by Calculated Risk on 10/09/2018 06:08:00 PM

From Matthew Graham at Mortgage News Daily: Mortgage Rates Improve Slightly Today, But Risks Remain

Mortgage rates recovered a small portion of their recent losses today, but the average loan applicant might not even notice. The 2 key ingredients of a mortgage rate (for the purposes of tracking their movement) are the rate itself (the "note rate") and the upfront costs tied to that rate. The note rate and associated costs make up what many refer to as an "effective rate" (a number, expressed in interest rate form, that adjusts the actual note rate based on the implications of upfront cost changes.

It takes big market movement to change note rates, largely because lenders tend to offer rates in 0.125% increments. As such, bond yields such as 10yr Treasuries need to be moving by about that much in order to see a similar change in mortgage rates. That was the case last week as 10yr yields moved up nearly 0.25% in just a few days last week. The average mortgage lender also moved up 0.25% on 30yr fixed rate quotes.

If rates took the elevator up, they're taking the stairs down. Most borrowers will see a small adjustment toward lower upfront costs with the same interest rate they would have seen on Friday afternoon. [30YR FIXED - 5.0-5.125%]
emphasis added

Wednesday:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:30 AM, The Producer Price Index for September from the BLS. The consensus is a 0.2% increase in PPI, and a 0.2% increase in core PPI.

by Calculated Risk on 10/09/2018 12:41:00 PM

At the end of last year, I posted Ten Economic Questions for 2018. I followed up with a brief post on each question. The goal was to provide an overview of what I expected in 2018 (I don't have a crystal ball, but I think it helps to outline what I think will happen - and understand - and change my mind, when the outlook is wrong).

By request, here is a quick Q3 review. I've linked to my posts from the beginning of the year, with a brief excerpt and a few comments:

10) Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?

My sense is the low end of the housing market will be fine. The Mortgage Interest Deduction (MID) will be capped at interest on a mortgage up to $750,000 instead of $1,000,000, so the lower priced markets will not be hit by the reduction in the MID. There might be some additional taxes for these buyers due to the limits on SALT and property taxes, but this should be minor.

I also expect the high end of the market to be fine. The high end is already doing well even with the MID capped at $1 million. For these buyers, the bigger impact will be the SALT and property tax limitations, but there will be offsets for these buyers due to the lower rates - and these buyers will likely benefit from the corporate tax cuts.  Many of these buyers will also benefit from the changes to the Alternative Minimum Tax (AMT).

It is the upper-mid-range in the certain markets that will probably slow.  This might be in the $750,000 to $1.5 million price range.  These potential buyers probably don't benefit from the AMT or corporate changes, but they will likely be hit by the SALT and property tax limits. 

There isn't any clear evidence of an impact from the new tax law, although many areas  are now seeing a year-over-year increase in inventory - and that suggests that price growth will slow.

9) Question #9 for 2018: Will housing inventory increase or decrease in 2018?

I was wrong on inventory last year (and the previous year), but right now my guess is active inventory will increase in 2018 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in December 2018).   My reasons for expecting more inventory are 1) inventory is historically low (lowest for November since 2000), 2) and the recent changes to the tax law.

According to the August NAR report on existing home sales, inventory was up 2.7% year-over-year in August, and the months-of-supply was at 4.3 months.  Some areas, like Las Vegas, are reporting inventory up sharply year-over-year in September.    It appears inventory will be up year-over-year this year.

8) Question #8 for 2018: What will happen with house prices in 2018?

Inventories will probably remain low in 2018, although I expect inventories to increase on a year-over-year basis by December of 2018.  Low inventories, and a decent economy suggests further price increases in 2018.

Perhaps higher mortgage rates will slow price appreciation.  If we look back at the "taper tantrum" in 2013, price appreciation slowed somewhat over the next year - but that was from a high level.  In June 2013, the Case-Shiller National index was up 9.3% year-over-year.  By June 2014, the index was up 6.3% year-over-year.

If inventory increases year-over-year as I expect by December 2018, it seems likely that price appreciation will slow to the low-to-mid single digits.

If is early, but the CoreLogic data released last week showed prices up 5.5% year-over-year in August. This was the slowest appreciation in nearly two years.  It appears likely that price appreciation will slow as expected.

7) Question #7 for 2018: How much will Residential Investment increase?

Most analysts are looking for starts to increase to around 1.25 to 1.3 million in 2018, and for new home sales of around 650 thousand.

I also think there will be further growth in 2018. My guess is starts will increase to just over 1.25 million in 2018 and new home sales will be just over 650 thousand.

