Let’s look at a few questions raised by this past week’s indicators.
1. The Existing Home Sales report contained an announcement that completed sales had increased in April by 7.6% month-over-month—23% above last year’s reading for April. One thing is obvious: This increase was fueled by homebuyers’ wish to take advantage of the $8,000 and $6,500 tax credit available to those who signed purchase documents by April 30 (and who close their transactions by June 30). One thing was not at all obvious: According to National Association of RealtorsÒ figures, sales varied greatly in different regions of the nation. Existing home sales (month-to-month) rose by a striking 21.1% in the Northeast, by 9.9% in the Midwest, by 8.6% in the South—but fell by 6.2% in the West.
All that can be said about this at the moment is that sales began to pick up in the West far ahead of the rest of the nation, especially sales of distress properties. Further, sales of distress properties have started to drop off in the West earlier than in the rest of the nation. And it is possible that the West is in an advanced stage of recovery, in which sales move to higher price levels and the market begins to look perhaps more “normal” than in the rest of the nation. None of this adequately explains why homebuyers didn’t rush out in large numbers to take advantage of the tax credit, however. Doubtless, we will all continue to seek an answer to this puzzle.
2. The Mortgage Applications Index surprised no one by running precisely counter to the Existing Home Sales Report. It was expected that the week in which purchase agreements had to be signed would also be the week in which loan applications would begin to fall off.
However, the 27.1% decline in the number of purchase money loans (with which homebuyers finance the purchase of their homes) was unsettling. The index figure of 192.1 is the lowest the index has reached during the whole recession. But if you look at how the index responded last fall to the assumed conclusion of the initial $8,000 tax credit program, you will find a great similarity between the moves of the index then and the moves of the index now. The shouting about a deep decline in real estate sales is overdone.
3. The week also brought us small disappointments. The number of claims for unemployment insurance rose, reversing a steady decline that had lasted for the past several weeks. And the Conference Board Index of Leading Indicators, which has been an enthusiastic indication of the recovery’s strength for months, fell for the first time in a year. Yes, it was only a 0.1% decline, but it seems to signal a slight slowing to the progress of the recovery. Moody’s Economy.com has been predicting this for some time—that the economy would slow, but continue to advance. If they prove to be correct (and they probably will), the slowing isn’t a big thing.
May we live in interesting times, indeed! Last week’s peculiar market rout changed the economic landscape like a tsunami. The financial world sought cover in the likelihood that the 1,000+ plunge mid-day in the Dow Jones Industrial Average was the result of some arcane technological changes (mainly automatic sell programs) and not the result of the fermenting panic in Europe, but there can be little question that the panic created the conditions in which such a stupendous market plunge could occur.
The issues that continue to haunt me, however, are (1) how we expect the price tag for the bailout package agreed to this weekend to be paid, and (2) how we plan to restore credibility and certainty to investment markets in which things happen that make no sense. This latter problem, though few people are talking about it, will probably drag on and on. Perhaps new regulations and oversight will help. I don’t know what it’s going to take, but we’re in trouble if it becomes the dead elephant in the stock exchange pits.
The good news, though, is that the real estate market is not only responding to the end of the homebuyer tax credit program with higher sales volume and more mortgage applications, but is also giving signs that it may hold its own in the short-term, if not for the time being. At the very least, we have reason to suspect that sales volume will continue to edge higher once the market gets used to the fact that the tax credit programs are indeed gone…but the low prices and attractive interest rates remain.
Conforming 30 year fixed rates for borrowers with excellent credit, 20% down (25% for condos) and who are buying an owner occupied home are currently 5% with no points (rates are subject to change until locked).
Jumbo 5/1 Arms for owner occupied homes with 25% down and loan amounts up to $850,000 are currently 4.125% with no points (rates are subject to change until locked).
