It's hard to predict mortgage interest rates. We have folks that say we're coming off the bottom of the housing crash, but ...It is a matter of perspective. New home construction is still barely half of what a normal market would look like. Existing home sales are coming off lows from last year.
Basic data is mixed and continues to change - with heaving selling in the bond and mortgage markets. Since the end July when the 10 yr bond and mortgage rates were at their lowest point ever - there have been rallies, but they have not been sustained. Without a major change in attitude low mortgage rates seem here to stay going into 2013. My expectation is that rates will move within a .75% range for quite awhile.
To get an idea of how things might go, keep track of:
- the Unemployment #'s/trend
- Inflation #'s/trend
- what happens with new tax rates
With the Fed done with their announcements, the bond market has seemed almost listless. But, there is some good news: Builder confidence has increased to 41% thanks to a jump in housing starts and inventory of existing home s down to a 5.9 month supply (lowest since March 2006).
2011 - FORECAST:
What's on the horizon for Mortgage Rates, the Housing Market, the Economy, Jobs?
My crystal ball is a little cloudy - but here goes:
Mortgages and bonds improved slightly over last week as concerns in the European sector continue to overshadow any bit of positive economic data that may be reflected in early morning data releases. Treasuries continue to climb, even though the stock market has been stuck in a sideways drift. Demand for the safety of fixed income investments has taken the yield on the benchmark 10-year Note down to a new 2011 low of 2.85%.
The resumption of selling pressure amid rekindled concerns over Europe resulted in another weekly loss for stocks. The market has mustered only one weekly gain, which was actually only an incremental move higher, since April. Although last week's move lower was only fractional, it was enough to offset last week's incremental advance, which was the market's first weekly gain since April.
This week holds great uncertainty about the Greek debt situation and the removal of the security blanket of Fed easing that could combine for another week of volatility, as the second quarter draws to an end. The three Treasury auctions in the coming week are comprised of $35 billion 2-year notes Monday; $35 5-years Tuesday, and $29 billion 7-year notes on Wednesday.
There is a busy economic calendar, including important ISM manufacturing data and three Treasury auctions totaling $99 billion in new securities, which hit the market next week just as the Fed's quantitative easing Treasury purchase program winds down.
Interest rates remain bullish, however with overbought conditions, we could see some consolidating at current levels which would make it tough to extend improvements in the very near term. There are a number of risk factors as the QE2 winds down and earnings season creeps up on the horizin in July. Consumers are urged to take advantage of the lowest rates of the year - not seen since last November.
NEXT WEEK's ECONOMIC CALENDAR:
Monday, June 27th
8:30ET Personal Income/Spending
1:00ET 2yr Treasury Auctions
Tuesday, June 28th
9:00ET Case-Shiller 20 City Index
10:00ET Consumer Confidence
1:00ET 5yr Treasury Auction
Wednesday, June 29th
7:00ET MBA Mortgage Applications
10:00ET Pending Home Sales
1:00ET 7yr Treasury Auction
Thursday, June 30th
8:30ET Weekly Jobless Claims 420k
9:45ET Chicago PMI
Friday, July 1st
9:55ET U of Michigan Consumer Sentiment
10:00ET ISM Manufacturing
10:00ET Construction Spending
3:00ET Auto Sales
Beginning on April 1, Fannie Mae follow in Freddie Mac's footsteps and formally raise the fees that they charge lenders, which will almost certainly pass these fees on to borrowers. The bottom line is that for virtually all borrowers, obtaining a mortgage is set to become significantly more expensive.
Fannie/Freddie are currently hemorrhaging money at the combined rate of $1-2 Billion per month. While the government hasn't yet determined how these two organizations - which currently underwrite 95% of all new mortgages and without whom, the mortgage financing system would collapse - in the mean time, it will certainly seek to limit their losses. Thus, the expansion of "loan-level price adjustments" should not have come as too much of a surprise.
Home prices rose slightly in April for the first month-to-month increase since May 2010 - according to new numbers released today by the Federal Home Finance Agency.
Prices rose 0.8 percent on a seasonally adjusted basis from March to April, according to the FHFA's monthly House Price Index. For the 12 months ending in April, U.S. prices fell 5.7 percent.
The FHFA number echo similar data from FNC, Altos. ClearCapital, Move and other sources reporting an uptick in prices in April, following the double dip in prices during the first quarter.
Despite the monthly bump up, the US index is 19.3 percent below its April 2007 peak and roughly the same as the January 2004 index level.
The FHFA monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac.
Applications for new mortgage went down 5.9% from the prior week per data from the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ending June 17, 2011. The seasonally adjusted Purchase Index decreased 2.8 percent from one week earlier. The unadjusted Purchase Index decreased 3.9 percent compared with the previous week and was 4.4 percent higher than the same week one year ago.
The MBA moving average for the seasonally adjusted Market Index is up 0.4 percent. The four week moving average is down 0.7 percent for the seasonally adjusted Purchase Index, while this average is up 0.8 percent for the Refinance Index.
The refinance share of mortgage activity decreased to 69.2 percent of total applications from 70.0 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 5.9 percent from 6.1 percent of total applications from the previous week.
The average contract interest rate for 30-year fixed-rate mortgages increased to 4.57 percent from 4.51 percent, with points decreasing to 0.91 from 1.04 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate also increased from last week.
The average contract interest rate for 15-year fixed-rate mortgages increased to 3.70 percent from 3.67 percent, with points decreasing to 1.05 from 1.06 (including the origination fee) for 80 percent LTV loans. The effective rate also increased from last week.