Through August, starts were up about 7% year-over-year compared to the same period in 2017, and on pace for about 1.3 million this year.  New home sales were also up about 7% year-over-year and on pace for about 640 thousand in 2018.

6) Question #6 for 2018: How much will wages increase in 2018?

As the labor market continues to tighten, we should see more wage pressure as companies have to compete for employees. I expect to see some further increases in both the Average hourly earning from the CES, and in the Atlanta Fed Wage Tracker.  Perhaps nominal wages will increase close to 3% in 2018 according to the CES.

Through September 2018, nominal hourly wages were up 2.8% year-over-year. This is slightly faster than last year, and it appears wages will increase at a slightly faster rate in 2018 than in 2017.

5) Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?

My current guess is the Fed will hike three times in 2018.

As an aside, many new Fed Chairs have faced a crisis early in their term.   A few examples, Paul Volcker took office in August 1979, and inflation hit almost 12% (up from 7.9% the year before), and the economy went into recession as Volcker raised rates.   Alan Greenspan took office in August 1987, and the stock market crashed almost 34% within a couple months of Greenspan taking office (including over 20% in one day!).  And Ben Bernanke took office in February 2006, just as house prices peaked - and he was challenged by the housing bust, great recession and financial crisis.

Hopefully Jerome Powell will see smoother sailing.

The Fed has already hiked three times in 2018, and it now appears there will be four hikes this year.

4) Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?

The Fed is projecting core PCE inflation will increase to 1.7% to 1.9% by Q4 2018.  However there are risks for higher inflation with the labor market near full employment, and new tax law providing some fiscal stimulus.

I do think there are structural reasons for low inflation, but currently I think PCE core inflation (year-over-year) will increase in 2018 and be closer to 2% by Q4 2018 (up from 1.4%), but too much inflation will still not be a serious concern in 2018.

As of August, inflation has moved up to the Fed's target.

3) Question #3 for 2018: What will the unemployment rate be in December 2018?

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline into the high 3's by December 2018 from the current 4.1%.   My guess is based on the participation rate declining about 0.2 percentage points in 2018, and for decent job growth in 2018, but less than in 2017.

The unemployment rate was at 3.7% in September.

2) Question #2 for 2018: Will job creation slow further in 2018?

So my forecast is for gains of around 150,000 to 167,000 payroll jobs per month in 2018 (about 1.8 million to 2.0 million year-over-year) .  Lower than in 2017, but another solid year for employment gains given current demographics.

Through September 2018, the economy has added 1,875,000 thousand jobs, or 208,000 per month. This is  above my forecast, and it appears the economy will add more jobs in 2018 than in 2017 although still below gains for the years 2014 through 2015.

1) Question #1 for 2018: How much will the economy grow in 2018?

It is possible that there will be a pickup in growth in 2018 due to a combination of factors.

The new tax policy should boost the economy a little in 2018, and there will probably be some further economic boost from oil sector investment in 2018 since oil prices have increased recently.  Also the housing recovery is ongoing, however auto sales are mostly moving sideways.

And demographics are improving (the prime working age population is growing about 0.5% per year, compared to declining a few years ago).

All these factors combined will probably push GDP growth into the mid-to-high 2% range in 2018.  And a 3% handle is possible if there is some pickup in productivity.

GDP growth was at 2.2% in Q1, and 4.2% in Q2.  Most estimates suggest growth in the mid to high 3s in Q3.   This would put GDP growth in the low 3s through Q3.

Currently it looks like 2018 is unfolding about as expected, although, employment gains will be somewhat higher than I originally expected.

by Calculated Risk on 10/09/2018 10:26:00 AM

Fannie Mae reported that the Single-Family Serious Delinquency rate decreased to 0.82% in August, down from 0.88% in July. The serious delinquency rate is down from 0.99% in August 2017.

These are mortgage loans that are "three monthly payments or more past due or in foreclosure". 

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

This is the lowest serious delinquency for Fannie Mae since September 2007.

Click on graph for larger image

By vintage, for loans made in 2004 or earlier (3% of portfolio), 2.71% are seriously delinquent. For loans made in 2005 through 2008 (5% of portfolio), 4.74% are seriously delinquent, For recent loans, originated in 2009 through 2018 (92% of portfolio), only 0.34% are seriously delinquent. So Fannie is still working through poor performing loans from the bubble years.

The increase late last year in the delinquency rate was due to the hurricanes - there were no worries about the overall market.

