Friday, February 11, 2011
Thursday, February 10, 2011
Back In Black: Economy Moves From Recovery To Expansion
Key points
- Real GDP moves from recovery to expansion, but growth remains below potential.
- Inflation concerns globally replacing double-dip recession concerns as key theme in 2011.
- Egyptian unrest and rising volatility could further temper optimism, which could bring back the "wall of worry" the stock market likes to climb.
Real GDP Surpasses Prior High
Click to enlarge
Source: Bureau of Economic Analysis and FactSet, as of December 31, 2010. As you can see in the chart below, this was the longest stretch in at least 60 years for this move into expansion to occur. The good news (potentially) is that, historically, expansions have lasted at least three years.
Long Time Between Recovery and Expansion
Click to enlarge
Source: Bespoke Investment Group (B.I.G.), as of December 31, 2010. The latest news on the economy should further put to rest the bears' theme of 2010: double-dip recession. However, the civil unrest in Egypt adds to the bears' theme of 2011: global inflation. Let's start with the economy and, later in this report, I'll move on to inflation.
Strong consumption likely to ebb this year Real gross domestic product (GDP) was reported as initially up 3.2% in last year's fourth quarter (remember, there will be two subsequent revisions). This was light relative to the 3.5% consensus expectation, with the drop in inventory accumulation taking away 3.7 percentage points from growth.
There was a huge 7.1% surge in "real final sales," which is basically everything we buy, excluding changes in the aforementioned inventories. That jump was the highest since the second quarter of 1984. The net reading for personal consumption was 4.4%, which was the largest increase in five years.
However, to get these big jumps, the savings rate fell a bit, to 5.4% from 5.9%. That's still up sharply from its negative reading before the financial crisis erupted, but it would have been better to see a sales increase coming alongside income growth, not a reduction in the savings rate.
Real disposable incomes were only up 1.7% in the fourth quarter, and some of that was government transfer payments.
And, after a year and a half of consistent consumer debt retrenchment, consumer credit has been rising during the past two months. This is not a recipe that suggests continued robust strength in consumption.
To round out the summary of the GDP report:
- In addition to personal consumption moving to new highs, so did federal government spending (shocker, I know).
- Also back to their previous highs were business spending and exports.
- State and local government spending has been flat for the past 10 years, following a 33% increase during the 1990s.
- Net trade was a big positive last quarter, with exports up over 8% and imports down over 13% (reflecting the slowdown in inventory-building).
- Still at recession lows are private residential investment and business spending on structures (two key real-estate components).
On the other hand, the construction-related side of our economy is still mired in recessionary conditions. It's a bifurcated economy.
We know the overall economy continues to operate below potential. Take a look at the chart below, which makes this painfully clear.
Economy Still Operating Below Potential
Click to enlarge
Source: FactSet and Ned Davis Research, Inc. (Further distribution prohibited without prior permission. Copyright 2011 Ned Davis Research, Inc. All rights reserved.), as of December 31, 2010. Output gap = potential GDP using Congressional Budget Office estimates less actual GDP.
Headline inflation heats up with Egypt's unrest … Lest you see little good in what I've written so far, such a large output gap will help keep a lid on core inflation. A growing concern, and partly to blame for Egypt's turmoil, is the rapid pace at which food and energy inflation is rising.
Unfortunately, it's becoming a vicious circle as the escalating civil unrest is contributing to even-higher commodity prices, especially oil, given fears of a Suez Canal closure (the route through which a lot of exported oil travels, especially bound for Europe).
… but core inflation remains subdued
We've been consistent in our view that rising food and energy prices will not bleed into broader core inflation any time soon. This is a function both of the aforementioned output gap and the absence of strength in the money multiplier (or velocity of money), about which I've written extensively.
I don't diminish the economic impact of rising commodity prices, which will undoubtedly hit the consumer and in turn the consumption component of GDP. They could also affect corporate profit margins, for those companies with the most limited pricing power.
However, the reason we separate core (excludes food and energy) and headline inflation is because of the impact it has on monetary policy.
