Incline Village Real Estate Blog

Thumbnail Sketch: Though it is important to remember that existing home sales are down 23.8% from their year-ago level, the February uptick of 2.9% over January’s sales level may suggest that the market has hit bottom. Even more impressive is the fact that the number of homes available for sale is dropping—with February’s drop in inventory larger than any since October 2001. 

Does this mean the recovery is here? That’s a tough call, of course. Most economists believe the market has much further to fall, primarily because they expect huge numbers of foreclosures to continue swelling the inventory on the market. There are, however, two factors—at the least—that argue somewhat persuasively for a market bottom: 

First, the number of new listings coming to market typically rises during the beginning of a calendar year. This February, there were 400,000 fewer new listings that came to the market than in February 2007. This coupled with signs that home purchases are just now starting to increase in number suggests a turning point—though turning around fully could take a long time. 

Second, as many contrarians have noted, every tangentially relevant government agency is working on the housing problem and the major issues in the financial markets. This brings to mind the so-called “Business Week Indicator.” Investors have long held that a stock sector’s appearance on the cover of the magazine should tell us that we’re looking at old news, and where the magazine may be suggesting we buy, we might profit far more by selling. Similarly, many suspect that the enormous amount of attention being showered upon the housing market’s problems suggests that they may be about over. 

But again, the best advice may be to expect that the real estate market may bounce along a rocky bottom for several months before a recovery gains traction. 

Meantime, nearly everyone is becoming aware that we have problems of “epic” proportions (to use economist Paul Krugman’s term) that will need to be mended—as the Bear Stearns mess is still in the midst of repair—and, even more important, our financial market needs to be reinvented, especially in the ways it has and has not been regulated over recent years.  

This is not an anti-free-market observation. The bastion of free marketing thinking, London’s The Economist, declares: “No doubt, there are many ways in which financial regulation needs to be fixed; but that is for later. The priority for policymakers is to shore up the financial system.”

KEY INDICATORS 

Gold $936.50/ounce [up slightly]Crude Oil (Brent) $103.77/brl             [up]U.S. Dollar to…    Euro .6331 [slightly down]    Japanese Yen 99.24 [down]6-mo Treasury Bill Yield 1.51%10-yr Treasury Note Yield 3.44%[6-mo down 4 bps, 10-yr down 7 bps]11^th Dist Cost of Funds: 3.970%30-yr Fixed-rate Mortgage 6.41%15-yr Fixed-rate Mortgage 5.80%1-yr ARM 5.48%[HSH averages rates: 30-yr down 4 bps, 15-yr down 25 bps; 1-yr ARM down 72 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 3/14  Overall    652.0 (down 2.9%; down 1.9% the week prior)  Purchase Money Loans     365.0 (down 1%: up 1.6%  the week prior)  Refinancing Loans    2335.0 (down 4.6%; down 4.7% the week prior) 

Weekly Jobless Claims 3/15    378,000 first computation – 356,000 prior week (with upward revision of 3,000) 

Conference Board Leading Indicators Index Feb    Down 0.3% (fifth month down – consistent with mild recession) 

Existing Home Sales Feb    Up 2.9% - inventories down 7.5% -  median price down 8.2% 

NAHB Housing Market Index Mar    Unchanged at 20 

Housing Starts Feb    Down 0.6% - permits down 7.8% 

Fed funds rate cut by .75%

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

Thumbnail Sketch: Though it is important to remember that existing home sales are down 23.8% from their year-ago level, the February up tick of 2.9% over January’s sales level may suggest that the market has hit bottom. Even more impressive is the fact that the number of homes available for sale is dropping—with February’s drop in inventory larger than any since October 2001. 

Does this mean the recovery is here? That’s a tough call, of course. Most economists believe the market has much further to fall, primarily because they expect huge numbers of foreclosures to continue swelling the inventory on the market. There are, however, two factors—at the least—that argue somewhat persuasively for a market bottom: 

First, the number of new listings coming to market typically rises during the beginning of a calendar year. This February, there were 400,000 fewer new listings that came to the market than in February 2007. This coupled with signs that home purchases are just now starting to increase in number suggests a turning point—though turning around fully could take a long time. 

Second, as many contrarians have noted, every tangentially relevant government agency is working on the housing problem and the major issues in the financial markets. This brings to mind the so-called “Business Week Indicator.” Investors have long held that a stock sector’s appearance on the cover of the magazine should tell us that we’re looking at old news, and where the magazine may be suggesting we buy, we might profit far more by selling. Similarly, many suspect that the enormous amount of attention being showered upon the housing market’s problems suggests that they may be about over. 

But again, the best advice may be to expect that the real estate market may bounce along a rocky bottom for several months before a recovery gains traction. 

