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: Job cuts fall

Vital Statistics:

			Last	Change
S&P futures			2725	1
Eurostoxx index			386.51	1
Oil (WTI)			67.49	-0.72
10 Year Government Bond Yield				2.86%
30 Year fixed rate mortgage				4.47%

Stocks are flat this morning after personal incomes came in as expected. Bonds and MBS are flat. 

Personal Incomes rose 0.3% in April, in line with expectations. Personal Spending rose 0.6%, higher than the 0.4% estimate and inflation was tame at 2% YOY, with the core rate up 1.8% YOY. The big jump in consumer spending will probably have some strategists taking up their estimates for Q2 GDP. March and February spending numbers were revised upward. Inflation remains in check, which will give the Fed the leeway to hold off on hiking rates if the European situation with Italy escalates. 

Pending Home Sales fell 13% in April, according to NAR. The supply / demand imbalance remains the story: Lawrence Yun, NAR chief economist, says the housing market this spring is hindered because of the severe housing shortages in much of the country. “Pending sales slipped in April and continued to stay within the same narrow range with little signs of breaking out,” he said. “Feedback from Realtors®, as well as the underlying sales data, reveal that the demand for buying a home is very robust. Listings are typically going under contract in under a month1, and instances of multiple offers are increasingly common and pushing prices higher.”

Initial Jobless Claims fell to 221,000 last week. We are still at exceptionally low levels. 

Mortgage rates fell 10 basis points last week, and this is even before the huge bond market rally on Tuesday. 

Deutsche Bank was put on the troubled bank list last year. This was obviously a big impetus behind its decision to reduce its US footprint. The German regulators have been on top of the bank as well. With credit default spreads widening in the Euro banking market, expect to see the European Central Bank tread extremely cautiously with policy normalization, and for the Fed to adopt a wait and see attitude after hiking in June. Separately, if Deutsche Bank decides to exit the US entirely, wouldn't it be wild to see them spin off Bankers Trust? 

Job Cuts fell to 31,517 in May, according to outplacement firm Challenger, Gray, and Christmas. This is the seasonally slow period for job cuts, as most companies concentrate them in Jan-Feb time frame. The cuts are mainly coming in retail, although things are picking up in the financial sector. Regionally, they are concentrated in the Northeast, particularly NY and NJ. 

The Trump Administration is set to push for tariffs on European steel and aluminum. A German magazine said that Trump told French President Emannuel Macron that he wanted to "stick to his trade policy long enough until no Mercedes-Benz cars were cruising through New York." The deadline for negotiations is this Friday.

US regulators are set to sand off some of the harder edges on Dodd-Frank and the Volcker Rule. The biggest change requested from the industry is the rebuttable presumption that any position held for less than 60 days is considered a proprietary trade. Essentially, this is a "innocent until proven guilty" scenario. The Fed also intends to clarify the liquidity management exception, which is meant to distinguish between market-making and proprietary trading. At the end of the day, falling commissions and tightening bid/ask spreads have made market-making an unprofitable business for the most part anyway. I suspect investors and regulators are in for an unpleasant surprise the next time we have a crash and the only bids in the market are retail GTC orders. 

The number of underwater homes fell below 10% in the fourth quarter for the first time since the crisis. Torrid home price appreciation has cut the percentage down to 9.1%, or about 4.4 million homes. "For much of the country the Great Recession is an increasingly distant memory - the American economy is booming once again and markets are now shifting their gaze to future downturn risks," said Zillow senior economist Aaron Terrazas. "But scattered in neighborhoods across the country, the legacy of the mid-2000s housing bubble and bust lingers among the millions of Americans still underwater on their mortgages, trapped in their homes with no easy options to regain equity other than waiting.” The worst areas? Chicago, Virginia Beach, and Baltimore. 

Morning Report: Personal Incomes and Spending increase

Vital Statistics:

			Last	Change
S&P futures			2679	7.6
Eurostoxx index			385.1	0.46
Oil (WTI)			67.48	-0.62
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.56%

Stocks are higher after a slew of new mergers were announced. Bonds and MBS are up small. 

We have a big week ahead with the FOMC meeting starting tomorrow and the jobs report on Friday. The Street isn't looking for any changes in interest rates at the May meeting, but will focus as usual on the language of the statement. For the jobs report, the expectation is 190k new payrolls and 2.7% annual wage inflation. 

Pending Home Sales were up marginally from February, but were still down on an annual basis, according to NAR's Pending Home Sales Index. Bad weather in the Northeast pushed down pending sales, however all parts of the country were down. Again, blame low inventory and falling affordability. 