Commodity prices are set by global forces and there's little the Federal Reserve can do to rein them in. The Fed is also aware that raising interest rates to combat commodity inflation would both not likely work, but would also put an additional crimp in economic growth.
As such, there should be no expectation the Fed will preemptively try to beat down commodity inflation with its rate stick. Those central banks globally that are tightening policy are generally doing so for other reasons too, including excess lending growth as in China.
The GDP deflator increased only 0.3% in the fourth quarter of 2010, while the core consumer price deflator was up only slightly more at 0.4%. Looking ahead, leading indicators for core inflation in this year's first half are a bit less optimistic, but not yet dire.
The present mixture of low core inflation, low short-term interest rates, a steep yield curve and strong earnings growth is very favorable to the stock market.
Sentiment's improved, but remains troublesome We remain optimistic about the market, but we've also recently expressed concerns in the short term about elevated optimistic sentiment (a contrarian indicator). In my recent report on the subject, I noted the market's increasing vulnerability to bad news, and we certainly got it last week with the unrest in Egypt.
I won't attempt to divine the political outcome there, but it represented an easy excuse for investors to sell last Friday, although that weakness doesn't appear (as of this writing) to be extending into the early part of this week.
We're not the only sentiment watchers out there, of course. And, frankly, I think because there's been so much chatter about why too much optimism might breed a market pullback, some of those measures of sentiment have already begun to pull back themselves, even without a major hiccup in the market.
The spread between the bulls and bears in the American Association of Individual Investors (AAII) poll has narrowed by a decent amount, as has the spread between "dumb money" and "smart money" optimism as per the SentimenTrader index. You can see both below.
Bulls Down, Bears Up
Click to enlarge
Source: AAII and FactSet, as of January 26, 2011.
"Dumb Money" Getting More Pessimistic
Click to enlarge
Source: FactSet and SentimenTrader.com, as of January 28, 2011.
Another way to judge sentiment is to look at complacency, as measured by the Chicago Board Options Exchange Volatility Index (VIX), seen below.
Volatility Pops From Lows
Click to enlarge
Source: FactSet, as of January 28, 2011.
You can see the spike last Friday as a result of the crisis in Egypt, but we could see a bigger pick-up in volatility as some of this excess optimism and/or complacency wears off.
Frankly, I wouldn't mind seeing a bit of a consolidation in order to further work off these recent sentiment extremes. I'm not sure investors need to try to position themselves too precisely in anticipation of an increase in volatility or market weakness given that a correction is likely to be relatively shallow.
Remember, no one can time the market with any precision. But, as always, be mindful of the need and opportunity for any portfolio rebalancing, to the extent your allocations are out of whack.
In sum, our core view remains optimistic, but the sky has some black clouds:
- Parts of the economy are booming but, overall, we're operating below potential.
- Instability in the Middle East is having a negative impact on oil prices and could heighten volatility.
- Our ever-present debt crisis is not imminently solvable.
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative (or "informational") purposes only and not intended to be reflective of results you can expect to achieve.
Wednesday, February 9, 2011
A third of mortgaged Seattle-area homes worth less than what's owed
The owners of one-third of the houses with mortgages in the Seattle metro area now owe more than their homes are worth, Zillow.com estimates.
That's up from less than 23 percent a year ago, the online real-estate database and marketplace said in an analysis released Wednesday.
At the end of 2010, 34.3 percent of all single-family homeowners with mortgages in King, Snohomish and Pierce counties were "underwater" on their homes, Seattle-based Zillow said. That was higher than the national figure, 27 percent.
This region's rate of increase over the past year — and especially over the last quarter — also topped the national increase.
"Negative equity" is rising faster now in the Seattle area largely "because of where we are in the housing cycle," said Stan Humphries, Zillow's chief economist.
Home values in this market kept rising for a year after values began falling in most of the rest of the country, Humphries said. Now Seattle is seeing steeper drops — leaving more homeowners upside down — as price declines in many other metropolitan areas are moderating.
"We're kind of where L.A. was in early 2009," Humphries said.
Negative equity can have a significant impact on both the housing market and the broader economy, especially if the gap between the home's value and the loan balance is large, said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.
