Morning Report: Housing inventory and entry level homes

Vital Statistics:

	Last	Change
S&P Futures	2839.5	-14.0
Eurostoxx Index	397.5	-2.3
Oil (WTI)	65.0	-0.6
US dollar index	83.1	-0.3
10 Year Govt Bond Yield	2.71%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.19

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

The FOMC meeting starts today. This will be Janet Yellen's last hurrah, and that will probably dominate the news more than whatever decision they make. 

Consumer Confidence improved in January, according to the Conference Board. Confidence is at levels not seen since the late 90s. 

Home price appreciation continues its torrid pace, according to the Case-Shiller Home Price Index. The housing market is partying like it is 2005, with the usual suspects (San Diego, LA, Lost Wages) leading the charge. Case-Shiller Chief Economist David Blitzer had this to say about home price appreciation: “Home prices continue to rise three times faster than the rate of inflation... Given slow population and income growth since the financial crisis, demand is not the primary factor in rising home prices. Construction costs, as measured by National Income and Product Accounts, recovered after the financial crisis, increasing between 2% and 4% annually, but do not explain all of the home price gains. From 2010 to the latest month of data, the construction of single family homes slowed, with single family home starts averaging 632,000 annually. This is less than the annual rate during the 2007-2009 financial crisis of 698,000, which is far less than the long-term average of slightly more than one million annually from 1959 to 2000 and 1.5 million during the 2001-2006 boom years. Without more supply, home prices may continue to substantially outpace inflation.”

The lack of supply is puzzling, however part of what has pushed demand higher has been affordability due to decreasing interest rates and increasing wages. Home price unadjusted for inflation are back to bubble levels, however when you take into account inflation, they are not. As I argued before, affordability is a function of interest rates as much as it is about home prices. Borrowers focus on the monthly payment, not necessarily the sticker price. As far as the lack of supply, I think a lot of this is standard post-bubble psychology, where lenders and builders become more risk-averse (and often overcorrect to the other direction). Yes, regulation does play a role here, however post-bubble recoveries generally are weaker than normal because of this change in psychology. Eventually fear of being caught with too much inventory translates into fear of missing out. Despite years of below-average inventory, we aren't there yet. 

The outlook for housing this year remains similar to what we have seen for the past several years - tight inventory constraints will keep sales down while rising interest rates will affect affordability. The bottleneck is tightest at the lower price points - where the first time homebuyer is most likely to be found. The latest NAR exiting home sales report has supply overall around 3.2 month's worth. At the entry level, it is even tighter: in the price range of $125k - $250K, it is probably around 2.7 months or so. Unsurprisingly, we are seeing the biggest price appreciation in that segment as well. Here is a chart of inventory over time: We are at levels last seen during the bubble years:

Tonight Donald Trump will give his State of the Union Speech in front of Congress. The focus will be a $1.5 trillion infrastructure plan. Part of the plan will include a process for streamlining the approval process. Gary Cohn had this to say on CNBC: "He's going to talk about a trillion and a half dollars of investment, but more importantly, he's going to talk about streamlining the approval process on infrastructure," Cohn said. "Right now, we have an infrastructure approval process that takes seven to 10 years to build relatively simple roads. We need to streamline that to less than two years." 

I talked about the Mick Mulvaney memo to CFPB staffers and how they intend to end regulation by enforcement action, which was the MO of the Obama / Cordray regime. The Labor Department is also ending another Obama policy of refusing to give guidance to companies that ask for it. This is yet another example of the regulatory environment taking a less adversarial approach to the private sector, and this should translate into a stronger economy and mitigate some of the risk aversion I alluded to earlier. 

Tax reform is translating into more business spending headlines. Exxon-Mobil plans to add another $35 billion to its previous $15 billion expansion, and Pfizer plans to invest $5 billion. Given that capacity utilization is still historically low, this is somewhat surprising. Eventually, these newfound animal spirits have to affect the homebuilders, right? 

Years of central bank manipulation of the risk free rate has created a slew of questionable investments. Remember the PIIGS? (Portugal, Ireland, Italy, Greece, and Spain - the high yielding Euro states with massive budget issues?) Portugal has lower yields than the US right now. The Japanese Central Bank has been directly buying Japanese equities. If there is one "black swan" out there right now, it is the mal-investment that has been driven by central banks pushing yields to the floor in order to support asset prices.  

