Lake Tahoe Real Estate Blog

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151

As is to be expected, this is a rather ragged time economically, with very little news that can be called “good”–but no news that is negative enough to knock the markets for a loop.
 
Also to be expected–we have entered the heavy blood-letting phase that precedes recovery. (The obvious problem is that we don’t know how long this will last or how far it will go.) Prices are declining as bargain-hunters become more active in the markets and sellers finally acknowledge that they must bring prices down if they expect a sale. This is what happens when the market begins to form its bottom and foreclosures and emergency sales dominate the sales activity.
 
We will struggle out of this dark forest, indeed, but as I said, it is impossible to know just when and how much damage will be done. The only silver lining to this cloud is that, as I also said, current market activity makes sense in the context of a market seeking its bottom and a turnaround waiting to happen.  

Weekly Commentary

Thumbnail Sketch: Commodity prices are climbing again, with gold near the $1,000-an-ounce threshold and crude oil oozing north to nearly $150. Mortgage applications, meanwhile, are still slipping, with purchase money loan applications 22.2% lower recently than they were a year ago and refis down significantly.

It is difficult to be a happy camper in the face of these numbers. We are inclined to grasp at straws—like the slight upward revision to first quarter Gross Domestic Product growth (from 0.9% to 1%). More important, perhaps, is the rise in personal income, which climbed 1.9% in May—primarily due to the distribution of tax rebate checks (without which personal income rose 0.4%).

Intriguingly, personal spending rose at about a 0.8% rate (for the same reason) but the big winner was the savings rate, which made a breathtaking leap to 5%, a feat it has not accomplished since 1995. (By way of contrast, the savings rate has been confined to the 0.2% to 0.6% range over the past several months and before that was flirting with the negative range in which spending wipes out any savings.)

This is potentially good news, though we will wait to see the outcome. What seems significant is that taxpayers aren’t necessarily rushing off to Wal-Mart with their checks (though sales are up at that mega-chain), but are tucking their rebates away, it seems, in savings accounts of one sort or another.

In any case, the rebate checks aren’t having a particularly salient effect on consumer confidence which, as we saw last week, slipped from 58.1 in May to 50.4 in the June survey. That was a 16-year low, the fourth lowest reading in the history of the index (which was first compiled in 1969).

The worst news in the consumer confidence index was the low reached by the “current conditions” category. The nation is neither confident nor happy about today’s economy. Nor are the figures for future expectations at all positive. Beneath all of these figures, of course, is the question of how the labor market will perform—the central issue for consumer confidence, and a powerful influence on whether people buy homes. Watch employment data with care in the coming weeks for a preview of near-term economic conditions.

KEY INDICATORS 

Gold $945.80/ounce [up]Crude Oil (Brent) $142.16/brl [up]U.S. Dollar to…    Euro .6342 [slightly down]    Japanese Yen 105.98 [down]6-mo Treasury Bill Yield 2.12%10-yr Treasury Note Yield 3.96%[6-mo down 13 bps, 10-yr down 12 bps]11^th Dist Cost of Funds: 2.918%30-yr Fixed-rate Mortgage 6.88%15-yr Fixed-rate Mortgage 6.34%1-yr ARM 6.12% [HSH averages rates: 30-yr down 8 bps, 15-yr down 19 bps; 1-yr ARM up 20 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 6/20  Overall    461.3 (down 9.2%; down 8.8% the week prior)  Purchase Money Loans     333.4 (down 7.3%; down 4.4% the week prior)  Refinancing Loans    1212.2 (down 12.1%; down 15% the week prior) 

Weekly Jobless Claims 6/21    384,000 first computation – 384,000 prior week (with 3,000 upward revision) 

New Home Sales May    Down 2.5% from April 2008, down 40.3% from May 2007 

Existing Home Sales May    Up 2% from April 2008, down 15.9% from May 2007 – 10.8 months’ worth of homes available

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151

Hints of recovery continue to tease those who hold to the idea that the economy and real estate market will get worse and worse, with home prices falling significantly further in their view. We doubt it, though there are two big worries.
 
First, we need Congress to do its part to minimize the further foreclosures. Just passing legislation will buoy the markets, giving them more confidence that a recovery is on the way.Senators announced yesterday that an agreement has just about been reached on workable legislation.
 