Meantime, nearly everyone is becoming aware that we have problems of “epic” proportions (to use economist Paul Krugman’s term) that will need to be mended—as the Bear Stearns mess is still in the midst of repair—and, even more important, our financial market needs to be reinvented, especially in the ways it has and has not been regulated over recent years.  

This is not an anti-free-market observation. The bastion of free marketing thinking, London’s The Economist, declares: “No doubt, there are many ways in which financial regulation needs to be fixed; but that is for later. The priority for policymakers is to shore up the financial system.”

KEY INDICATORS 

Gold $935.00/ounce [down]Crude Oil (Brent) $100.13/brl [down]U.S. Dollar to…    Euro .6405 [very slightly up]    Japanese Yen 100.15 [down]6-mo Treasury Bill Yield 1.55%10-yr Treasury Note Yield 3.51%[6-mo up 24 bps, 10-yr up 2 bps]11^th Dist Cost of Funds: 3.970%30-yr Fixed-rate Mortgage 6.53%15-yr Fixed-rate Mortgage 6.05%1-yr ARM 6.20%[HSH averages rates: 30-yr up 5 bps, 15-yr up 27 bps; 1-yr ARM up 19 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 3/14  Overall    652.0 (down 2.9%; down 1.9% the week prior)  Purchase Money Loans     365.0 (down 1%: up 1.6%  the week prior)  Refinancing Loans    2335.0 (down 4.6%; down 4.7% the week prior) 

Weekly Jobless Claims 3/15    378,000 first computation – 356,000 prior week (with upward revision of 3,000) 

Conference Board Leading Indicators Index Feb    Down 0.3% (fifth month down – consistent with mild recession) 

Existing Home Sales Feb    Up 2.9% - inventories down 7.5% -  median price down 8.2%

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

From my seat at this odd spectacle, it appears that we are coming down to it. It? The true economic crisis in our land: Giant financial companies have long been making tremendous amounts of money through the manipulation of debt. But debt must be repaid at some point, somehow. It isn’t a game that can go on forever. While the game is indeed going on, the financial entities can use debt to create huge amounts of debt. It can look like they’re creating wealth in the process. But the truth is, debt must be repaid someday, somehow.
 
Bear Stearns seems to have turned itself into an elaborate Ponzi Scheme, and when investors finally started to line up outside the door, demanding their money, the Bear could not pay…could not raise the money to make good on its debts. The Federal Reserve stepped in with financial backing to keep the game going, created an elaborate scheme in which J.P.Morgan Chase “buys” the Bear (at $2 a share!), and the result is several thousand people who have apparently lost their jobs and amazing amounts they invested in the Bear.
 
These are very, very tough times. The financial markets are now being forced to reinvent themselves. Each morning, when I wake up, I’m not sure which companies will still be there–which brokerage houses, which banks, which mortgage giants.
 
But this will all pass–though it is impossible to say how long it will take and how many people will be hurt by it. The truth is, we do continue to need to buy and sell houses, and to manufacture products, and to invent and create…and we will slip gradually from the grasp of a system that became so mired in the massaging of debt that it forgot what business is really about.
 
Perhaps the surest sign that we’re emerging from this mess will be a series of mornings when we wake up and no longer check the newspapers for details of the next major failure among the giants of our economic life. I think that may be a few months from now, not a few years.
 
Hold firm. Remember what we say about the darkest light…just before the dawn.

Thumbnail Sketch: You probably understand this already, but a quick review won’t hurt. Ground Zero for the current economic crisis can be found among the largest financial brokerages on Wall Street—focused in the fifth largest brokerage house in the world, Bear Stearns. Bear Stearns dove with enthusiasm into the market for subprime mortgage-backed securities. You will recall that two Bear Stearns funds were among the first to fall. We’ve been watching this company over the past several months with great concern. 

Whether it was lowering (fed funds) interest rates, or making it possible for financial brokerages to borrow at the discount window along with banks, or, most recently, allowing those brokerages to use their AAA-rated mortgage-backed securities as collateral for 28-day borrowings of U.S. Treasury securities…the Fed has been trying to provide some relief for the financial brokerages and to calm the markets, which are losing faith in the financial viability of those brokerages. Why? Because the brokerages haven’t been able to sell their assets to anyone; no one has wanted to buy mortgages at anything but fire-sale prices. The Fed was—and still is—trying to head off an avalanche of panic as investors lose all confidence in the financial brokerages and demand their deposits. Which is precisely what started to happen, as a good old-fashioned “run on the bank’ developed for Bear Stearns, which simply didn’t have any way to put together enough funds to pay its depositors. The Fed stepped in, called on J.P.Morgan Chase (arguably the only house large enough to handle all of Bear Stearns’ accounts) to help, and agreed to guarantee the assets of Bear Stearns. That was, to say the least, a stop-gap measure. 

