FRM Update

August 20, 2018



Yield spreads on current production MBS underperformed Treasuries and widened slightly over the past week on a risk-off sentiment driven by geopolitical concerns.  Both 15- and 30-year MBS yield spreads to Treasuries were wider by 1 to 2 bps.

Although mortgage rates have been fairly steady in recent weeks, mortgage applications have continued to trend lower. Mortgage application volume fell 2.0% for the week, with volume declining 19.0% from the same week one year ago.  This marks the fifth weekly decline in purchase apps, matching the longest run since 2009.  Weakening home affordability and a supply-demand imbalance continues to weigh on activity.

The soft patch in housing continued last week with construction on new houses increasing by less than 1.0% in July.  Housing starts grew to an annual rate of 1.17 million during July, while most economists had expected starts to total 1.27 million.  Meanwhile, rising construction costs and skilled labor shortages sent homebuilder confidence levels down marginally.  The headline index moved down to 67 which marked its sixth monthly decline in 2018 and its lowest level in 11 months (64 in September 2017).

Most of the MBS trading activity last week continued to be concentrated on seasoned 15-year 2.5s and 3.0s, as investors sought after discounted paper with high scheduled cash flow.  15-year 2.5s have cheapened up 2 to 3 ticks during the last month.  The following represents a summary of the activity we observed last week:

FNMA DUS and Freddie K’s – The focus for FNMA DUS continues to be on 7-year finals with 5.0% coupons.  The trading in Freddie K’s has been on the 4- to 5-year part of the curve.  There has also been some renewed interest in Freddie K floaters, as spreads have widened over the past few months and have now reached levels that were last seen back in mid-November 2017.  During 2018, the most commonly issued floating rate structures have been the 7-year maturities with 2- or 3-year interest only periods and 10-year maturities with a 5-year interest only period.




Mortgage Rates and Refinance Activity



Housing:

Mortgage Applications Continue to Struggle on Higher Rates: Mortgage applications for the week ending August 10 fell 2.0% on a 3.3% decline in purchase applications and unchanged applications for refinance.  This marks the fifth weekly decline in purchase apps, matching the longest run since 2009.  On a 4w/4w basis, purchase applications are now down 9.5% over the past three months and point to a 7% decline in home sales over the coming months.  The 30-year mortgage rate peaked three months ago at 4.86% and has since held near that level, now at 4.81% in the August 10 report.

Housing Starts Disappoint but Permits Offer Hope: July’s housing starts data disappointed expectations, rising just 0.9% after falling 12.9% in June.  Economists expected new starts to rebound 7.4%.   Starts in the West declined 19.6% and were down 4.0% in the Northeast.  On the flip side, new construction increased 11.6% in the Midwest and 10.4% in the South.   On a year-over-year basis, starts are now down 1.7% on a 3.0% increase in single family but a 13.3% drop in multi-family. The pace of new housing starts has been choppy, as it always is, but the trends point to a weaker pace of gains led, particularly, by weaker multi-family activity.  On a positive note, building permits actually rose 1.5% in July while June’s 2.2% decline was revised up to -0.7%.  The only region that saw a month-over-month decline in permits was the South, where they fell 0.3% on a decline in multi-family permits.  On a year-over-year basis, permits for new construction are now up 10.8% as single family permits are 12.1% higher, offsetting a 23.9% decline in multi-family.

Homebuilder Confidence Hit an 11-Month Low in August: As expected, the National Association of Homebuilders reported a 1-point decline in its housing market index for the month of August. The headline index moved down to 67 which marked its sixth monthly decline in 2018 and its lowest level in 11 months (64 in September 2017). Residential investment declined in the initial GDP release for 2Q and has dropped in four of the last five quarters. The recent trends in the housing data have drawn attention back to continued strains on affordability from too little supply and higher mortgage rates. The details of Wednesday’s homebuilder report should do little to assuage the concerns that the housing data will remain weak in the coming months. The indexes tracking current sales and those expected six months from now both slipped 1-point. The current sales index fell to an 11-month low while the future sales index edged down to a 21-month low (November 2016). Foot traffic from potential buyers also cooled, with the related index at its lowest level in 10 months.



Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120