It increases the likelihood that owners will default — even if they still can manage the payments, he said.
After that, they probably wouldn't be able to buy another house anytime soon, he added, "and that would hold the housing market back."
A "strategic default" — choosing to default on a mortgage — also damages owners' ability to obtain credit for other purchases, further curtailing economic activity, Crellin said.
Underwater homeowners who don't default also may behave in ways that harm the economy, some researchers suggest. They may be less likely to move — even for a better job — and less inclined to spend money on home improvements.
Zillow determines whether a house is underwater by comparing publicly available loan information with the company's proprietary estimate of the home's value. Those estimates, too, are extrapolated from public records.
While the percentage of houses with negative equity in the Seattle area is climbing, it still doesn't compare with Sun Belt markets that have become poster children for the housing bust.
About 82 percent of all houses in Las Vegas, 70 percent in Phoenix and 62 percent in Orlando, Fla., are underwater, Zillow estimates.
Using public records, Zillow also estimates that more than 28 percent of all houses and condos that sold in the Seattle metropolitan area in December sold for a loss. That's up from 20 percent in December 2009.
Snohomish County was hardest hit.
The sellers of nearly 42 percent of all homes sold in that county in December got less than what they had paid.
The number of sales at a loss will continue to increase as long as prices keep dropping, Humphries said.
By Zillow's calculation, homes in King, Snohomish and Pierce counties now are worth about the same on average as in summer 2004.
"Anyone who's bought their home since then probably paid a higher price than they could get now," Humphries said.
◦
That's up from less than 23 percent a year ago, the online real-estate database and marketplace said in an analysis released Wednesday.
At the end of 2010, 34.3 percent of all single-family homeowners with mortgages in King, Snohomish and Pierce counties were "underwater" on their homes, Seattle-based Zillow said. That was higher than the national figure, 27 percent.
This region's rate of increase over the past year — and especially over the last quarter — also topped the national increase.
"Negative equity" is rising faster now in the Seattle area largely "because of where we are in the housing cycle," said Stan Humphries, Zillow's chief economist.
Home values in this market kept rising for a year after values began falling in most of the rest of the country, Humphries said. Now Seattle is seeing steeper drops — leaving more homeowners upside down — as price declines in many other metropolitan areas are moderating.
"We're kind of where L.A. was in early 2009," Humphries said.
Negative equity can have a significant impact on both the housing market and the broader economy, especially if the gap between the home's value and the loan balance is large, said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.
It increases the likelihood that owners will default — even if they still can manage the payments, he said.
After that, they probably wouldn't be able to buy another house anytime soon, he added, "and that would hold the housing market back."
A "strategic default" — choosing to default on a mortgage — also damages owners' ability to obtain credit for other purchases, further curtailing economic activity, Crellin said.
Underwater homeowners who don't default also may behave in ways that harm the economy, some researchers suggest. They may be less likely to move — even for a better job — and less inclined to spend money on home improvements.
Zillow determines whether a house is underwater by comparing publicly available loan information with the company's proprietary estimate of the home's value. Those estimates, too, are extrapolated from public records.
While the percentage of houses with negative equity in the Seattle area is climbing, it still doesn't compare with Sun Belt markets that have become poster children for the housing bust.
About 82 percent of all houses in Las Vegas, 70 percent in Phoenix and 62 percent in Orlando, Fla., are underwater, Zillow estimates.
Using public records, Zillow also estimates that more than 28 percent of all houses and condos that sold in the Seattle metropolitan area in December sold for a loss. That's up from 20 percent in December 2009.
Snohomish County was hardest hit.
The sellers of nearly 42 percent of all homes sold in that county in December got less than what they had paid.
The number of sales at a loss will continue to increase as long as prices keep dropping, Humphries said.
By Zillow's calculation, homes in King, Snohomish and Pierce counties now are worth about the same on average as in summer 2004.
"Anyone who's bought their home since then probably paid a higher price than they could get now," Humphries said.