Next, the Fed helped negotiate the purchase of Bear Stearns by J.P.Morgan Chase at the stunning fire-sale price of $2 a share. Friends, Bear Stearns analysts had recently measured the resale value of their assets at about $80 a share. And last year the stock sold for more than $130 a share. Their office buildings alone are surely worth more than the equivalent of $2 a share. J.P.Morgan Chase, in other words, is being paid a great deal of money to keep this shell of a financial house in the game. Again, however, this is stop-gap. The markets—and you and I—watch this with tremendous concern. The financial giants are in danger of imploding. The system is reinventing itself as fast as it can, which may not be fast enough to avoid further significant damage.KEY INDICATORS 

Gold $1004.30/ounce [up]Crude Oil (Brent) $105.56/brl [up]U.S. Dollar to…    Euro .6400 [down]    Japanese Yen 99.82 [down]6-mo Treasury Bill Yield 1.31%10-yr Treasury Note Yield 3.49%[6-mo down 32 bps, 10-yr down 11 bps]11^th Dist Cost of Funds: 3.970%30-yr Fixed-rate Mortgage 6.48%15-yr Fixed-rate Mortgage 5.71%1-yr ARM 5.91%[HSH averages rates: 30-yr down 24 bps, 15-yr down 42 bps; 1-yr ARM up 13 bps] Mortgage Bankers Association Mortgage Applications Index week ending 3/7  Overall    671.7 (down 1.9%; up 3% the week prior)  Purchase Money Loans     368.8 (up 1.6%; up 1.4% the week prior)  Refinancing Loans    2448.2 (down 4.7%; up 4.5% the week prior) 

Weekly Jobless Claims 3/8    353,000 first computation – 353,000 prior week (with upward revision of 2,000) NAHB Housing Market Index Mar    Unchanged at 20 

Housing Starts Feb    Down 0.6% - permits down 7.8% Fed funds rate cut by .75%

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

An exciting day in the financial markets! Happily, the Fed seems to have substituted putting money into the mortgage-making system for making money cheaper (lowering interest rates)–for the moment. As you can see by looking at the numbers for the day, the markets responded very enthusiastically.
 
One of the things that worries me at this point is that the markets, committed to self-preservation (vs. thinking through ways in which they should and must change to keep from creating again the kind of mess we’re in now) will applaud anything that seems to give them a lease on life…even a very temporary one. We need far more than that.
 
I think, again, that we’re in the midst of a huge revolution in our financial markets. Dubai owns a significant share of Citigroup. Countrywide went to the Bank of America. A huge number of our mortgage companies are history. Will we wake up in a couple of years and wonder where companies like Merrill Lynch went?

Thumbnail Sketch: The Federal Reserve appears to have made a brilliant move yesterday, making credit more plentiful rather than reducing interest rates between scheduled meetings. (The Federal Open Market Committee (FOMC), which meets on March 18, will still most likely cut the fed funds rate by half a percent—50 basis points.)

Now, the very recent moves are a bit difficult for non-economists to understand. Still, the markets get the point, and they responded immediately, gleefully taking interest rates a bit higher and, even more to the liking of the markets, giving a strong boost to stock indices, both of which represented a vote of confidence. We even saw the dollar shoring up a bit of value against foreign currencies.

The Fed’s move, artfully accomplished with the cooperation of foreign central banks, was to set up new programs for financial giants to borrow large amounts of money based on their attractive mortgages. These huge companies, which have been buying up mortgages (and thus providing money for more mortgages to be written) have had a terribly time finding ready, willing and able investors to buy up the mortgage investment products they create from the mortgages they buy. That has created a bottleneck in the system, and lenders have had increasing problems trying to find available financing that can actually fund.

The Fed will now loan against these mortgages—not with overnight loans, but with unprecedented 4-week loans. There is discussion of the Fed actually buying mortgage-backed securities (MBS) as well. (“Of course, the next step would be to add MBS to the Fed’s balance sheet on a more permanent basis. Such action could receive serious consideration at next week’s FOMC meeting.”[David Greenlaw, Morgan Stanley] It also announced an increase in its current lending program to banks. And four other central banks announced they will participate in the program.

Of course, the long-term effects of this move remain to be seen. It appears, at least, as if a shiny new pump has been installed in the bow of a boat that continues to fill with water. We need more. We need, above all, mortgage loan programs that will truly allow people to refinance out of the loans that threaten to make them lose their homes, and we need loans that allow buyers to start buying again.

