Morning Report: Strong ADP number offsets trade fears

Vital Statistics:

			Last	Change
S&P futures			2576	-38
Eurostoxx index			365.5	-3.53
Oil (WTI)			62.56	-0.95
10 Year Government Bond Yield				2.75%
30 Year fixed rate mortgage				4.41%

Stocks are lower this morning on trade war fears. Bonds and MBS are up.

While the drop in the futures is pretty dramatic, the market is basically just giving back the end-of-day ramp yesterday after the Administration said there is nothing imminent with Amazon. We are coming out of a long period of low volatility in the stock market, and volatility begets volatility. The silver lining is that Treasuries love stock market volatility, so they stand to benefit at the margin. 

Mortgage Applications fell 3.3% last week as purchases fell 2% and refis fell 5%. "Heading into the holiday weekend, mortgage application volume fell a bit both for purchase and refinance volume," said MBA Chief Economist Mike Fratantoni. "Mortgage rates were little changed for the week, despite the increase in financial market volatility. Potential homebuyers may be a little rattled by the swings in the stock market the past few weeks, but the job market continues to strengthen, which should power demand through the spring season. The main uncertainty remains whether enough listings will be available to meet this demand."

Factory orders increased 1.2% in February, a bit lower than the Street estimate of 1.7%. 

The ISM Non-Manufacturing Index dipped in March to 58.8 last month. Interesting comment from a builder: "The unbelievable amount of market volatility in construction-related materials that started with lumber continues with the tariffs on steel and aluminum. Accurate, long-term planning has become incredibly difficult, as distributors that historically held costs for at least 30 days are now, in some cases, committing to only seven days, as prices can change drastically in that time."(Construction). Increasing housing starts has been a manana story forever, and it looks like that might be the case again this year. 

Street estimates for Friday's payroll number might be too low, at least if you look at the ADP number, which came in way stronger than expected at 241,000. The Street is looking for an increase of 175k in Friday's report. While the ADP number doesn't track the BLS number as tightly as you think it should (it actually tracks the revised number, not the preliminary one), it does indicate that trade issues haven't affected employment, at least not yet. Manufacturing payrolls increased by 29k (strongest in 3 years), but remember that there are winners and losers in a trade war with China. For every steelworker, there are many more who work for a manufacturer that uses steel as an input. Construction employment was up smartly as well.  

Wilbur Ross said that the US may end up negotiating with China on trade. In other words, all of this is simply a negotiating tactic. 

Regardless of the payroll number, the main focus is wage inflation these days, so even if you get a big payroll number you might not see much of a reaction in the bond market if average hourly earnings are only up a little (consensus is 0.3% MOM / 2.7% YOY). Higher wages are fighting to chart below, which is the employment-population ratio. The most striking feature is how dramatic the Great Recession was. Most of the 30 increase in the ratio which was driven by women entering the workforce was given back. 

The Fed has a model which looks at demographics and that ratio, which predicts a drop in the ratio due to the retirement of the baby boomers. In fact, that model shows that we are much closer to full employment than the chart above suggests. 

Lennar reported first quarter earnings this morning. It it hard to read too much into the numbers: there are tax charges from tax reform and a partial quarter for the CalAtlantic deal, so the increases in orders, backlog, average selling prices, etc aren't really comparable to other builders. Lennar also launched a second multi-family fund, while it is looking to sell Rialto, its commercial real estate arm. 

San Francisco Fed Chairman John Williams has been nominated to take over the NY Fed. This makes him Vice Chairman of the FOMC as well. 

Vehicle sales rebounded last month, which should boost Q1 GDP estimates. 

Spotify went public yesterday without the services of an investment bank. Not sure that we are quite ready to write the epitaph for investment banking, but this is a big deal. 