- Al Rodenburg, Sr. Mortgage Banker - Bank Of Texas
Mortgages and bonds improved again this morning significantly following growing concerns in Japan and overseas markets. Investors flood into safety bets as global equity markets selloff. The 10yr treasury yield sinks down to 3.27%, while mortgages are about .375-.5 better in pricing that yesterday's levels. Yesterday, it seemed that the US markets didn't flinch much at the concerns in Japan, but as the Japanese market deteriorated, it became clear that US debt and mortgages would become a safe haven.
Stocks are plunging, and bond prices are rising, as the nuclear crisis in Japan intensifies following a deadly earthquake and tsunami. The Dow Jones industrial average fell more than 200 points.
The latest dose of data has done nothing to help stock futures recover from their slump. The Empire Manufacturing Survey for March came in at 17.5, which is slightly stronger than the 17.0 that had been expected, on average, among economists polled by Briefing.com. The prior month's Survey came in at just 15.4. Separately, import prices for February increased by 1.4% after a 1.3% increase in the prior month. Excluding oil, import prices increased just 0.3% in February. They had increased 0.8% in the prior month.
Expect continuing downward pressure on Mortgage Rates for the near term.
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December 2, 2010
10-Yr TSY 3.00%
MBS 4.0% 100.44
MBS 3.5% 97.03
DOW +96 at 11352
S&P +12 at 1218
NAS +22 at 2571
Mortgages took a beating yesterday. Pricing ended up over a full point worse than the day prior. Today, the weakness continues as the 10y treasury yeild tests 3.00% for the first time in months. Equities are continuing to extend gains from yesterday. Mortgages opened weaker, but have found their way back to the nuetral line currently, however if bonds continue to weaken and break support levels around 3%, look for pricing to worsen further.
Pending home sales for October were released. They showed a month-over-month spike of 10.4%, which is a positive surprise since pending home sales had been widely expected to remain flat. What's more, the monthly increase is the best move in almost 10 years of record keeping.
U.S. retailers reported higher-than-foresales for November, while pending home sales unexpectedly surged in October, hinting the economic recovery has legs. Also, the four-week moving average for jobless claims fell to a fresh two-year low, though new claims were higher for the week.
Overbought / Oversold Bond Conditions: Oversold
People had been buying into QE2 and are selling into the reality.
PIMCO called for the end of a great 30-year bull market in bonds last week because of expected future inflation caused by the excessive printing of money by the Fed in its QE1 and soon-to-come QE2 programs. Many analysts and economists alike are now warning investors about the possibility of a bond bubble.
We expect decent to good demand on these short term note auctions this week, but we wouldn't expect it to translate into much better mortgage pricing. With that being said, lock up on any improvements ahead of the long holiday weekend.
The mortgage and bond markets continue to digest improving economic data from recent weeks coupled with talks of inflation and uncertainty surrounding how the Fed's QE2 will impact long dated fixed rates. We don't believe rates will run away, but there is nothing that would suggest rates will improve from current levels, so consumers are urged to lock in rates early in the process of applying for new mortgages.
In general, we're remaining defensive and locking on some of the best mortgage pricing ever. The risk is greater of price worsening at current levels, and to break through resistance to the upside will be tough from here, and as we've mentioned, overbought conditions reverse quickly.
** The Fed's focus on QE2 has been directed more at shorter term rates, and mortgages and longer dated yields (10y and 30y) have been under pressure every since. For this reason, it'll likely be difficult for mortgage rates to improve much from current levels without some help.
Float/Lock Talking Points:
• Overbought bond conditions can reverse quickly and violently.
• Mortgage pricing is near all-time highs and historically is very challenging to improve or even maintain these levels for long
• Q3 Earnings expected to report very positive news- bullish for stocks, while bearish for bonds and mortgage pricing.
Consumer Float/Lock Recommendation:
This is some of the best ever historical pricing and overall we continue to recommend that consumers lock these historically great rates early in the process. We hold this view unless we start to see some fundamental turn in the economic news or European debt issues that would spur a flight to bonds and better mortgage pricing on the horizon. If we are indeed in the early stages of an economic recovery, mortgage rates have nowhere to go but up. If, however, the economic recovery turns out to be unsustainable at levels currently anticipated, we could see a turn in sentiment and a downward sloping bias for mortgage pricing.
Stocks: The Dow and the S&P 500 scored their biggest gains in three months on Wednesday as optimism over efforts to resolve the EU's debt crisis helped push the S&P above 1,200.If the S&P 500 continues to hold above that level, the market uptrend will see strong resistance at 1,225-1,230, which coincides with a recent two-year high and the 61.8 percent Fibonacci retracement of the benchmark's slide from October 2007 to March 2009, a key technical indicator.
Bonds: - Treasuries slipped, more than reversing Tuesday's gains, as speculation that the ECB could take decisive steps to combat turmoil in the region lifted risky assets including stocks and reduced demand for safe-haven debt.
November 3, 2010
ALERT-Mortgages have traded with strength all morning long leading up to the much anticipated announcement from the Fed today at 2:15ET. In the hours leading up to the recent announcement, mortgages improved by another .125 or so in pricing relative to this morning's opening.
The Fed just announced the new policy commiting to buy $600 billion more in government bonds by the middle of next year in an attempt to breathe new life into a struggling economy. The decision is aimed at further lowering borrowing costs for consumers and businesses still suffering in the aftermath of the recession. The central bank said it would buy about $75 billion in longer-term Treasury bonds per month. It said it would regularly review the pace and size of the program and adjust it as needed depending on the path of the recovery. In its post-meeting statement, the Fed described the economy as "slow", and said employers remained reluctant to add to payrolls. It said measues of inflation were "somehwhat low."
The New York Fed expects to conduct $850 billion to $900 billion in Treausury purchases through the end of the second quarter of 2011.
