Incline Village Real Estate Blog

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

Here we are at the end of February already–and I have to believe that worries are increasing in the back rooms of the Federal Reserve and Congress’s banking committees, not to mention the coffee rooms of real estate companies.With interest rates higher, loans even harder to qualify for, OFHEO dragging its feet on putting the actual numbers to how high FHA loans can go in specific areas–loan application numbers are falling and, most likely, home sales data will look even worse in a couple of months than they do today.
 
This is either (1) a severe, possibly long-term worsening of the real estate market crunch of (2) the darkness before the dawn. I tend to choose the latter, but–as is always the demonic way with economic cycles–I can find few reasons to justify the positive inclination I still have.
 
Think with me–”darkness before the dawn.” Perhaps we can hasten the recovery.

Thumbnail Sketch: It was not that long ago that then-Chairman Alan Greenspan was confused by the markets’ reluctance to take interest rates higher, as the Fed pushed the fed funds rate higher. “It a conundrum,” he declared, a puzzle. And now, as the markets refuse to take interest rates lower while the Fed is diligently chopping away at the fed funds rate, we seem to have the reverse side of the conundrum. Why?

There are several reasons, none of them particularly good. First, the fed funds rate can be lowered very quickly and easily, and other interest rates tend to move more slowly—though not always. Second, the very worries that are causing the Fed to reduce the funds rate are eating away at the broader markets’ confidence, and investors aren’t yet inclined (1) to leave their worries over inflation and, even more important (2) to reduce the increased yield they’re demanding for investments in debt such as mortgage securities. The money just isn’t there, making it unusually expensive to create mortgages at this moment. 

So…while we can applaud the higher mortgage ceilings and the lower fed funds rate, we still have to line up at the bank and pay big for our mortgages. You can see what this is doing to the mortgage applications—especially for refis, which fell by a resounding 27.9% in the week ending February 15 and are most likely to show another decline in the Feb 22 data to be issued later today.

Note, at the same time, that the cost of a barrel of oil has ascended nearly to $100 a barrel, and an ounce of gold has moseyed back up very nearly to $950. These are, among other things, indications of anxiety in the current financial markets.

The rate of inflation remains a bit higher than usual, with the Producer Price Index offering up a core rate of 0.4% and an annual (core wholesale inflation rate) of 2.4%, and the Consumer Price Index rising slightly to a core rate of 0.3% and an annualized rate of 2.5%. Not worthy of breaking into a sweat, by any means, but still a bit higher than would usually make the Fed comfortable.

Leading indicators are down 0.1%—no biggie. But the Consumer Confidence Index—which could tell us something about how retail sales should go in the near future—plunged from 87.3 to 75, having peaked last July at 112.

These are dicey times. Expect changes—lower rates, perhaps new legislation to jump-start the economy—perhaps surprisingly soon.Gold $948.70/ounce [up]Crude Oil (Brent) $99.59/brl [up]U.S. Dollar to…    Euro .6702 [down slightly]    Japanese Yen 107.45 [down very slightly]6-mo Treasury Bill Yield 2.08%10-yr Treasury Note Yield 3.88%[6-mo down 3 bps, 10-yr up 3 bps]11^th Dist Cost of Funds: 4.072%30-yr Fixed-rate Mortgage 6.71%15-yr Fixed-rate Mortgage 6.18%1-yr ARM 5.39%[HSH averages rates: 30-yr up 40 bps, 15-yr up 41 bps; 1-yr ARM up 14 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 2/15  Overall    822.8 (down 22.6%; down 2.1% the week prior)  Purchase Money Loans     357.6 (down 11.5%; down 0.3% the week prior)  Refinancing Loans    3533.8 (down 27.9%; down 3% the week prior) 

Weekly Jobless Claims 2/16    349,000 first computation – 358,000 prior week (with upward revision of 10,000) 

New Res. Construction Jan    Up 0.8% - permits down 3% 

Existing Home Sales Jan    Down 0.4% - median existing home price down 4.3% year-over-year – months’ worth of inventory 10.3 (up from 10 in Dec)

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

The current forecast from our best prognosticators seems to anticipate a market turnaround (at last) about six to nine months from now. One very unusual prognosticator is the action among builders’ stocks on Wall Street. Many of these downtrodden shares have burst into dramatic recovery in the past two months, and that is, quite often, an accurate prediction of a recovering real estate market about 6 to 9 months before the fact.
 
