Morning Report: The problem of the unaffordable starter home.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2049.1	-4.2	-0.21%
Eurostoxx Index	3016.5	-45.5	-1.49%
Oil (WTI)	39.01	0.5	1.43%
LIBOR	0.642	0.002	0.38%
US Dollar Index (DXY)	95.03	-0.860	-0.90%
10 Year Govt Bond Yield	1.89%	-0.02%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.70

Markets are weaker this morning after a terrorist attack in Brussels leaves 35 dead. Bonds and MBS are up.

The FHFA House Price Index rose 0.5% last month. House prices have recouped all of their losses from the housing bust and are making new highs. Note the FHFA House Price Index is the only one showing the losses have been recouped - Case Shiller, and Core Logic have not. 

You can also see the huge geographic disparity between the different regions in the US. The Northeast (which includes New England and the Middle Atlantic) are picking up the rear compared to the other parts of the country. As someone who grew up in the Rust Belt, I am beginning to notice similarities in the Northeast. 

In other economic data, the Richmond Fed Manufacturing Index improved last month, and the Markit US Manufacturing PMI was flat. 

We are well aware there is a problem with the first time homebuyer. They are saddled with large student loan debt, and are under-employed for the most part. The other big issue - low housing inventory is making the starter home unaffordable. When you look at the expensive areas, it gets ridiculous. The mortgage payment for a starter home in San Francisco (admittedly an extreme example) would run someone 110% of median income! I have said it before: the difference between 2% GDP growth and 3% GDP growth is housing. To address the dearth of inventory, we should have a run rate of 2 million starts a year. Yet we remain mired around 1.2 million. It obviously isn't an oversupply issue - it is a credit issue. Yet the consensus seems to be that the financial sector remains "unregulated" and needs to be reined in. You would think politicians would like to see 3% economic growth but apparently they don't.

Over half of US homes are now built in community associations. Issues over the creditor priority HOA claims over mortgages have been an issue in some states, apparently.

More evidence that the cheap labor arbitrage for China is about over. 

Morning Report - The dearth of starter home construction

Vital Statistics:

	Last	Change	Percent
S&P Futures	2102.6	-6.6	-0.31%
Eurostoxx Index	3573.8	-1.2	-0.03%
Oil (WTI)	60.93	0.7	1.21%
LIBOR	0.284	0.001	0.35%
US Dollar Index (DXY)	96.2	-1.189	-1.22%
10 Year Govt Bond Yield	2.23%	0.05%
Current Coupon Ginnie Mae TBA	101.7	-0.3
Current Coupon Fannie Mae TBA	100.7	-0.3
BankRate 30 Year Fixed Rate Mortgage	3.88

Stocks are lower this morning as European stocks and bond fall on some strong inflationary numbers. US Treasuries and MBS are lower as well.

Looks like we have dueling proposals to address the Greek situation. The parties are still a ways away from agreeing to anything. 

The ISM New York fell to 54 from 58 last month. Factory orders fell 0.4% in April. 

Economic Optimism fell to 48.1 from 49.7, according to IBD / TIPP. A reading of 50 is considered neutral, so consumers still feel slightly depressed about the state of the economy. If you dig into the data, the mood about the economy in general is somewhat negative, people's personal financial situation are slightly positive, and their view of government economic policy is highly negative.

May auto sales are coming better than expected. Ford is still negative, while Chrysler Fiat is up small. GM was up 3%. Surprisingly, this is the best May in 8 years. That said, with the average age of a US car at 11.4 years, I guess the comps are pretty easy.

An interesting stat demonstrates the lack of starter homes on the market. 10 years ago, about a quarter of new homes had 3 or more bathrooms. Today, that number is 36%. The average size of a new home has increased by something like 140 square feet since the crisis. If you look at the homebuilders, Toll Brothers has been seeing all the action, while the more diversified builders like D.R. Horton and Pulte are only recently beginning to focus on the first time homebuyer. Here are all sorts of fun facts about new construction, courtesy of the Census Bureau. This speaks to both sides of the income inequality debate that has been raging in Washington. If you are an aging baby boomer with assets, QE has been very good to you. If you are a Millennial, the results are mixed at best. You had a very narrow window to pick up a bargain in the real estate market and it closed very quickly. Now house prices are again over their skis relative to incomes. In fact, Bank of America is expecting slightly negative house price growth in 2017-2019 as income growth fails to materialize. What is a Millennial with a bunch of student loan debt to do? Go to Atlanta, Dallas, or Houston.