Volatiltiy has hit the stock market with the release of the latest FOMC statement. Stock's started to slide ahead of the announcement, but quickly rebounded into positive territory, only to run into resistance and then retreat to fresh session lows.
The knee jerk reaction in the bond markets apears to be a bit more bearish as yields back up slightly in the moments following the statement. 10yr yields are up a few ticks to 2.60 after hitting 2.52 ahead of the statement.
. When the Federal Reserve raises interest rates, you can expect your ARM to increase. And because the economy has depressed interest rates to historic lows, there is no other way for the adjusted rate on your LIBOR-based mortgage to go but up!
. Adjustable rate mortgages are a gamble as the economy begins its ascent into better years. Save your money now and in the future with the low fixed rate mortgage refinancing options.
OK…when will it stop? “Why” should continally decreasing interest rates stop? Isn’t that “good” for the economy.
Well, look at it this way – if you were an investor and the return on your investments kept going down, down, down – how would you feel.
Someone has to buy the mortgages, right; and there has to be some positive (employment, housing, manufacturing, something…) to get markets trending up again.
As much as we all like low interest rates, I’m not a fan. Sorry, but for our economy to pull itself out of this “malaise” (remember Jimmy Carter?), rates need to go up.
Current market conditions:
Mortgage pricing opens under slight pressure, but stable for the time being. We ended the week on a very strong note on friday as MBS reached record breaking levels once again. The 10yr treasury note was finally able to close below the 2.88% level and currently sits at 2.82%. The bullish trend in bonds seems to be in full effect as economic data in housing and jobs continues to be questionable at best. We don’t see anything in the near term to break the trend, however with treasury auctions on the calendar this week, you’ll want to be cautious if floating as traders will likely begin hedging ahead of the auctions.
Consumer Credit shrank for the 5th straight month by $1.3 bn according to the Federal Reserve making it the 16th drop out of the past 17 months, but it was less than the expected drop of $5 bn yet the figure still shows the consumer continues to pay down debt and not run to the malls. If you are an optimist you could say, ‘hey, it is leveling off’ BUT as long as income and employment don’t show improvements consumer continue to avoid taking on new debt. Between Sep 2001 to Sep 2008, not including mortgages, consumer credit increased 59% to nearly $2.6 trillion. Since then, consumer debt has decline about 6% or $166 billion, to a little more than $2.42 trillion. 2010 continues to shape up into a year that is well below expectations…
Econ News According to the Commerce Dept, income and savings basically unchanged in June. Income increased by $3 billion, or less than 0.1%, but they downwardly revised the 0.3% rise in May. Economists expected the figure to edge up 0.1% during the month. Spending by individuals, a key driver of economic growth, fell $2.9 billion June, or by less than 0.1%, in line with economists’ estimates. The report showed that Americans saved a slightly larger chunk of their disposable income during the month, as the personal savings rate edged higher for a third straight month. Personal savings totaled $725.9 billion, or 6.4% of disposable income, up from $713.9 billion, or 6.3%, in May. Meanwhile, the core consumption expenditures index, a closely watched gauge for year-over-year inflation that excludes food and energy, increased less than 0.1% in June, following a 0.1% increase in May. Economists are worried that the financial troubles weighing on households could cause spending to ebb even more in the second half of the year.
The sub-par economic growth, just about half the pace normally seen coming out of a deep recession, has made little headway in reducing the 9.5 percent unemployment rate. The zero reading on income growth was weaker than the 0.2 percent increase economists had expected. It followed a 0.3 percent rise in May and was the poorest showing since incomes were also flat in September. Part of the weakness in June reflected a decline in the number of temporary census workers, which subtracted $3.4 billion from federal payrolls at an annual rate. A spurt in census hiring in May had boosted government payrolls. The zero reading on consumer spending was also slightly weaker than economists had forecast. It followed a small 0.1 percent rise in May and a 0.1 percent decline in April. No good news in this report…….
Treasury Market The 2-10 Yield Curve continues to narrow – 3 weeks ago it was 242 bps, 2 weeks ago 239 bps, and last week it was 236 bps – as the 2 yr ended last week at 0.50% (another new low in yield) and the 10-yr ended at 2.86%. As I mentioned earlier, a good proxy for GDP is the 10-yr yield. At 2.86%, you can assume that is what the bond market is saying GDP growth will be for the year. If the 10-yr starts to rise, bad for borrowers, but good news for the economy. Right now, the bond market is not expecting much from the economy or the inflation rate – and I agree. It would not be surprising to me, or others, that the 10-yr Treasury gets down to 2.5% sometime next year.
FHA said this week that it is down to $3.5 bn in cash in its ‘capital reserve account’ after they transferred $9.8 bn to another account to cover losses in its portfolio from expected defaults and foreclosures. In less that 3 months, FHA CRA has shown a 71% decline which is certainly dramatic. This past week Congress approved changes to allow the FHA to replenish their depleted reserves, thus increasing costs for borrowers. The FHA will simultaneously lower their upfront mortgage premium from 2.25% to 1%, and increase their annual mortgage premium from .55% to up to 1.55%. According to the FHA letter it will not be fully increasing the annual premium to 1.55% at this time. Beginning September 7, 2010, the FHA will first increase their annual premium to .85% for borrowers with 95% LTV or lower, and .90% for borrowers above 95% LTV. The combined impact of lowering the upfront fee and raising the monthly fee would mean a borrower taking out a mortgage of $170,000 at an interest rate of 5 percent would pay an extra $38 a month. The good news is, the lower upfront mortgage premium will allow new borrowers to get in the door more cheaply.
Bottomline: economic news continues to be negative, overall; and, although rates continue to go down, they are going down much less than expected – due to bank/lender concern about overall risk and its associated costs. Don’t expect dramatically lower rates, just a continuuing slow spiral in that direction.