Morning Report: House prices continue to rise on inventory tightness

Vital Statistics:

	Last	Change
S&P Futures	2689.8	2.8
Eurostoxx Index	390.1	-0.1
Oil (WTI)	59.5	-0.4
US dollar index	86.6	-0.2
10 Year Govt Bond Yield	2.46%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	103.25
30 Year Fixed Rate Mortgage	3.97

Stocks are higher this morning on no real news. Bonds and MBS are up as well. 

Home prices rose 0.7% MOM in October and are up 6.4% YOY, according to the Case-Shiller Home Price Index. Seattle, Las Vegas, and San Diego led the charge with 12.7%, 10.2%, and 8.1% gains respectively. Inventory fell to 3.4 month's worth of supply, although some of that is probably seasonal. With home prices accelerating so fast out West, renting could be more attractive than buying in some MSAs. 

Manufacturing continued to be strong in in December according to the Richmond and Dallas Fed.

Pending home sales rebounded in November, according to NAR.  This is the first YOY gain since June, and is being driven by a strong economy. There might have been some hurricane elements at play however. 

What trade worked in 2017 (aside from Bitcoin and the stock market?) Credit risk transfer securities issued by Fannie and Fred. These are meant to offload some of the credit risk that the GSEs hold on their balance sheets. They take the first losses when borrowers default. The subordinate tranches of these securities made over 11% last year. outstripping high yield bonds and MBS by a wide margin. If there is more of an appetite for these securities, it will go a long way in helping establish the framework for competition to Fannie and Fred. 

The current state of affairs over who runs the CFPB: Mick Mulvaney (appointed by Trump) or Leandra English (appointed by outgoing director Richard Cordray). 

Tax reform will probably cause more migration from the high-cost states like NY, NJ, CT, IL, and CA to cheaper states like NC and TX. These states are hit with the double-whammy of high housing costs and high state taxes. The difference probably isn't going to be enough to cause a massive migration, however it could nudge those who are on the fence. 

Bond funds have been seeing outflows since tax reform has passed and investors are making changes to their asset allocations. Bond funds saw a withdrawal of $3.3 billion in the week ending Dec 20, which may account for the big increase in the 10 year's yield that week. It isn't just US Treasuries - the German Bund yield is up big this year as well. As investors become more constructive on the economy, they are shifting to emerging market sovereign bonds, which pay more and are more levered to global economic growth and out of Treasuries and Bunds, which are largely looked at as safe haven assets. Developed market stock funds also saw outflows as investors rang the register after a great year. 

Morning Report: Janet Yellen speaks at 11:50 today

Vital Statistics:

	Last	Change
S&P Futures	2495.8	-1.3
Eurostoxx Index	384.1	0.2
Oil (WTI)	51.9	-0.4
US dollar index	86.1	0.3
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.85

Stocks are lower this morning as we await a Janet Yellen speech at lunchtime. Bonds and MBS are flat. 

Janet Yellen will address inflation, uncertainty, and monetary policy at the National Association of Business Economics today. Charles Evans, Lael Brainard, and Loretta Mester also speak this morning. There probably won't be any market-moving comments, but just be aware. 

Charles Evans said he won't support further rate hikes until we see clearer signs of inflation. This puts him in the camp of Neel Kashkari, who also doesn't see the need to tap on the brakes. The dot plot from the last meeting showed 11 out of 16 members forecasting a rate hike in December. The Fed Funds futures are pricing in a 3/4% chance of a rate hike. This is the highest we have seen in this contract. Note the futures are predicting nothing happens in the November meeting. 

Case-Shiller is out this morning, and home prices are up 5.9% YOY. The Pacific Northwest continues to outperform, with Seattle up 13.5% and Portland up 7.6%. Separately, home prices rose 0.5% MOM and are up 6.2% YOY, according to the Black Knight Financial Services Home Price Index. We are starting to see the areas around DC cool down, while New York (especially upstate) is beginning to pick up. 

New Home Sales fell to 560k in August, according to the Census Bureau. This is a drop of 3.4% MOM and 1.2% YOY. Tight inventory remains the biggest problem. The median sales price of a new home was $300,200, and inventory was about 284k or 6.1 month's worth. The Street was looking for 583k. 

Consumer confidence slipped in September, according to the Conference Board. The index came in at 119.8, a touch below expectations. Expectations concerning employment and income contributed to the strong showing. 

