Morning Report: Housing starts and building permits are flat

Vital Statistics:

	Last	Change	Percent
S&P Futures	2067.1	-3.5	-0.17%
Eurostoxx Index	2852.4	33.1	1.17%
Oil (WTI)	47.21	1.0	2.16%
LIBOR	0.656	0.002	0.24%
US Dollar Index (DXY)	94.4	-0.169	-0.18%
10 Year Govt Bond Yield	1.58%	0.01%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.68

Markets are flattish on no real news. Bonds and MBS are flat as well.

Housing starts came in at 1.16 million in May, a tiny decline from the downward-revised April number. Building Permits rose slightly. Starts rose the most in the West and fell the most in the Northeast. It is amazing that we have a shortage of housing and are building very little. Take a look at the chart below: It is housing starts divided by population. We have just barely touched the low from the 91-92 recession, which also was the result of a frothy real estate market. If the government wants to get the economy going, it should be asking the question why housing is still so depressed in the face of such tight inventory and high demand. 

The Brexit campaign is on hold after a member of Parliament was murdered yesterday. Officials don't have a motive, however there have been calls on both sides to tone down the rhetoric. 

The current global economy resembles the 1930s in many ways, and can help explain why the Fed is going so slowly in raising interest rates. Of course there are major differences as well - rates didn't go negative in the 1930s, the world was on the gold standard, and capital was much less mobile. Still, we have a recession in the aftermath of an asset bubble and the hangover is debt that needs to be worked down. The Fed is trying to avoid the mistake of the 1937 "depression within the depression" where they hiked rates too quickly. Of course by that time, FDR was on an anti-business tear with the undistributed profits tax, and that certainly put a wet blanket on business investment. 

The most deadly words in investing are "this time is different." That said, we are in a world of negative bond yields, and massive central bank balance sheet growth, which you won't find in your Econ 101 textbook. This time is indeed different. Or, is the answer more simple: we are in a bubble for sovereign debt? When you are purchasing a German Bund for no yield whatsoever, the only reason why you would make that investment is because you anticipate a capital gain - in other words you are making the investment on the "greater fool" theory. Which is of course no different from paying 60x earnings for Cisco Systems in 1999 hoping to flip it to someone willing to pay 61x earnings. Or flipping condos in Palm Beach for that matter. 

I went on Louis Amaya's Capital Markets Today podcast after the Fed decision and discussed the Fed, the economy, housing and regulations. You can hear the podcast here.

Morning Report - housing starts stuck in a range

Vital Statistics:

	Last	Change	Percent
S&P Futures	2037.9	-5.9	-0.34%
Eurostoxx Index	2947.8	12.3	0.42%
Oil (WTI)	46.21	-0.5	-1.05%
LIBOR	0.627	-0.002	-0.24%
US Dollar Index (DXY)	94.58	0.426	0.45%
10 Year Govt Bond Yield	1.78%	0.01%
Current Coupon Ginnie Mae TBA	105.7
Current Coupon Fannie Mae TBA	104.8
BankRate 30 Year Fixed Rate Mortgage	3.59

Stocks are lower this morning on Fed worries and emerging market woes. Bonds and MBS are flat

We will get the minutes from the April FOMC meeting today at 2:00 pm EST. The markets have been focusing like a laser on any sort of Fed-speak, so this could present the possibility of some volatility in the bond markets. Just be aware. 

Yesterday, Atlanta Fed President Dennis Lockhart and San Francisco Fed member John Williams said that two hikes this year may be the proper course. 

Mortgage Applications fell 1.6% last week as purchases fell 5.8% and refis rose 1.4%. 

We had some housing data earlier this week. First, the NAHB Housing Market Index was steady at 58. This is the homebuilder sentiment index. After peaking in late 2015, it has fallen slightly. Builders are certainly happy with mid single-digit increases in average selling prices, but they aren't pumping out more units yet. 

The drop in sentiment is evident in housing starts, which continue to be mired in the 1.1 million to 1.2 million unit range. In April, starts rose to 1.17 million from an upward-revised 1.1 million. Building permits rose to 1.1 million. It is amazing that we have such low inventory of homes and yet starts are around 25% less than historical, pre-bubble numbers. That is even more dramatic when you factor in population. We have only approached the lows from the 81-82 recession, which was a bad one. 

Morning Report: Housing starts and building permits going the wrong way

Vital Statistics:

	Last	Change	Percent
S&P Futures	2102.8	17.8	0.4%
Eurostoxx Index	3054.4	-6.4	-0.21%
Oil (WTI)	40.26	0.5	0.36%
LIBOR	0.628	-0.001	-0.20%
US Dollar Index (DXY)	94.76	-0.139	-0.15%
10 Year Govt Bond Yield	1.78%	-0.01%
Current Coupon Ginnie Mae TBA	105.5
Current Coupon Fannie Mae TBA	104.8
BankRate 30 Year Fixed Rate Mortgage	3.62

Markets are higher this morning as commodities rally. Bonds and MBS are flattish.

Housing starts fell 9% MOM in March to an annualized rate of 1.09 million, a highly disappointing number. Both SFR and multi-fam fell. This is the lowest level since October. Building Permits also fell around 8%, hitting a 1 year low. It is astounding that we have such a deficit of housing in this country, and are building 25% fewer homes than we did before the bubble, Housing (or lack thereof) has been the reason why this recovery has been so weak. Take a look at the chart below, which shows housing starts from 1959. Typically you see V-shaped recoveries in housing starts, however this time you haven't. Granted some of that was due to oversupply from the bubble years, but that excess inventory got worked off years ago. Is the problem a lack of skilled labor? Credit? Regulation? Probably all three.

