Morning Report: Appraisals not keeping up with prices

Vital Statistics:

	Last	Change
S&P Futures	2262.0	-1.8
Eurostoxx Index	364.8	0.7
Oil (WTI)	51.1	0.3
US dollar index	93.0	0.3
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.11

Markets are flat ahead of Donald Trump's news conference. Bonds and MBS are flat.

Mortgage Applications rose 5.8% last week as purchases rose 6% and refis rose 4%. 

Secretary of State nominee Rex Tillerson will face Congress today. Jeff Sessions had his time in the box yesterday.

Home sales are falling through at a faster pace than last year, according to Trulia, and it is the starter home price points that are seeing it the most. 4.3% of all sales failed in the fourth quarter, compared to 1.4% two years ago. This may have to do with the increase in the number of first time homebuyers and the drop in professional investors which makes this probably a credit story. We are also seeing people who had foreclosures and bankruptcies during the bubble years re-approach the housing market as those events fall off their credit reports. 

Part of this phenomenon could in fact be the divergence between the opinions of buyers / sellers and appraisers. According to Quicken loans, appraised values came in about 1.3% lower than owner expectations in November. Interestingly, appraised values fell in November, while house prices (at least according to the home price indices) have been rising. That said, appraisal values did increase almost 4% YOY, however that is much lower than the 6% or so home price appreciation we have been seeing in the other indices. That said, since appraisals use historical comparisons, some lag is to be expected. 

Bob Shiller says the animal spirits are stirring in the housing market. Of course tight credit for both buyers and builders as well as increasing interest rates will offset that somewhat, but confidence plays a huge role in economic growth. That said, demographic headwinds are going to be an issue.

In keeping with the demographic headwinds issue, the Bipartisan Policy Center Senior Health and Housing Task Force has some advice for Ben Carson and helping the Baby Boom generation age in their homes. 

Morning Report: Pending home sales fall in November

Vital Statistics:

	Last	Change
S&P Futures	2266.5	5.5
Eurostoxx Index	361.3	0.8
Oil (WTI)	52.2	0.1
US dollar index	93.7	0.3
10 Year Govt Bond Yield	2.55%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.29

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

Pending home sales fell 2.5% in November on rising mortgage rates and tight supply, according to the National Association of Realtors. They forecast existing home sales to hit just over 5.5 million in 2017, which works out to be a 10 year high. NAR anticipates that increasing wages will offset some of the problems with affordability. 

Same store sales increased 2.1% last week according to Johnson Redbook. Despite the increases in consumer confidence indices, it doesn't appear to be translating into actual buying. 

Bob Shiller (of Case-Shiller fame) thinks that next year could usher in a housing boom, provided some regulatory relief happens. Initially, he thinks that rising rates could accelerate home purchases, as buyers realize that waiting will mean higher house prices and higher rates. 

House flippers are making a comeback as well. The number of house flippers has reached a 9 year high, and average profits are up to 61k from 19k at the bottom of the market. About 1/3 are financed with debt, the highest level in 8 years. The market for home flipping loans is still relatively small compared to the vanilla home loan market, but it is expected to reach almost $50 billion this year. The banks don't seem to be making these loans directly, but are lending to smaller finance companies that do. Since these loans are non-owner occupied, a lot of the post-crisis regulations don't apply to them or the companies that make them. Rates are in the 7% - 12% range. 

Zillow is predicting a modest slowdown in home price appreciation. They are forecasting a 0.7% increase in November, which works out to be a 5.6% increase YOY. Most analysts are looking for a 3% - 5% increase in house prices for 2017. 

Here is a good summary of the various important housing charts, all in one place. 

The key to improving housing and mortgage lending next year is to bring back the private label securitization market. You can see below that private label securitization is still way below pre-bubble levels. Increasing interest rates could actually be a help as the risk-reward ratios of home lending decrease, which will bring in more investor money. More regulatory clarity will help issuers.