Morning Report: Risk-off feeling on North Korea missile launch

Vital Statistics:

	Last	Change
S&P Futures	2431.3	-12.5
Eurostoxx Index	367.6	-4.7
Oil (WTI)	46.6	0.0
US dollar index	85.1	-0.1
10 Year Govt Bond Yield	2.11%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.84

Stocks are lower on news that North Korea fired a missile over Japan. Bonds and MBS are up.

Pre-open, the 10-year bond is trading at 2.11%, the lowest level of 2017 and we are back at immediate post-election levels. Remember, on the day of the election, the 10 year was trading around 1.83%, so we could still have further to fall in rates. The Great Trump Election Reflation simply isn't going to happen, though the Administration still intends to pivot to tax reform. The trader in me thinks we test the 1.83 level at some point. 

Home prices rose 0.1% MOM and are up 5.7% YOY according to the Case-Shiller Home Price Index. The Case-Shiller index has been lagging the FHFA index, which indicates that there might be some issues at the high end of the market. The FHFA index only looks at homes with a conforming mortgage, so jumbos and all-cash sales are excluded. 

Consumer confidence rose again in August to 122.9. The present situation component of the index hit a 16 year high, as we are back to mid 2001 levels. 

Tax reform won't be a slam dunk, but there could be a possibility for a bipartisan deal. Democrats might be willing to trade a carbon tax for an income tax cut, but that might be too tough of a deal for Republicans to stomach. A repatriation holiday for overseas corporate earnings is another possibility, however Democrats will certainly want some sort of strings attached to the repatriation break to ensure the funds don't simply go to buybacks and dividends, which is what happened last time we did one. Perhaps a deal could be found if there is a stipulation that some percentage of the savings be applied to worker compensation and training. 

A drop in the cap for the mortgage interest deduction is also something being considered, however that is such a politically risky issue that I doubt anyone does anything about it. The main beneficiaries are the wealthy and the upper middle class, and the upper middle class is really the third rail of politics. Liberals may hate the distribution of the benefits, but they probably won't go to the mat for it. Why? It isn't indexed for inflation, so the cap will hit more and more people simply due to home price appreciation. As a practical matter, the cap is declining 6% a year. 

Fannie Mae Chief Economist Doug Duncan looks at the implications of the Fed ending QE. He believes that it will increase MBS spreads, which means that mortgage rates will rise more than you would typically expect when rates rise, and fall less than you would expect when rates fall. FWIW, I think any effect would be minor: it certainly was when QE was actually happening. He also speculates that tapering will affect Fannie Mae and Freddie Mac spreads more than Ginnie spreads due to the differing capital treatment for banks. This means that FHA and VA loans will be relatively more attractive to a borrower than a Fannie or Freddie loan. The GSEs have also been ordered to reduce their balance sheets to a set level, so they won't automatically absorb that lost demand. 

Morning Report: Spending and incomes rise

Vital Statistics:

	Last	Change	Percent
S&P Futures	2099.8	2.5	0.12%
Eurostoxx Index	3079.7	-10.3	-0.33%
Oil (WTI)	49.59	0.3	0.53%
LIBOR	0.673	-0.001	-0.15%
US Dollar Index (DXY)	95.65	0.126	0.13%
10 Year Govt Bond Yield	1.89%	0.04%
Current Coupon Ginnie Mae TBA	105.5
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.65

Markets are up this morning after Chinese stocks rallied overnight. Bonds and MBS are down.

The second revision to first quarter GDP came in at 0.8%, slightly below the Street estimate of 0.9%. This was an upward revision from the initial 0.5% estimate. 

Personal incomes rose 0.4% in April, in line with expectations. Personal spending rose 1%, which topped the 0.7% estimate. The personal consumption expenditures index (which is the inflation measure preferred by the Fed) rose 0.2% month-over-month and is up 1.6% annualized. We are seeing some sell-side firms take up their second quarter GDP estimates on this number. 

Home prices rose 0.9% MOM and 5.4% YOY, according to the Case-Shiller Home Price Index. This was slightly ahead of estimates. An improving labor market along with tight inventory is driving prices higher. 

In other economic data, both the Chicago Purchasing manager index and the consumer confidence index fell. 

