Morning Report: Uptick in the homeownership rate

Vital Statistics:

			Last	Change
S&P futures			2817.75	0
Eurostoxx index			391.62	-0.46
Oil (WTI)			69.98	1.29
10 Year Government Bond Yield				2.98%
30 Year fixed rate mortgage				4.58%

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

Global bonds are under pressure this morning on fears that the Bank of Japan may make some changes to its monetary policy. While these sorts of things don't impact the US directly, global sovereign bonds tend to trade as a group and US yields will be influenced by them.

We have a lot of important numbers this week, with personal incomes / personal spending on Tuesday and the jobs report on Friday. We also have the FOMC meeting on Tuesday and Wednesday. No changes in policy are expected, however the language of the statement will be in focus as always. 

Earnings season continues, with announcements from Freddie Mac, Annaly, Pennymac, and MFA.

FHFA Director Mel Watt was accused of sexual harassment. His term expires at the end of the year, but he will probably be shown the door regardless. 

The homeownership rate increased to 64.4% from 64.3% in the second quarter, according to the Census Bureau. This is a 4 year high. Interesting, the geographic dispersion is quite large, ranging from 59.7% in the West to 68.3% in the Midwest. Affordability matters, but that is a big divergence. We also saw a marked increase in younger homeowners, with the under-35 age cohort increasing from 35.3% to 36.5%. Rental vacancy rates fell from 7% to 6.8% while homeowner vacancy rates were flat at 1.5%. The overall homeownership rate is below the long term average, however the increase that started in 1994 and ended with the top of the housing bubble was probably artificial. 

Pending home sales rose 0.9% in June, according to NAR. While this is a nice uptick from May, contract signings are still down 2.5% on a YOY basis. It looks like we are seeing an uptick in inventory in some of the MSAs with the biggest inventory issues: Seattle, San Jose, and Portland. With the lion's share of 2018 in the books already, NAR is projecting a decline in existing home sales for 2018 of 1% and an increase in the median home price of 5%. 

Morning Report: Housing starts disappoint

Vital Statistics:

	Last	Change
S&P Futures	2802.5	-1.3
Eurostoxx Index	398.1	0.1
Oil (WTI)	64.0	0.1
US dollar index	84.5	-0.2
10 Year Govt Bond Yield	2.62%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	103.25
30 Year Fixed Rate Mortgage	4.03

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

The House looks ready to pass a one-month stopgap measure to keep the lights on. Senate Democrats are considering blocking it in order to push immigration reform, but nothing is set in stone. Bottom line, the odds of a government shutdown tomorrow are falling. 

Initial Jobless Claims came in at 220,000 last week. This is a 45 year low. When you take into account population growth and the fact that we had a military draft back then that number is astounding. 

The Beige Book was released yesterday, and contained no major surprises. Growth is "modest to moderate" in most districts and the labor market is tight, to the point of constraining growth. They mentioned that we are seeing wage inflation more broadly in some districts, while inflation is generally under control. Separately, the Philly Fed report showed that growth eased somewhat, however it is still very strong. 

Housing starts came in at 1.19 million units (annualized), which was a big disappointment. Hurricane effects probably played a part, as many construction workers are being diverted to repair work. We did see a substantial (14%) drop in starts in the South. Building Permits came in at 1.3 million. All told, 1.2 million housing units were started in 2017, which was more or less flat with 2016. This is about 80% of the pre-bubble average of 1.5 million units a year. 

Mel Watt discussed housing reform in a letter to the Senate Banking Committee. He urged lawmakers to establish a guarantor framework where shareholder-owned entities guarantee mortgages with a government backstop and a utility model. The utility model means that pricing will be set by the government in order to set an allowable rate of return for the company and nothing more, similar to how gas and electric companies are run. If one of the guarantors runs into trouble, they will be allowed to fail, however the mortgages they guarantee will be backstopped by the government, thus protecting MBS investors. The document also recommended that these guarantors offset their credit risk in the private market when economically feasible and that they hold enough capital to withstand another 2007. 