Personal Incomes rose 0.3% in March, while personal spending rose 0.4%, in line with expectations. The PCE index was up 2% YOY and the core PCE index was up 1.9%. This is the Fed's preferred measure of inflation and it is right where they are targeting. Income growth was the weakest since last Fall, however. 

The big debate right now is whether there is any slack in the labor market. Anecdotal evidence abounds that companies are struggling to find qualified workers. However, Econ 101 says that we should be seeing higher wage inflation as a result and that isn't happening (at least not yet). Some theories are claiming this is a market failure and that employers are artificially holding down wages (which is then used as an argument for more government intervention in the labor market). I suspect the issue is that there are three big forces holding back wage growth. First, inflation is low - if companies cannot pass along price increases to their customers, they aren't going to be raising wages. Second, lower wage jobs are competing with technology which is only getting better and cheaper. And finally, the long-term unemployed represent a reservoir of slack that companies know they can tap if needed. FWIW, I think the first and third explanations explain it, and find the idea that employers are somehow colluding to keep wages low to be wholly unconvincing. Take a look at the chart below, which shows wage increases versus inflation. You are seeing actual wage growth.

For now it looks like the 3% level in the 10 year has held. What drove the sell-off - it wasn't like there was anything data-wise to support it. JP Morgan blames CTAs using momentum strategies to short the 10-year. Chinese selling has also been rumored to be a factor. We won't be able to confirm or deny that theory for a couple of months. CTA funds have been net short Treasuries since September, however a momentum signal in mid-April caused people to pile into the trade and that apparently drove the late month sell-off. 

Steve Mnuchin is "cautiously optimistic" on trade talks with China. The subject will include intellectual property and joint ventures. 

Defect risk decreased on a MOM basis but was up on a YOY basis, according to the First American Loan Defect Index. The biggest risk was in the sand states, while the lowest risk was in the Rust Belt. 

Morning Report; Fourth quarter GDP revised upward to 2.9%.

Vital Statistics:

			Last	Change
S&P futures			2623.25	8
Eurostoxx index			366.29	-1.28
Oil (WTI)			64.88	-0.37
10 Year Government Bond Yield				2.77%
30 Year fixed rate mortgage				4.45%

Stocks are lower this morning following yesterday's sell-off. Bonds and MBS are up on the risk-off trade. 

The market leaders (in other words the FAANG stocks) are getting taken to the woodshed on Facebook is down about 20% from mid-February. Is it time to rename the index fAANG?

Mortgage applications rose 4.8% last week as purchases rose 3% and refis rose 7%. Despite the jump in refis we are still at lows not seen for a decade. 

Q4 GDP was revised upward by 40 basis points to 2.9% in the third and final revision. The Street was looking for an upward revision of 20 bps. Consumption was bumped up 20 bps to 4%, while the price index was unchanged at 2.3%. Inventory was increased as well. For 2017, GDP increased 2.3% compared to 1.7% in 2016. 

Pending Home Sales rose 3.1% in February, according to NAR. Despite the gain, it is still over 4% lower than a year ago. That said, February 2017 was exceptionally strong. Expect to see a decrease in March, at least in the Northeast, after a series of storms. 

Home Price appreciation continues as the Case-Shiller Home Price Index increased 6.3% YOY in January. Seattle led the group, increasing almost 13%, followed by San Francisco and Las Vegas. All MSAs reported year-over-year gains. The smallest increases were in the Washington DC and some of the Midwest. 

Increasing real estate prices are pushing up home equity, which grew over $15,000 on average in the fourth quarter, according to CoreLogic.  It was biggest in California, where it jumped $40,000. This is the biggest increase in 4 years, and should bump up consumer spending. Since home equity is considered more permanent than stock market equity, it should affect consumer spending more. 

Consumer confidence slipped a little in March, but is still at elevated levels. The tax cuts are helping to offset some of the losses in the stock market. Generally speaking, consumer confidence indices are inverse S&P indices, so expect them to fall if this sell-off continues. 

As the Spring Selling Season takes shape, we are seeing the biggest home price appreciation at the middle and lower tiers of the market, where there is the biggest supply problem. While mortgage rates are rising, so far they aren't making a dent in housing demand. Surprisingly, Moody's thinks the tax new tax law will dampen home price appreciation about 4% over the next few years, due to the changes in the mortgage interest deduction (which will pretty much only affect the high end in certain states) and increased interest rates due to rising deficits. Perhaps. At any rate, I think the supply / demand imbalance is the biggest driver of home prices, and that will probably get worse before it gets better. 