Wednesday, January 19, 2011
FHA Suspends Anti-Flipping Rule
On Feb. 1, the Federal Housing Administration will place a one-year moratorium on its anti-flipping rule, which will allow buyers with FHA-backed loans to purchase homes that have been held for less than 90 days, officials said Friday.
The move will open a new pool of homes to first-time homebuyers who have been losing bids to cash buyers, but shouldn't have much effect on home prices, analysts said.
"Opening up to FHA buyers means I can sell it to anybody. That's big," said investor Bruce May, owner of SoCal Homes.
FHA buyers made up 28.1 percent of the market in San Diego County, and 50.1 percent in Riverside County, according to real estate data firm DataQuick. Analysts said cash buyers take up much of the rest of the market, and many of them are speculators and investors. The new rule will connect the two groups.
"Give the consumers as many options as possible," said Nathan Moeder, a real estate economist with the London Group. "Someone who's buying an investment property to flip it, isn't buying a junk property where there's holes in the walls. From the consumer side, I'd be happy about that."
The new rules limit seller's profits to 20 percent above the purchase cost, unless an independent appraiser confirms that renovations and repairs justify the higher price.
"They didn't want to facilitate speculators," said Mark Goldman, an instructor at San Diego State University.
May thinks this move will grow the number of transactions in coming months: More buyers for investors will motivate investors to buy and renovate more houses.◦
The move will open a new pool of homes to first-time homebuyers who have been losing bids to cash buyers, but shouldn't have much effect on home prices, analysts said.
"Opening up to FHA buyers means I can sell it to anybody. That's big," said investor Bruce May, owner of SoCal Homes.
FHA buyers made up 28.1 percent of the market in San Diego County, and 50.1 percent in Riverside County, according to real estate data firm DataQuick. Analysts said cash buyers take up much of the rest of the market, and many of them are speculators and investors. The new rule will connect the two groups.
"Give the consumers as many options as possible," said Nathan Moeder, a real estate economist with the London Group. "Someone who's buying an investment property to flip it, isn't buying a junk property where there's holes in the walls. From the consumer side, I'd be happy about that."
The new rules limit seller's profits to 20 percent above the purchase cost, unless an independent appraiser confirms that renovations and repairs justify the higher price.
"They didn't want to facilitate speculators," said Mark Goldman, an instructor at San Diego State University.
May thinks this move will grow the number of transactions in coming months: More buyers for investors will motivate investors to buy and renovate more houses.◦
Tuesday, November 9, 2010
Crisman Report
I should have listened to my Mom and become a lawyer. In Florida, where palmetto bugs rule the earth, attorneys who take on foreclosure dismissal cases are accepting payments in the form of 2nd mortgages on their client's house. A lien is added if the foreclosure is dismissed and the homeowner's debt to the bank is reduced. Given all the press about sloppy processing of foreclosures, attorneys who specialize in property law are in demand but many of the clients are short on funds to pay the legal fees. "It's a new model, a new paradigm'' said Peter Ticktin of the Ticktin Law Group in Deerfield Beach. According to the story in the New York Times, each will be a contractual obligation with the law firm, labeled as a mortgage and structured like one, too, with the client paying a certain sum every month and using the house as collateral. If the Ticktin lawyers cause the original mortgage to be nullified or reduced because of the bank's misdeeds, the client must take out a new mortgage for 40% of the savings. (They'd better be sure they do the paperwork & disclosures correctly!)
"Why don't the strategic default people apply that 'walking away' logic to everything they borrow money to purchase? Their car is worth less the minute they drive it off the lot - why not quit making that payment? Common sense underwriting will return when the American public applies common sense to repayments. When they promise to pay back the loan they need to keep their promise, regardless of what the asset backing the loan is worth. The industry is trying to protect itself from the "strategic default" people....something we've never had to contend with before. So even if you have a "good loan" based on performance and risk, you still have to dot every "I" and cross every "T" twice so if the borrower executes their "strategic default", you don't have to repurchase (or make whole) the loan. We spend more time every day just trying to make our loans bullet proof than we do actually making the loan decision. OK - I'm done ranting - pass the Xanax."
