I send this to you, as you may have guessed, before we have any idea of where the election is going. It is not mentioned, therefore. (I have no idea what I would have said about it, in any case. This is your letter, not mine.)

I can say, though, that our federal agencies are moving in the direction of providing greater help where it is needed–particularly thanks to Sheila Bair, the Chairman of the FDIC, who is determined to create meaningful help for people whose mortgages need a work-out. IndyMac, which the FDIC took over not that long ago, has been a laboratory for ways in which distressed loans can be approached in larger numbers and more effectively. The new program that has come out of the experiments is mentioned in this week’s update.

The other good news is that sales of existing homes continue to improve, affordability indexes are rising, and inventory is declining a bit. We may be seeing the start of a season in which real estate continues gradually to improve while the overall economy falls ever-deeper into a recession. Not a time to go on vacation, if you’re selling houses or writing loans.

Steven C Peterson, Senior Loan Officer
Office: 888-232-7687 Cell: 775-219-7151Chase Home Loans
930 Tahoe Blvd., Ste. #802-195
Incline Village, NV 89451

Weekly Commentary

Thumbnail Sketch: In a word, the economy is slowing. But not plummeting.Commodities are regaining a small amount of their losses. The dollar is readjusting to foreign currencies slightly. Other than short-term maturities, interest rates are edging up, mortgage rates among them. At the same time, though, the number of applications for mortgages in the week ending October 24 improved, especially for refinancing loans—though an 8.5% increase in applications for purchase money loans is rather healthy as well.

Editor’s Note: Freddie Mac released the results of its Primary Mortgage Market Survey® in which the 30-year fixed-rate mortgage averaged 5.93 percent with 0.7 point for the week ending September 11, 2008, down from last week when it averaged 6.35 percent. Last year at this time, the 30-year FRM averaged 6.31 percent. This is the opportunity buyers have been waiting for to lock in a low rate and take advantage of this large inventory of homes. Low rates and low home prices will not coincide much longer, as rates should trend up going forward, to hedge inflationary fears. Now is the time to buy. View the Mortgage Market Survey here.

The federal government takes over Fannie Mae and Freddie Mac. Interest rates decline. A greater sense of security grows in the mortgage market. Mortgage-backed securities have one of the world’s most secure buyers. This is all good news, but there are Fannie and Freddie stockholders who will simply lose their investment, and there are taxpayers–all of us–who will pay to keep the system truly solvent. And we don’t really know what will become of our mortgage industry in the near- to mid-term future.
Steve Peterson
888-232-7687 office/ 775-219-7151 cell

Weekly Commentary

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.

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%