Morning Report: Jerome Powell spooks the bond market

Vital Statistics:

S&P Futures	2751.5	4.0
Eurostoxx Index	381.0	-1.3
Oil (WTI)	63.0	0.0
US dollar index	84.1	0.1
10 Year Govt Bond Yield	2.89%
Current Coupon Fannie Mae TBA	102.313
Current Coupon Ginnie Mae TBA	102.531
30 Year Fixed Rate Mortgage	4.4

Stocks are marginally higher this morning after the second revision to fourth quarter GDP came in as expected. Bonds and MBS are flat.

Fourth quarter GDP increased at 2.5%, which matched Street expectations. The price index was revised downward a touch and consumer spending was revised upward. For the year, GDP increased at 2.3% versus 1.6% for 2016. Inflation is picking up, as the price index rose 2.5% versus 1.7% in the third quarter. Excluding food and energy, the index was up 1.9%, compared to 1.3% in the third quarter. 

The Chicago PMI decelerated last month, but still came in at a strong 61.9. The number was below estimates however. 

Pending Home Sales fell 4.7% in January, according to NAR. This is down 3.8% YOY and the lowest since October 2014 after the Taper Tantrum. Despite higher rates and smaller inventory, traffic was up YOY in January, except for the Northeast, which could have been weather-driven. 

Jerome Powell spooked the bond markets yesterday during his testimony in front of the House. He acknowledged that inflation is accelerating and that the economy has improved since the meeting in December, and that statement pushed bond yields higher. He said he didn't want to "prejudge a new set of projections," referring to the dot plot at the March meeting. Powell will testify in front of the Senate tomorrow. 

The Fed Funds futures didn't really do much in response: The March futures are now handicapping an 87% chance of a hike and the consensus is still for 3 hikes this year. 

Mortgage applications increased 2.7% during the holiday-shortened week, with the refi index falling 1% and the purchase index increasing 6%. The average contract rate was 4.64%, unchanged from the prior week. 

The NAR and ATTOM weigh in on the real estate outlook for 2018. Unsurprisingly, they expect the inventory issue to continue, and homebuilders to modestly ramp up production while constrained by labor shortages. They point out also that the churn of move-up buyers has largely collapsed post-crisis. The average tenure (or amount of time that someone has lived in their home) has doubled since the crisis, from just over 4 years to 8 years. This lack of churn depresses the number of homes available on the market. I wonder if the churn was simply an issue related to underwater homeowners - short sales are tough to do. Second, as the foreclosure inventory is largely worked through, with the exception of the Northeast and a few other states, distressed homes are drying up. I suspect the professional investors who bought these homes will want to ring the register at some point, but that will be a function of interest rates and home price appreciation. 

Lowe's missed Street estimates and is down 8% pre-open. It looks like this is a company-specific problem and doesn't reflect on the home improvement market. The Despot beat earnings recently. 

Morning Report: Wages and salaries accelerating

Vital Statistics:

	Last	Change
S&P Futures	2835.5	11.0
Eurostoxx Index	396.6	0.4
Oil (WTI)	64.2	-0.3
US dollar index	83.0	0.0
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 higher this morning after global markets recovered overnight. Bonds and MBS are flat.

We should get the FOMC decision today around 2:00 pm EST. Be careful locking around then. The consensus seems to be that this will be a no change / hawkish tone type of statement. 

This will be Janet Yellen's last FOMC meeting. Jerome Powell seems to be cut more or less from the same cloth as Yellen, so the Fed's go-slow approach to hiking interest rates will probably continue. 

Treasury increased the size of its debt issues for the first time since 2009 this morning on the back of increased deficit spending and lower purchases from the Fed. They are offering $66 billion of 3, 10, and 30 year notes this time around, an increase from $62 billion in November. Less purchasing by the Fed plus increased issuance = higher interest rates, at least at the margin.  

Mortgage Applications fell 2.6% last week as both purchases and refis fell by the same amount. The average 30 year conforming rate increased 6 basis points to 4.41%

The ADP jobs number came in at 235,000 last month, which was higher than expectations. The Street is looking for 175,000 jobs in this Friday's jobs report. 

Compensation is accelerating, according to the Bureau of Labor Statistics. The Employment Cost Index rose 0.6% in the fourth quarter, and is up 2.6% YOY. Private Industry compensation rose faster than government, with wages and salaries up 2.8% YOY. A year ago, that annual increase was 2.3%. The industry with the biggest increase? Truck drivers. 