The highlight of this short week will be the jobs report on Friday, which will be the last big data point before the FOMC meeting in a couple of weeks. The number to watch: average hourly earnings. Average hourly earnings growth has been accelerating over the past 6 months or so, to around 2.5%. You can see the trend in average hourly earnings growth in the chart below: 

On Friday, Janet Yellen hinted that the next rate hike is probably at the June or July FOMC meetings. 

Morning Report: GDP revised upward on inventory build

Vital Statistics:

	Last	Change	Percent
S&P Futures	2073.0	-11.2	-0.54%
Eurostoxx Index	3380.9	-64.4	-1.87%
Oil (WTI)	42.58	0.8	1.99%
LIBOR	0.382	0.005	1.19%
US Dollar Index (DXY)	99.54	-0.264	-0.26%
10 Year Govt Bond Yield	2.23%	-0.01%
Current Coupon Ginnie Mae TBA	104
Current Coupon Fannie Mae TBA	103.4
BankRate 30 Year Fixed Rate Mortgage	3.93

Markets are lower this morning after Turkey shot down a Russian plane in Syria and Brussels stays on lockdown. Bonds and MBS are up small.

The second revision to third quarter GDP came in at 2.1%, in line with estimates, and up from the initial 1.5% estimate. Personal consumption rose 3.0%, a little below expectations, while inflation was slightly higher. Inventory build accounted for a lot of the growth, which means the third quarter may have "borrowed" some growth from Q4. 

Consumer Confidence took a big hit in November, falling from 97.6 to 90.4,

The Richmond Fed Manufacturing Index fall to -3 from -1 in November.

The S&P/Case-Shiller index rose .61% in September and is up 5.45% year-over-year. 

The Allergan / Pfizer merger has brought out all the usual suspects jawboning about "corporate patriotism." It is another inversion trade, where the larger Pfizer is getting bought by smaller Allergan in order for Pfizer to change its domicile to Ireland and lower its effective tax rate from 25% to 17-18%. The companies sure made themselves a target by doing this in an election year, however the reality remains: the US has the highest corporate tax rate in the world, and we double-tax foreign income, which most countries do not. Until corporate tax reform happens, these sorts of things will continue. 

Morning Report: House prices rise 5%

Vital Statistics:

	Last	Change	Percent
S&P Futures	2057.0	-5.3	-0.26%
Eurostoxx Index	3393.7	-20.9	-0.61%
Oil (WTI)	43.1	-0.9	-2.00%
LIBOR	0.323	0.003	0.94%
US Dollar Index (DXY)	96.76	-0.101	-0.10%
10 Year Govt Bond Yield	2.04%	-0.02%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.6
BankRate 30 Year Fixed Rate Mortgage	3.79

Stocks are lower this morning as the Fed begins their two day FOMC meeting. Bonds and MBS are up small. 

Another sign the economy is slowing down: Durable goods orders fell 1.2% in September, and are down 0.4% ex-transportation. Capital Goods orders (a proxy for business capital expenditures) fell 0.3%. As a result of these numbers, Goldman took down their Q3 GDP estimates to 1% from 1.2% and JPM took theirs down to 0.6%.  

The Markit US Composite PMI slipped to 54.5 from 55 in October and the Services PMI fell from 55.1 to 54.4.

Consumer confidence fell in October to 97.6 from a downward-revised 102.6 in September. 

The S&P/Case-Shiller Home Price Index rose 0.11% in August and is up 5.1% year-over-year. They make this point about home price appreciation: “A notable part of today’s economy is the continuing low inflation rate; in the year to September, consumer prices were unchanged. Even excluding food and energy, the core inflation was 1.9%. One result is that a 5% price increase in the value of a house means more today than it did in 2005-2006, the peak of the housing boom when the inflation rate was higher. The rebound from the recent lows was faster than the 1997-2005 housing boom, and also much less driven by inflation."

Supposedly there is a deal to prevent a government shutdown. The sequester is lifted, and the carried interest deduction goes away. This should clear the decks for Paul Ryan to take over as Speaker of the House. This deal will probably get unanimous Democratic support, but it might be hard to get the necessary 30 Republican votes. 

How to get the Millennials to buy houses? NAR had a symposium on that recently, with HUD Secretary Julian Castro speaking. He lamented the tight credit in the mortgage market. The aftermath of the housing bubble has sent homeownership rates to the lowest levels in almost 50 years.