The OFHEO just released the mortgage ceilings for different areas in the U.S. and they’ll now go into effect. See them at http://www.ofheo.gov/newsroom.aspx?ID=418&q1=1&q2=NoneKEY INDICATORS 

Gold $971.80/ounce [up]Crude Oil (Brent) $104.02/brl [up]U.S. Dollar to…    Euro .6533 [down]    Japanese Yen 103.21 [up]6-mo Treasury Bill Yield 1.63%10-yr Treasury Note Yield 3.60%[6-mo down 6 bps, 10-yr up 8 bps]11^th Dist Cost of Funds: 3.970%30-yr Fixed-rate Mortgage 6.72%15-yr Fixed-rate Mortgage 6.13%1-yr ARM 5.78%[HSH averages rates: 30-yr up 25 bps, 15-yr up 35 bps; 1-yr ARM up 49 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 2/29  Overall    684.9 (up 3%; down 19.2% the week prior)  Purchase Money Loans     363.1 (up 1.4%; up 0.2% the week prior)  Refinancing Loans    2569.0 (up 4.5%; down 30.4% the week prior) 

Weekly Jobless Claims 3/1    351,000 first computation – 375,000 prior week (with upward revision of 2,000) 

Employment Report Feb    Payrolls declined by 63,000 – unemployment rate down to 4.8% 

Consumer Credit Jan    Up 3.3% - revolving up 7.3% - non-revolving up 1.1%

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

Economic indicators, including interest rate levels, seem determined to change radically every few days. This means that one day we’ll hear analysts say that the dollar is going to fall even further and interest rates will rise much higher, then another day we’ll hear that interest rates are settling lower again and the dollar is edging up.
 
This makes business planning and economic forecasting nearly impossible. Still, I tend to hold to the idea that the real estate market is nearing its first clear evidences of recovery–not a speedy, heady recovery but a gradual return to life. Even the momentary Chicken-Little concerns that we are surely headed into a deadly downdraft seem to me varied version of the darkest hour before the dawn.
 
That’s my story, and I’m stickin’ to it–though my conviction rests, still, on rather thin ice.

Thumbnail Sketch: Though the indicators of late have been gnashing their teeth, mumbling about bad days ahead, it seems that the fear has settled back a little—and we can buy an ounce of gold for less than $1,000, a barrel of oil for less than $100. Even mortgage rates look strikingly better, having come off recent highs in a big way. The 6-month Treasury bill’s 40-basis-point plunge (nearly half a percent) is particularly persuasive, as is the average 30-year mortgage’s 24-basis-point drop (nearly a quarter percent). Rates are, for the moment at least, improving.

But these wild gyrations are either the sign of an extra-volatile marketplace that, full of fear and uncertainty, can’t make up its mind where rates will go next…or the beginning of an easing trend for interest rates. Or both—a sign of continuing volatility in a market defined by an underlying trend toward lower rates.

In short, we don’t have a clue. 

What we do know, though, is that the market isn’t on the verge of falling off a cliff, as it appeared to be only a few days ago with commodity prices and interest rates rising rapidly. From a sober view, the fundamentals really aren’t there for a lengthy plunge. We are still a safe distance away from overly high unemployment, low productivity, low factory capacity utilization, and—notably—low retail sales. 

Looking at the interest rates cited to the left should inspire us. Yes, that’s a 6-month Treasury bill yielding less than 2%, suggesting that longer-term rates will also decline significantly as well. Already, the news may be improving…though it has a dangerous edge to it.

The issue to keep our eyes on just now is the rate of inflation which, like an actor waiting in the wings to make a big appearance on stage, seems about to frighten the world’s central banks into raising interest rates—just as the Fed is probably about to lower the Fed Funds rate (on March 11-12) by 25 or, perhaps more likely, 50 basis points.

Do the math. Lower American interest rates and higher foreign rates (for the foreign investors we depend on to buy our Treasuries) very likely add up to a still-lower dollar, higher commodity prices, and a potentially weaker American economy. That character waiting in the wings, both happy and worried at the same moment, may be named Catch-22.

KEY INDICATORS 

Gold $964.40/ounce [up]Crude Oil (Brent) $97.40/brl [down]U.S. Dollar to…    Euro .6574 [down]    Japanese Yen 102.87 [down]6-mo Treasury Bill Yield 1.69%10-yr Treasury Note Yield 3.52%[6-mo down 49 bps, 10-yr down 36 bps]11^th Dist Cost of Funds: 3.970%30-yr Fixed-rate Mortgage 6.47%15-yr Fixed-rate Mortgage 5.78%1-yr ARM 5.29%[HSH averages rates: 30-yr down 24 bps, 15-yr down 39 bps; 1-yr ARM down 10 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 2/22  Overall    655.1 (down 19.2%; down 22.6%   the week prior)  Purchase Money Loans     358.2 (up 0.2%; down 11.5% the week prior)  Refinancing Loans    2458.9 (down 30.4%; down 27.9% the week prior) 

Weekly Jobless Claims 2/23    373,000 first computation – 354,000 prior week (with upward revision of 5,000) 

New Home Sales Jan    Down 2.8% - nearly 10 months’ worth of homes on market – median selling price down 15% below last year 

Construction Spending Jan    Down 1.7%