Dec. 24: Vendor partnership; repo activity, household debt, tariffs, and shelter costs in the capital markets

Where are the well-known Democratic presidential hopefuls on housing issues? As with most politicians, it’s a little vague. While we’re on politics, regardless of gender, Senators make $174,000 per year, plus lots of benefits. The President’s comp is $400k, if they take it, plus even more benefits, also regardless of gender. While workers with a bachelor’s degree earn about double that of their co-workers without a college education, the difference between men’s and women’s earnings actually widens with more education, as women unfortunately earn 74 cents for every dollar men make, which is less than the 78 cents for workers without the college degree. The influx in recent decades of college-educated women has driven their numbers to record levels. In fact, the number of women working full time, year-round with a bachelor’s degree is almost equal to men’s (18 million women and 21 million men), and women are more likely to have a bachelor’s degree than men (41.7 percent compared with 36.2 percent) among full-time, year-round workers.

Vendor partnership

How do you take a one-time transaction and turn it into a lifetime relationship? Mortgage lenders are tasked with connecting with their customers on a personal level, earning their trust, and proving they are their trusted financial partner, for life. Total Expert has announced its exclusive partnership with The Mortgage Collaborative (TMC) as its Preferred Partner for customer engagement and marketing automation. The Total Expert Marketing Operating System® (MOS) humanizes complex financial transactions, delivering value to customers throughout their financial journey. “We are thrilled to be reinforcing our mutual commitment to transforming the industry with innovative solutions and powerful insights that create efficiencies and increase ROI,” said Jeff Walton, President at Total Expert. Total Expert will also be the Opening Reception sponsor at TMC’s Winter Conference on Feb. 16-18 in New Orleans. Read the full partnership announcement.

Capital markets

The yield curve was inverted for four months in 2019. Does it matter in terms of predicting a recession? We’ll see, but there are other economic activities that originators should be aware of.

CoreLogic took a deeper look at how specific regions were hit during and after the Great Recession to show the economic evolution and the role the housing market has played. Some interesting trends CoreLogic identified include: In 2009, home prices dropped by 11.2 percent nationally, with Nevada experiencing the largest decline (-25.5 percent), followed by Arizona (-21.3 percent), Florida (-19.7 percent) and California (-14.5 percent). North and South Dakota were the only states to see any annual growth in 2009, but in June 2019, North Dakota experienced only 0.7 percent annual home price increase while South Dakota had an annual decrease of -4.7 percent.

As California goes, so goes the nation? While California’s home prices grew considerably from 2013 to 2018, the state’s average annual home prices have fallen off mostly due to affordability issues. That isn’t the case in all western states, as Idaho and Nevada not only became the fastest-growing states, but they also led the country in annual home price growth from 2018 to 2019. About 32 percent of the 392 metro areas analyzed were overvalued in May 2019. For comparison, in September 2006, this figure was over 70 percent.

CoreLogic considered home prices in individual markets as undervalued, at value or overvalued, by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income). Millennial homebuyers are moving away from overvalued markets and toward more affordable areas. Of the top 10 metros for millennial buyers in May 2019, four were undervalued and five were at value, with only Salt Lake City being overvalued. CoreLogic next expects the housing market to enter a normalcy phase over the next 24 months, with prices neither rising too fast nor too slow, and a healthy housing market for the next couple decades with a growing stream of young households looking to buy homes.

Despite the muted inflation figures of this current economic expansion, most consumers’ largest expense, housing costs have risen faster than all other major categories of expenditures. That is until recently, as home price appreciation has slowed dramatically over the last year, potentially dragging overall inflation down just as core inflation seems to finally be in line with the Fed’s 2 percent target. Core CPI over the last year is running at the fastest pace of the current economic expansion, but shelter costs account for about one-third of the overall figure. Compare that one-third to goods directly exposed to tariffs, which are less than one-tenth of the overall figure, and you get a sense of why slowing home appreciation may be such a troubling trend.

Shelter costs have been rising at over 3 percent for the last four years, accounting for about 60 percent of inflation over that time, and adding more than a full percentage point to headline CPI inflation. But the slowdown in home price appreciation since early 2018 will eventually drag on core CPI inflation, though hopefully modestly, as sales have firmed recently and income growth has remained decent. Additionally, housing costs as measured by official inflation indices aren’t particularly representative of consumers’ costs, as homeowners with a fixed-rate mortgage or no mortgage do not see a rise in their housing costs consummate with official indices. Remember, housing holds significant sway over inflation and thus central bank policy. But with low vacancies and strong demand amid steady wage growth, housing costs should not derail inflation too far from the Fed’s target.

Turning to what is moving rates… Now, with the full value of many finished goods subject to tariffs, there is less scope for businesses to absorb the additional cost. Retailers and wholesalers already operate under thinner margins than manufacturers, meaning some of the tariffs that importers pay will be passed on to consumers via higher prices. The fact that higher prices for consumer goods might be lurking around the corner does not mean that consumer spending is going to fall off the map because of the tariffs, but higher prices will either lead to lower sales of these items (the same amount could be spent on less goods), a decline in other spending categories, or result in a lower saving rate.

The latest escalation in the trade war likely means that after so much effort in previous rounds to avoid collateral damage to consumer confidence and spending, consumers are now in the crossfire of the trade war. Higher prices alone may not derail consumer spending, but to the extent that higher prices get into consumers’ heads it could weigh on sentiment and eventually spending. As a result, until trade tensions dissipate, the FOMC is likely not finished with its “mid-cycle adjustment(s).”