Who are the 10 big servicers? By the end of the 2nd quarter, Bank of America was #1 with $2.2 trillion in servicing. Heading down the list we find Wells Fargo at #2 with $1.8 trillion, Chase with $1.4 trillion, Citi with $700 billion, Ally/GMAC with $400 billion, US Bank with $200 billion, SunTrust with $175, PHH with $155, PNC with $150, and OneWest/IndyMac with $110 billion. (The Florida lawyers mentioned above are not on this list yet.)
Servicing provides a great cash flow, and apparently is worth the headache for those who own it. Of course, if something goes wrong with foreclosures, as GMAC is experiencing in Ohio, look out. "If Ohio has 10,000 of these cases, there should be 10,000 hearings." So said an Ohio judge, regarding reviewing foreclosures. "I'm sympathetic to the fact that it's onerous for the lenders, but I still have to do my job." The judge said she will hear arguments (tell the truth - did you think it was a "he"?) related to the integrity of the foreclosure documents and may decide to allow depositions of individuals who signed affidavits in the case at a subsequent hearing. If she determines the circumstances rise to the level of fraud, GMAC could be found in contempt of court. OhioForeclosures
Every investor in fixed-income securities has choices to make: US Treasury debt, foreign bonds, corporate notes, etc. And each investor has limited capital, the supply of each of those is carefully monitored, and a large amount of one type can drive prices down and rates higher and compete for investment dollars. It seems that municipal bonds are about to see a lot of supply hit the market - over $10 billion this week, and $16 billion in the next 30 days, according to Ipreo LLC and The Bond Buyer. Some believe that issuers will have to make the yields more attractive to find a home for the bonds and get the deals done.
The National Association of Realtors (NAR) is urging the lending industry to make things easier to qualified buyers to become homeowners. Appealing to the agencies, the NAR's president said that the government agencies are impairing their own mission to provide mortgage liquidity to home buyers with unnecessarily restrictive limits on the availability of credit. "These policies are delaying recovery both of the housing market and the larger economy." With home ownership hovering in the mid-60% range, high by world standards, it is important to define "qualified buyers".
Someone already wrote to me about this. "Extending credit to unqualified buyers, or qualified borrowers who are walking away, is a key piece of the entire mortgage credit mess. Hasn't the NAR been reading the newspapers over the last few years? Realtors have never been known for their underwriting prowess. How about we crank up the rating agency machine while we're at it, where investment banks pay rating agencies to grade securities issued by...investment banks?"
It has almost been a week since the FOMC came out with its $600 billion bond buying program. How exactly will it work? The Fed, although it does not print money per se, effectively does so by expanding its balance sheet - currently triple where it stood in 2007. The Federal Reserve Bank of New York will buy $600 billion of government debt by next summer, a chunk of which will come from the expected $250-300 billion of income/early pay-offs from the $1.2 trillion of mortgages it purchased earlier this year. Most of those government securities will be in the two- to 10-year range - which is the part of the Treasury yield curve that helps to determine mortgage rates. Given supply and demand, as the Fed buys Treasuries, the rates on those securities will fall, and it is believed that rates on mortgages, corporate debt and other loans pegged to the Treasury securities will also drop, and cheaper loans will push Americans to spend. And if companies start to spend and expand, it will lead to more hiring, etc.
A mortgage industry vet wrote, "Now, here I am printing money out of thin air, creating electronic entries for specified amounts on my own balance sheet. I then, on my own wire, aka Fed Wire, send that amount over to the US Treasury Department's operating account. At exactly that same moment I simultaneously enter an asset entry on my own balance sheet which is identified by a specific CUSIP number for that particular U.S. Treasury bill or note that I just purchased with my magic money. Voila - I am making interest on money that didn't exist 30 days ago. This interest income becomes a part of my operating revenue. I have purchased a trillion or so dollars of bonds and notes, and I have earned (billions) of dollars in interest, from cash that didn't exist until I waived my magic money making wand. But if I really am another branch of the Federal government, why would I continue to collect interest from myself? Said another way, why wouldn't I simply forgive the US Treasury Debt?"
