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

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151
The economic indicators this week are rather glum, and I have to say that I expect them to remain rather negative for quite some time. Oddly, though, that won’t necessarily mean that the real estate market is getting worse–even though analysts in the newspapers will say it does.

We have a great deal of restructuring ahead of us. The financial markets–notably stock brokerages–have a lot of work ahead, primarily to regain some degree of confidence from investors and to assemble a system of regulation that makes sense, probably headed by the Federal Reserve.

While this is going on, mortgages will increasingly be written, houses will increasingly be sold…but we’ll all be rethinking the way we practice our trade and making changes where they seem right.

Warm regards,

Steve

Weekly Commentary

Thumbnail Sketch: There were a number of other important economic indicators released last week. Let’s review them:

Industrial production rose 0.3% in March, which suggests that, though the sector isn’t growing with much vigor, any weakness is rather muted. This is in agreement with the thesis that the recession—which most noted economists agree we have already entered—should prove to be relatively mild.

It is partly due to this apparent strength in the manufacturing sector and the Fed-induced growth in the nation’s money supply that the Index of Leading Indicators halted its gradual decline after five months and rose in March by 0.1%.

Meanwhile, sales of existing homes in March declined by 2%, with the supply of homes on the market slightly higher than the prior month, at 9.9 months’ worth (meaning, of course, that it would take 9.9 months to sell off all current inventory at current rates of sale, assuming no further homes were added to the inventory). The median price of a home was 8% lower than at this time last year. All in all, the real estate market is eating feathers here—but the story becomes far more intriguing, as usual, if you look at reality a bit more closely.

One rather fascinating report that reached the news recently is that homes within easy driving—or even walking—distance of places to work in metropolitan areas have recently shown about a 10% jump in median selling values. This may signal a major change in what buyers are looking for. With gasoline prices unlikely to drop by much in the foreseeable future, with concerns about the environmental expense of long commutes—not to mention the expense in terms of time wasted—more and more homebuyers are placing more and more value on housing that is closer to work. Further, there is a revitalization of many of our nation’s cities underway. These are important trend-makers for the future of real estate here.

Two other observations, both of them rather intuitive: First, you may have noticed that interest rates tend to edge north whenever we go through an economically neutral period—generally, with few startling economic indicators. This underscores a belief that we are unlikely to see interest rates fall much further unless lower rates are clearly needed to rescue a plummeting economy.

Second, we may not even see the real estate recovery when it has settled in our midst—because it might not look the way we expect it to. Certainly, it won’t look like the market of two years ago. We’ll need to remain very alert to market changes.

KEY INDICATORS

Gold $924.30/ounce [down]Crude Oil (Brent) $116.46/brl [up]U.S. Dollar to… Euro .6251 [slightly down] Japanese Yen 102.89 [up]6-mo Treasury Bill Yield 1.63%10-yr Treasury Note Yield 3.72% [6-mo up 19 bps, 10-yr up 13 bps]11^th Dist Cost of Funds: 3.560%30-yr Fixed-rate Mortgage 6.68%15-yr Fixed-rate Mortgage 6.13%1-yr ARM 6.86% [HSH averages rates: 30-yr up 32 bps, 15-yr up 25 bps; 1-yr ARM up 49 bps]

Mortgage Bankers Association Mortgage Applications Index week ending 4/11 Overall 743.4 (up 2.5%; up 5.4% the week prior) Purchase Money Loans 381.6 (down 0.8%; up 8.1% the week prior) Refinancing Loans 2866.0 (up 5.2%; up 3.4% the week prior)

Weekly Jobless Claims 4/12372,000 first computation – 355,000 prior week (with downward revision of 2,000)

Consumer Price Index (CPI) Mar Up 0.3% – core (w/food &energy prices removed) rose 0.2% – annual inflation rate 4% (core was 2.4%)

New Housing Starts March

Down 11.9% – permits down 5.8%

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

A few more tea leaves telling us that recovery is gradually beginning…but leaving us totally in the dark as to how the recovery will look. One thing seems clear: It will look different from what most of us expect (which is, I suppose, the re-emergence of a market like the one we experienced about two years ago. Not going to happen.)

Warm regards,
Steve

Weekly Commentary

Thumbnail Sketch: The optimistic signs are rather weak tea at the moment, but they may prove significant nonetheless, especially as regards the very slow recovery builders are beginning to predict.

How are they predicting a recovery? As we said—it’s weak tea, but it’s there. The National Association of Home Builders Index, which results from a survey of major builders, is no longer declining. In fact, it has stalled at a reading of 20 for three months now. That’s a low reading, of course, but the significant part is that it appears unlikely to fall lower again. As Aaron Smith suggested in Moody’s Economy.com, “Homebuilder confidence may have bottomed.”

The good signs in the latest NAHB survey are reports from builders that, though current sales are still very slow, potential buyer traffic is improving. Further, the “expectations index”—a measure of optimism among builders regarding how sales volume will look in a few months—rose by four points, the largest monthly increase in a year.

At the same time, there are signs that our nation’s manufacturing sector is doing slightly better than expected, and even the unemployment insurance claims (see Weekly Jobless Claims to the left) seem to be declining again.

