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Michael Nelson

Efficient Lending.net

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mike@efficientlending.net

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Weekly Review

The stock market turned in a mixed performance for the week with the Dow Jones Industrial Average and the S&P 500 Index both recording new all-time highs while the technology-laden Nasdaq Composite Index and some of the smaller-cap indexes recorded modest losses.  The bond market slid lower with yields rising.  The solid performance in larger-cap stocks took place as investors shrugged off a further escalation in the trade conflict between the U.S. and China.

Last Monday evening President Trump announced the U.S. will be enacting tariffs on $200 billion worth of Chinese goods beginning September 24 at an initial rate of 10% that will increase to 25% on January 1, 2019.  The president also declared he will impose additional tariffs on $267 billion worth of Chinese goods if China retaliates, which it stated it would do with 5-10% tariffs on $60 billion worth of U.S. goods.

Stocks traded unexpectedly higher on Tuesday following Monday’s tariff announcement as a number of analysts suggested the initial 10% tariff rate by the U.S. was not as severe as expected and appeared to be a negotiating strategy.  Regardless, investor activities likely reflected the market's conviction that the trade disagreements between the U.S. and China will eventually be resolved.

Wednesday, the Commerce Department reported Housing Starts rose 9.2% in August to a seasonally adjusted annual rate of 1.282 million, exceeding the consensus forecast of a 1.229 million annual rate.  However, monthly housing starts numbers are notoriously volatile and August’s housing starts number was driven by an outsized spike in apartment building that camouflaged weakening across single- and multifamily construction.  

Single-family housing starts in August increased by 1.9% to a seasonally adjusted annual rate of 876,000 units while multifamily starts skyrocketed 27.3% to an adjusted annual rate of 392,000 units.  The 27% spike in multifamily starts inflates top-line numbers and covers a developing down trend in permits issued.

 Total Building Permits declined 5.7% from July to August to a seasonally adjusted annual rate of 1.229 million and were below the consensus estimate of 1.310 million.  Single-family permits fell 6.1% and multifamily permits declined down 4.9% for the month.  Quoting from Wells Fargo Economics Group’s analysis of the August housing numbers, “Permits are now running below Starts, suggesting homebuilding is losing momentum.”

Thursday, the National Association of Realtors (NAR) reported Existing Home Sales held steady in August at a seasonally adjusted annual 5.34 million pace, a rate that was unchanged compared to July.  Total sales were 1.5% lower than a year ago, and although sales seem to have grind to a halt in 2018, in the year-to-date reading they’re only 1.2% lower than the same period a year ago.  The flat reading missed the consensus forecast of a 5.37 million rate.

The median existing home price for all housing types increased 4.6% to $264,800, marking the 78th straight month of year-over-year gains.  The median existing single-family home price was $267,300, up 4.9% from a year ago.  The inventory of homes for sale at the end of August was unchanged at 1.92 million remaining 2.7% higher from a year ago.  Unsold inventory remained at a 4.3-month supply for the third consecutive month.  This is below the 6.0-month supply typically associated with a more balanced market.  NAR Chief Economist Lawrence Yun remarked “the housing market seems to be wobbling toward some equilibrium.  Prices are still rising, rising, rising, but at a slightly slower pace.”

However, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), a measure of home-builder confidence, may portray current housing-market conditions the best. Survey results are transformed into an index where any score over 50 indicates more builders view conditions as good than poor.  Tuesday, the September HMI was reported at a solidly positive 67 matching August’s number.  The HMI index measuring current sales conditions rose one point to 74 and the component gauging expectations in the next six months increased two points to 74. Further, the metric charting buyer traffic held steady at 49.  Moving forward, there are expectations for some housing market disruption effects due to the impact of Hurricane Florence.  Single-family construction in North Carolina, South Carolina and Virginia makes up 12% of national production.

Elsewhere, the latest data from the Mortgage Bankers Association’s (MBA) weekly mortgage applications survey showed an increase in mortgage applications.  The MBA reported their overall seasonally adjusted Market Composite Index (application volume) rose 1.6% during the week ended September 14, 2018.  The seasonally adjusted Purchase Index increased 0.3% from the week prior while the Refinance Index increased 4.0% from a week earlier.