The "typical" mortgage payment rose 12% last year, according to CoreLogic. This measure takes the median home price and calculates the principal and interest payment using the prevailing Freddie Mac mortgage rate and assumes a 20% down payment. They are looking for this payment to increase another 13% next year as home prices and interest rates continue to rise. 

Pending home sales rose 0.5% in December, according to NAR. Home sales are being depressed by tight inventory despite strong growth in wages and jobs. 

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: Pending Home Sales flat

Vital Statistics:

	Last	Change
S&P Futures	2561.8	3.3
Eurostoxx Index	389.7	2.5
Oil (WTI)	52.2	0.0
US dollar index	87.4	0.2
10 Year Govt Bond Yield	2.43%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.93

Stocks are up this morning after yesterday's sell-off. Bonds and MBS are up on the ECB's decision to start tapering QE.

Initial Jobless Claims rose 10k to hit 233k last week. We are still at historically low levels.

Pending home sales were flat in September, according to NAR. The hurricanes in Florida and Texas did depress the number somewhat, but the same old story of low inventory is the real culprit. The Pending Home Sale Index is the lowest since early 2015. 

The House will vote on a budget for next year, which will set the stage for tax reform scheduled to be announced on November 1. As expected, the state and local tax deduction is the biggest bone of contention, with Northeast Republicans dead set against ending it. They are hoping to use the budget vote as leverage to keep the deduction in the tax plan, but they may end up having to wait to see what comes out of the Committee. 

Rising rents are becoming a burden for one in five renters, as the number of people looking to rent exceeds the supply of rentals out there. For people earning under 30,000, 28% were unable to make a full rental payment in the last 3 months. Affordable housing advocates will undoubtedly seize upon this number in order to push HUD to do more. 

The MBA is forecasting about a 5% drop in origination volume from 2017 to 2018 based on higher interest rates depressing refinancing opportunities. Refis will probably be driven by two effects going forward: home price appreciation and the flattening yield curve. As home prices appreciate, those that have FHA loans with MI may now have enough equity in their homes to refinance into a conventional loan with no MI, thus saving a lot of money. Second, 30 year fixed rate mortgages will become more attractive relative to ARMS as the yield curve flattens. These two effects will create refinance opportunities in a rising interest rate environment. That said, purchase activity will be driving things going forward.

The financial services industry had a small victory yesterday as the Senate overturned a rule from the CFPB allowing class-action suits for banks. The argument in favor of class action lawsuits say it is necessary to prevent bad behavior from the banks, while those against class action suits say that wronged customers make more in arbitration, since they save on legal fees. While the big banks are probably able to absorb the massive penalties from a class-action suit, the smaller ones probably cannot. This is a highly divisive issue, pitting two giant funding sources for both parties: the trial lawyer bar for Democrats, and the financial services industry for Republicans. The vote was 50-50 and Mike Pence had to cast the tiebreaking vote.

The BLS released its projection of the job market for the next 10 years. Suffice it to say, the trends we have been seeing over the past decades (decreased emphasis on manufacturing, increased emphasis on services, higher education requirements) will continue. Heath care employment is the growth area, while many manufacturing jobs are becoming obsolete. 

Morning Report: Freddie Mac explores what is driving low inventory

Vital Statistics:

	Last	Change
S&P Futures	2473.3	3.0
Eurostoxx Index	379.6	1.3
Oil (WTI)	49.7	0.0
US dollar index	86.2	-0.3
10 Year Govt Bond Yield	2.29%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

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

Pending Home Sales rose 1.5% in June, according to NAR. On a YOY basis, the index is up half a percent. Housing inventory is down 7% YOY. 

Freddie Mac explores the issue of tight inventory and asks why builders aren't adding much supply. The issue largely concerns labor, especially skilled labor. The bust laid off about 1.5 million construction employees, who ended up finding new jobs in different sectors of the economy (especially the energy sector). These people are probably not coming back to the construction sector without some sort of catalyst. Second, young people don't seem all that interested in working construction, and the ones that are cannot pass a drug test. Tighter immigration enforcement and the economy in general have led to a drop in immigrants, who have historically been about 25% of the construction industry. Land costs as a percent of new home costs have been rising as well, which is creating pressure on margins. Land use regulations are also stretching out the time it takes to work through the permitting process. 

Speaking of drug tests, a factory owner in Ohio says they have plenty of jobs, but can't find people who can pass the drug test. 40% of their applicants cannot pass a drug test. 

