Morning Report: FOMC statement and government pricing

Vital Statistics:

	Last	Change
S&P Futures	282.0	-2.8
Eurostoxx Index	395.1	-0.4
Oil (WTI)	65.4	0.7
US dollar index	83.3	0.0
10 Year Govt Bond Yield	2.74%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.19

Stocks are down small on earnings. Bonds and MBS are down small as well. 

The Fed left interest rates unchanged, and released a somewhat hawkish statement. The changes weren't really all that major, and they confirmed what we pretty much already know: the economy continues to strengthen, the labor markets remain tight, and inflation remains below target. The Fed Funds futures pushed up their probability estimate for a March hike by a few percentage points and the market is now handicapping a 77% chance of a 25 basis point hike in March. Bonds sold off a couple of basis points on the statement. 

Initial Jobless Claims came in at 230,000 last week, a drop from the downward-revised 231,000 the week prior. Meanwhile, the Challenger Job cuts report increased to 44,500 as retailers shed jobs after the holidays. 

Nonfarm productivity declined 0.1% last quarter as output increased 3.2% and hours worked increased 3.3%. Unit labor costs increased 2.0%, with compensation increasing 1.8%. Manufacturing productivity really took off, as output increased over over 7% while hours worked increased 1.5%. Productivity is incredibly hard to actually measure, but it is the secret to increasing living standards. A lack of productivity growth since the late 90s has acted to depress wage growth. 

Some loan officers have noticed that FHA and VA pricing has been lousy lately higher up in the rate stack. This is an industry-wide phenomenon. For some reason, there is not much demand for the higher coupon Ginnie Mae TBAs, which means borrowers aren't seeing the pickup in lender credit they would expect as they go up in rate. It has been so bad, that we are seeing state downpayment assistance programs suspend pricing until things work themselves out. I am not sure what is driving this - the knock on Ginnie mortgage backed securities has always been prepayment speeds. Between FHA streamlines and VA IRRRLs, the prepay speeds have been much higher than trading desks have been modeling. Ginnie has issued new guidance and regulations in order to prevent serial refinancings. So far, that hasn't translated into demand for the higher note rate TBAs. Loan officers, don't be afraid to contact us with pricing issues - we will do what we can to try and help. 

The DC appeals court yesterday affirmed the CFPB's structure, largely along partisan lines. The Court also lowered the penalty to PHH, so it isn't necessarily a given that this will go to SCOTUS. 

Construction spending increased 0.7% MOM and is up 2.6% YOY. Residential construction was up 0.4% MOM and 6.2% YOY. 

D.R. Horton's affordable home program targeted to the first time homebuyer is growing, and it seems like this segment is becoming the focus of the homebuilding industry, especially since demand in general (and tax law changes) are affecting the luxury end of the market. D.R. Horton started the unit in 2014, and was bucking the trend in building of buying up urban land and focusing on renters. Instead, they bought land in the less-fashionable suburbs and focused on entry-level homes. You are starting to see other builders attack this segment as well. 

Morning Report: Tax reform is on the agenda this week

Vital Statistics:

	Last	Change
S&P Futures	2496.8	-2.8
Eurostoxx Index	383.9	0.7
Oil (WTI)	51.2	0.5
US dollar index	85.8	0.3
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.85

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

We have a decent amount of economic data this week, along with a lot of Fed-speak. The big economic news will be the final revision to second quarter GDP and the personal income and personal spending releases. Janet Yellen speaks on Tuesday. 

Economic activity slowed in August, according the Chicago Fed National Activity Index. The index fell from 0.4 to -.31, for the lowest reading in a year. Production-related indicators drove the decrease. Employment-related indicators were a mild positive. 

The Trump Administration is going to push for tax reform this week. The highlight is a cut in the top rate to 35% and a cut in the corporate income tax to 20%. The cut in the top rate will be paid for in part by limiting deductions for state and local taxes. Chuck Schumer has insisted that "not one penny" of tax cuts go to the top 1%, so that could make the plan doomed. The estate tax will also get the axe. Republicans are working on the procedures to pass this without Democratic votes. 

Meanwhile, Obamacare repeal and replace looks like it is going to go down as well. 

We are starting to see some of the fallout from the recent hurricanes: Homebuilder D.R. Horton cut its cash flow forecast by 50%. Lennar has also said that the hurricanes will delay deliveries. At the end of the day, there is such high demand for homes that this should be a 1 quarter effect which will be made up in following quarters. 