Second, the economy must somehow finesse the apparent number of foreclosures on the horizon–nearly two million. Amazingly, if we seem to be successfully driving the numbers of potential defaults and foreclosures lower, it will help everyone who is currently facing trouble. As Cyril Moulle-Berteaux wrote in The Wall Street Journal, “Even if write-backs [of existing mortgage values] do not occur, stabilizing collateral values will have a huge impact on the markets’ perception of risk related to housing, the financial system, and the economy.”

Thumbnail Sketch: Very little movement—especially important: very little negative movement—among economic indicators. Two camps have formed, one of which says the economy and real estate market have already bottomed with nowhere to go but up (very slowly)…and the other argues that there is a great deal more slowing and pain in our economic future.

Based on the flow of economic indicators, either could be right—or, as was suggested in this update recently, perhaps both could be right, with the recovery eventually pushing the remaining dangers aside.

Meantime, a few more salient indicators:

·        The Conference Board of Leading Indicators rose in April by 0.1%–obviously nothing to get tremendously excited about, except that it is the first time in a year and a half that it has risen two months in a row. Consider it a mild vote in favor of the economy-already-bottoming idea.
·        The Consumer Price Index (CPI) rose 0.2% in April; the core index (with volatile food and energy data removed) rose by 0.1%. Core CPI has increased by 2.3% over the past year, and is apparently slowing.
·        Meantime, the Producer Price Index (PPI) which measures the advance of inflation at the wholesale level, rose by 0.2% in April, with a 0.4% increase at the core level, suggesting a lot of inflationary pressures remaining among the materials used in the manufacturing process.

None of this is particularly conclusive. The economy seems to be plodding along reasonably well, despite the drama surrounding a possible recession (are we in one? how deep? how long?).

The far more interesting news is starting to come from real estate sales reports. The Sacramento Bee reported Monday that Sacramento-area homes sales rose to the highest level in almost a year in April—“the April sales tally was 26.3 percent higher than April 2007”—according to DataQuick Information Systems.

Another article in the same newspaper declared, “Home sales surged 22 percent in Southern California as bargain-hunters bought lower-end homes in areas hardest hit by foreclosures,” again according to DataQuick.

And is that the cavalry we hear off in the distance? There were announcements Monday evening that the Senate was on the brink of a housing (read: foreclosure) recovery act. Stay tuned!

KEY INDICATORS 

Gold $920.20/ounce [up]Crude Oil (Brent) $127.80/brl [up]U.S. Dollar to…    Euro .6383 [down]    Japanese Yen 103.73 [down]6-mo Treasury Bill Yield 1.89%10-yr Treasury Note Yield 3.79% [6-mo unchanged, 10-yr down 10 bps]11^th Dist Cost of Funds: 3.280%30-yr Fixed-rate Mortgage 6.48%15-yr Fixed-rate Mortgage 6.00%1-yr ARM 6.15% [HSH averages rates: 30-yr down 6 bps, 15-yr up 1 bp; 1-yr ARM down 63 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 5/9  Overall    674.4 (up 2.9%; up 15.6% the week prior)  Purchase Money Loans     378.5 (down 0.7%; up 12.1% the week prior)  Refinancing Loans    2422.1 (up 6.5%; up 19.3% the week prior) 

Weekly Jobless Claims 5/10    371,000 first computation – 365,000 prior week (with no revision) 

NAHB Housing Market Index May    Down from 20 to 19 

Housing Starts April    Up 4.9% residential construction up 8.2% - SFRs down 1.7%

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151

I realize I’m apparently in the minority, but I see a process of bottoming that includes gradual improvement. I expect plenty of bumps in the road ahead, but I also expect a much milder recession and sunnier real estate market than most people are predicting. (Not difficult, given how negative many predictions still are.)
 
I believe it is time to start marketing yourself solidly–standing out from the crowd. Those who are the most visible will do well in the coming months

Thumbnail Sketch: The recent data on productivity pretty well sum up the confusing signals being sent by the current economy.

“Productivity growth was 3.2% from the first quarter of 2007 to the first quarter of 2008. Nonfarm unit labor costs rose an annualized 2.2% in the first quarter, slightly below the consensus [of among forecasters]. Unit labor costs were up just 0.2% on a year-ago basis. The numbers indicate that productivity continues to increase, despite the weak economy, and there is little in the way of inflationary pressures coming from the labor market.” [Augustine Faucher, Moody’s Economy.com]

The rate of productivity growth—the rate at which our economy produces what it produces—is quite healthy and well above what most analysts thought it would be. If we are in a recession, after all—especially if the rate of inflation is rising ominously—then we would expect productivity to decline, slowing with the recession and price growth. Apparently not.