The Fed plans to unveil soon its recommendation to replace LIBOR. LIBOR had been the benchmark interest rate for all sorts of variable rate products for decades, but had one fatal flaw: it was set based on self-reports from a consortium of investment banks. The problem is that the bank could say it was pricing LIBOR at a rate that it wasn't prepared to actually honor. Since banks have all sorts of products that are pegged to LIBOR, they have an incentive to manipulate the measure in order to get the most favorable mark for their own positions. The group is recommending a broad treasury financing rate based on Treasury repos. This rate will be based on what people are actually paying for financing in the markets, not a survey. There are something lie, $330 trillion of derivatives and loans (everything from mortgages to student loans) that are pegged to LIBOR. 

New documents bolster the case for Fannie Mae shareholders that the government lied when began to sweep all of Fannie's profits. The cover story was that Fannie was in a "death spiral" and this was necessary to hasten the wind-down of their business. The documents show Tim Geithner saying that Fannie will be earning strong revenues and can support the 10% dividend for years into the future. Does that mean shareholders will get anything? They probably shouldn't, as the government maintained a 20% public minority stake only so it didn't have to consolidate Fannie's debt on its own balance sheet. Under any sort of bankruptcy scenario shareholders would have been wiped out. The stock is a litigation lottery ticket. 

Morning Report: Pending home sales fall

Vital Statistics:

	Last	Change
S&P Futures	2424.0	3.5
Eurostoxx Index	384.6	-1.4
Oil (WTI)	44.1	-0.2
US dollar index	88.3	0.0
10 Year Govt Bond Yield	2.21%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.91

Stocks are up this morning after the ECB said that they will continue to stimulate the economy. Bonds and MBS are down

Last week was bad for mortgages as applications fell 6%. Purchases were down 4% and refis were down 9%. The index was up 10% from a year ago, however. The refi share fell a point to 45.6%. Note that applications have an income skew: starter home buyers are still aggressive, while it is the jumbo space that is taking a breather. 

Pending Home Sales fell 0.8% in May, which was the third consecutive monthly decline. Lawrence Yun, NAR chief economist, says it's clear the critically low inventory levels in much of the country somewhat sidetracked the housing market this spring. "Monthly closings have recently been oscillating back and forth, but this third consecutive decline in contract activity implies a possible topping off in sales," he said. "Buyer interest is solid, but there is just not enough supply to satisfy demand. Prospective buyers are being sidelined by both limited choices and home prices that are climbing too fast."

As demand for mortgages falls and competition increases, lenders are looking to ease lending standards to capture business, according to the latest Fannie Mae Lender Sentiment Survey. The net share of lenders reporting demand growth fell to a 2 year low, while the number of lenders who expect to ease standards rose to a 2 year high. 

More on inventory woes. Trulia found that over the past year, the inventory of starter homes has fallen by 16%. The inventory of move-up homes has fallen by 13%, and the number of luxury homes has fallen by 3.9%. Inventory is so tight in California that only 25% of the homes for sale remain on the market for over 2 months. Trulia's recommendation to buyers: Move fast, make multiple offers, and be willing to adjust to the seller's timetable. 

Redifin looked at 11 metro areas and found that 33% of the people who bought a home in the past year made an offer without visiting the property. Note to LOs who are worried about rates: Only 5% of the respondents said they would cancel their purchases if mortgage rates topped 5%. The metro areas were Baltimore, Boston, Chicago, Dallas-Fort Worth, Denver, Los Angeles, Portland, San Diego, San Francisco, Seattle and Washington, D.C.

A new ransomware attack is hitting Europe. It is similar to the Wanna Cry attack a few months ago. So far it has not been reported in the US, but it has hit big European companies like advertising giant WPP and shipper Maersk, which has shut down shipping terminals worldwide. The cost to decrypt your machine is $300 in bitcoin. Obviously don't open suspicious attachments - and also note that the hackers are getting better and better at disguising these attachments. For example, an email might appear to be coming from a vendor you work with frequently, but if you check the actual email address it is clear that it isn't actually from that vendor. 

Separately, it is good news the hackers are asking for a fixed dollar value of Bitcoin, since is has been on a tear the past couple of months.

Janet Yellen said that another 2008 style crisis is not likely in our lifetimes. While she attributes that to regulation and increased capital, the real reason is that only residential real estate bubbles cause this sort crisis. Residential real estate bubbles are the Hurricane Katrinas of banking and economics, and they really only come around ever few generations. That said, we will undoubtedly see another 2008 style financial crisis - it just won't be in the US. China has an immense real estate bubble and is trying to find a way to deflate it slowly. Canada has one as well, although it is probably tied pretty closely to Chinese money. 