Lenders are easing standards given the increase in interest rates and the corresponding drop in volume. “Lenders further eased home mortgage credit standards during the third quarter, continuing a trend that started in late 2016. In particular, both the net share of lenders reporting easing on GSE-eligible loans for the prior three months and the share expecting to ease standards on those loans over the next three months increased to survey highs," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Lenders’ comments suggest that competitive pressure and more favorable guidelines for GSE loans have helped to bring about more easing of underwriting standards for those loans. We believe that the GSEs’ attempts to relieve repurchase concerns and expand credit for creditworthy borrowers have contributed to the easing trend. Meanwhile, market competitiveness also led to the fourth consecutive quarter in which lenders’ net profit margin outlook deteriorated. The share of lenders citing competition from other lenders as the key reason for a negative profit market outlook rose to a new survey high.”

Morning Report: Productivity flat

Vital Statistics:

	Last	Change
S&P Futures	2435.8	-2.0
Eurostoxx Index	391.8	-0.7
Oil (WTI)	47.1	-0.5
US dollar index	88.3
10 Year Govt Bond Yield	2.18%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.9

Stocks are lower this morning after we saw terror attacks in London. Bonds and MBS are down as well.

Four nations over the weekend cut diplomatic ties with Qatar, one of the Middle East's biggest financial centers. The issue is over political interference, terrorism, and ties with Iran. Oil is selling off on the news. 

The week after the jobs report is generally data-light and that is the case this week as well. We are entering the blackout period for the Fed ahead of the FOMC meeting, which means no Fed-speak either. Should be a relatively calm week. 

Nonfarm productivity was flat in the first quarter as unit labor costs rose 2.2%. Productivity is the biggest driver of wage increases (because it is generally non-inflationary) and the lack of productivity has been a big reason why wages have been going nowhere for the past 10 years. 

Factory orders fell 0.2% last month, despite strength from aircraft orders. The ISM services index came in at a strong 56.9, just missing Street expectations. 

The Fed Funds futures are now pricing in a 96% chance of a rate hike next week. The implied probability of rate hikes continues to increase as the yield curve flattens. This means the long end of the curve (which is the biggest influence on mortgage rates) is sanguine about the economy and the risk of inflation. 

How regulation is impacting the supply of starter homes by increasing the cost to build them. In the DC area, about $75 of the price of a new home is driven by government mandates. Meanwhile, D.R. Horton is in a bidding war for Austin Texas based Forestar. 

Morning Report: Markets bounce on French election news

Vital Statistics:

	Last	Change
S&P Futures	2374.8	27.3
Eurostoxx Index	386.0	7.9
Oil (WTI)	49.9	0.3
US dollar index	89.5
10 Year Govt Bond Yield	2.29%
Current Coupon Fannie Mae TBA	102.78
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.98

Stocks are higher this morning after the French election had no surprises. Bonds and MBS are down on the risk-on trade.

We will have a lot of real estate related economic releases this week, however we don't have much in the way of market moving data until Friday when we get the first look at Q1 GDP. We have Fed-Speak today and Friday. 

The French election will pit a centrist against a right wing candidate. The far left candidate did not make it to the next round. Given this is just a first round election, the market's sugar high probably won't last all that long. 

After the French election, the next big event is the the potential government shutdown on Friday. The sticking point is that Trump wants funding for the border wall, which Democrats are calling a non-starter. If Trump and the Democrats can't get a deal (or Trump can't get Republicans to help him out), we will get a partial government shutdown starting Saturday. This will be the big event this week, although markets are probably used to this sort of drama. 

Note that the last time we had a shutdown, people weren't able to get 4506-T's out of the IRS during the shutdown. LO's should plan accordingly to keep closings on track.

Economic activity took a step back in March, according to the Chicago Fed National Activity Index. Employment related indicators drove the decrease. Not sure how much of that is coming from retailers, who have been struggling as of late. This is a meta-index of leading and lagging indicators, however it certainly shows that the hard data (actual spending / employment / production numbers) is not catching up to the soft data (sentiment surveys).

Tight inventory has home prices on a tear, with the Black Knight Home Price Index up 0.8% MOM and 5.7% YOY. The index has now passed its bubble peak and is making new highs. The FHFA index and the CoreLogic indices have hit new highs as well, leaving only the Case-Shiller index still underwater. Mortgage originators are issuing tons of pre-qual letters, but the offers are not forthcoming since the market is so competitive. Buyers are now making offers without contingencies in order to get the home they want. The hottest market? Seattle, where prices rose 2.7% on a month-over-month basis. This is hard for the first time homebuyer who often needs some help paying closing costs. VA loans allow for seller's concessions (which don't cost the seller any money), which means you can get up to a 103% LTV loan. 