- Al Rodenburg - www.mortgageoffice.com
Comments as of 3:00pm (Eastern time)
10-Yr TSY 3.00%( -4 bps)
MBS 4.5% 104.20 (+17 bps)
MBS 4.0% 102.04 (+20 bps)
DOW -39 at 10,497
S&P -7 at 1,116
NAS -23 at 2,264
Mortgage pricing ended the day better again by another .125-.25 from closing levels Tuesday. Mortgages are outperforming and tightening the spread between treasuries as the stock market is finding trouble gaining traction again on Wednesday.
Stock futures fell after another disappointing economic report added to investors' doubts about the recovery. The Commerce Department's durable goods orders report for June indicated manufacturing growth is slowing. Orders for goods expected to last at least three years fell 1 percent last month, well short of the 1 percent gain that economists polled had forecast. Orders dipped 0.6 percent when the volatile transportation sector was excluded. Economists had expected a small gain.
The reaction to the Fed's latest Beige Book was in-line with what Fed Chairman Bernanke recently stated in his semiannual testimonies to the Senate and House In turn, stocks continue to trade with moderate losses. To be more specific, though, the Beige Book stated that the economic recovery has slowed in some areas amid sluggish residential real estate markets and modest improvements in most labor markets.
The big win on the day was the 5yr note auction with strong demand. Results from an auction of 5-year Notes were released at 1:00 PM ET. The auction produced a bid-to-cover ratio of almost 3.1. For comparison, the prior auction was met with a bid-to-cover of 2.6. Treasuries have only ticked slight higher in response.
Tomorrow, we have more weekly jobless claims numbers early in the morning followed by the final note auction of the week in the afternoon. The markets will be looking for another strong auction tomorrow, especially if equities find it difficult to get momentum again.
Treasuries and mortgages have been trading faithfully within a range over the last several weeks between 2.88 and 3.12 on treasury yields, and we expect to see more of the same going forward until something breaks the sentiment to fuel the markets. Right now, we're sitting in the middle of the range on the way up after testing the bottom just 3 sessions ago.
CONSUMER Lock Recommendations:
This is some of the best ever historical pricing and overall we continue to recommend that consumers lock these historically great rates early in the process. We hold this view unless we start to see some fundamental turn in the economic news or European debt issues that would spur a flight to bonds and better mortgage pricing on the horizon. If we are indeed in the early stages of an economic recovery, mortgage rates have nowhere to go but up. If, however, the economic recovery turns out to be unsustainable at levels currently anticipated, we could see a turn in sentiment and a downward sloping bias for mortgage pricing. The first scenario seems to be the likely case currently
Stocks: Stocks fell moderately Wednesday after the Federal Reserve said the economic recovery is slowing in some parts of the country.
Volume has been light even by summer standards, which has added to the day-to-day volatility.
Bonds: Treasurys strengthened following strong demand for U.S. debt during the government's five-year note auction, and another report highlighting the uphill struggle facing the U.S. economy.
Conference at the Treasury Department will address the future of Freddie & Fannie What will you be doing August 17th, besides commemorating the conclusion of Woodstock in 1969? The Obama administration, or Congress – take your pick – will be hosting a conference at the Treasury Department on that day which will address the future of Freddie & Fannie. The wheels of government usually grind slowly, and this will no exception. The financial overhaul signed by President Barack Obama didn’t address their future, despite protests that it was incomplete without a plan for the two companies. The Obama administration has said it wants to wait until next year to determine their future, and the public comment period just ended for the Treasury’s study on them.
Freddie’s and Fannie’s future Although no move is expected until 2011, a story in the Wall Street Journal on Freddie’s and Fannie’s future stated that Treasury Secretary Geithner said the government should retain “some type” of federal guarantee to ensure that Americans can easily finance home loans. Fannie and Freddie were taken over by the government in 2008, turning their implied government guarantee into an explicit guarantee and receiving almost $150 billion in aid. On “Meet the Press”, Mr. Geithner promised the administration would “bring fundamental change” and said it wouldn’t “preserve Fannie and Freddie in anything like their current form” but that “there’s going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee so, again, homeowners have the ability to borrow to finance a home even in a very difficult recession.” Since F&F own or guarantee more than half of the nation’s $10.2 trillion in mortgages it is not a “slam dunk” issue, and the Treasury received many responses during the 90 day public comment period (which ended last week).
Freddie and Fannie have become more central than ever to our mortgage business An editorial was quick to point out that, in a twist of fate showing where things stand, the two companies have been nationalized. They underwrite the vast majority of all new home loans, and they own or guarantee about half of all the mortgages outstanding. Per the WSJ editorial, “There’s simply no room in this story for two giant government-sponsored enterprises that distorted the housing and credit markets, took advantage of implicit government guarantees to operate at leverage ratios that would have made Lehman Brothers executives blush, and finally, and predictably, collapsed under the weight of that leverage and their bad bets on the housing market.”
Visit www.mortgageoffice.com for updates
E-con-o me For the 7th straight month in a row May auto sales rose. May sales were up 19% to 1.1 million vehicles. The annualized pace for the month was 11.68 million. That is up from the year ago figures of 9.86 million. Interesting that SUV and light trucks, like Ford's F-Series pick-up sales zoomed by 49% and even Toyota's Tundra sales climbed 32%. Huh? Where are the 'greenies'? The Prius, the hybrids, the high mileage matchboxes?
