With the holiday shopping season entering it’s final week, the November personal income and spending numbers due this Friday will give us an indication of how the early days of the season went. Those results may give us a feel for how the season started, but with the late Thanksgiving this year, the real retail fireworks will come in the December numbers. While we look for signs of strong consumer spending, and our anecdotal research finds the malls and roads chock-full, we turn to the housing market today and find numbers this week that have mostly been solid, if not downright encouraging. Industrial production numbers too appear solid for November but that might change in coming months with Boeing halting 737 Max production in January and all the ancillary activity that goes with it. That will likely keep the manufacturing sector in a spot of bother as the calendar flips to 2020. We explore those topics and more below.
- Housing activity has noticeably picked-up in recent months after the Fed moved from hiking to pausing to cutting rates during the course of the year. Another example of that was the housing starts and permits for November. Starts beat expectations by increasing 3.2% while the prior month was revised higher. Permits rose by 1.4%—to a new cycle high— when a –3.5% decrease was expected. Single-family permits increased for the seventh consecutive month. What’s more encouraging too is the steady increase in single-family starts. Often this series gets whipped around by multi-family volatility, and while that continues, the single-family segment continues to post steady month-over-month gains. Thus, limited housing inventory, which has been blamed for holding back sales activity, should begin expanding providing more housing options to potential buyers.
- In conjunction with the starts and permits numbers, the National Association of Home Builders Index for December hit a 20-year high on Monday. The potent elixir of limited inventory, low mortgage rates, and moderate wage gains for consumers have home builders feeling giddy that the good times from 2019 will continue well into 2020. That activity should provide new housing stock for both first-time homebuyers and those looking to move up.
- Away from housing, industrial production for November came in slightly ahead of projections growing 1.1% versus an expected 0.9% MoM gain. Excluding the volatile utility segment, manufacturing also posted a modest beat at 1.1% versus 0.8% expected. While those nascent gains might look encouraging as we turn the calendar to 2020 and a détente, of sorts, in the China trade war, the Boeing 737 Max news will provide another headwind. Management’s decision to halt the 737 Max production lines in January will weigh on the overall manufacturing sector. While Boeing has called the halt temporary, they also haven’t announced a resumption date either so it’s hard to say how long the drag continues but it looks like manufacturing will continue to remain in the doldrums in early 2020.
- The latest Job Openings and Labor Turnover Survey for October paints another picture of a labor market operating on all cylinders. The number of unfilled jobs rose by 235,000 to 7.27 million, easily beating the 7.0 million forecast. The pick-up from a 1 1/2 year low in September shows job openings are stabilizing after drifting lower earlier in the year. The Quits Rate, (those leaving voluntarily as a percent of total workers), remained at 2.3% for a second straight month after peaking at 2.4%. The high rate shows workers are confident they’ll find new and better jobs after leaving voluntarily.
Assessing Prepayment Risk in MBS
Housing activity has noticeably picked-up after the Fed moved from hiking to pausing to cutting rates during the course of the year. As we mentioned on the previous page housing starts and permits for November beat expectations, and the National Association of Home Builders Index for December hit a 20-year high. As construction activity accelerates it will provide new housing stock for both first-time homebuyers and those looking to move up.
The first issue we want to consider is the importance of vintage year (the year a loan is originated) and the subsequent refinance/pay-off risk given the yearly range in mortgage rates. The graph tracks the average FHLMC 30yr mortgage rate (blue line) and the MBA Refinance Index (white line) since 2011. Mortgage rates peaked in late 2018 near 4.85% but today rates are 3.73%. As the 30yr rate tracked lower during 2019, the number of refinances has steadily increased (white line). That’s one big reason we’re cautious about premium coupon MBS pools originated in 2018 given the incentive those underlying borrowers have to refinance. The other big takeaway from the housing numbers this week is the likelihood of more pay-off activity from move-up buyers given the housing starts, permits and home builder stats. That cohort is more difficult to game than the rate incentive group but it would seem prepays in general are likely to increase which points to caution over high-premium pools and how they may underperform in an accelerating prepayment environment.
If you’re looking to add MBS exposure to your portfolio and/or review your current holdings in light of possible increases in prepayments please contact your CenterState Bank representative to assist in exploring investment options as well as analyzing current holdings.
Agency Indications — FNMA / FHLMC Callable Rates
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