Chris Whalen has a good piece on what the origination business will look like for 2017. Punch line: lower volumes, increasing purchase activity, and a widening of the credit box. He also speculates that CFPB Chairman Richard Cordroy's response to Trump staffer Gary Cohn's request to resign was to launch a new assault on Ocwen. There are rumors that JP Morgan might get back into the FHA lending business, and Wells has cut pricing on FHA loans as well. In terms of home price appreciation, housing affordability is stretched, but low inventories will proved price support. 

Homebuilder DR Horton reported strong Q2 earnings as revenues and income rose 17%. New orders were up 14% in units and 17% in value. They took up guidance as well. 

Morning Report: D.R. Horton's bet on the first time homebuyer is paying off

Vital Statistics:

	Last	Change	Percent
S&P Futures	1888.0	9.0	-0.85%
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	2.01%	0.02%
Current Coupon Ginnie Mae TBA	104.7
Current Coupon Fannie Mae TBA	104
BankRate 30 Year Fixed Rate Mortgage	3.71

Stocks are higher this morning in spite of another down 7% day in China overnight. Bonds and MBS are flat

House prices continue to rise, according to the FHFA House Price Index and Case-Shiller. The FHFA House Price index rose 0.5% MOM, while Case-Shiller rose .94%. The Case-Shiller index is up 5.83% YOY. The FHFA House Price Index has recouped all its post-bubble losses. 

In other economic data, the Richmond Fed Index slipped while consumer confidence increased. 

The Fed starts their 2 day FOMC meeting today. The decision is expected tomorrow at 2:00 PM EST. 

Homebuilder D.R. Horton reported earnings yesterday and met Street expectations. Orders increased 9% in units and 12% in value. Backlog is up 15% at 10,665 homes. The company is “Well-positioned” for spring selling season, FY 2016, given backlog, “positive sales trends” in Jan., “robust” lot supply, inventory of homes available for sale according to Donald R. Horton, chairman of DHI. Their new brand for first time homebuyers - Horton Express - accounted for 22% of sales last quarter. 

D.R Horton said that the Houston market was softening as oil continues to fall. State-by-state employment figures show that the collapse in oil prices is now being felt in the fracking states.

Foreign money helped prop up the ultra-luxury sector of the real estate market and now they pulling back. Prices are stagnating and homes are not moving. Blame the stock sell-off in China, and the oil price collapse which is hurting Middle Eastern and Russian investors. 

Morning Report: Good numbers out of D.R. Horton

Vital Statistics:

	Last	Change	Percent
S&P Futures	2068.7	-4.2	-0.20%
Eurostoxx Index	3419.4	1.1	0.03%
Oil (WTI)	43.85	0.0	-0.05%
LIBOR	0.341	-0.003	-0.73%
US Dollar Index (DXY)	99.36	0.376	0.38%
10 Year Govt Bond Yield	2.34%	-0.01%
Current Coupon Ginnie Mae TBA	103.8
Current Coupon Fannie Mae TBA	102.9
BankRate 30 Year Fixed Rate Mortgage	3.84

Stocks are lower on no real news. Bonds and MBS are flat

The NFIB Small Business Optimism Index was flat in October at 96.1. Interestingly, "quality of labor" has replaced "poor sales" as the #3 issue facing small business (taxes and regulations are 1 and 2). Over half of all firms reported trying to hire in October, but 48% of them couldn't find qualified applicants. A net 17% of small businesses intend to raise pay, up from September and the highest level since 2007. Perhaps we are finally starting to see wage growth pick up in the US. 

Import prices fell 0.5% in October and are down 10.5% year-over-year. 

Wholesale inventories and wholesale sales rose 0.5% in September. The inventory to sales ratio is at 1.31, which is pretty high and is a warning sign for a cyclical slowdown. 

Completed Foreclosures are up 50% to 55k in September, but are down 17.6% year-over-year. The seriously delinquent percentage is 3.4%, the lowest since December 2007. The judicial states, particularly the Northeast are beginning to make some progress in reducing their foreclosure inventory. 

Homebuilder D.R. Horton reported better-than-expected numbers this morning. Earnings were up 44% to 64 cents a share. They also hiked their dividend. Homebuilding revenue was up 28% and orders increased by 19%. Overall, orders seem to be looking up for the builders, which bodes well for the 2016 Spring Selling Season, which starts in a few months. 