The service sector, as measured by the Institute for Supply Management Index for activity came in at 55.4 in May, unchanged from April. Anything above 50 represents expansion. The hope was that growth in the service sector would confirm the recovery that began in manufacturing has broadened but it now looks more like a plateau. Retail Sales in May, the 28 largest retailers as tracked by Thomson Reuters, shows that same-store sales growth was up only 2.5% over very easy year-earlier comparisons. The growth in April and May posted the smallest monthly same-store sales increase since last Nov. The consumer, and the economy, is just limping along.
Hey Punk! Where are you hiding the private job creation? The BIG monthly Employment Report for May was released this past Friday and it was punk. I know that job growth is not linear but the expectation coming into the report was private job growth of over 500,000. Well, how about 431,000 new jobs with no fewer than 411,000 of those, or about 95% of the total being temps hired by the Census Bureau - again, punk numbers. Now Prez Obama admitted this early in his new conference following the jobs number as did the Bureau of Labor Statistics right on the very page of the report. Moreover, the dubious birth/death model adjustment swelled the ranks of new jobholders by 215,000. I remain clueless as to how many of those additions were live bodies or mere illusions. But I suspect neither does the Bureau of Labor Statistics. So, it appears to me and judging by this past Friday decline in the Dow, that Wall Street sees what I do - zilch improvement in the job total. Not very encouraging either was the punk rise in private-sector employment (a modest 41,000 in case you are keeping a box score.
Helped by the shrinkage in the overall labor force (meaning people who have given up on finding work), the unemployment rate fell to 9.7% from April's 9.9% only because the numerator shrank. Counting in the underemployed folks - who would love to have full-time work but can't land any - the jobless rate decline to 16.6% from 17.1%. Nearly 1/2 of all unemployed workers today (actually 46%) have been out of work for 6-months or longer - the largest number since 1948. Normally job growth accelerates during the early stages of an economic rebound, but this dismal employment report suggests that the recovery remains well short of becoming a typical expansion. Other stray pieces of good news included an uptick in the length of the work week and in average hourly earnings. The average factory workweek, a leading gauge of hiring, lengthened by 0.1 of an hour to 34.2 and earnings nudged upward by 0.3%, for the third time this year. Temp hiring also rose for the 8th consecutive month. Manufacturing got a lift from durables and auto sales, job growth in most sectors was slow or non-existent. Construction saw a 2-month string of gains snapped like a twig, while state and local governments, reflecting a financial squeeze, shed 22,00 workers.
It seems that all the gov't stimulus programs have indeed primed the pump, for example appliance sales are up, auto sales are up, retail sales are up home sales are up and there has been job growth the past 5 months even though you might need a microscope to see it; but the gov't can not continue to prime the pump - at some point the pump must start. It is very hard to point to a sustainable recovery without job growth that brings unemployed workers back to work and creates new jobs for the growing job force (high school and college grads).
The economy can't grow without an increase in jobs. Without jobs the consumer is not going to buy more stuff at the malls. This is a sub-prime recovery. The US economy needs to generate 125,000 new private sector jobs a week just to keep up with the number of new workers entering the labor force. The economy is recovering even though it is certainly is very spotty and lacks the robust nature of prior recoveries. Could this be another 'jobless recovery' in the economy?
Feb-think versus Private Economists Economists are people who work with numbers but who don't have the personality to be accountants. Federal Reserve economists and policy makers say full employment means a long-term jobless rate between 5 percent and 5.3 percent. Some of the most influential private economists say they’re wrong. Bondholders "must worry that if the natural unemployment rate is up to 7 percent, then there’s the danger that the Fed will keep piling on more stimulus money as if they didn’t have to worry about joblessness. Joblessness has stalled above 9 percent since May 2009 and many leading private economists believe that the natural rate -- the level that neither accelerates nor decelerates inflation -- will remain high because there’s a mismatch between available jobs and the skills of the unemployed. People whose homes are worth less than their mortgages also may be reluctant to move for work, and the extension of unemployment benefits deters some people from accepting employment with lower pay because a portion of their lost income has been replaced.
If you knew for sure that the natural rate was 5 percent, then it might make sense for the unemployment rate to hit 7 or 7.5 percent before you start tightening at all. But it can become a very risky strategy when the natural rate has risen, because you could be sitting at a zero percent Fed funds rate at full employment and not realize it. Central bankers may be loathe to keep raising their estimates because it’s politically unpopular to say more Americans should be out of work to create equilibrium in the economy. For the central bank to increase its benchmark rate to a "neutral" level of at least 4 percent a year ahead of the economy’s return to potential, possibly as soon as mid-2013, the Fed would need to alternate increases of 25 basis points and 50 basis points at each meeting between January 2011 and June 2012 unless it starts sooner. So, who do you want to believe? It will impact housing, the economy and certainly the mortgage market - let alone many of my friend's who are on the street looking for jobs or an apple cart.
Of course, knucklehead Fed Reserve Bank of Atlanta Prez, Dennis Lockhart, said the central bank, to counter inflation, may eventually need to raise its target interest rate from near zero even with U.S. unemployment still high. "The policy rate may have to begin to rise even while unemployment is considerably higher than before the recession," Lockhart said this past Thursday in a speech in Atlanta. "The time is approaching when it will be appropriate to consider recalibrating interest rate policy," he said in remarks prepared for the Atlanta Technical College. "I do not believe that time has yet arrived. However, extraordinarily low policy rates will become inconsistent with maintaining price stability," he said. If you have a recaltricant borrower who is on the fence thinking rates will go lower........ you might want to quote a Fed Prez who is basically saying 'if you snooze, you lose' a great rate.
Policy makers are debating when to begin withdrawing record liquidity from the financial system as the economy emerges from the worst recession since the Great Depression. The Fed’s preferred inflation gauge -- the core personal- consumption expenditures price index, which strips out food and energy -- rose at an annual rate of 0.6 percent in the first quarter, the slowest pace since records began in 1959. Personally, I don't see the Fed raising rates anytime this year with no inflation, unemployment high and a very fragile recovery at best.