MBA head Dave Stevens and ex-FHFA head Ed DeMarco will testify in front of the Senate today on housing reform. 

Morning Report: Nominal versus real home prices

Vital Statistics:

	Last	Change
S&P Futures	2416.3	5.5
Eurostoxx Index	392.1	1.6
Oil (WTI)	48.6	-1.1
US dollar index	88.6
10 Year Govt Bond Yield	2.21%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.98

Stocks are higher this morning on good overseas economic data. Bonds and MBS are up small. 

Mortgage applications fell by 3.4% last week as purchases fell 1% and refis fell 6%. Mortgage rates barely moved last week. We continue this up/down, up/down pattern. 

Pending Home Sales fell 1.3% in April, according to the NAR. Rising prices plus falling affordability are translating into lower sales for the second straight month. Sales are below a year ago. While building (or lack thereof) continues to be a problem, professional investors who are still paying the REO-to-rental trade are not selling. 

JP Morgan and Bank of America warned this morning that Q2 numbers will be lower than a year ago. A flattening yield curve, along with a lack of volatility is hurting results. The S&P Financials SPDR (XLF) is down about 1.5% this am. 

Economic confidence continues to give back its post-election gains, but is still better than it was pre-election. For the past week, 33% of respondents rated the economy as "excellent" or "good", while 22% rated the economy as "poor."

You hear people sometimes worry about another bubble because home prices have reached their prior peaks. Set aside the argument that bubbles are exceedingly rare psychological phenomenons that only come around every few generations for an asset class. Are home prices really back at bubble levels? If you look at the home price indices like Case-Shiller or FHFA, the answer is yes. However, those indices use nominal (i.e. non-inflation adjusted) prices. And while inflation has been low over the past 10-15 years, it hasn't been zero either. On an inflation-adjusted basis, home prices are still about 14% below peak levels. Compare the two charts below, one with nominal prices and the other with inflation-adjusted prices:

Nominal:

Inflation-adjusted:

You can see that home prices are still elevated compared to historical averages, but they aren't back at bubble levels. Housing has definitely increased in price on an inflation-adjusted basis since the mid-70s, however improvements in financing (interest rates, different products etc) have increased people's buying power and that may account for some of the increase. 

Morning Report: Pending Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2385.0	2.8
Eurostoxx Index	387.6	-1.2
Oil (WTI)	48.7	-0.9
US dollar index	89.7
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.63
Current Coupon Ginnie Mae TBA	103.68
30 Year Fixed Rate Mortgage	3.98

Stocks are mixed this morning as markets digest the ECB non-move. Bonds and MBS are down small. 

Pending Home Sales fell 0.8% in March as tight inventory reduced transactions. On a YOY basis, they are up 0.8%, as February was an unusually strong number. NAR chief economist, says sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year. "Home shoppers are coming out in droves this spring and competing with each other for the meager amount of listings in the affordable price range," he said. "In most areas, the lower the price of a home for sale, the more competition there is for it. That's the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall."

Durable Goods orders rose 0.7% in March, lower than the 1.1% estimate. Ex transportation and defense, they rose 0.1%. Capital Goods orders, which is a good proxy for business capital investment, rose 1.2%. Yet another data point where the hard data isn't confirming the buoyant soft data. 

Initial Jobless Claims rose slightly to 257k last week, while retail inventories rose 0.4% and wholesale inventories fell 0.1%. The consumer comfort index edged up as well. 

Regular readers of this blog know I have been discussing the post-Trump interest rate sell-off for months. I lay out the full case in the latest issue of the Scotsman Guide: Finding Comfort in History. I discuss why the Fed might not move 3 times this year (because they have invariably been high in their GDP estimates), why a 75 basis point move in the Fed Funds rate won't necessarily translate into a 75 basis point hike in mortgage rates (because the yield curve usually flattens), and why the end of QE reinvestment won't have a dramatic effect on mortgage rates. 

Trump's tax plan which was unveiled yesterday was really more of a guidance to Congress than an actual plan. FWIW, legislation originates in Congress, not the White House, so it is unrealistic to expect a detailed, CBO-scoreable plan. That said, we know that the basis plan will be to reduce the number of tax brackets, lower the rates, increase the standard deduction, and to limit itemized deductions. What does that mean for real estate? Nobody knows for sure, but the National Association of Realtors is weighing in already, urging the government to maintain the mortgage interest deduction and the state / local tax deductions. Trump's plan will probably ding upper middle class homeowners in high tax states the hardest. 