Granted, it’s hard to get overly excited about this–most of us will wait until the chickens hatch before we start to count them–but it’s good news, and I’ll take it!

Thumbnail Sketch: Mixed news. Mortgage rates have been rising slightly, in spite of Fed’s efforts to bring interest rates down. Mortgage applications are down a bit, with purchase money loan applications in slightly weak territory. Various data—unemployment insurance claims, January retail sales and industrial production all seem—often surprisingly—positive. And we have a likely confirmation that the real estate market will noticeably turn upward by the end of 2008. 

Why are mortgage rates edging north? Two main reasons seem credible. First, investors may not be buying the idea that sending out tax rebates and raising mortgage loan ceilings will actually have much effect on the structural problems in our financial markets. Instead, they seem to be waiting, rather than joining the party. 

Second, the volume of applications for refinancing mortgage loans has been so heavy that, by the basic laws of supply and demand, the expense of the product has been rising. Thus, interest rates have been moving north, even as the Fed is making very convincing cuts in the fed funds rate. 

The general malaise—the lack of faith in complex financial instruments and their makers—is infecting the financial markets at all levels. Student loans are in trouble, as are the agencies that insure the bonds backed by debt instruments. Quite simply, we are unlikely to have a strong real estate mortgage market again until some confidence is rebuilt among those who invest in Collateralized Mortgage Obligations and related debt investments. 

At the same time, however, we are seeing rather benign figures from retail sales and industrial production, and jobless claims are declining. This flies in the face of worries that we’re about to do a free fall into recession. Perhaps it isn’t. 

But the level of uncertainty is still with us, fueling higher prices for precious metals and crude oil. Again, there is little faith in the financial giants, including the U.S. government, at the moment. 

The footnote to all of this—which turns out to be very good news—is that those who bought the downtrodden major construction company stocks at the beginning of this year in anticipation of a recovery for builders have enjoyed great profits. Fortune magazine noted, “the stocks of home builders Toll Brothers, Lennar, and Hovnanian rose 40 percent, 52 percent, and 96 percent respectively.” Many analysts feel this predicts an industry recovery will show up in six to nine months. This is significant, though a lack of news coverage wouldn’t lead us to think so.

KEY INDICATORS 

Gold $926.80/ounce [up]Crude Oil (Brent) $97.26/brl [up]U.S. Dollar to…    Euro .6782 [down slightly]    Japanese Yen 107.73 [up a bit]6-mo Treasury Bill Yield 2.11%10-yr Treasury Note Yield 3.85%[6-mo up 1 bp, 10-yr up 20 bps]11^th Dist Cost of Funds: 4.072%30-yr Fixed-rate Mortgage 6.31%15-yr Fixed-rate Mortgage 5.77%1-yr ARM 5.25%[HSH averages rates: 30-yr up 10 bps, 15-yr up 13 bps; 1-yr ARM up 15 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 2/8  Overall    1063.5 (down 2.1%; up 3% the week prior)  Purchase Money Loans     403.9 (down 0.3%; up 12% the week prior)  Refinancing Loans    4901.5 (down 3%; down 1% the week prior) 

Weekly Jobless Claims 2/9    348,000 first computation – 357,000 prior week (with upward revision of 1,000) 

Monthly Retail Sales Jan    Up 0.3% - after 0.4% decline in December 

Industrial Production Jan

    Up 0.1% - capacity factory utilization 81.5%

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151
The news is both good and not-so-good, as you know. What intrigues me in the commentary by Michael Hill (cited in this update) is that it recognizes the need for new mortgage instruments, for a revolution in lending. My concern is that such a revolution won’t occur unless it gets even more obvious that we need extraordinary thinking to reignite the real estate market. We’ll continue to hammer on this.