Morning Report: Bonds testing support

Vital Statistics:

	Last	Change
S&P Futures	2741.5	-10.8
Eurostoxx Index	398.0	-216.0
Oil (WTI)	63.6	.06.6
US dollar index	85.6	-0.4
10 Year Govt Bond Yield	2.58%
Current Coupon Fannie Mae TBA	101.75
Current Coupon Ginnie Mae TBA	102.875
30 Year Fixed Rate Mortgage	4.01

Stocks and bonds are lower this morning on news that China may slow or halt its purchases of Treasuries. 

Bonds are currently trading at 2.58% after Chinese officials recommended slowing or halting purchases of US Treasuries. Driving this decision are the relative attractiveness of US Treasuries and the possibility of a trade war. Between the Fed tapering their purchases of Treasuries, and potential disinvestment of the Chinese, Treasuries are heavy. Ultimately, this is about the trade deficit, which is the difference in value between what we import from China and what we export to China. The deficit is simply filled in by Treasury purchases. While a trade war is probably just saber-rattling, a drop in trade will probably mean a drop in the trade deficit, which means less demand for Treasuries. Ultimately, the US would prefer the Chinese to buy less Treasuries since that would mean they are buying more goods and services. 

Note that the recent peak in the 10 year was 2.62% in March this year. We are close to breaking through support, which would probably trigger at least some technically-driven selling. We have a 10 year bond auction this afternoon at 1:00 pm EST. If we get a lousy bid / cover ratio that could be the catalyst to break through that level. 

We have a lot of Fed-speak today, with Charles Evans, Robert Kaplan and James Bullard speaking. 

Mortgage Applications rose 8.3% in a holiday-shortened week, as purchases rose 5% and refis rose 11%. The average contract rate for the 30 year conforming rate rose a basis point to 4.23%. 

Import prices rose 0.1% MOM and 0.3% YOY, while export prices fell 0.1% MOM and rose 2.6% YOY. 

Lennar reported fourth quarter earnings of $1.29 a share which missed analyst expectations. An undisclosed "one-time strategic transaction" was delayed until the first quarter, which apparently drove the miss. Revenues increased 12%, while deliveries were up 5% in units. Backlog was up 17% in units and 23% in dollars. Gross margins fell by 90 basis points to 22.4%. Lennar is also in the process of buying CalAtlantic, and that deal should close in February. 

The National Association of Homebuilders projects that 653,000 new homes will be sold in 2018, an increase of 5.4% from 2017. This won't be enough to meet demand. Lack of labor and land are the limiting factors, as well as government regulations. It seems that "urban villages" are the flavor du jour, with apartments and walkable developments that mix commercial and residential. 

Morning Report: Good numbers out of Lennar

Vital Statistics:

	Last	Change
S&P Futures	2446.3	-1.3
Eurostoxx Index	391.2	-0.8
Oil (WTI)	43.1	-1.1
US dollar index	88.9	0.1
10 Year Govt Bond Yield	2.18%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.92

Stocks are lower as oil continues to fall. Bonds and MBS are flat.

No economic data today, however we do have some Fed-speak. Overnight Stanley Fischer observed that some countries have real estate bubbles and low interest rates might have played a role. (Gee, ya think?) The planet's central bankers are on a mission to create inflation, however the inflation they want (wages) is not happening - it is going into inflation they don't necessarily want (asset prices). Fischer noted that the US government basically IS the mortgage market in the US and that government support for MBS should be made explicit. 

Lennar reported better than expected earnings this morning, with revenues up 19%. Deliveries increased 15% and backlog was up 20% in dollar terms. While revenues rose, margins are falling, with gross margins down 160 basis points. Lennar CEO Stuart Miller said: "We are now seeing, contrary to recent reports on housing starts and building permits, more of a reversion to normal in the housing market than the slow and steady recovery pace of the last several years." The stock is up a couple of percent pre-open. 

Meanwhile, the lousy housing starts number prompted a number of houses to take down their Q2 GDP estimates. Merrill took their estimate down to 2.2%, while the Atlanta Fed took their estimate down to 2.9%. The NY Fed's estimate is coming in at 1.9%. 