The economic outlook has darkened and investors are rushing to sell stocks and commodities most closely linked to growth. The unrelenting concerns over Europe's sovereign-debt crisis weights on everyone - particularly central banks. Then there is Korea, the Gulf oil spill, Israel and Turkey at odds, Iran having the material for 2 nukes, Afghanistan, Somalia, and the list goes on and on. And, as is the case, what is bad news for the economy is good for Treasury bonds as interest rates fall. The ole Ying-Yang.
Notorious BIG The ECB (European Central Bank) said itself, meaning the estimate is likely low, that Euro Zone banks face $239 billion in write-offs in its semi-annual financial stability report. The old 'one-two punch'. Still reeling from the mortgage related financial crisis hatched in the US, now Europe has to deal with the PIGS (Portugal, Italy, Greece and Spain) and perhaps other countries on the continent. These little piglets represent $2 trillion of public and private debt on the balance sheets of Euro banks. Now matter how you slice it - that is alot of bacon frying in the pan. The Euro banks are extremely leveraged - the ratio of assets to common equity - at a ratio number of between 21 to 29 times capital. By comparison, the leverage ratio of US banks is between 12 to 17. Like B.I.G., I continue to believe the Euro is likely to be the victim of a drive by shooting of its own design. The Euro collapsed again this past week on new concerns that the PIGS now have another piglet that me joining the gang - Hungary, the 53rd largest economy is the world. Not a big player but just another fear that the piglet farm may need to build a bigger pen to house all the countries in trouble. What does this mean to you and I?
China continues to reign in its hot real estate market. As the gov't stimulus funds fade, GDP growth is expected to slow to 9.5% in 2010 versus the previous growth estimate of 10.5%. Their main stock market is down this year by 19.4% over concerns about growth. In the housing sector, banks have been ordered to increase down payments and restrict purchases of multiple homes. This past week, the gov't said that it was considering increasing the tax rate on real estate profits. And, like our markets, a change in taxes makes ownership of real estate less profitable and pushes down the value of properties. As China puts on the economic brakes it will influence global commerce.
Real Estate: the 'Dark Side' If you believe housing is on the rebound, take a very hard look at the numbers. There are 140 million personal residences in the US. Today, there are 26 million homes either directly or indirectly for sale. According to a survey by Zillow.com, a real estate appraisal website, 20 million homeowners plan to sell on any improvement in prices. Add to that, 4 million existing homes now on the market, 1 million new homes flogged out by companies like Lennar (LEN) and Pulte Homes (PHM), and 1 million bank owned properties. Another 8 million mortgage owners are late on their payments and are on the verge of foreclosure, bringing the total overhang to 34 million homes. In all there are 35 million who are underwater on their mortgages and aren’t buying homes anytime soon, nor are the 35 million unemployed and underemployed. That knocks out 50% of the potential buyers. Add to this, the reality of 80 million baby boomers retiring at the rate of 10,000 a day. Assuming that they downsize over time from an average 2,500 sq ft. home to a 1,000 sq. ft. condo, and eventually to a 100 sq. ft. assisted living facility, the total shrinkage in demand is 4.3 billion sq.ft. per year, or 1.7 million average sized homes. That amounts to a shrinkage of aggregate demand for a city the size of San Francisco, every year. And now there is talk circulating the sewers in Washington of reducing or eliminating the home mortgage interest deduction which will result in the value of home being lower as the value of owning versus renting diminishes the appeal. Add it all up, and there is a massive structural imbalance in residential real estate that will take at least a decade to unwind. This past week the 'shadow inventory' of homes in purgatory; not yet in foreclosure but waiting for divine intervention, would push the housing inventory number to over 60 months!
Simultaneously, foreclosure procedures have been initiated against 1.7 million of the nation’s households. A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They don't pay the mortgage and use the money they save to get back on their feet or just get by. It’s a Force me out if you can attitude. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads. Not only have I said this, but many others also, "I tried to explain my situation to the lender, but they wouldn’t help," I have been there, done that, and took the highway.
The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages. The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS (Lender Processing Service) Applied Analytics. While there are no firm figures on how many households are on their way to passive resistance, real estate agents and other experts say the number of overextended borrowers taking the "free rent" approach is on the rise. More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. These "free riders" are "the unintended and unfortunate consequence" of lenders struggling to work out a solution.
Double Dip - Relief Well........ it might just work to stop the leak in the Gulf but keep in mind you are trying to hit a target the size of a dinner plate from a distance of about 3 miles down (vertical and horizontal drilling). Is this possible? Another half-baked plan? Even drilling 2 relief wells is no slam dunk. And, even it they hit the well, the containment dome still needs to be in place and there better not be any hurricanes. And, even if you are optimistic, and this works by August, there is little doubt that the area is going to suffer for countless years to come. If this doesn't bring a tear to your eye and you thought it couldn't get any worse, a new foreby Housing Predictor has many experts fearing more bad news- coastal real estate and condos throughout Florida, Louisiana and Mississippi dropping as much as 30 percent or more in response to what is already being termed the worst natural disaster in the history of the United States. Specifically cited properties expected to be hardest hit include: Beachfront vacation homes and condos: Not only have many of these properties been overbuilt in recent years but high vacancy rates, troubled HOAs and rising fees have contributed to escalating prices and declining resale rates. The added burden of tar covered beaches combined with poisoned water could be the straw that breaks the proverbial camel's back.