One major bugaboo is the mounting worry over inflation, both in our nation and in the world. We are reaching the point where so-called “core inflation”—the numbers resulting when you remove food and energy data because they are so volatile—no longer seems as relevant, because food and energy prices continue to climb at a very fast pace. The effects of higher food and energy prices are by now working their way into all the other prices in our economy. With India and China becoming greater consumers of food (notably, for example, grains and beef) and energy (notably crude oil), higher prices for these staples are likely to remain with us for many years to come.

The overall economy, therefore, is somewhat precarious. Our financial systems, as discussed recently, need regulatory structures. Our commodity prices remain very high. But the tendency seems to be to edge toward greater economic health.

All of which raises an increasingly salient question: If health is returning to the real estate sector, what exactly will it look like? We will need to be on our toes for changes, for new opportunities, as well as for new potential problems. Watch, in particular, for new mortgage programs—and old (e.g., FHA)—to become very important to a recovering market.

KEY INDICATORS Gold $932.00/ounce [up]Crude Oil (Brent) $111.58/brl [up]U.S. Dollar to… Euro .6336 [slightly down] Japanese Yen 101.75 [down]6-mo Treasury Bill Yield 1.44%10-yr Treasury Note Yield 3.59% [6-mo down 12 bps, 10-yr up 4 bps]11^th Dist Cost of Funds: 3.560%30-yr Fixed-rate Mortgage 6.36%15-yr Fixed-rate Mortgage 5.88%1-yr ARM 6.37% [HSH averages rates: 30-yr down 16 bps, 15-yr down 11 bps; 1-yr ARM up 13 bps]

Mortgage Bankers Association Mortgage Applications Index week ending 4/4 Overall 725.6 (up 5.4%; down 28.7% the week prior) Purchase Money Loans 384.7 (up 8.1%; down 11.8% the week prior) Refinancing Loans 2724.7 (up 3.4%; down 38.1% the week prior) Weekly Jobless Claims 4/5357,000 first computation – 410,000 prior week (with upward revision of 3,000)

Producer Price Index (PPI) Mar Up 1.1% – core (w/ food &energy prices removed) rose 0.2% NAHB Housing Market Index Apr

Flat at 20 for third month in a row

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

Thumbnail Sketch: There is a curious contrast between the fervor with which many in Washington are seeking programs that will ease the real estate madness and the lackadaisical way others are brushing aside any sense of urgency.

Why the contrast? Those on one side of the issue are motivated by specific interests: they want relief for homeowners, for builders, for the real estate market. Those on the other side seem motivated by the belief that any intervention by the government should be a last resort measure—and we should give the earlier legislation and rate cuts time to take effect before doing anything more.

This is a political drama now, where it was more of a bipartisan rush to respond earlier in the year when the Economic Stimulus Act was passed so quickly. At this point, the contents of further legislation are difficult to predict.

The building industry is working diligently to get major tax relief from legislation allowing builders to take a four-year carry-back on recent losses (that is, to bring the losses to bear on profits earned as much as four years ago, rather than just two). Such a change would bring many builders something of a windfall and would likely mean the difference between survival and bankruptcy for many small builders.

Another idea with a good deal of backing is to provide tax credits to those who buy a home where a foreclosure process has begun.

Another is to raise the FHA loan level for refis to $550,000—and not temporarily, it seems—allowing the FHA program to offer the opportunity for people to refinance their way out of trouble brewing with their existing subprime loan.

Meanwhile, there is a problem that Washington can’t do much about. Lenders have kept rates higher—whether on adjustable rate mortgages or on 30-year fixed-rates—due in part to a disinclination to loan unless the borrower is extraordinarily qualified.

The 30-year fixed-rate loan usually follows the ups and downs of the 10-year Treasury note, but it has been moving independently for many weeks. The same is true of ARMs tied to shorter-term Treasury bills and notes. Treasury rates have declined far more than have the actual ARM offered rates.

We have not heard from major lenders why this is so. We seem to sit in the midst of a tornado, not quite knowing which way it will turn next. The good news? The recessionary tornado so far looks relatively mild.

KEY INDICATORS

Gold $918.00/ounce [down]Crude Oil (Brent) $106.76/brl [up]U.S. Dollar to… Euro .6360 [slightly up] Japanese Yen 102.42 [up]6-mo Treasury Bill Yield 1.56%10-yr Treasury Note Yield 3.55%[6-mo up 5 bps, 10-yr up 11 bps]11^th Dist Cost of Funds: 3.560%30-yr Fixed-rate Mortgage 6.52%15-yr Fixed-rate Mortgage 5.99%1-yr ARM 6.24%[HSH averages rates: 30-yr up 11 bps, 15-yr up 19 bps; 1-yr ARM up 76 bps]

Mortgage Bankers Association Mortgage Applications Index week ending 3/28 Overall 688.3 (down 28.7%; up 48.1% the week prior) Purchase Money Loans 356.0 (down 11.8%; up 10.6% the week prior) Refinancing Loans 2636.0 (down 38.1%; up 82.2% the week prior)

Weekly Jobless Claims 3/29 407,000 first computation – 369,000 prior week (with upward revision of 3,000)

March Employment Report Payroll jobs down 80,000 – unemployment rate up to 5.1%

Consumer Credit Feb Up 2.4% – revolving up 6.1% – non-revolving up 0.4%