Credit risk for new mortgages edged up according to CoreLogic. The index is at similar levels to 2001-2003, which CoreLogic considers a baseline for credit risk. Part of this is due to the effect higher interest rates have on credit scores. As CoreLogic observes: “Since 2009, for every one-half percentage point increase in mortgage rates, the average credit score on refinance borrowers has dipped by 9 points, and this pattern will likely continue if mortgage rates move higher. That is because when rates rise, applications drop off and loan officers spend more time with the applicants that have less-than-perfect credit scores, require more documentation or have unique property issues.”

Morning Report: Consumer confidence highest since Dec 2000

Vital Statistics:

	Last	Change
S&P Futures	2334.5	-1.5
Eurostoxx Index	374.0	-1.3
Oil (WTI)	48.32	0.5
US dollar index	89.4
10 Year Govt Bond Yield	2.36%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.32
30 Year Fixed Rate Mortgage	4.15

Markets are slightly lower after recouping most of yesterday's losses. Bonds and MBS are up small. 

The trade deficit improved to $64.8 billion from $68.8 billion in February. The weakening dollar is helping things, along with lower oil prices. Meanwhile retail inventories increased 0.4%.

Janet Yellen is scheduled to speak at 12:50 pm on workforce development. I doubt there will be any monetary policy (i.e. market-moving) statements, but you never know. 

Donald Trump is hoping he can attract some moderate Democrats to vote in favor of his infrastructure spending plan. Democrats are in favor of infrastructure investment, however they want the government to spend directly, while Trump and the Republicans want to do it via the tax code. The partisan rift will almost undoubtedly fall down that line, although the failure of Obamacare repeal leaves less money for direct spending. 

Remember the debt ceiling negotiations and threats of government shutdowns in the Obama admin? The government runs out of money in a month. 

Charles Evans said that two hikes might be the right number for 2017, which is more dovish than the consensus. The collapse of the Obamacare repeal is still sinking in. Watch for more dovish statements and a lowering of growth and inflation forecasts. 

Economic confidence fell last week according to Gallup and is at the lowest since the election. It is still higher than pre-election however. It will be interesting to see the numbers post the health care vote. 

That drop in confidence was not apparent in the Consumer Confidence numbers, which came in way higher than expected in March. The reading of 125.6 was the highest reading since December 2000. Note the cutoff for this survey was mid-March. 

The Richmond Fed Manufacturing Index is showing further strength, echoing the strength we have been seeing in the other regional Fed indices. 

Home prices rose smartly in January, increasing 5.9% and hitting a 31 month high, according to the Case-Shiller home price index. Seattle, Portland, and Denver led the charge all reporting over 9% growth. Seattle increased by over 11%.

Home inventories are at the lowest level in 2 decades, according to NAR at just under 4 months' worth. The first time homebuyer is being squeezed by tight inventory, rising prices, and increasing mortgage rates. Unless incomes begin to catch up with prices, something has to give: either home prices or building. According to NAR, the median home price February was $228,400, while the median income (from Sentier Research) was $58,056, putting the median house price to median income ratio at 3.9x, which is higher than the historical range of about 3.2- 3.6 times. Given the continued acceleration in home prices, professional investors who bought properties during the bust years and rented them out are happy holders. And to be honest, as an investor, you would sell real estate to buy what, exactly? Stocks? Bonds? Bitcoins?

Meanwhile, the homebuilder stocks are almost back to 2 year highs heading into the Spring Selling Season. Note that KB Home recently reported strong earnings, while Lennar disappointed on the the gross margin side. Increasing land costs are the biggest problem, while rising material and labor costs are an issue. The question for the bigger builders is what is going to drive revenue growth going forward once home prices plateau. At that point, they may begin to start building again. We aren't there yet however, as Stuart Miller of Lennar commented on an earnings call: "In this environment of accelerating sales pace, together with limited land and labor, and tight inventory particularly at the lower price points, we believe we are positioned for increased pricing power and solid earnings going forward." Translated, that says that Lennar plans to keep inventory tight and let price increases drive the top line going forward.