Thumbnail Sketch: The big news, of course, is that the loan ceiling for Fannie, Freddie and FHA was raised (through the end of 2008 only) from $417,000 to $729,750. This should help many homeowners refinance existing loans and complete advantageous purchases of real estate, and may also bring the long-lagging FHA back into the mortgage game as a viable player. 

But yes, there are problems here. The first, for which there isn’t adequate space, is that the other major part of the Economic Stimulus Act—the widely-discussed rebate of $300 or more to taxpayers—is unlikely to have much effect. The money for Paul will come from Peter’s pocket, a magic shell game, and then…where will it go? Most of us are less likely to run out and buy something than we are to set the money aside for a rainy day. And rainy days are definitely predicted for the near- to mid-term future. 

Second, regarding the new loan ceilings: Someone whose home is losing value at a rapid clip is probably unable to refinance, no matter the loan ceiling. Lenders, needless to say, look askance at writing loans secured by properties that are likely to be worth $10,000 less next month and then $10,000 less the month after, etc. To the thousands of homeowners in such a position, all that most lending experts can suggest is a short sale—as soon as possible. 

Needless to say, nothing in the Economic Stimulus Act deals clearly with this sort of issue. So we end up with a major problem: The legislation which is being billed as the solution to the current economic slowdown generally doesn’t address the severe structural problems that caused the slowdown in the first place. And we can’t solve those problems with bandages. 

A fine op-ed article by the president of Emerge Homes, recently printed in several newspapers, suggested that we reached the point quite some time ago where our available mortgage programs couldn’t really support the demand for homes whose prices had risen so greatly. Most of those who bought a home in the past five years could not have bought that home without a program that bends the rules of the old 30-year fixed-rate loan, allowing the buyer to pay less than he would with an old, conventional loan. The resulting problems with that approach to affordability are now obvious. “Now is the time,” writes Michael Hill, “for more trustworthy capitalists, more focused on long-range outcomes, to meet this demand [with radically new mortgage programs] and reopen the door to home ownership to millions of Americans.” 

He concludes that “what is needed is a new standard mortgage product, something as revolutionary today as the 30-year fixed-rate loan was when it was introduced.” Food for thought!!!Gold $909.50/ounce [up]Crude Oil (Brent) $92.86/brl [up]U.S. Dollar to…    Euro .6858 [up slightly]    Japanese Yen 107.32 [up a bit]6-mo Treasury Bill Yield 2.10%10-yr Treasury Note Yield 3.65%[6-mo down 4 bps, 10-yr up 9 bps]11^th Dist Cost of Funds: 4.072%30-yr Fixed-rate Mortgage 6.21%15-yr Fixed-rate Mortgage 5.64%1-yr ARM 5.10%[HSH averages rates: 30-yr down 3 bps, 15-yr down 5 bps; 1-yr ARM down 37 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 2/1  Overall    1086.6 (up 3%%; up 7.5%  the week prior)  Purchase Money Loans     405.3 (up 12%: down 17.7% the week prior)  Refinancing Loans    5054.2 (down 1%: up 22.1% the week prior) 

Weekly Jobless Claims 2/2    356,000 first computation – 378,000 prior week (with upward revision of 3,000) 

Productivity fourth quarter    Up 1.8% month-to-month - up 2.6% year-over-year 

Consumer Credit Dec

    Up 2.1% annualized – revolving up 2.8% - non-revolving up 1.8%

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Here we are in the heat of the political season but this time, the economy is a front-and-center issue. Certainty grows as each day passes: We seem to be entering a recession. The best economists are telling us to tighten our belts for a rather rough ride.
 
It doesn’t change much, of course. The only big question it raises is whether interest rates will start to ease again. Truly, there’s no saying. In the best of all possible worlds–which is not where we live, of course–every effort would be made to keep rates declining so that people can refinance out of loans rather than default on them. The number of applications for refis continues to skyrocket.