Speaking of betting on housing, two big timber REITs - Plum Creek Timber and Weyerhaeuser - announced a merger yesterday. This deal is basically a big levered bet on housing. The US has under-built for years and we have tremendous pent-up demand, especially at the lower price points. 

Morning Report - Homeownership falls to 4 decade low

Vital Statistics:

	Last	Change	Percent
S&P Futures	2087.8	0.6	0.03%
Eurostoxx Index	3552.5	-1.6	-0.05%
Oil (WTI)	47.73	-0.3	-0.52%
LIBOR	0.294	0.001	0.17%
US Dollar Index (DXY)	96.71	-0.062	-0.06%
10 Year Govt Bond Yield	2.27%	0.02%
Current Coupon Ginnie Mae TBA	104.1	0.0
Current Coupon Fannie Mae TBA	103.4	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.98

Markets are flattish as we await the FOMC decision. Bonds and MBS are down small. 

Mortgage Applications rose 0.8% last week as purchases fell 0.1% and refis rose 1.6%. 

Pending Home Sales fell 1.8% in June versus May, but are up 11.1% year over year. 

Pretty much no one is forecasting a rate hike at today's meeting, given there is no press conference. There is a chance of rate volatility around 2:00 pm, but I would expect the statement to say pretty much what the various Fed speakers have been saying for a while - the economy is improving, the labor market is losing some of its slack, inflation remains contained, and the Fed will remain data-dependent. 

Homebuilder D.R. Horton reported yesterday, beating estimates. Orders increased 25%, closings increased 37%. Texas remains strong despite the drop in oil prices. 

The homeownership rate fell to the lowest level since 1967. Basically all of the gains that began with the Great Bill Clinton / George W Bush experiment in using housing as a tool for social engineering have been given back. Note that household formation is finally back on the upswing, so we have a lot of pent-up demand.

Morning Report - Homebuilder earnings and new home sales disappoint

Vital Statistics:

	Last	Change	Percent
S&P Futures	2095.2	-5.0	-0.24%
Eurostoxx Index	3682.6	-41.9	-1.13%
Oil (WTI)	56.64	0.5	0.85%
LIBOR	0.277	0.001	0.45%
US Dollar Index (DXY)	97.87	-0.060	-0.06%
10 Year Govt Bond Yield	1.96%	-0.01%
Current Coupon Ginnie Mae TBA	103.1	0.0
Current Coupon Fannie Mae TBA	102.2	0.1
BankRate 30 Year Fixed Rate Mortgage	3.77

Stocks are lower on overseas economic weakness. Bonds and MBS are flattish.

Initial Jobless Claims came in at 295, a little higher than expected. The Bloomberg Consumer Comfort index slipped to 45.4 from 46.6.

New Home Sales dropped to an annualized pace of 481k in March, from 543k in February. This was a big miss - the Street was at 515k. 

We heard from homebuilder D.R. Horton yesterday. They beat expectations, but the margin and revenue guidance was on the light side, so the stock was sold off. D.R. Horton is very exposed to Texas and has yet to see any evidence of an slowdown in that economy. Horton was encouraged by the demand and is seeing strong growth in its Express brand, which is targeted at the first time homebuyer. The downside is that the margins in Express are lower. 

Pulte reported this morning, and missed expectations. Revenues were light, however orders were up 6% and ASPs were up 2% to 323k. The company noted at strong start to the spring selling season, and characterized the housing recovery as "sustained but slow."

Interesting stuff on the state of part-time workers. US part-time employment is reaching historical norms and that indicates the slack in the labor market is going away. Interestingly they polled workers who put in 30 hours a week or less. Of those people, a third were happy with their hours or wanted to work less. Only 23% wanted a traditional 40 hour a week job. Of those working more than 30 hours, about a quarter wanted to work less. Punch line: as the slack is taken up, wages are going to have to go up. Which means the Fed is more likely to mover sooner rather than later. 

The Clinton Foundation is under the microscope right now, and the New York Times has a piece about how the State Department approved a Russian nuclear deal after a big donation to the Clinton Foundation. WaPo has a piece on the foundation and Bill Clinton's speaking fees. There is supposedly a tell-all book coming out on the Clinton Foundation as well. Whatever comes out of it, the Democratic Party is all-in on Hillary and will dismiss any revelations as partisan poo-flinging regardless of the merits.