Morning Report: Existing home sales fall

Vital Statistics:

	Last	Change
S&P Futures	2398.3	0.3
Eurostoxx Index	392.2	0.2
Oil (WTI)	51.5	0.0
US dollar index	88.8
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	4

Stocks are lower this morning after Moody's downgraded China's sovereign credit rating overnight. Bonds and MBS are up small. 

Existing Home Sales dropped 2.3% in April to a seasonally adjusted annual rate of 5.57 million. Tight inventory remains the biggest problem and pushed days on market to a record low of 29 days. Inventory is 1.93 million homes, down 9% YOY and represents a 4.2 month supply. The first time homebuyer accounted for 34% of all sales, while the median home price rose 6% to 244.8k, which has pushed the median house price to median income ratio to 4.1x, which is straying back towards the bubble years. 

Home prices rose 1.4% in the first quarter and are up 6% YOY, according to the FHFA House Price Index. The biggest annual increases were in DC, Idaho, New Hampshire, Colorado, and Washington. New England is beginning to show some signs of life after lagging the rest of the country post-crisis. 

Mortgage Applications rose 4.4% last week as purchases fell 1% and refis rose 11%. The refinance share of mortgages rose to 44% from 41% the week before. The contract interest rate on conforming mortgages fell 6 basis points to 4.17% the lowest since November. The 10 year bond yield fell 9 basis points to 2.23% for the week ending May 19. 

We will get the FOMC minutes from the April meeting this afternoon at 2:00 pm EST. Be careful locking around that time as we could see some volatility. 

HUD's statement on the proposed budget. HUD is getting $500 billion in new commitment authority for FHA. The Community Development Block Grant program is slated to be defunded, while most other activities continue intact. Rental Assistance is also unchanged. 

Speaking of HUD, Ben Carson hinted last week that he intends to widen the number of condos which will be eligible for the FHA's condo program. The biggest change will be to allow financing of individual units in buildings that lack FHA certification. Only 7% of condo buildings have FHA certification so this could open up the program quite a bit. Overly strict regulations issued by the Obama administration more or less put the FHA condo program in a dormant state, however the outgoing administration suggested some tweaks in the final months to try and get more loan volume.

Zillow is facing a class action lawsuit over its Zestimates.  A homeowner in Illinois is charging that Zillow's Zestimimate undervalued her house and and that Zestimate constitutes an appraisal under Illinois law. The suit seeks to have her Zestimate changed to reflect what she wants it to be, to have Zillow licensed and to require the consent of the homeowner before the estimates are posted online. 

Comp values exceed the appraisal price on 61% of all appraisals, according to CoreLogic. While in theory this should push appraisal prices higher, adjustments by the appraiser negate this to some extent. You would think in a rising real estate market, the comps would generally be lower due to timing differences, but they aren't. 

Dave Stevens from the MBA discusses what to do with the GSEs. The punchline: The current situation is untenable, as the GSE's capital buffer will be gone by the end of the year. The recap and release option without any sort of reform is no solution either. The MBA fears that a more conservative (i.e. someone who wants a smaller Federal role in the mortgage market) FHFA director could be nominated when Mel Watt's term expires in 2018. 

Morning Report: Treasury and FHFA disagree on the GSEs

Vital Statistics:

	Last	Change
S&P Futures	2370.5	6.8
Eurostoxx Index	390.7	1.5
Oil (WTI)	50.0	0.6
US dollar index	88.8	-0.4
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	103.27
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	4.03

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

Slow news day.

No economic data this morning, but we have Fed-speak at 9:45 and 1:40. 

Treasury Secretary Steve Mnuchin and FHFA Head Mel Watt disagree on what to do with Fannie Mae's dividends to Treasury. A week ago, Watt suggested that Fannie and Freddie may have to retain some of their earnings in order to build / maintain their capital base. Yesterday, Mnuchin said that he expected the dividend payments to continue. Despite a Republican president, Mel Watt is going nowhere - his term expires in 2019 and he can only be removed for cause. 

Ellie Mae's Origination Insight Report is out, and it shows that fallout increased, along with the purchase share of mortgages. Cycle times improved by a day across the board. 

St. Louis Fed Head James Bullard believes that the unemployment rate could fall further without igniting inflation. He seems to think the new normal is about 2% GDP growth and sees that sort of pace for the immediate future. That will probably be the case until wage inflation picks up, and who knows when that will be? 