Thumbnail Sketch: Four very important developing trends:

(1) Interest rates have stopped declining and, in fact, some rates have risen slightly in recent weeks. Yes, shorter-term Treasury securities are still edging down, but mortgage rates are tip-toeing in the opposite direction. Why? Largely because of the astonishing increase in demand for refinancing loans. Higher demand = rising prices. 

(2) While demand for refis continues to climb, there is a feeling of desperation that cannot help but worry us. The issue, clearly, is as much availability of appropriate loans as it is lower interest rates (which aren’t going to get much lower, apparently—at least, for the time being). The number of applications for purchase money loans fell by a convincing 17.7% in the week ending January 25. Clearly, there is little appetite for home purchases and much for pulling out of precarious existing financing and into stronger, safer loans—especially fixed-rate mortgages. 

The salient issue here, though, is that rates are showing signs that, for the near-term at least, they will not decline significantly. 

(3) “After racking up more than $100 billion in mortgage-related losses in recent months, banks and their investors had hoped they were out of the woods. They aren’t.” [Amy Hoak, The Wall Street Journal] The subprime soap opera has moved into bond insurance firms, which seem increasingly weak. Notice the chain of cause-and-effect: If the strength of bond insurers is down rated by the rating firms, that means the major financial brokerages must downgrade the value of existing bonds (collateralized debt obligations) which in turn means they are likely to charge off more in losses. “A lot of investors want to believe [the fourth-quarter losses] were the end,” Joseph Mason, a finance professor at Drexel University’s business school, noted. “We’re definitely not done here.” 

This means mortgages aren’t likely to become easier to originate in the coming months—and they may possibly become harder. The concerns about debt, meanwhile, are spreading far beyond mortgage debt to credit cards, auto loans, and nearly every other form of loan. 

(4) The fourth-quarter growth of the nation’s Gross Domestic Product, in the first estimate published last week, was a very slim 0.64%. Looking at the data, Moody’s Economy.com suggested that the “growth” had turned negative in December, the last month of the quarter, and declared, “We are now forecasting a 2008 recession.” 

There is tough sledding still ahead, but it should be viewed at least as much in terms of opportunity as it is in terms of trouble. Time to get creative!

KEY INDICATORS 

Gold $896.70/ounce [down]Crude Oil (Brent) $89.02/brl [down]U.S. Dollar to…    Euro .6832 [up]    Japanese Yen 106.89 [down slightly]6-mo Treasury Bill Yield 2.14%10-yr Treasury Note Yield 3.56%[6-mo down 22 bps, 10-yr down 11 bps]11^th Dist Cost of Funds: 4.072%30-yr Fixed-rate Mortgage 6.24%15-yr Fixed-rate Mortgage 5.69%1-yr ARM 5.47%[HSH averages rates: 30-yr up 9 bps, 15-yr up 5 bps; 1-yr ARM up 12 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 1/25  Overall    1054.95 (up 7.5%; up 8.3% the week prior)  Purchase Money Loans     362.0 (down 17.7%; down 4.6% the week prior)  Refinancing Loans    5103.62 (up 22.1%; up 16.9% the week prior) 

Weekly Jobless Claims 1/26    375,000 first computation – 306,000 prior week (with upward revision of 5,000) 

Employment Report Jan    New payroll jobs down 17,000 – unemployment rate edged down to 4.9% 

Construction Spending Jan

    Down 1.1% - residential down by 2.8%

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

Enclosed in the economic stimulus package, along with a bunch of $300 checks, we might just find a gift to the local real estate market of great value. It looks as if we’ll have a $729,750 ceiling on conforming loans for the balance of this year. (The hike expires at the end of the year.)
 
This, more than anything else I can think of, could truly provide economic stimulus. Champagne, anyone? Well, maybe we should wait until we see this in writing.