Overall, the refinance portion of mortgage activity increased to 39.0% from 37.8% of total applications from the prior week.  The adjustable-rate mortgage share of activity increased to 6.5% from 6.4% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 4.88% from 4.84%, its highest level since April 2011, with points decreasing to 0.44 from 0.46 for 80 percent loan-to-value ratio (LTV) loans.

For the week, the FNMA 4.0% coupon bond lost 26.5 basis points to close at $100.844 while the 10-year Treasury yield increased 6.60 basis points to end at 3.066%.  The Dow Jones Industrial Average gained 588.83 points to close at 26,743.50.  The NASDAQ Composite Index lost 23.08 points to close at 7,986.96.  The S&P 500 Index added 24.69 points to close at 2,929.67.  Year to date on a total return basis, the Dow Jones Industrial Average has gained 8.19%, the NASDAQ Composite Index has advanced 15.70%, and the S&P 500 Index has added 9.58%.

This past week, the national average 30-year mortgage rate rose to 4.85% from 4.74%; the 15-year mortgage rate increased to 4.30% from 4.22%; the 5/1 ARM mortgage rate rose to 4.05% from 4.02% while the FHA 30-year rate increased to 4.48% from 4.42%.  Jumbo 30-year rates increased to 4.40% from 4.37%.

Economic Calendar - for the Week of September 24, 2018

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

Date

Time

ET

Event /Report /Statistic

For

Market Expects

Prior

Sep 25

09:00

FHFA Housing Price Index

July

0.2%

0.2%

Sep 25

09:00

S&P Case-Shiller Home Price Index

July

6.2%

6.3%

Sep 25

10:00

Consumer Confidence Index

Sept

131.0

133.4

Sep 26

07:00

MBA Mortgage Applications Index

09/22

NA

1.6%

Sep 26

10:00

New Home Sales

Aug

630,000

627,000

Sep 26

10:30

Crude Oil Inventories

09/22

NA

-2.1M

Sep 26

14:00

FOMC Rate Decision

Sept

2.125%

1.875%

Sep 27

08:30

Advance International Trade in Goods

Aug

-$71.0B

-$72.2B

Sep 27

08:30

Advance Retail Inventories

Aug

NA

0.4%

Sep 27

08:30

Advance Wholesale Inventories

Aug

NA

0.7%

Sep 27

08:30

Initial Jobless Claims

09/22

209,000

201,000

Sep 27

08:30

Continuing Jobless Claims

09/15

NA

1,645K

Sep 27

08:30

Durable Goods Orders

Aug

1.8%

-1.7%

Sep 27

08:30

Durable Goods Orders excluding transportation

Aug

0.4%

0.2%

Sep 27

08:30

3rd Estimate for 2nd Quarter GDP

Qtr. 2

4.3%

4.2%

Sep 27

08:30

3rd Estimate for 2nd Quarter GDP Deflator

Qtr. 2

3.0%

3.0%

Sep 27

10:00

Pending Home Sales

Aug

-0.4%

-0.7%

Sep 28

08:30

PCE Prices

Aug

0.1%

0.1%

Sep 28

08:30

Core PCE Prices

Aug

0.1%

0.2%

Sep 28

08:30

Personal Income

Aug

0.4%

0.3%

Sep 28

08:30

Personal Spending

Aug

0.3%

0.4%

Sep 28

10:00

Final Est. Univ. of Mich. Consumer Sentiment Index

Sept

100.5

100.8

Mortgage Rate Forecast with Chart - FNMA 30-Year 4.0% Coupon Bond

The FNMA 30-year 4.0% coupon bond ($100.844, -26.50 bp) traded within a wider 54.7 basis point range between a weekly intraday high of 101.156 on Monday and a weekly intraday low of $100.609 on Wednesday before closing the week at $100.844 on Friday.  Mortgage bond prices trended lower until reaching technical support found at the 100% Fibonacci retracement level located at $100.609.  The bond then made a small bounce off of this support level on Thursday and Friday resulting in a weak buy signal.  The bond remains extremely “oversold” and thus could continue to make a run higher toward resistance at $101.15.  Such a rebound toward nearest technical resistance would have a positive influence on the mortgage bond market resulting in slightly lower rates.