Guess who's back? Ex-NJ governor, MF global collapse Jon Corzine, who is apparently fundraising for a new hedge fund...

Morning Report: Starter homes are back

Vital Statistics:

	Last	Change
S&P Futures	2389.5	-5.8
Eurostoxx Index	394.6	-1.9
Oil (WTI)	48.0	0.6
US dollar index	90.6	0.1
10 Year Govt Bond Yield	2.41%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.53
30 Year Fixed Rate Mortgage	4.08

Stocks are lower this morning on lousy retailer earnings. Bonds and MBS are down small. 

Initial Jobless Claims fell to 236,000 last week which is a 28 year low. 

Inflation remains close to the Fed's 2% target, according to the Producer Price Index. The headline number rose 0.5% MOM and is up 2.5% on a YOY basis, but when you strip out food and energy, it is up 1.9% YOY. 

We had some hawkish statements from Boston Fed President Eric Rosengren yesterday, where he urged 3 more hikes this year as the economy is on an "unsustainable pace." His rationale is the unemployment rate at 4.4%, which is below his estimate for full employment at 4.7%. Of course sub 1% GDP growth is probably "sustainable" ad infinitum, and there is no evidence of much in the way of wage growth. He also doesn't think the tapering of MBS buying will affect mortgage rates too much, as long as it is gradual. 

Inflation isn't uniform, of course, and the index that measures it has to take this into account. Here is a chart of different goods and services and their inflation rates over the past 20 years:

The Canadians have a housing bubble on their hands, and the ratings agencies are getting worried. Canada is bedeviled with the same problem in the US of tight supply, although foreign demand is a big factor as well. Prices in Toronto rose 25% last year. Note that Canada's economy is highly dependent on strong commodity prices, and indirectly, Chinese demand. If / when the Canadian real estate bubble bursts, it will probably affect property prices in the Pacific Northwest. 

More evidence that builders are pivoting away from luxury building and towards more starter homes. In Q1, 854,000 new owner households were formed versus 365,000 new renter households. This is the first time new owners exceeded new renters in a decade. Fannie Mae's share of mortgages to first time homebuyers has been steadily increasing. We are seeing an increase in the number of new homes smaller than 2200 square feet. Even McMansion giant Toll Brothers is going smaller. 

FHFA Director Mel Watt is warning that the continuing sweep of Fannie Mae's profits to Treasury is risking confidence in the entity. His proposal is to let Fannie Mae retain their earnings in order to re-build its capital cushion. This is to prevent the GSEs from needing another bailout later on. Note that the Obama administration used Fannie's profits to paper over holes in Obamacare spending. 

Morning Report: FOMC minutes show Fed preparing to back off tightening

Vital Statistics:

	Last	Change	Percent
S&P Futures	1928.5	5.8	0.30%
Eurostoxx Index	2922.3	24.6	0.85%
Oil (WTI)	31.37	0.7	2.32%
LIBOR	0.618	0.000	0.00%
US Dollar Index (DXY)	96.93	0.144	0.15%
10 Year Govt Bond Yield	1.82%	0.00%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.6
BankRate 30 Year Fixed Rate Mortgage	3.67

Stocks are higher this morning after oil continues its rally. Bonds and MBS are flat

Initial Jobless Claims fell from 269k to 262k., while the Philly Fed improved to -2.8.

The Bloomberg Consumer Comfort Index fell slightly to 44.3 from 44.5 the prior week. The Economic Expectations index fell markedly from 47 to 42.5.

The Index of Leading Economic Indicators improved slightly in January from -0.3% to -0.2%. 

Mortgage Delinquencies fell from 4.99% to 4.77% and foreclosures fell from 1.88% to 1.77% in the fourth quarter, according to the MBA. 

The FOMC minutes were released yesterday, and for the most part they were a non-event as far as the markets were concerned. The Fed did spend some time talking about the slowdown in China, and the reverberations in the markets. A number of officials are beginning to think the inflation forecasts are too high. In addition, the stresses in the financial system act as a tightening even if rates go nowhere. The Fed seems to be setting the stage for a cut in the GDP and inflation forecasts at the March meeting, as well as a pause in tightening. Separately, the OECD took down its forecast for global growth to 3.0% from 3.3%. 