Morning Report: Pending Home Sales back to bubble years

Vital Statistics:

	Last	Change
S&P Futures	2352.5	1.0
Eurostoxx Index	377.2	-0.1
Oil (WTI)	48.6	0.2
US dollar index	90.1
10 Year Govt Bond Yield	2.40%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.36
30 Year Fixed Rate Mortgage	4.11

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

Mortgage Applications fell 0.8% last week as purchases rose 1% and refis fell 3%. Rates collapsed at the end of the week due to the failure of health care reform, so it is probably premature to see if that has affected things. Note that mortgage rates invariably lag moves in the 10-year as lenders wait to see if the changes are for real. 

Pending Home Sales increased 5.5% in February, which is 2.6% higher than a year ago, and the second-highest reading since the bubble years (the first was last April). A slight uptick in listings drove the increase. Demand is there, supply is not.

Deep Subprime auto loans (loans to borrowers with sub 550 credit scores) have increased to 1/3 of all auto loan ABS. In 2010, they were just 5%. As you can expect, delinquencies are increasing on these. It is surprising that institutional investors are happy to buy bonds securitized by assets that depreciate like sushi, while securitizing an overcollateralized pool of high quality non-QM loans is like pulling teeth. 

If there is anything in Washington that should have bipartisan support, it is finding a solution for Fannie Mae and Freddie Mac. The current situation is untenable, as the government is sweeping all of their profits, which is making them more and more undercapitalized. The Trump Administration has indicated that dealing with the GSEs is a high priority, but they have yet to give any sort of indication of how they think the future housing market should look. The model the MBA supports is to turn them into regulated utilities, with a capped rate of return. The Obama Administration supported nationalizing them, while another plan would get them out of the securitization business and into the mortgage insurance business. There are many stakeholders in this discussion, including the affordable housing types who want to ensure underserved areas can get credit, hedge funds who own the common and preferred shares, as well as lenders and borrowers. 

Here is a good backgrounder on how hard tax reform is going to be. Every "loophole" will have a constituency which will defend it to the death. The failure to end Obamacare (at least for now) will have taken the biggest "pay for" off the table. That leaves Republicans with a couple choices: Either pass a 10 year tax cut the way George W Bush did, or do revenue-neutral tax reform like Reagan did. 

Institutional Investors are implementing artificial intelligence into the stock picking business. How much do you want to bet that everyone's algorithms will look pretty much the same and will pick the same stocks? 

Morning Report: Pending Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2363.5	-1.5
Eurostoxx Index	368.6	-1.4
Oil (WTI)	54.5	0.6
US dollar index	90.8
10 Year Govt Bond Yield	2.33%
Current Coupon Fannie Mae TBA	102.045
Current Coupon Ginnie Mae TBA	103.17
30 Year Fixed Rate Mortgage	4.09

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

We have a slew of economic data this week with the second revision to Q4 GDP, Personal Income and Spending, Construction Spending, and the ISM data. Even though this Friday is the first of March, the jobs report will be released on the 10th. Finally, we get some Fed-speak this week, culminating with Janet Yellen on Friday, which will begin the quiet period ahead of the March FOMC meeting. 

Durable Goods orders rose 1.8% MOM but are down 0.6% YOY. Capital Goods expenditures fell 0.4% MOM and are up 0.5% YOY. Capital Goods orders are a proxy for business investment (and therefore the animal spirits), so for all the talk about improved sentiment businesses are still in maintenance mode, not growth mode.

Pending Home Sales fell 2.8% in January as tight inventory reduced sales. Lawrence Yun, NAR chief economist, says home shoppers in January faced numerous obstacles in their quest to buy a home. "The significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would-be buyers at bay," he said. "Buyer traffic is easily outpacing seller traffic in several metro areas and is why homes are selling at a much faster rate than a year ago 1. Most notably in the West, it's not uncommon to see a home come off the market within a month."

Donald Trump's proposed budget includes increased defense spending, a cut to agency budgets, and no changes to Social Security and Medicare. This is just an opening bid, and Congress will ultimately determine who gets what. Separately, Trump signed an executive order taking aim at excessive regulations. 

Jeffrey Gundlach, CEO of Double Line Capital sees the 10 year heading to a range of 2% - 2.25% as there is a "stealth flight to safety" happening globally and the most crowded trade on the planet (short bonds) goes the wrong way. He is supportive of Treasury's plan to issue longer-dated bonds (30 years up to 100 years). At these rates, why not? Warren Buffet won't touch them with a barge pole, however. 