Despite the increase in rates, lenders are still optimistic about the economy, according to the latest Fannie Mae Investor Sentiment Survey, however a challenging purchase environment and the death of refis remain huge issues. Lenders are beginning to increase the size of the credit box in response, although the changes are modest. Increasing the credit box meaningfully will require some sort of return of the private label securitization market, which remains largely dormant. Addressing the issues here will be a huge part of Dodd-Frank reform. The US taxpayer currently stands behind something like 90% of all new origination, which almost nobody in government wants. 

The regulators are using AI and machine learning to deal with the markets. 

Morning Report: Lennar beats

Vital Statistics:

	Last	Change
S&P Futures	2256.8	1.5
Eurostoxx Index	359.6	-0.4
Oil (WTI)	51.7	-0.2
US dollar index	93.2	0.1
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 up as well.

Not much in the way of economic data this morning, however Janet Yellen speaks at 1:30pm EST. 

The flash services PMI fell slightly to 43.5. 

Today the Electoral College votes for President. The vote will then go to Congress to be certified in early January. 

Homebuilder Lennar reported earnings this morning, with revenues up 15%, new orders up 12%, and backlog up 17%. Average selling prices rose only 2.9% to $357k, which indicates that home price appreciation is slowing. The press release didn't address the cancellation rate, which will probably begin to grow for the builders as higher rates kick in. Lennar has a November 30 fiscal year, so it is probably a little early to see how higher rates are affecting them. 

Lenders foresee a drop in margins and demand going forward as rates rise, according to the Fannie Mae Quarterly Lender Survey.  Fully 2/3 of lenders view rates as "not favorable" at the moment. Lenders expect margin compression as well as refi shops cut prices to stay competitive. Lenders do expect to continue to ease lending standards. Lenders also intend to execute more through the GSEs and the government and plan to reduce the number of loans they hold on their balance sheet. 

CoreLogic put out its forecasts for 2017. Home price appreciation will slow into 2017 as higher mortgage rates and home prices take a bite out of demand. Credit quality will remain good, however and we will start to see more HELOC activity, while refis will decrease. Vacancy rates will remain low, and rental inflation will be around 3%. 

Here is a look at the effects of rising rates for the mortgage lending sector. 

Morning Repot: Lennar's take on the state of housing

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.1	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	1.71%	-0.01%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.72

Markets are flattish ahead of the Brexit vote tomorrow. Bonds and MBS are down small.

Mortgage Applications rose 2.9% last week as purchases fell 2.4% and refis rose 6.5%. Refis rose to 57.7% of all loans as rates bombed out on the FOMC decision.

The FHFA House Price index rose 0.2% in April, and is up 5.9% year-over-year. Interestingly, New England went from cellar-dweller to the leader in monthly price appreciation. The region is still lagging the most on a YOY basis however. The FHFA index is the only housing price index that has regained all of the losses from the crisis. This is because it concentrates only on houses with a conforming mortgage, so it ignores the all-cash distressed sales and the jumbo space.

Existing home sales rose 1.8% in May to 5.53 million. This is the highest pace since February 2007. The median house price was $239,700 up 4.7% YOY. Total housing inventory is at 2.15 million units, which represents a 4.7 month supply. Inventory is still tight. The first time homebuyer accounted for 30% of all sales, a decrease from last month and last year. Days on market dropped to 32 days, a record.

On Lennar's earnings conference call, CEO Stuart Miller summed up Lennar's view of the housing market. In a way, he also explained why housing starts remain so low. "As we've noted consistently over the past years, the overall housing market has been generally defined by a rather large production deficit that has continued to grow over the past years. While questions have been raised as to the real normalized levels of production that are required to serve the U.S. current population, we believe that production levels in the 1 million to 1.2 million starts per year range are still too low for the needs of American household growth that is now normalizing.While measuring current production levels against historical norms of 1.5 million starts per year might be flawed logic as there may be a new normal, we believe that the very low inventory levels in existing and new homes and the low vacancy rates and high and growing rental rates for apartments indicate that we are in short supply nationally. 