Mortgage REIT MFA Financial reported earnings this morning. They continue to position their portfolio of MBS more towards credit risk and less towards interest rate risk. When the private label securitization market comes back, REITs like MFA will be the big buyers of non-QM paper. Their appetite for non-agency MBS will be the key driver bringing back the widespread use of products that don't fit in the agency box. 

FHFA Chairman Mel Watt says that the GSE's lack of capital is the most serious risk to the mortgage market right now. He says that guarantee fees have increased 25 basis points since 2009 and they are now "appropriate." He also said that the current state of conservatorship is "not a desirable end state" and said that the GSE's protection from market forces "presents itself in multiple decisions, including pricing." 

Morning Report - Lousy housing starts

Vital Statistics:

	Last	Change	Percent
S&P Futures	2091.3	-8.5	-0.40%
Eurostoxx Index	3755.6	-48.0	-1.26%
Oil (WTI)	55.51	-0.9	-1.56%
LIBOR	0.276	0.000	0.09%
US Dollar Index (DXY)	97.92	-0.401	-0.41%
10 Year Govt Bond Yield	1.87%	-0.02%
Current Coupon Ginnie Mae TBA	103.5	-0.2
Current Coupon Fannie Mae TBA	102.5	0.0
BankRate 30 Year Fixed Rate Mortgage	3.79

Markets are lower this morning on European profit-taking. Bonds and MBS are up small.

Very disappointing housing starts numbers this morning - 926k versus expectations of 1.04M. Building permits fell to 1.04M as well. The weakness was both in single fam and mult-fam. It is hard to reconcile these numbers with the NAHB Homebuilder sentiment survey from yesterday, or the trading in the XHB ETF but here we are. You might be able to blame starts on the weather (and even that is a stretch) but you can't blame permits on that. Punch line: supply will remain tight, and prices will probably be a touch higher than people are forecasting. 

The Philly Fed Index improved to 7.5 versus 5 last month. 

The Bloomberg Consumer Comfort Index fell to 46.6 last week The perception of the buying climate is improving the most, while people's perception of the economy and their personal financial situation is improving more slowly.

Initial Jobless Claims increased to 294k last week. At least the labor market seems to be holding up, although wage growth is still lackluster. 

The left continues to agitate for "living wage" legislation and is hoping they have the beginnings of a movement. Set aside the fact that these protests are largely rent-a-mobs of union people, professional protesters, bums, and college students, there is something bigger happening here. This is at its core a war between "shareholder capitalism" and "stakeholder capitalism" as the left moves to seize ideological ground it lost 30 years ago. Expect to hear a lot of "If Company XYZ just suspended its stock buyback program, they could pay everyone a living wage" claims. 

We will undoubtedly see a lot of demagoguery about wages from politicians, but there really isn't much anyone can do about it. The Democrats will agitate for minimum wage hikes and living wage legislation while Republicans will blame regulation and an anti-business environment. The only thing that will change it is economic growth, and as long as we have slack in the labor market, wages aren't going up. Growth will happen, but we are still in the aftermath of a burst asset bubble, and recoveries from burst bubbles can be maddeningly slow. Of course this gives the Fed an excuse to stand pat, although they are creating bigger and bigger imbalances as ZIRP continues. 

The German Bund yield is now a single-digit midget. If you lend money to the German government for 10 years, you will get 9 bps. Guess we are headed to negative rates there as well. How are insurance companies like Allianz and Munich Re at 52 week highs? There is no way they can cover their actuarial liabilities in sovereign debt these days. I know the stock has a fat dividend yield of 4.1%, but I wouldn't bet on that dividend getting maintained. As I have said before, the actuarial tables don't care that money is free. Insurers are stuck between having to take a lot of risk for a little return or to simply use unrealistic future growth assumptions to remain solvent. 

Mel Watt is going to lower fees on Fan and Fred loans in order to increase lending to lower credit scores. The "free market' versus "housing policy as a means of social engineering" battle has been fought and is over. The social engineers won.