It appears that the USDA Rural Development program is back. Wholesalers, such as Wells Fargo and Mountain West, are telling their broker clients, "The USDA announced on Thursday that funding for the single family housing Guaranteed Loan Program is now available for fiscal year 2011." Wells said, "We are pleased to announce that RD Rate/Term Refinance transactions are now available at a 1% guarantee fee. Purchase transactions continue to be available at a 3.5% guarantee fee."
As expected, Ambac, the bond insurer, declared Chapter 11 bankruptcy yesterday, seeking relief on $1.6 billion of debt. "The Company was unable to raise additional capital as an alternative to seeking bankruptcy protection and was also unable to agree to terms with an ad-hoc committee of certain senior debt holders in order to restructure its outstanding debt through a prepackaged bankruptcy proceeding."
Yesterday had very little market-moving news, although mortgage prices finished the day worse by .5 in price on $1.4 billion of sales. It appeared that most traders spent their day rolling hedging positions than in bidding bonds. Little was said about the 3-year UST note auction, other than it was yielding .56% in pre-auction trading, which would be the least ever. Today is another day of no news, but the US government will be selling $24 billion in 10-year notes (and $16 billion of 30-year bonds tomorrow). The "benchmark" 10-yr is sitting at 2.55% and mortgages are roughly unchanged.◦
"Why don't the strategic default people apply that 'walking away' logic to everything they borrow money to purchase? Their car is worth less the minute they drive it off the lot - why not quit making that payment? Common sense underwriting will return when the American public applies common sense to repayments. When they promise to pay back the loan they need to keep their promise, regardless of what the asset backing the loan is worth. The industry is trying to protect itself from the "strategic default" people....something we've never had to contend with before. So even if you have a "good loan" based on performance and risk, you still have to dot every "I" and cross every "T" twice so if the borrower executes their "strategic default", you don't have to repurchase (or make whole) the loan. We spend more time every day just trying to make our loans bullet proof than we do actually making the loan decision. OK - I'm done ranting - pass the Xanax."
Who are the 10 big servicers? By the end of the 2nd quarter, Bank of America was #1 with $2.2 trillion in servicing. Heading down the list we find Wells Fargo at #2 with $1.8 trillion, Chase with $1.4 trillion, Citi with $700 billion, Ally/GMAC with $400 billion, US Bank with $200 billion, SunTrust with $175, PHH with $155, PNC with $150, and OneWest/IndyMac with $110 billion. (The Florida lawyers mentioned above are not on this list yet.)
Servicing provides a great cash flow, and apparently is worth the headache for those who own it. Of course, if something goes wrong with foreclosures, as GMAC is experiencing in Ohio, look out. "If Ohio has 10,000 of these cases, there should be 10,000 hearings." So said an Ohio judge, regarding reviewing foreclosures. "I'm sympathetic to the fact that it's onerous for the lenders, but I still have to do my job." The judge said she will hear arguments (tell the truth - did you think it was a "he"?) related to the integrity of the foreclosure documents and may decide to allow depositions of individuals who signed affidavits in the case at a subsequent hearing. If she determines the circumstances rise to the level of fraud, GMAC could be found in contempt of court. OhioForeclosures
Every investor in fixed-income securities has choices to make: US Treasury debt, foreign bonds, corporate notes, etc. And each investor has limited capital, the supply of each of those is carefully monitored, and a large amount of one type can drive prices down and rates higher and compete for investment dollars. It seems that municipal bonds are about to see a lot of supply hit the market - over $10 billion this week, and $16 billion in the next 30 days, according to Ipreo LLC and The Bond Buyer. Some believe that issuers will have to make the yields more attractive to find a home for the bonds and get the deals done.
The National Association of Realtors (NAR) is urging the lending industry to make things easier to qualified buyers to become homeowners. Appealing to the agencies, the NAR's president said that the government agencies are impairing their own mission to provide mortgage liquidity to home buyers with unnecessarily restrictive limits on the availability of credit. "These policies are delaying recovery both of the housing market and the larger economy." With home ownership hovering in the mid-60% range, high by world standards, it is important to define "qualified buyers".