Worker related neighborhoods: Undoubtedly the oil spill will adversely impact workers in the fishing and tourism industries as massive blobs of oil pollute the waterways and ocean. Out of work fishers, tour guides and others displaced by the oil spill will be hard pressed to replace their earnings with unemployment rates already in the double digits for many parts of Florida, Mississippi and Louisiana. Riverfront homes & wetlands: Although it's too early to tell for sure, environmental experts believe the oil and other pollutants are likely to make their way inland via freshwater deltas resulting in further damage to environmentally sensitive wetlands, marsh areas and even rivers throughout much of the Southeastern United States.
The timing couldn't be worse; real estate has declined by as much as 65 percent in many of these areas including the Florida panhandle, with official unemployment rates well into the double digits. Not only is the BP oil spill dramatically impacting tourism, the oil industry and the local ecology...the main sources of income for an already struggling region...but this crisis is expected to have profound impact on the economy for years - if not decades - to come. Already nearly 70 percent of the $40 Billion dollar summer bookings have been cancelled, resulting in one of the most severe losses in recent history for a state that is facing severe fiscal shortages...... and the oil is just starting to hit the FL shores.
Unfortunately, the worst may not be over. As BP continues to encounter difficulty in sealing the leak, weather patterns and the gulf stream are expected to make matters even worse. As the hurricane season officially begins, the weather service is calling for an above average years in terms of storm related activity; activity that could easily worsen an already fragile situation by distributing oil over an even larger area of land and sea. Of even more immediate concern is the observation that the oil spill is now reaching the gulf stream which circulates ocean waters from the gulf around the bottom of the state and then north via the eastern coastline potentially impacting more than 75% of the Florida's coastline. With BP's most recent announcement suggesting the spill may continue running until at least August, experts are bracing for the worst even while hoping for the best.
The homebuilder Hovnanian reported this past Wednesday that it trimmed its 2Q loss as writedowns on land and other assets declined sharply from a year ago. Sales contracts signed tumbled but with fewer communities open this year than last, it improves the sales contract numbers to just flat showing some stabilization. How much of this being aided by the now expired Fed home buyer tax credit is not certain but even Hovanian estimates that this goosed sales by at least 10%. Without that goose, their gander would still be in a trick. As it was with fewer net contracts and lower sales prices, both disappointments, the stock slid down to $4.90
Mortgage News In what was less than a surprise, Barclays Bank PLC has agreed to sell HomEq, a mortgage servicer to Ocwen Financial for $1.3 billion. Barclays owned EquiFirst (my ex-employer) and now is selling its servicer platform which completes its exit of the US mortgage market. Barclays bought HomEq from Wachovia 4-yrs ago for $470 million, so the Brits will make a handsome profit but are hitting the exit door. Liberty Mortgage of Norcross, GA told mortgage brokers it was exiting the wholesale sector offering little in a way of an explanation.
Whoa, BofA Bank of America rolled out their new "Principal Reduction Enhancement" program, which is an earned principal forgiveness plan for borrowers behind on their mortgages and whose loans are at least 20 percent underwater in value. The plan is in conjunction with the government's Home Affordable Modification Program, but the government's principal reduction plan isn't in place yet. What makes BofA's plan so proactive is that it employs, a principal reduction as the first step toward reaching HAMP’s affordable payment target of 31 percent of household income when modifying certain NHRP-eligible mortgages — ahead of lowering the interest rate and extending the term. Why are they getting more aggressive on modifications? Because more borrowers are walking away. BofA's credit loss mitigation executive, Jack Schakett, said the amount of strategic defaulters (those who can pay their loans but opt not to) are "more than we have ever experienced before." He went on to say, "there is a huge incentive for customers to walk away because getting free rent and waiting out foreclosure can be very appealing to customers." Glad someone woke up to the obvious.
The foreclosure process is still taking 13 to 14 months (and by my estimates that's an optimistic assessment), and so there's over a year of free rent. While the banks are trying to improve the time, they're just not there yet. 31% of foreclosures in March were deemed to be "strategic default" by researchers at University of Chicago and Northwestern University. We also learn from those same researchers that the likelihood of walking away increases by 23 percent when homeowners learn that a neighbor got some principal forgiveness. I'll let you all argue that one.
FHA single-family originations totaled $22.9 billion in April, basically unchanged from March and February, according to the agency. Nearly 68% of FHA loan endorsements were for borrowers purchasing a home. Of the 36,000 refinancings in April, 68% were conventional borrowers seeking low-downpayment FHA loans. The April report shows that FHA's 'Hope for Homeowners' program helped 23 underwater borrowers. That is not a typo - 35 homewowners! Over the past seven months FHA has approved only 35 H4H refinancings where the lender has to reduce the principal amount of the loan to 97.5% of the current appraised value. Meanwhile, FHA reported that 8.5% of its insured single-family loans are 90 days or more past due, down from 8.8% in March and 9.17% in February.
Mortgage Interest Rates have set a new record low. Last week, mortgage rates managed to tick even lower — albeit not by much — than the record-setting figured recorded back on December 04, 2009. This time around, the record low was brought on not by federal intervention or a bleak economic picture, but by the continued fiscal struggles in Europe. The 4.90% seen for the 30-year Conforming fixed rate was down by three basis points (.03%) from the week ending 5/21/10, and two basis points better than the previous recorded low on December 4, 2009.
Mortgage Apps - Refi's Up and Purchases Down The MBA this past Wed released its Weekly Mortgage Applications Survey for the week ending May 28, 2010. The Market Composite Index, a measure of mortgage loan application volume, increased 0.9 percent from one week earlier. The Index increased 0.3 percent compared with the previous week. The Refi Index increased 2.4 percent from the previous week. This was a smaller increase than in previous weeks, but was still the fourth consecutive weekly increase for the Refi Index and it remains at its highest level since October 2009. The Purchase Index decreased 4.1 percent from one week earlier. The Purchase Index decreased for the fourth consecutive week and is currently at the lowest level since April 1997. Purchase applications are now almost 40 percent below their level four weeks ago, while the refinance share, at 74 percent, is at its highest level since December. In addition, the ARM share dropped last week to its lowest level since March of this year, as borrowers took the opportunity to lock in at historically low fixed mortgage rates. The adjustable-rate mortgage (ARM) share of activity decreased to 5.2 percent from 6.0 percent of total applications from the previous week.