While housing starts remain depressed, builder confidence is still strong, with the NAHB Housing Market Index (a measure of homebuilder sentiment) holding steady at 58 in April. The builders continue to report big increases in average selling prices, although gross margins are lagging. This means input prices (raw land, sticks and bricks, and labor) are rising faster than prices. Given that incomes aren't rising in the mid-high single digits the way ASPs have been, we have to be hitting the ceiling. Note we will get earnings from Pulte and D.R. Horton on Thursday.

There are signs of weakness building in the labor market - temporary employees are typically the canary in the coal mine, and temp hiring is falling. Historically, that has been an early warning sign of a recession. Separately, the Federal Reserve's Labor Market Conditions Index, which is a meta-index of leading and lagging indicators has been turning downward. Could 2015 have been the peak of the labor market recovery?

Certainly things are not going swimmingly in the financial sector: Goldman reported a 60% drop in earnings as revenues fell. The bright side? The multi-billion fines from the government may finally be in the rear view mirror. I wonder if you tally up all the bailout money and compare it to the revenues the government has received in paybacks, fines, and Fannie Mae profits how profitable was the Great Recession for the government. 

Morning Report: Awaiting the decision...

Vital Statistics:

	Last	Change	Percent
S&P Futures	1983.2	-4.8	-0.24%
Eurostoxx Index	3252.7	0.9	0.03%
Oil (WTI)	46.95	-0.2	-0.42%
LIBOR	0.334	-0.001	-0.37%
US Dollar Index (DXY)	95.17	-0.252	-0.26%
10 Year Govt Bond Yield	2.29%	-0.01%
Current Coupon Ginnie Mae TBA	103.9	0.0
Current Coupon Fannie Mae TBA	103.3	0.1
BankRate 30 Year Fixed Rate Mortgage	3.89

Markets are lower this morning after housing starts disappoint. Bonds and MBS are flattish.

Today is Fed day. We should get the decision around 2:00 pm EST. Expect bond market volatility (or at least be prepared for it). The consensus seems to no move and very hawkish language in the statement. 

Initial Jobless Claims fell to 264k last week, an extremely strong reading. People who have jobs are keeping them.  

The Bloomberg Consumer Comfort Index fell to 40.2 from 41.4 last week. 31% of respondents think the economy is excellent / good, while 69% think it is not-so-good / poor.

Housing starts fell to a 1.12 million pace in August, below the 1.16 estimate. July was revised downward from 1.21 million to 1.16 million. Building Permits rose to 1.16 million from an upward-revised 1.13 million. Both single fam and multi-fam dropped. We are entering the seasonally slow period for the builders, so I wouldn't read too much into these numbers. 

We have tremendous pent-up demand for homes and the inventory of homes for sale is very light. So why aren't we seeing more homebuilding? Part of the problem is a shortage of labor. Many of the construction workers from the housing boom have either left to new industries (mainly energy), aged out of the workforce, or left the country. 22% of construction workers are foreign, and the NAHB is asking for a temporary guest worker program to fill demand for workers. Right now, the builders are stealing skilled workers from each other using higher pay as an incentive to move.

This of course begs the question why there is a shortage in the first place. The labor force participation rate is stuck at almost 40 year lows and presumably many would want these jobs, which pay well. They aren't retail / hospitality minimum wage jobs. Are the people who involuntarily left the workforce too old to do construction work? Are they untrainable? It seems strange we would have labor shortages with so much apparent slack in the labor market, but here we are....

Morning Report - Dodd-Frank 5 years on..

Vital Statistics:

	Last	Change	Percent
S&P Futures	2120.3	1.5	0.07%
Eurostoxx Index	3701.6	31.3	0.85%
Oil (WTI)	50.82	-0.1	-0.14%
LIBOR	0.292	0.005	1.66%
US Dollar Index (DXY)	97.9	0.042	0.04%
10 Year Govt Bond Yield	2.37%	0.02%
Current Coupon Ginnie Mae TBA	103.8	0.2
Current Coupon Fannie Mae TBA	103.1	0.2
BankRate 30 Year Fixed Rate Mortgage	4.17

Stocks are higher this morning after Greece made a payment to the ECB and re-opened its banks. Bonds and MBS are down small.

There is very little data this week - nothing today and tomorrow. We will get existing home sales on Wednesday and new home sales on Friday. Earnings season is in full swing and we will hear from heavyweights like Apple and IBM this week. Now that Greece and Chinese stocks seem to be stabilizing, I could see a gentle drift up in interest rates throughout the week. 

Good housing numbers out of Census on Friday, with housing starts hitting 1.17 million and building permits hitting 1.34 million. Building Permits have risen by 200 units or so over the past two months, which portends an end to the tight supply we have been seeing in many real estate markets, which is causing bidding wars in some areas. The big improvement is largely in the Northeast, where permits are finally surpassing the levels in the West. 

Chart: Building Permits: 1990 - Present

Interview with Chris Dodd and Barney Frank on Dodd-Frank 5 years later. Short summary: Dodd Frank is damn near perfect. A counter-take on it. Dodd-Frank did not end TBTF (too big to fail), however it does restrict credit, especially in mortgage banking (Barney Frank thinks D/F didn't go far enough). 

One of the unintended consequences of Dodd-Frank has been the pullback in liquidity in Treasury and corporate bond markets. Since Dodd-Frank prohibits proprietary trading, market-making has been pulled back as well, making Treasury markets more volatile, and according to studies has raised the interest rate the government pays on bonds by about 13 basis points or so. The side effect of this is that we will have more days like October 15, where Treasuries traded in a 36 basis point range as the market hit an air pocket during the day. What does this mean for LOs? Floating is going to be more dangerous.