Someone already wrote to me about this. "Extending credit to unqualified buyers, or qualified borrowers who are walking away, is a key piece of the entire mortgage credit mess. Hasn't the NAR been reading the newspapers over the last few years? Realtors have never been known for their underwriting prowess. How about we crank up the rating agency machine while we're at it, where investment banks pay rating agencies to grade securities issued by...investment banks?"
It has almost been a week since the FOMC came out with its $600 billion bond buying program. How exactly will it work? The Fed, although it does not print money per se, effectively does so by expanding its balance sheet - currently triple where it stood in 2007. The Federal Reserve Bank of New York will buy $600 billion of government debt by next summer, a chunk of which will come from the expected $250-300 billion of income/early pay-offs from the $1.2 trillion of mortgages it purchased earlier this year. Most of those government securities will be in the two- to 10-year range - which is the part of the Treasury yield curve that helps to determine mortgage rates. Given supply and demand, as the Fed buys Treasuries, the rates on those securities will fall, and it is believed that rates on mortgages, corporate debt and other loans pegged to the Treasury securities will also drop, and cheaper loans will push Americans to spend. And if companies start to spend and expand, it will lead to more hiring, etc.
A mortgage industry vet wrote, "Now, here I am printing money out of thin air, creating electronic entries for specified amounts on my own balance sheet. I then, on my own wire, aka Fed Wire, send that amount over to the US Treasury Department's operating account. At exactly that same moment I simultaneously enter an asset entry on my own balance sheet which is identified by a specific CUSIP number for that particular U.S. Treasury bill or note that I just purchased with my magic money. Voila - I am making interest on money that didn't exist 30 days ago. This interest income becomes a part of my operating revenue. I have purchased a trillion or so dollars of bonds and notes, and I have earned (billions) of dollars in interest, from cash that didn't exist until I waived my magic money making wand. But if I really am another branch of the Federal government, why would I continue to collect interest from myself? Said another way, why wouldn't I simply forgive the US Treasury Debt?"
It appears that the USDA Rural Development program is back. Wholesalers, such as Wells Fargo and Mountain West, are telling their broker clients, "The USDA announced on Thursday that funding for the single family housing Guaranteed Loan Program is now available for fiscal year 2011." Wells said, "We are pleased to announce that RD Rate/Term Refinance transactions are now available at a 1% guarantee fee. Purchase transactions continue to be available at a 3.5% guarantee fee."
As expected, Ambac, the bond insurer, declared Chapter 11 bankruptcy yesterday, seeking relief on $1.6 billion of debt. "The Company was unable to raise additional capital as an alternative to seeking bankruptcy protection and was also unable to agree to terms with an ad-hoc committee of certain senior debt holders in order to restructure its outstanding debt through a prepackaged bankruptcy proceeding."
Yesterday had very little market-moving news, although mortgage prices finished the day worse by .5 in price on $1.4 billion of sales. It appeared that most traders spent their day rolling hedging positions than in bidding bonds. Little was said about the 3-year UST note auction, other than it was yielding .56% in pre-auction trading, which would be the least ever. Today is another day of no news, but the US government will be selling $24 billion in 10-year notes (and $16 billion of 30-year bonds tomorrow). The "benchmark" 10-yr is sitting at 2.55% and mortgages are roughly unchanged.◦
Wednesday, October 27, 2010
Home Sales UP in September!
The U.S. Census Bureau and the Department of Housing and Urban Development have jointly released NEW RESIDENTIAL SALES for September 2010.
The survey is primarily based on a sample of houses selected from building permits. Since a “sale” is defined as a deposit taken or sales agreement signed, this can occur prior to a permit being issued. Changes in sales price data reflect changes in the distribution of houses by region, size, etc., as well as changes in the prices of houses with identical characteristics. It takes four months to establish a trend of new home purchases.
New Home Sales were expected to increase 4.0% to an annualized pace of 300,000 in September, up from 288,000 in August. As the effect of the first time homebuyer tax credit expiring wanes, sales are anticipated to inch forward. The NAHB index of homebuilder sentiment also rose 3 points in October, although the overall level was still still far from indicating optimism.
