio is back down to pre-crisis levels. While we have yet to see much evidence of increased turnover in the quits rate, it does appear at least anecdotally that we are seeing more turnover. Certainly the stage is set for further wage inflation.

Mortgage credit tightened slightly in August, according to the MBA. Apparently, one investor is exiting the correspondent business and that accounted for the tightening. Credit is easing in the jumbo space however. 

Morning Report: Bank of Japan to the rescue

Vital Statistics:

	Last	Change	Percent
S&P Futures	1908.0	22.0	1.15%
Eurostoxx Index	3024.6	80.7	2.74%
Oil (WTI)	30.46	0.1	0.12%
LIBOR	0.621	-0.003	-0.48%
US Dollar Index (DXY)	99.34	0.279	0.28%
10 Year Govt Bond Yield	1.92%	-0.05%
Current Coupon Ginnie Mae TBA	104.7
Current Coupon Fannie Mae TBA	104
BankRate 30 Year Fixed Rate Mortgage	3.71

Stocks and bonds are higher this morning after the Bank of Japan instituted negative interest rates in an attempt to improve their struggling economy and weaken the yen.

The Bank of Japan's move caused a worldwide bond rally, which has brought the US 10 year bond solidly below 2%. Mortgage bankers could catch a break here as refi activity will pick up.

We have a lot of economic data this morning

Fourth quarter GDP came in at an anemic 0.7%, missing the Street estimate of 0.8%. The only bright spot of the report was consumption, which increased 2.2%

Inflation remains well-contained with the PCE (the preferred inflation measure of the Fed) increasing at 0.8%, and the core index increasing at 1.2%

The Employment Cost Index rose at 0.6% as wage inflation remains nowhere to be found.

Consumer sentiment slipped in January, while the ISM Milwaukee and Chicago Purchasing Manager Indices increased. 

The homeownership rate increased by a tenth of a percent in the fourth quarter to 63.8%. It bottomed in the second quarter at 63.4%. Median asking rent increased 6% from the third quarter to $850. On an annualized basis, it increased 11%.

Household formation dropped to 460,000 in the fourth quarter from 1,447,300 in the third quarter. This almost looks like a data error. If household formation was slowing that much, you wouldn't see the tight inventory of housing that we have. 

Morning Report: Return of the Yen Carry Trade

Vital Statistics:

	Last	Change	Percent
S&P Futures	1550.7	2.2	0.14%
Eurostoxx Index	2661.8	22.8	0.86%
Oil (WTI)	93.96	-0.5	-0.52%
LIBOR	0.28	-0.001	-0.25%
US Dollar Index (DXY)	83.19	0.469	0.57%
10 Year Govt Bond Yield	1.77%	-0.04%
Current Coupon Ginnie Mae TBA	104.9	0.1
Current Coupon Fannie Mae TBA	103.7	0.2
RPX Composite Real Estate Index	189.4	0.1
BankRate 30 Year Fixed Rate Mortgage	3.68

Markets are giving back some Japan-led gains after Initial Jobless Claims spiked to 385k from 357k. This was the holiday-shortened Easter week, so there is a seasonality adjustment there.  On a non-seasonally adjusted basis, they fell. Bonds and MBS are rallying, with the 10 year yield down to 1.77%.

The Bank of Japan outlined more aggressive monetary actions last night with their own version of quantitative easing. This pushed the Nikkei 225 stock market index up 2%, and caused a sizeable drop in the yen.  This explains the rally in US bonds as Japanese investors flee for the "high yielding" US treasury market.  Don't laugh - the Japanese 40 year bond (the 2's of 52) yields 1.34%.  The US 10-year at 1.77%, in the context of a depreciating yen, is reviving the yen carry trade. The Yen Carry Trade is when Japanese investors borrow funds at yen rates and invest in high-yielding sovereign debt. They benefit from the pickup in yield and any favorable currency movements. With the high quality Euro sovereigns yielding even lower than the US, we are the only game in town. Punch line - this will put downward pressure on mortgage rates in the US, at least at the margin.

The CoreLogic Home Price Index increased 10.2% on a year-over-year basis in February, the highest increase since March of 2006.  It is the 12th consecutive monthly increase.  The gains were broad based, with 96% of their MSAs reporting gains.  California, Arizona, and Nevada all showed gains in the high teens.   They are forecasting a 2% month over month increase in March, or 12% year over year.

Chart:  CoreLogic Home Price Index

Hank Paulson, George Bush's Secretary of Treasury, says that Fannie Mae's new profitability shouldn't deter the government from establishing a new platform for mortgage finance. He mentioned the Washington Post article that says the Administration is pushing banks to make home loans to people with weaker credit. Nominated to take over as Treasury Secretary just as the housing bubble was peaking, he can be forgiven for being a little gun-shy on re-inflating the bubble.

San Francisco Fed President John Williams said he is hopeful that "the economy has shifted into high gear" and that the Fed could begin slowing the purchases of Treasuries and MBS this summer, with a full exit by the end of the year.

Finally, you can hear my latest interview on Capital Markets Today, where I discuss real estate pricing, politics, and the economy.