I expect the serious delinquency rate will probably decline to 0.5 to 0.7 percent or so to a cycle bottom.

Note: Freddie Mac reported earlier.

by Calculated Risk on 10/09/2018 08:25:00 AM

CR Note: Most of this survey is ideological noise, but there is some information, especially on the labor market and the "Single Most Important Problem".

From the National Federation of Independent Business (NFIB): September 2018 Report: Small Business Optimism Index

The NFIB Small Business Optimism Index continued its historic 23-month positive trend, with a reading of 107.9 in September, the third highest reading in the survey’s 45-year history.
..
A record net 37 percent of owners reported raising overall compensation, as reported in last week’s NFIB monthly jobs report. This surpasses the previous record of a net 35 percent in May 2018. Twenty-four percent plan to increase total compensation at their firm and six percent plan reductions. Sixty-one percent of owners reported hiring or trying to hire, with 87 percent of those reporting few or no qualified workers. Thirty-eight percent of owners reported job openings they could not fill in the current period, unchanged from last month.
…
Twenty-two percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, down 3 points but historically very high.
emphasis added

Click on graph for larger image.

This graph shows the small business optimism index since 1986.

The index decreased to 107.9 in September.

Note: Usually small business owners complain about taxes and regulations (currently 2nd and 3rd on the "Single Most Important Problem" list).  However, during the recession, "poor sales" was the top problem. Now the difficulty of finding qualified workers is the top problem.

by Calculated Risk on 10/08/2018 07:54:00 PM

Tuesday:
• At 6:00 AM ET, NFIB Small Business Optimism Index for September.

by Calculated Risk on 10/08/2018 02:08:00 PM

Here is another monthly update on framing lumber prices.   Lumber prices declined further in September from the recent record highs, and are now down year-over-year.

This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through October 5, 2018 (via NAHB), and 2) CME framing futures.

Click on graph for larger image in graph gallery.

Right now Random Lengths prices are down 12% from a year ago, and CME futures are also down 12% year-over-year.

There is a seasonal pattern for lumber prices. Prices frequently peak around May, and bottom around October or November - although there is quite a bit of seasonal variability.

by Calculated Risk on 10/08/2018 10:49:00 AM

This is a key former distressed market to follow since Las Vegas saw the largest price decline, following the housing bubble, of any of the Case-Shiller composite 20 cities.

The Greater Las Vegas Association of Realtors reported Southern Nevada home prices bounce back to hit $300,000 mark, GLVAR housing statistics for September 2018

After a sluggish summer, Southern Nevada home prices bounced back in September to hit $300,000 for the first time in more than 11 years, according to a report released today by the Greater Las Vegas Association of REALTORS® (GLVAR).
...
The total number of existing local homes, condos and townhomes sold during September was 3,005. Compared to one year ago, September sales were down 16.4 percent for homes and down 13.4 percent for condos and townhomes.
...
For the first time in years, Bishop said Southern Nevada now has more than a two-month supply of existing homes available for sale. A six-month supply would be a more balanced market, he added. By the end of September, GLVAR reported 6,148 single-family homes listed for sale without any sort of offer. That’s up 23.7 percent from one year ago. For condos and townhomes, the 1,356 properties listed without offers in September represented a hefty 99.4 percent increase from one year ago.
...
The number of so-called distressed sales continues to drop. GLVAR reported that short sales and foreclosures combined accounted for just 2.5 percent of all existing local home sales in September, down from 5.2 percent of all sales one year ago.
emphasis added

1) Overall sales were down 15.9% year-over-year from 3,571 in September 2017 to 3,881 in August 2018.

2) Active inventory (single-family and condos) is up sharply from a year ago, from a total of 5,649 in September 2017 to 7,504 in September 2018. Note: Total inventory was up 32.8% year-over-year.   This is a significant change in inventory.

3) Fewer distressed sales.

by Calculated Risk on 10/08/2018 08:37:00 AM

Black Knight released their Mortgage Monitor report for August today. According to Black Knight, 3.52% of mortgages were delinquent in August, down from 3.93% in August 2017. Black Knight also reported that 0.54% of mortgages were in the foreclosure process, down from 0.76% a year ago.

This gives a total of 4.06% delinquent or in foreclosure.