Reuters quick recap....
RTRS-US SEPT SINGLE-FAMILY HOME SALES 307,000 UNIT ANN. RATE (CONS 300,000) VS AUG 288,000 (PREV 288,000)
RTRS-US SEPT SINGLE-FAMILY HOME SALES +6.6 PCT VS AUG +1.1 PCT (PREV UNCH)
RTRS-US SEPT HOME SALES NORTHEAST +3.4 PCT, MIDWEST +60.6 PCT, SOUTH +3.2 PCT, WEST -9.9 PCT
RTRS-US SEPT NEW HOME SUPPLY 8.0 MONTHS' WORTH AT CURRENT PACE VS AUG 8.6 MONTHS
RTRS-US SEPT MEDIAN SALE PRICE $223,800, +3.3 PCT FROM SEPT 2009 ($216,600)
RTRS-US HOMES FOR SALE AT END OF SEPT 204,000 UNITS, LOWEST SINCE JULY 1968, VS AUG 206,000 UNITS
RTRS-TABLE-U.S. Sept single-family home sales rose 6.6 pct
Excerpts from the Release....
Sales of new single-family houses in September 2010 were at a seasonally adjusted annual rate of 307,000. This is 6.6 percent (±16.9%)* above the revised August rate of 288,000, but is 21.5 percent (±13.3%) below the September 2009 estimate of 391,000.
The seasonally adjusted estimate of new houses for sale at the end of September was 204,000. This represents a supply of 8.0 months at the current sales rate. The median sales price of new houses sold in September 2010 was $223,800; the average sales price was $257,500.
New home sales are up from record lows. Not many folks are talking about an increase in purchase business though. Are you?◦
The survey is primarily based on a sample of houses selected from building permits. Since a “sale” is defined as a deposit taken or sales agreement signed, this can occur prior to a permit being issued. Changes in sales price data reflect changes in the distribution of houses by region, size, etc., as well as changes in the prices of houses with identical characteristics. It takes four months to establish a trend of new home purchases.
New Home Sales were expected to increase 4.0% to an annualized pace of 300,000 in September, up from 288,000 in August. As the effect of the first time homebuyer tax credit expiring wanes, sales are anticipated to inch forward. The NAHB index of homebuilder sentiment also rose 3 points in October, although the overall level was still still far from indicating optimism.
Reuters quick recap....
RTRS-US SEPT SINGLE-FAMILY HOME SALES 307,000 UNIT ANN. RATE (CONS 300,000) VS AUG 288,000 (PREV 288,000)
RTRS-US SEPT SINGLE-FAMILY HOME SALES +6.6 PCT VS AUG +1.1 PCT (PREV UNCH)
RTRS-US SEPT HOME SALES NORTHEAST +3.4 PCT, MIDWEST +60.6 PCT, SOUTH +3.2 PCT, WEST -9.9 PCT
RTRS-US SEPT NEW HOME SUPPLY 8.0 MONTHS' WORTH AT CURRENT PACE VS AUG 8.6 MONTHS
RTRS-US SEPT MEDIAN SALE PRICE $223,800, +3.3 PCT FROM SEPT 2009 ($216,600)
RTRS-US HOMES FOR SALE AT END OF SEPT 204,000 UNITS, LOWEST SINCE JULY 1968, VS AUG 206,000 UNITS
RTRS-TABLE-U.S. Sept single-family home sales rose 6.6 pct
Excerpts from the Release....
Sales of new single-family houses in September 2010 were at a seasonally adjusted annual rate of 307,000. This is 6.6 percent (±16.9%)* above the revised August rate of 288,000, but is 21.5 percent (±13.3%) below the September 2009 estimate of 391,000.
The seasonally adjusted estimate of new houses for sale at the end of September was 204,000. This represents a supply of 8.0 months at the current sales rate. The median sales price of new houses sold in September 2010 was $223,800; the average sales price was $257,500.
New home sales are up from record lows. Not many folks are talking about an increase in purchase business though. Are you?◦
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