The idea of a "new normal" being somewhere above current production levels (1.2 million units) and the historical average (1.5 million units) is as good an explanation as any. Lennar mentioned on their call that they have been transitioning from the early growth phase of the cycle to the mature phase of the cycle. In other words, they aren't looking for the typical 2 million level of starts you usually see in the recovery from a recession. They do give a good graphic analysis of the supply / demand state of the housing market in this slide from a recent JP Morgan housing conference. 

Notice that the current level of production (sub 1.2 million units is closer to the "housing depression" line than it is to the "normal production" line.. That would make 2009-2012 "nuclear winter." Lennar is making the same bet a lot of other builders are making that multi-fam is the way to go as they see the Millennials happy to rent. Actually, the meta-bet they (and everyone else in the financial markets) are making is that inflation is gone, dead, buried, and never, ever, ever coming back. The only reason why you would lend money to the government for no return is that you think inflation is gone. It truly is a "this time is different" argument, which is the most dangerous argument in all of investing, especially when every central bank on the planet is on a mission to create inflation. Inflation is a debtor's best friend, and if the Millennials can get out from under their student loan debt, we should see a bull rush for new SFR housing. The cautious homebuilders will probably be caught with too little inventory, and will suddenly start bidding against each other for workers, land and materials. That dynamic is how recessions typically end and is the difference between a strong economy and the "meh" economy of the past 8 years. 

KB Home also reported earnings last night. Earnings were better than expected, and they see a return of the first time homebuyer. Note that the current number of first time homebuyers (30%) is well below the historical average of 40%. Average selling prices were up 2%, which is much lower than the other builders. 

Morning Report: Janet Yellen gets more dovish

Vital Statistics:

	Last	Change	Percent
S&P Futures	2087.1	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	1.68%	-0.01%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.53

Markets are up this morning as the market frets about Brexit and Janet Yellen speaks. Bonds and MBS are up small.

The latest polls for Brexit are mixed, and the bottom line is that it is too close to call. If the UK leaves the EU, the most likely effect will be a flight to safety, which would mean global flows to US Treasuries, lowering rates. Some of the forecasts I am seeing would be a sub 1.4% on the 10 year if the UK leaves, or a return to the old 1.7% - 1.9% range if they stay. FWIW, spread betting is common in the UK, and the markets there are much deeper than the political betting sites in the US. Right now, the spread betting markets are assigning a 25% probability of Brexit. 

Janet Yellen adjusted her language to be slightly more dovish ahead of her testimony today in front of the Senate Banking Committee. She is exhibiting a little more uncertainty over whether the economy is ready to return to moderate growth. Not sure what changed in the last week or so, but there you go. 

Homebuilder Lennar beat estimate this morning as the housing market continues to improve and wage growth begins to appear. Interestingly, they are pulling back a little from the market, it appears: "As this year's spring selling season improved over last year, our second quarter new orders increased 10% to 7,962 homes year-over-year, while our home deliveries and home sales revenue also increased to 6,724 homes and $2.4 billion, respectively.  As the recovery has continued to mature, we have remained focused on our strategy of moderating our growth rate in community count and home sales, as well as on our soft-pivot land strategy, targeting land acquisitions with a shorter average life." For some reason, the builders don't seem to trust this recovery in housing. 

Perhaps Lennar's reticence comes from the attitudes of consumers. A recent survey shows housing affordability remains a big problem. That said, perceptions of real estate as a good long-term investment are improving. They should, since rental inflation is generally outpacing house price appreciation and the buy-rent decision is skewed heavily towards buying. That said, consumers are becoming more pessimistic that the housing crisis is over. 

Good breakdown on how big of a boost homebuilding is for the economy. Unfortunately, the only discussion of housing in DC revolves around how hard we should be slugging the banks. 