Comments regarding the Fed announcement:

Several hours after this week’s update was written, we received the news that the Fed (the Federal Open Market Committee, to be more precise) has cut the fed funds rate once more, this time by 50 basis points, taking the short-term rate down to 3%.
 
This will, of course, reduce the cost of much short-term funds. Since most banks key their prime rate to the fed funds rate these days, it will means loans that adjust to the prime rate will also decline. ARMs adjusting to short-term indexes should also go lower.
 
As for fixed-rate mortgages–most dance to the beat of the 10-year Treasury, and the effect of this further fed funds rate cut on the 10-year Treasury is unpredictable just now. It will be interesting to watch. If the markets truly are ruled more by fear of an economic slowdown right now than they are by a fear of potentially rising inflation, longer-term rates should decline a bit as well.
 
Watch interest rates over the next 48 hours. They should provide some insight into where rates will continue to go…or if they will stall.

Thumbnail Sketch: It is not a done deal yet—and several officials in our government do not favor the idea—but it strongly appears that a higher ceiling ($729,750) for conforming mortgage loans (those that can be sold to Fannie Mae and Freddie Mac) is a part of the “stimulus package” being worked out by Congress and the President. It is worth noting that the President didn’t mention this in his State of the Union Address Monday night. Instead, he declared that Fannie and Freddie needed to undergo changes—meaning that they have, in the view of many in Washington, control over far too much money, and are thus economic neutron bombs waiting to explode. 

Just who should have control over trillions of dollars in mortgage debt is a worthy subject for careful debate, indeed, but bringing it up here tells us that any hike in the allowable maximum for conforming loans will occur quietly and most likely will be viewed as a temporary stimulus to the economy. There is still work to be done. Does that mean we’ll lose the possible higher ceiling at some point in the future? Yes. It’s scheduled to expire at the end of the year. But that would happen in the context of revamping the powers of Fannie and Freddie and of making the FHA loans relevant once more. This latter process is long overdue—and many among us are even uncertain that FHA can truly be brought into the 21^st century. But this is, after all, the agency that first developed 30-year mortgages, making the modern real estate market possible. 

Perhaps—especially as we are in a necessary process of utterly rethinking how we finance home purchases—it is an appropriate time to give the FHA a complete overhaul. We need to involve our best thinkers in this process.  In any case, the figures being thrown before us now still suggest that the real estate market is taking a bashing. Moody’s Economy.com suggested recently that we are at the midway point in the real estate slump, and that we’ll start to pull ourselves out of it in a year. The important thing, though, is that we’re actually beginning to talk about a recovery. If we want an enduring recovery, though, we must realize that we can’t return to the zany market of two years ago. We will likely watch the creation of a marketplace that more truly serves the needs of homebuyers and investors and strives for a kind of honesty and transparency that will keep it healthy in the future.

KEY INDICATORS Gold $931.00/ounce [up]Crude Oil (Brent) $91.46/brl [up]U.S. Dollar to…    Euro .6770 [down]    Japanese Yen 107.03 [up             slightly]6-mo Treasury Bill Yield 2.36%10-yr Treasury Note Yield 3.67%[6-mo down 9 bps, 10-yr up 15 bps]11^th Dist Cost of Funds: 4.172%30-yr Fixed-rate Mortgage 6.15%15-yr Fixed-rate Mortgage 5.64%1-yr ARM 5.35%[HSH averages rates: 30-yr up 5 bps, 15-yr unchanged; 1-yr ARM down 15 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 1/18  Overall    981.5 (up 8.3%; up 28.4%  the week prior)  Purchase Money Loans     439.9 (down 4.6%; up 11.4% the week prior)  Refinancing Loans    4178.2 (up 16.9%; up 43.5% the week prior) Weekly Jobless Claims 1/19    301,000 first computation – 302,000 prior week (with upward revision of 1,000) 

Existing Home Sales Dec    Down 2.2% - median housing price down 6% annualized – slightly better (lower) inventory figures New Home Sales Dec    Down 4.7% - median price down 10.4% annualized –inventory up