Press Release: Black Knight: 474,000 Mortgaged Properties in FEMA-Declared Disaster Areas Resulting from Hurricane Florence; VA Loans Disproportionately Represented

Today, the Data & Analytics division of Black Knight, Inc. released its latest Mortgage Monitor Report, based on data as of the end of August 2018. This month, in light of the devastating flooding experienced in North and South Carolina as a result of Hurricane Florence, Black Knight examined the potential mortgage-related impact that could follow. Looking at the 34 counties in those states declared disaster areas by the Federal Emergency Management Agency (FEMA) as of Sept. 28, and using last year’s hurricanes as a model, Black Knight’s analysis shows approximately 474,000 mortgaged properties in the impacted zone. As Ben Graboske, executive vice president of Black Knight’s Data & Analytics division explained, if the post-storm trajectory follows that of Hurricanes Harvey and Irma, thousands of Americans affected by Hurricane Florence could become past-due in the coming months.

“Although the situation in the Carolinas continues to evolve as we speak, we are beginning to get a sense of the potential scope of the storm’s impact from a mortgage performance aspect,” said Graboske. “As those affected by the storm begin recovery efforts, recent history suggests many will have some difficulty remaining current on their mortgages. Of the nearly 1.2 million properties in the 34 counties in the Carolinas thus far declared disaster areas by FEMA, approximately 474,000 have at least one mortgage. The majority – 80 percent – of these properties are in North Carolina, and account for more than 20 percent of the homes in that state. The remainder are in South Carolina. In general, while average home prices in these areas run $100,000 below the national average, they tend to be more heavily leveraged. Nationally, the average combined loan-to-value (CLTV) ratio is 51 percent, while in these FEMA-declared areas the average is 63 percent. As a whole, the area also had a higher-than-average delinquency rate of 4.4 percent going into the storm, as compared to the national average of 3.5 percent.
emphasis added

Click on graph for larger image.

Here is a graph from the Mortgage Monitor showing mortgage payment to income ratio.

From Black Knight:

• Interest rates hit 4.72% in the last week of September, a 7.5-year high [CR Note: Now above 5%]

• As of September, it now requires a $1,238 monthly P&I payment to purchase the average-priced home with a 20% down payment

• That marks a $168 increase to the average monthly payment since the start of the year

• The monthly payment needed to purchase the average home has risen by 16% so far in 2018, compared to just 3% for all of 2017, marking the fourth highest single year jump in 22 years, with 3 months still remaining in the year

• Factoring in income growth, it now requires 23.2% of median income to make the monthly payments on the average home purchase, up from 20.9% entering the year

• This is the first time the payment-to-income ratio has breached the 23% mark since August 2009, although it is still more affordable than the long-term average (1995-2003) of 25%

There is much more in the mortgage monitor.

by Calculated Risk on 10/07/2018 07:30:00 PM

Weekend:
• Schedule for Week of October 7, 2018

Monday:
• Columbus Day Holiday: Banks will be closed in observance of Columbus Day. The stock market will be open. No economic releases are scheduled.

From CNBC: Pre-Market Data and Bloomberg futures: S&P 500 are up 5 and DOW futures are up 40 (fair value).

Oil prices were up over the last week with WTI futures at $74.08 per barrel and Brent at $83.71 per barrel.  A year ago, WTI was at $50, and Brent was at $55 - so oil prices are up about 50% year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.91 per gallon. A year ago prices were at $2.47 per gallon, so gasoline prices are up 44 cents per gallon year-over-year.

by Calculated Risk on 10/07/2018 12:59:00 PM

Earlier - while I was hiking in Peru - the Census Bureau reported that overall construction spending increased slightly in August:

Construction spending during August 2018 was estimated at a seasonally adjusted annual rate of $1,318.5 billion, 0.1 percent above the revised July estimate of $1,317.4 billion. The August figure is 6.5 percent (±2.0 percent) above the August 2017 estimate of $1,237.5 billion.

Private spending decreased and public spending increased:

Spending on private construction was at a seasonally adjusted annual rate of $1,001.7 billion, 0.5 percent below the revised July estimate of $1,006.9 billion. ...

In August, the estimated seasonally adjusted annual rate of public construction spending was $316.7 billion, 2.0 percent above the revised July estimate of $310.5 billion.
emphasis added

Click on graph for larger image.

This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.

Private residential spending had been increasing - although has declined slightly recently - and is still 19% below the bubble peak.

Non-residential spending is 9% above the previous peak in January 2008 (nominal dollars).

Public construction spending is now 3% below the peak in March 2009, and 21% above the austerity low in February 2014.

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, private residential construction spending is up 4%. Non-residential spending is up 5% year-over-year. Public spending is up 14% year-over-year.

This was another disappointing construction spending report, especially for residential (although public spending has picked up recently).