Morning Report: Lennar beats

Vital Statistics:

	Last	Change	Percent
S&P Futures	2023	-17.2	0.78%
Eurostoxx Index	3271	33.0	1.03%
Oil (WTI)	35.45	0.48	1.46%
LIBOR	0.532	0.006	1.13%
US Dollar Index (DXY)	97.77	-0.165	-0.17%
10 Year Govt Bond Yield	2.20%	-0.02%
Current Coupon Ginnie Mae TBA	104.2
Current Coupon Fannie Mae TBA	103.4
BankRate 30 Year Fixed Rate Mortgage	3.93

Markets are lower this morning on no real news. Bonds and MBS are up small.

Homebuilder Lennar reported better than expected earnings this morning with average sales prices up 6%, a decrease in gross margins and an increase in new orders of 10%. CEO Stuart Miller sees a "slow and steady" housing market improvement. He said the Fed rate hike was a sign of confidence in the economy.

Rob Chrisman discussed how TRID is impacting the non-agency markets. quotes one lender: "I see in your commentaries lots of feedback about TRID. Something else is happening and it appears, absent some quick changes in philosophy, the effect could be both a complete seizure of non-agency lending and possibly some firm's very existence could be put in jeopardy. My firm has had 100% of the jumbo loans that we've sent for delivery rejected by our buyers. Yes - 100% - and we're talking nearly 50 loans so far. Why? Every one had a TRID violation. Does that mean my firm screwed up and is alone on this? No. Two of the firms we sell to say they have purchased ZERO loans so far in December. ZERO. Why? Same reason. None of them were TRID compliant. The TRID rule is so severe, and so open for interpretation, and because the buyers are taking a zero defect approach - it is near impossible to manufacture a perfect loan from a TRID perspective. It's clear to anyone in our business what could happen next. If I were a warehouse lender - I'd immediately cease funding non-agency loans. Same goes for any correspondent lender who doesn't want a giant pipeline of unsaleable production. We're large enough to be able to fund our unsaleable pipeline with cash. But many firms are not. What happens to a firm that has $5 million of cash on hand when its warehouse lender asks them to buy $6 million of jumbos (literally only 5 to 8 loans) off of the line? Game, set, match. Because TRID only affected new applications after 10/3 - the fundings are now only starting to be affected. This crisis is about to get real..."

Of course the reaction from the CFPB lawyers will undoubtedly be that these stooges in the mortgage banking industry just can't get their act together.  And they better start expanding credit in our targeted areas, or else!

The latest CoreLogic Market Pulse is out: They expect home prices to reach their previous peaks in mid 2017. Note that the FHFA House Price Index (which covers a subset of homes) is pretty much already there.

Fannie Mae reports that lenders are easing credit standards in their latest mortgage lender sentiment survey. They hope that easier credit will help mitigate the drop in home affordability. 

Morning Report: Existing home sales fall

Vital Statistics:

	Last	Change	Percent
S&P Futures	1960.8	10.2	0.52%
Eurostoxx Index	3190.2	32.9	1.04%
Oil (WTI)	45.8	1.1	2.51%
LIBOR	0.319	-0.026	-7.51%
US Dollar Index (DXY)	95.57	0.705	0.74%
10 Year Govt Bond Yield	2.17%	0.04%
Current Coupon Ginnie Mae TBA	104.6	0.2
Current Coupon Fannie Mae TBA	104	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.83

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

Existing Home Sales fell 4.8% month-over-month in August. On a year-over-year basis they were up about 4.7%. The median home price rose to $228,700, which puts the median house price to median income ratio over 4x, which is pretty high. The first time homebuyer accounted for 32% of sales, which is an uptick from 28% last month. Inventory continues to be a problem, although it did increase to 2.29 million homes, which represents a 5.2 month supply. A balanced market is about 6 - 6.5 months' supply. Days on market increased to 47 days from 34 two months ago.

