Morning Report: Tough times in mortgage banking

Vital Statistics:

			Last	Change
S&P futures			2840	0.75
Eurostoxx index			388.33	-0.84
Oil (WTI)			69.29	0.8
10 Year Government Bond Yield				2.95%
30 Year fixed rate mortgage				4.58%

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

The week after the jobs report is invariably data-light and this week is no exception. We will get inflation data on Thursday and Friday and JOLTS data tomorrow and that is about it. 

Everyone knows that 2018 has been an awful year for mortgage banking. How bad is it? Check out the graph below courtesy of Garrett Macauley:

The one thing that jumped out at me (aside from the -8 basis points this year) is how little the industry made during the bubble years. Is it as simple as saying the mortgage business lives and dies on the refinance business and even in great purchase markets (like 04-06) mortgage banking is a marginal activity at best? 

If you are tired of hearing predictions of an inverted yield curve, check this out. Jamie Dimon thinks the 10 year bond yield should be 4% right now, and is saying that 5% is a possibility. "I think rates should be 4 percent today," Dimon said from the gala, according to Bloomberg News. "You better be prepared to deal with rates 5 percent or higher - it's a higher probability than most people think." While it is impossible to rule that forecast out, take a look at the chart below: Interest rate cycles are long and during periods of low inflation they just don't move around all that dramatically.  It took rates 20 years (1946 - 1966) to go from 2% to 5%. What was inflation in 1966? 5%. With the core CPI sitting at 2%, a 5 handle on inflation seems pretty unlikely. Not saying it is impossible - lots of differences between the mid 20th century and today - but.... 

Chinese buying has been supporting prices in some big West Coast markets, and it is drying up. While trade war concerns are probably playing a role, we are seeing declines in other global real estate markets, like London and Vancouver. This is a signal that the issue is probably internal to China, which has a real estate bubble of its own. The government has issued regulations limiting the purchase of foreign property, and seems worried about the currency. If the Chinese real estate bubble bursts, expect to see more selling in West Coast markets because that will be the only way for Chinese investors to raise cash. 

Morning Report - Case Schiller

Vital Statistics:

	Last	Change	Percent
S&P Futures	1490.8	3.6	0.24%
Eurostoxx Index	2586.8	-65.1	-2.45%
Oil (WTI)	92.23	-0.9	-0.95%
LIBOR	0.287	0.000	0.00%
US Dollar Index (DXY)	81.85	0.180	0.22%
10 Year Govt Bond Yield	1.87%	0.01%
RPX Composite Real Estate Index	194.1	-0.5

Markets are higher after yesterday's bloodbath.  Yesterday's sell-off was blamed on Italian election results which caused a 32 bp sell-off in Italian sovereigns.  They have traded another 50 basis points wider this morning. The Bernank will testify before the Senate Banking Committee today.  Bonds are higher, continuing yesterday's furious rally. The 10-year has tightened by 13 basis points and is trading at 1.87%.  MBS are flat.

The S&P Case-Schiller index of home prices rose 6.8% YOY and .88% MOM in December. The only MSA with negative growth was New York.  Separately, FHFA reported that prices increased .6% MOM in December. They note that while the foreclosure pipeline is still high, the actual number of homes available for sale is very low and falling.

Altos has a piece on why inventory is so low. First, they cite low housing starts. From 1957 - 2002, we averaged 1.5 million units a year.  Since the bubble burst, we have been hitting around 700k. Quickly ramping up housing construction is difficult. Second, there is psychological effect of sellers who now see the light at the end of the tunnel.  Prices are rising again, and they are hoping to get out flat. Finally, the government has emphatically sided with home owners over home buyers. They are pulling out all the stops to keep inventory off the market through foreclosure mitigation and refinance opportunities for underwater homeowners.  This has the net effect of restricting supply, which is good for existing homeowners, but not so much for first time homebuyers who want in. The net result:  2013 home price appreciation should be very strong.

In confirmation of the above, the Despot reported a 13.9% increase in 4Q sales, with comps up 7%. While they attribute some of the growth to Sandy repairs, they mainly cite the improving residential real estate market.

In a sign that the refi boom may be over, JP Morgan plans on cutting headcount in mortgage banking by 13k - 15k in an effort to cut $3B in expenses by the end of 2014. They see cutting 3,000 - 4,000 jobs in consumer banking this year, almost entirely by attrition.  The hits keep coming....

Bob Corker is saying the ball is in the White House's court in order to confirm CFPB acting Chairman Richard Cordray.  A January court decision that Obama's recess appointments to the NLRB were unconstitutional is giving Republicans a chance to press for changes to CFPB in order to bring more of it under Congressional control.  They are arguing for a 5 member bipartisan board, and for the budget to be subject to the normal appropriations process.