Rising levels of productivity indicate that inflation may not be worthy of the worry it’s received of late. Further, it suggests that the recession may be shallow.

Now, I must say that these suggestions fly in the face of a great many economic forecasters. Jim Rogers, for example, whose prediction many years ago that the commodities market would take off helped enshrine him in many investors’ hall of fame, is certain that we’re perhaps halfway through the financial meltdown and, as far as recession is concerned, we ain’t seen nothin’ yet.

But estimable investors like George Soros and market analysts with Warren Buffett believe we’ve hit the bottom and the financial markets will soon begin their recovery.

The differences in their opinions couldn’t be clearer (and Rogers used to work with Soros on a legendary fund). What do we lesser mortals make of all this?

Here’s an idea. It won’t help much, but it may work. We seem to have entered what could be called a trendless market, meaning that the market hasn’t established a predominant trend yet. But I continue to think that the real estate market, as an example, is bouncing rather painfully along a bottom, but that, of course, could be as wrong as either Rogers or Soros or Buffett will prove to be.

The point, perhaps, is that the markets have occasional obvious signs of recuperative strength, but the threats have not disappeared yet. It’s a good time to watch the circus, remaining as light on our feet as possible.

KEY INDICATORS 

Gold $869.70/ounce [down]Crude Oil (Brent) $123.95/brl [up]U.S. Dollar to…    Euro .6457 [up slightly]    Japanese Yen 104.74 [up a smidge]6-mo Treasury Bill Yield 1.89%10-yr Treasury Note Yield 3.89%[6-mo up 13 bps, 10-yr up 1 bp]11^th Dist Cost of Funds: 3.280%30-yr Fixed-rate Mortgage 6.54%15-yr Fixed-rate Mortgage 5.99%1-yr ARM 6.78%[HSH averages rates: 30-yr up 1 bp, 15-yr unchanged; 1-yr ARM down 26 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 5/2  Overall    655.4 (up 15.6%; down 11.1% the week prior)  Purchase Money Loans 381.3 (up 12.1%; down 4.8% the week prior)  Refinancing Loans    2273.8 (up 19.3%; down 16.7% the week prior) 

Weekly Jobless Claims 5/3    365,000 first computation – 383,000 prior week (with upward revision of 3,000) 

Consumer Credit March    Up 7.2% - Revolving up 8.2% - Non-revolving up 7% 

Productivity and Costs 1^st Quarter

   Nonfarm productivity up 2.2% - nonfarm unit labor costs up 2.2%

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151
It’s interesting that, with little to no movement among interest rates, the number of applications for mortgages declined so much. That tells us where we are in this market cycle–dragging along the bottom. But there is reason for some optimism. Prices seem to be hitting the bottom, too.

Weekly Commentary

Thumbnail Sketch: There seem to be several surprises here, most of them suggesting a milder recession than has been predicted until now.

For one thing, the dollar’s value has been improving relative to that of many foreign currencies…gradually rising each week, making our Treasury securities somewhat more attractive to foreign investors. Further, as you can see to the left, Treasury security and mortgage interest rates are moving very little. (The exception is rates for jumbos, subprimes and ARMs, all of which have been extremely volatile as the markets enforce occasional steep risk premiums over other interest rates.)

Intriguingly, you probably noticed that the 11th District Cost of Funds index being used in May for ARM rate adjustments is definitely lower than it was last month. This tells us, as the name suggests, that banks are finding it a bit less expensive to raise money for lending.

Even more significant, though many economists expected a negative figure for this past quarter’s Gross Domestic Product growth, the figure came in at a positive 0.6% of growth—nothing to write home about, but surprisingly higher than many people expected.

What all of these indicators and a few others seem to be predicting is a milder than expected recession. They are not, however, telling us that we won’t experience a recession. Indeed, many economists—probably wisely—are asserting that when we look back at this time period it will be seen as part of a relatively brief and mild recession. (How mild? Compare it to the short downturn of 1991.)

What does all of this mean about the real estate market? It’s hard to say. The good news, in the view of Aaron Smith of Moody’s Economy.com, is that we may likely be nearing the bottom for home price declines in many parts of the nation. But home sales aren’t likely to pick up significantly for quite some time.