Homebuilder Lennar reported earnings that topped estimates this morning. Deliveries were up 16%, while orders were up 20%. Average selling prices were 350k, up 8.9%. Incentives were down to 5.6% from 5.8%. Stuart Miller, CEO characterized the market this way: "During the third quarter, the housing market continued to improve in its slow and steady manner, as demonstrated in the past few years. The new home and rental markets continued to have significant pent-up demand, which positions us well for years to come. This demand is driven primarily by a large production deficit built up over the last several years, an increasing millennial population, reasonable affordability levels and high-rental occupancy rates."

A new Harvard study points out how the rent vs buy decision is becoming even more skewed towards buying as rental inflation continues to increase. The number of US households that spend at least half their income on rent could increase 25% to almost 15 million over the next decade. Note that the homebuilders are pretty much all venturing into multi-family housing as well as single family, which should alleviate this problem at least to some extent. We have had a production deficit for single and multi-fam construction for several years, prices keep rising, and yet housing starts remain at about 75% of normal levels (ignoring the boom and bust years). 

At least one housing statistic is showing signs of returning to normalcy - mortgage debt outstanding is rising again. This was the first gain since 2008. Such an extended contraction in mortgage debt is pretty much unprecedented, at least as far back as the data goes (late 1940s). Of course anyone in the mortgage business could tell you it has been nuclear winter since the crisis began. 

Various Fed-heads are still making the case for a December rate hike. Note that the Fed Funds futures contracts are pricing in something like a 50-50 chance for a hike in December. It is kind of hard to reconcile the Fed forecasting sub 5% unemployment and rates pegged to the zero bound. 

Morning Report - A generation of renters?

Vital Statistics:

	Last	Change	Percent
S&P Futures	2111.6	-4.8	-0.23%
Eurostoxx Index	3595.1	-30.9	-0.85%
Oil (WTI)	60.99	0.0	-0.03%
LIBOR	0.282	0.001	0.34%
US Dollar Index (DXY)	95.24	-0.189	-0.20%
10 Year Govt Bond Yield	2.39%	-0.02%
Current Coupon Ginnie Mae TBA	100.7	0.1
Current Coupon Fannie Mae TBA	99.28	0.1
BankRate 30 Year Fixed Rate Mortgage	4.18

Markets are lower after Greek Prime Minister Tsipras expressed shock that his proposals still do not go far enough to get a deal. Bonds and MBS are up.

Mortgage Applications rose 1.6% last week as purchases rose 1.2% and refis rose 1.8%. 

The third revision to first quarter GDP came in at -0.2%. This is an upward revision from the previous -0.7% estimate. A combination of harsh weather, a West Coast port strike, and a slowdown in the oil patch depressed growth. Lower gas prices still are not translating into higher spending at the malls, however. Consumers continue to save / repay debt.

Greece was handed new terms for a bailout. The proposals Tspiras provided do not go far enough, and he took to Twitter to harangue the IMF and the EU. Brave new world: negotiating and posturing via Twitter. “There is still a lot of work to do,” Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of his euro-area counterparts, told reporters in Brussels. “We are not there yet.”

Homeownership levels have fallen back to the levels of the early 90s. Millennials are renting in droves. Is this the new face of homownership, or simply the pendulum overcorrecting on the other side? While house prices are back in bubblicious territory (primarily due to a lack of inventory), rates are so low that mortgage payments are still comparable to rents. 

Speaking of lack of inventory, homebuilding giant Lennar reported earnings this morning, beating the Street. Revenues increased 30% as deliveries increased 21% and ASPs increased to $348,000. New orders increased 18% in units as well. The stock is up about 5% pre-open. Could housing be the new engine for the economy? Hopefully, as manufacturing seems to be going through a soft patch. 

Washington is alleging discrimination in REO, saying that homes in low-income neighborhoods are not being properly maintained. The problem in many of these place, especially in the rust belt, is that the opportunities are so sparse that people are moving out, and no one is moving in. When you have a net outflow of people and an endless supply of vacant houses, these properties become basically worthless. And what bank wants to throw good money after bad maintaining a house that probably will never sell in the first place?