Anyone reading this commentary is happy that people incur debt in buying homes. But on a bigger scale, how worried should we be over financial sector debt? Leverage in the financial sector increased significantly in the years leading up to the financial crisis, and the rise in debt was especially notable around GSE associated mortgage pools and issuers of asset-backed securities. The size of the sector mushroomed from $15 trillion in 1990 to $70 trillion on the eve of the financial crisis. Debt in the U.S. financial sector exploded from $2.5 trillion in early 1990 to more than $18 trillion at its peak in 2008, nearly doubling the sector’s debt-to-asset ratio, and tripling it as a percent of GDP.

Debt in the financial sector, however, currently stands nearly $2 trillion lower than at its peak ten years ago, and the debt-to-GDP ratio of the sector has receded to a 20-year low and sits at less than 80 percent today from nearly 125 percent in 2008. Commercial banks and other depository institutions are now relying more heavily on checking and savings deposits, which are non-debt liabilities, to finance their assets than they were a decade ago. Because deposits tend to be a more stable form of financing than short-term debt instruments, the banking sector is not as vulnerable today as it was prior to the financial crisis. The household debt- to-income ratio has receded by more than 30 percentage points since its peak in 2008, and the financial obligations ratio of the household sector currently stands near a four-decade low. Widespread defaults by households on their mortgage debt does not seem to be in the cards as the debt- to-GDP ratio of the financial sector is down by nearly 50 percentage points.

 

In the bond market, remember, the Federal Reserve’s recent balance sheet expansion is not quantitative easing (QE) despite the mechanics appearing similar. Repo market volatility over the past couple months caused the FOMC to officially announce in October it will conduct overnight and term repo operations to ensure that the supply of reserves remains ample through at least January 2020. The Fed has been conducting overnight and term repo operations since repo rates skyrocketed on September 16th, causing its balance sheet to grow for the first time since 2013.

Fed officials have repeatedly emphasized that these purchases are not QE, as the main motivation is to add banking reserves to the system, and not to put downward pressure on long-term interest rates, as was the case in previous asset purchase programs. Funding pressures are expected to be most acute until year-end, at which it is expected the Fed will gradually scale back its purchases.

The commitment to purchase T-bills at least into Q2 of next year is because it will take a few months before the impact of more reserves/fewer Treasury securities to be fully felt, and the Fed wants to maintain ample reserve balances at or above the level that prevailed in early September 2019 over time. The end result will be the Fed going from owning a tiny share of the T-bill market to around one-sixth in just six months. These policy moves have not necessarily altered rate cut projections.

Looking at the actual bond market, U.S. Treasuries, and Agency MBS, pulled back slightly to open this holiday week on reports more encouraging U.S./China headlines. China announced that it was cutting import tariffs on nearly 900 products beginning January 1, while President Trump said over the weekend that a phase one deal would be signed “very shortly.”

While that was positive news, it wasn’t all rosy for markets, as the Commerce Department revealed an unexpected decline (-2.0 percent) in Durable Goods for November, a key measure of the health of the manufacturing sector. Economists expected a jump of 1.2 percent. The reading will negatively factor into GDP computations. Additionally, New Home sales in November missed the mark due to a lack of available supply at more affordable price points, which hurts first-time homebuyers.

 

Data today consists of just the December Philly Fed non-manufacturing firm and region indexes and December Richmond Fed manufacturing and services indexes later this morning. There will also be a $41 billion 5-year Treasury note auction before the bond market closes at 14:00 ET/11 AM PT. We begin the day with both Agency MBS prices and the 10-year (1.94 percent) roughly unchanged from Monday’s close.

(Thank you to Wes M. for this!)

T’was the week before Christmas,

And all through the branch

Every Employee was stirring

Not even a lunch!

The appraisals were ordered out

By Pre-Processing with care

And we all hoped the 4506T’s

Soon would be there.

The pdf’s were nestled

All snug in my SCANS

While visions of commission checks

Were popped in my hands.

And Lorrie in her kerchief,

And I in my cap,

Had just settled down

And started to rap.

When over in Underwriting,

There arose such a clatter,

I sprang from my desk

To see what was the matter.

Well it seems that borrower

Had written a letter

But the spelling was poor,

And the grammar wasn’t much better.

The lights on the tree

With the pretty fake snow

Gave the luster of suspension

To Jane and John Doe.

When, what to my wondering eyes should be clear,

Was muddled and confusing

To those gathered here.

So with a little conversation log

I explained their dilemma,

They were simply getting a Gift

From dear old Aunt Emma.

More rapid than eagles

Their praises they came,

And they whistled, and shouted,

And called out some names;

Now Jason! Now Sue!

Now Zach and Christine!

On, Jennifer! On William,

On Laura in jeans.

To the top of the stack

To the top of the wall!

Now Clear away! Clear away!

Clear away all!

As dry leaves that before

The wild hurricane fly,

When they meet with an obstacle,

Mount to the sky,

So up to the branch top

The Closers they Closed,

With their emails full of loans,

And CD’s by a nose.

And then, in a twinkling,

My loan was approved,

Almost a 1 and done

But the buyers still had to move.

So I called up their agent,

Said we’re almost there,

And I’ll get this done

Even if I lose all my hair.

Then finally the next day,

As I wrapped up this prose,

I heard the jingle of bells,

When Jacque said, “Clear To Close!”

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Politics do Indeed Impact Interest Rates and Borrowers” If you have the inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.

Rob

(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are hundreds of mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2019 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)

Rob Chrisman