The Mortgage Applications Index has fallen to a low range despite attractive interest rates. The applications for refinancing loans have fallen back to rather standard levels. The applications for purchase money mortgages have edged down to very ordinary, slow levels, indicating that the market is in no hurry to hurry up.

This, it seems, is what we get to live with for much or most of this year. There is, though, a forecast currently making the rounds that an improvement in real estate financing will burst a logjam of pent-up demand.  Let’s hope for it.

KEY INDICATORS 

Gold $880.60/ounce [down]Crude Oil (Brent) $120.42/brl             [slightly up]U.S. Dollar to…    Euro .6438 [up]    Japanese Yen 104.68 [up]6-mo Treasury Bill Yield 1.76%10-yr Treasury Note Yield 3.88%[6-mo up 4 bps, 10-yr up 4 bps]11^th Dist Cost of Funds: 3.280%30-yr Fixed-rate Mortgage 6.53%15-yr Fixed-rate Mortgage 5.99%1-yr ARM 7.04%[HSH averages rates: 30-yr up 2 bps, 15-yr up 1 bp; 1-yr ARM up 154 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 4/25  Overall    567.0 (down 11.1%; down 14.2% the week prior)  Purchase Money Loans     340.1 (down 4.8%; down 6.4% the week prior)  Refinancing Loans    1905.2 (down 16.7%; down 20.2% the week prior) 

Weekly Jobless Claims 4/26    380,000 first computation – 345,000 prior week (with upward revision of 3,000) 

Construction Spending March    Down 1.1% - res. construction down 4.6% 

Personal Income March

    Up 0.3% - savings rate fell to 0.2% - spending up 0.4%

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151

Weekly Commentary

Thumbnail Sketch: The FOMC [Federal Open Market Committee] reduced the fed funds rate another quarter of a percent, making it clear that this will probably be the last rate cut for a long while. Worries about inflation are in the air.

We can see the effects of those worries, of course, in the higher Treasury security yields (see at right), but what seems to be happening among rates is a realignment with reality. The opening rate on the 1-year adjustable rate mortgage, for example, slid an amazing 136 basis points to a level that is relatively customary in comparison with the 15- and 30-year fixed-rates. (It had been held artificially high by the intense reluctance to make ARMs, on the part of lenders, and to take them, on the part of borrowers.)

In other words, interest rates appear to be shuffling back into a more recognizably normal distance from one another.

The number of new mortgages being applied for continues to slide. The number of purchase money loan applications has descended into a weak territory—11.5% lower than four weeks ago, and 13.1% lower than a year ago. Applications for refis, meanwhile, fell a stunning 46.3% from four weeks ago, though a gentler 9.8% from a year ago.

The data on new home sales, meanwhile, showed home sales sinking 9% from last year’s level, itself nothing to write home about, and the median price falling 13%—and the number of homes on the market rising by 11%.

How to read all of this? In truth, we get to choose.

This could be the harbinger of a long, slow season for real estate, with prices continuing to drop to lower-than-expected levels. Such a condition can be self-fueling, as falling prices cause people to wait for prices to fall still further before they consider buying a home.

On the other hand, what we are seeing could be the final crunch—as the majority of buyers and sellers see the worst and act on it—before the market improves. With so many signs that the market is just beginning to turn, the latter view may seem preferable.

KEY INDICATORS 

Gold $895.60/ounce [down]Crude Oil (Brent) $116.90/brl [slightly up]U.S. Dollar to…    Euro .6392 [up]    Japanese Yen 104.39 [up]6-mo Treasury Bill Yield 1.72%10-yr Treasury Note Yield 3.84% [6-mo up 9 bps, 10-yr up 12 bps]11^th Dist Cost of Funds: 3.560%30-yr Fixed-rate Mortgage 6.51%15-yr Fixed-rate Mortgage 5.98%1-yr ARM 5.50% [HSH averages rates: 30-yr down 17 bps, 15-yr down 15 bps; 1-yr ARM down 136 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 4/18  Overall    637.6 (down 14.2%; up 2.5% the week prior)  Purchase Money Loans     357.3 (down 6.4%; down 0.8% the week prior)  Refinancing Loans    2286.3 (down 20.2%; up 5.2% the week prior) 

Weekly Jobless Claims 4/19    342,000 first computation – 375,000 prior week (with upward revision of 3,000) 

Durable Goods Orders March    Down 0.3%New Home Sales March    Down 9% - median price down 13% - 11% larger supply of homes on the market