Morning Report - The Debt Ceiling Dance

Vital Statistics:

	Last	Change	Percent
S&P Futures	1457.5	-6.8	-0.46%
Eurostoxx Index	2701.4	-13.7	-0.51%
Oil (WTI)	93.67	-0.5	-0.50%
LIBOR	0.303	-0.001	-0.33%
US Dollar Index (DXY)	79.65	0.158	0.20%
10 Year Govt Bond Yield	1.82%	-0.02%
RPX Composite Real Estate Index	191.9	0.0

Futures are deteriorating on fears that Congress won't find a way to raise the debt ceiling. Fitch ratings said that it would put the US credit rating under review for a downgrade if there is a delay in raising the debt ceiling. The Bernank weighed in on the debt ceiling at the University of Michigan yesterday. The producer price index showed inflation remains under control at the wholesale level and Dec retail sales were better than expected.  Bonds and MBS are up.

The Empire State Manufacturing Survey indicated that conditions for New York State manufacturers continued to decline at a modest pace. Roughly 20% of businesses surveyed expected to increase payroll, while the same number expect to decrease payroll. Capital Expenditures dropped again to its lowest level since 2009. That said, the outlook for 2013 remained mildly positive.

Lennar reported a profit of 56 cents a share for the 4th quarter and FY12 EPS of $3.11 a share.  Revenues were up 42% in Q4, and backlog was up 32%. Margins also increased.  The CEO noted that the housing recovery seemed to accelerate in Q4 as low mortgage rates, affordable home prices, lower foreclosures and a compelling rent vs own comparison drove the recovery.

The CoreLogic Market Pulse showed that 2012 was better than expected for the housing market. They raise a good point though, that 2012 had no major economic shocks - no Japanese tsunami, no debt ceiling debate / downgrades, no major blow-ups of big financial entities. They characterize 2012 as "a year in recovery, but not one in which the country has actually recovered."  They foresee further recovery next year, but note that supply has been constrained as many move-up buyers have been underwater.  As prices rise, those properties will be put back on the market. As the economy recovers, the first-time homebuyer will become in a better position to purchase these properties, which will provide the increased demand to meet the increased supply.

The debt ceiling debate has been getting more confrontational, with the President using hostage-taking metaphors during his speech yesterday. Sen Pat Toomey (R-PA) has introduced a bill to avert default by requiring Treasury to prioritize payments (with interest, SS, and active duty military pay taking precedence) and allowing them to borrow just enough to cover those expenses if revenues aren't enough. My personal belief is that Republicans know the politics aren't there for a debt ceiling standoff, but they will accept the full sequestration cuts. The sequestration cuts were designed to never happen - the cuts were supposed to be unpalatable to both sides.  Much to the surprise of Democrats, Republicans are more comfortable with cutting defense than they thought, which means that the roughly $109 billion of spending in 2013 will get left on the cutting room floor.

To put the sequestration into perspective:  the 2012 budget was $3.729 trillion.  The 2013 budget is $3.803 trillion.  The increase is roughly $74 billion.  In other words, the actual cut to government spending is $109 billion - $74 billion or about $35 billion.  $35 billion is 22 basis points of GDP. We are currently spending 24% of GDP, while the highest taxes as a percent of GDP have ever gotten in a touch over 20%, primarily during the equity bubble when capital gains tax receipts were huge. To get spending down to where we are able to balance the budget under the best of conditions, we would need to lop off $567B from 2012, or about 4% of GDP.  Republicans would be wise to give Obama what he wants on the debt ceiling and then force the Administration to explain why cutting spending by 22 basis points of GDP is somehow intolerable. Of course, the Administration has already telegraphed how it will fight this battle (terrorists will run wild, pollution will increase, airplane accidents will happen, we won't be able to deal with natural disasters) so Republicans will be well advised to separate out the necessary functions of the government (basic safety net, FAA, FBI, FDA, etc) from the "nice-to-haves" like foreign aid to places like Egypt, agricultural subsidies, green energy subsidies, etc.