For those that follow Buffet, here is his annual letter to shareholders, which is usually a fun read. 

Morning Report: Incomes and spending rise

Vital Statistics:

	Last	Change
S&P Futures	2281.5	-7.5
Eurostoxx Index	364.2	-2.2
Oil (WTI)	53.1	0.0
US dollar index	91.4	0.0
10 Year Govt Bond Yield	2.48%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.16

Dow 20,000 hats are off this morning as corporate earnings continue to come in. Bonds and MBS are up.

Donald Trump temporarily restricted immigration from 7 countries over the weekend until new vetting procedures are put in place. This story dominated the news cycle. 

Personal Incomes rose in December by 0.3% while spending rose 0.5%. The core PCE index (the Fed's preferred measure of inflation) is up 1.7% YOY. 

Pending Home Sales increased in December, according to NAR. The challenge for 2017 will be increasing inventory enough to offset higher borrowing costs. NAR is forecasting housing starts to increase 8% this year to 1.26 million. Normalcy is closer to 1.5 million, so we have a ways to go there. 

We have a big week for data, with the FOMC meeting and the jobs report on Friday. We also get productivity and employment costs, which is another huge number. We are also in the middle of earnings season with several heavyweights reporting this week. 

Steve Mnuchin doesn't appear to be interested in removing the Volcker Rule, which prohibits banks with FDIC backing to conduct proprietary trading. He does believe that it has restricted market liquidity in its implementation however and he is interested in tweaking it. Overall, it looks like Dodd-Frank will be fixed but not repealed. 

A war is brewing over the state of the CFPB. Donald Trump has yet to weigh in on the agency or the fate of Richard Cordray. Also, it is looking like the CFPB will be remade into a bipartisan board as well. 

80% of all mortgage borrowers are completely honest on their loan applications, according to a study by UBS. The inaccuracies generally fall into four buckets: overstated income, underreported debt, underreported expenses, and overstated assets. 

The NAR's quarterly survey of mortgage lenders is out, and problems with appraisers (or lack thereof) dominate the headaches. Over half of all respondents reported issues in this area, with 11% characterizing them as significant. One problem is the lack of new entrants, however 28% of lenders won't accept an appraisal done by a trainee, and 44% require direct supervision of all aspects performed by a trainee. Non-QM lending fell slightly during the quarter, however investor demand for the product is rising. Rising rates are expected to have some effect on purchase demand, however there is such tight supply that it shouldn't affect volumes overall. 

Home prices are now within 0.3% of their peaks on a national level according to Black Knight Financial Services. 

Morning Report: Pending home sales fall in November

Vital Statistics:

	Last	Change
S&P Futures	2266.5	5.5
Eurostoxx Index	361.3	0.8
Oil (WTI)	52.2	0.1
US dollar index	93.7	0.3
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 flat. 

Pending home sales fell 2.5% in November on rising mortgage rates and tight supply, according to the National Association of Realtors. They forecast existing home sales to hit just over 5.5 million in 2017, which works out to be a 10 year high. NAR anticipates that increasing wages will offset some of the problems with affordability. 

Same store sales increased 2.1% last week according to Johnson Redbook. Despite the increases in consumer confidence indices, it doesn't appear to be translating into actual buying. 

Bob Shiller (of Case-Shiller fame) thinks that next year could usher in a housing boom, provided some regulatory relief happens. Initially, he thinks that rising rates could accelerate home purchases, as buyers realize that waiting will mean higher house prices and higher rates. 

House flippers are making a comeback as well. The number of house flippers has reached a 9 year high, and average profits are up to 61k from 19k at the bottom of the market. About 1/3 are financed with debt, the highest level in 8 years. The market for home flipping loans is still relatively small compared to the vanilla home loan market, but it is expected to reach almost $50 billion this year. The banks don't seem to be making these loans directly, but are lending to smaller finance companies that do. Since these loans are non-owner occupied, a lot of the post-crisis regulations don't apply to them or the companies that make them. Rates are in the 7% - 12% range. 

Zillow is predicting a modest slowdown in home price appreciation. They are forecasting a 0.7% increase in November, which works out to be a 5.6% increase YOY. Most analysts are looking for a 3% - 5% increase in house prices for 2017. 

Here is a good summary of the various important housing charts, all in one place. 

The key to improving housing and mortgage lending next year is to bring back the private label securitization market. You can see below that private label securitization is still way below pre-bubble levels. Increasing interest rates could actually be a help as the risk-reward ratios of home lending decrease, which will bring in more investor money. More regulatory clarity will help issuers.