Half of American's Can't Afford Large Downpayment on Mortgages......... like we didn't know that!? But in a survey conducted by the National Foundation for Credit Counseling of 2000 respondents, nearly half, or 46%, believe they will NEVER afford a 20% down payment to purchase a home. In the past, finding the money for a down payment was only a problem for first-time homebuyers. After making the first purchase, borrowers could use the proceeds of selling it as a down payment on the next one. That was in an appreciating market, however. Due to today’s turbulent housing market, the problem has now spread to those who currently own a home. Many mortgages are underwater. Thus, even if the homeowner is able to sell their current house, there may be no profit available to satisfy the down-payment on the next home. With home prices averaging at just below $200,000, a 20% down payment – $40,000 – is a nice chunk of change by any standard.
While 12% of the respondents said they would have no trouble coming up with a 20% down payment, 20% said they would need a loan with a much lower down payment, and 18% said they would have to borrow the down-payment money regardless of how much is required. Considering the staggering number of people who are out of work and those whose retirement plans have been decimated, buying a home may no longer be a part of the American dream, at least not in the near future.
GSEs Rolling Out New Short Sales Program Fannie and Freddie are rolling out the new short sales program that servicers must use for distressed borrowers who do not qualify for a permanent loan modification. "Once all other home retention options have been exhausted, eligible borrowers must be considered" for a short sale under the government's Home Affordable Foreclosure Alternative program, Freddie says in a new bulletin to servicers. Fannie/Freddie servicers are expected to have the HAFA short sales and deed-in-lieu program up and running by Aug. 1. The GSEs will pay servicers a $2,200 incentive for every completed HAFA short sale, and $1,500 for every deed-in-lieu of foreclosure transaction. Borrowers who become former homeowners will receive $3,000 for relocation costs for a successful short sale or DIL transaction. Also, incentives are being offered to investors for releasing borrowers from subordinated liens. The HAFA program brings more standardization to existing short sales programs. Freddie completed 9,600 short sales in the first quarter, compared to 3,100 a year ago. Fannie processed 17,000 short sales, compared to 6,000 in the first quarter of 2009. All servicers participating in the government's Home Affordable Modification Program are required to implement the HAFA program.
Commercial Mortgage Defaults Hit Record for Both Banks and Investors Pressures continue to drive up commercial mortgage defaults. The economic downturn has choked off demand for retail and office space, with vacancy rates rising and prospects of new occupants limited by the duress of today’s job market. At the same time, commercial real estate (CRE) values have dropped more than 40 percent in some markets, pushing a growing number of property owners severely underwater. According to new data from Real Capital Analytics, the default rate for commercial real estate loans owned by the nation’s FDIC-insured banks increased from 3.83 percent in the fourth quarter of 2009 to 4.17 percent in the first quarter of 2010. Real Capital says this is the highest default rate reported since 1992, the first year for which data is available, when it was 4.55 percent.
Year-over-year, the default rate is up by 192 basis points. By contrast, at its cyclical low in the first half of 2006, the commercial mortgage default rate was 0.58 percent. As of the first quarter of this year, $45.5 billion of bank-held commercial mortgages were in default, according to Real Capital’s tally. A separate study released this week by Trepp LLC shows that the share of past due loans held by investors in commercial mortgage-backed securities (CMBS), including those already in foreclosure and REO, jumped 40 basis points in May to 8.42 percent – the highest in the history of the CMBS industry. To put the delinquent CMBS universe into perspective just six months ago, the delinquency rate was 5.65 percent. One year ago, it was 2.77 percent. The delinquency rate in CMBS at 8.42% is triple what it was a year-ago. With roughly $700 billion of the CMBS are outstanding - more than the amount of securitized loans for credit cards, auto, student or car loans - this bomb is still ticking. historically when the properties are foreclosed on or sold, investors are losing on average 37% of their principal. Fitch Credit Rating Service expects the 'loss-severity rate' to increase thru 2011 and average 57%. That is a head throbbing, fist pounding number.....
NPLs (non-performing loans) going for 10 cents on the dollar Bottom feeders are picking up mortgages on non-performing income properties for as little as 10 cents on the dollar, a group of real estate writers meeting in Austin, Tex., was told. While the "rule of thumb" for re-pricing assets is at 40-60% from peak values, hotel notes are being marked down to 80-90% and those on some retail properties for even less than that. Mortgages on retail projects in places like Las Vegas that should never have been built— call them 'Monuments to Stupidity'—are being written down 90% or more. Pathfinder Partners was formed in 2006 to buy loans on "unusually high-risk" income producing properties, loans which "tended to be underwritten at lofty expectations." Jeff Friedman, co-chief executive of Mesa West Capital, Los Angeles, a non-recourse lender that has amassed a capital base of more than $1.5 billion to lend to troubled owners and borrowers, said that "lofty expectations not based on reality" are the main reason commercial real estate finds itself in distress. Likening "too much leverage" to cancer, Friedman told the journalists, "When you start hearing 'new paradigm' or 'new new,' that's when you should start heading to the exits." The current down cycle was unavoidable. Commercial real estate is a business of seven-year cycles and five-year memories. And once the train gets going, it's hard to stop. Do you hear 'choo,choo' as the train is going downhill?
FHA All the Way T