Sierra Pacific Mortgage
May 12, 2010
KEY INDICATORS [5/11/10]
Gold $1219.40/ounce [up]
Crude Oil (Brent) $80.48/brl [down]
U.S. Dollar to…
Euro .7862 [up]
Japanese Yen 92.88 [down]
6-mo Treasury Bill Yield 0.22%
10-yr Treasury Note Yield 3.55%
[6-month down 1 bp, 10-yr down 7 bps]
11th Dist Cost of Funds 1.859%[+]
30-yr Fixed-rate Mortgage 5.26%
15-yr Fixed-rate Mortgage 4.72%
1-yr ARM 4.88%
[HSH averages rates: 30-yr
down 6 bps;15-yr down 1 bp; 1-yr ARM up 10 bps]
Mortgage Bankers Association Mortgage Applications Index
week ending 4/30
556.2 (up 4%; down 2.9%
the week prior)
Purchase Money Loans
291.3 (up 13%; up 7.4%
the week prior)
2117.3 (down 2.1%; down 8.8%
the week prior)
Jobless Claims 5/1
444,000 – prior week 448,000 – continuing claims at 4.594 m
Employment Report April
290,000 new payroll jobs – unemployment rate up to 9.9%
Productivity first quarter 2010
Up an annualized 3.6% – unit labor costs down 1.6%
Consumer Credit March
Up 2% – revolving down 3.2%
What exactly happened last week? The Dow Jones Industrial Average (DJIA) suddenly plunged by more than 1,000 points at about 2:45 P.M. before regaining a bit more than 500 points later that afternoon, and we’re still reading headline articles in The Wall Street Journal speculating on what could have caused this odd performance.
The main culprits so far identified—albeit tentatively—have been automatic selling programs in the stock markets and hedge funds betting on further declines a few moments after the plunge began, deepening it. Many analysts also identified a huge sale of Procter and Gamble shares as a proximate cause—not exactly a news-making stock.
True, the DJIA, as these words are written, has climbed back to the 10,800 level, 10-year Treasuries are happily ensconced at the 3.55% level, and the euro is holding at about $1.28. The rout, it seems, has ended, though the recovery from the Thursday-Friday plunge is incomplete.
It appears that investors all over the world are digesting the details of the agreement among European Union countries reached last weekend to make about $995+ billion in loan guarantees available to bail out euro countries on the edge of default. Greece is first in line, of course, but this package was also designed to calm fears that Portugal, Spain and even Italy might find themselves in still deeper trouble.
This is difficult stuff. It requires Greece to sign on to very strict austerity measures that many Greeks have respond to recently with violent street demonstrations. It means Germany must somehow sign on to the bailout while the population is generally against the move and elections need to be won. (West Germans, remembering how much it cost to bring East Germany back to viability after the communist regime fell, are not at all excited about paying for more bailouts.)
But there are two big issues that need somehow to be dealt with. First, the bailout will indeed keep Greece from defaulting and/or leaving the euro behind. It may even, for the moment, allow a semblance of stability in Europe. But these are astoundingly huge bills and the piper must eventually be paid. How? Does the bailout help the weakened countries regain their economic feet? If so, no one sees how yet—other than the possibility of good economic luck.
The uncertainties in this market are very difficult. We watch with concern—even as the real estate market and broader economy continue to show signs of sustainable recovery.
MARCH 31, 2010
MORTGAGE NEWS FOR INCLINE VILLAGE
How can we help but be confused? We reach the point where we understand that our stock indices will rise if the dollar’s exchange rate rises and, further, Treasury security yields will decline if foreign investment in the dollar increases. In fact, these rules of the road begin to make logical sense to us.
Then we have a week like last week. It appeared that the rules were broken by all the global investors whose confidence in the debt securities of sovereign nations was beginning to fade. Greece is forced to pay a 6.5% yield on the money it borrows from investors, so it is an obvious example of a country whose debt has lost favor in the eyes of investors. Portugal, the security of whose debt was recently downgraded by Fitch Ratings, has also found it necessary to pay a premium to investors in its debt. And the weakness abroad has, until recently, bolstered the strength of the dollar by way of contrast.
Last week, though, we watched in wonderment as the dollar gained strength against the euro—but Treasury securities, where foreign money tends to go when it seeks a safe haven, weren’t as popular as they have been in the recent past. Indeed, the auctions of 2-year, 5-year and 7-year Treasury notes were all rather weak, with far fewer bidders driving down yields. So yields rose instead and, especially at the longer-term end of Treasury securities, rates rose rather significantly. The 10-year note ended the week at 3.852%, for example.
It is possible—though the jury is still out—that global investors will be hesitant to rush into Treasury securities in the near term when a worry infects the markets. And that would mean still higher interest rates.
Though the markets have settled into an easier pace now, we do have a few important tests ahead. One is the employment report for February which will be released on Friday. If it is good, especially if it is surprisingly good, the markets will all but forget the confusion of last week (for a time, at least). If it is bad, if we don’t see gains in the number of employed Americans, it could conceivably produce another day of rising rates.
Next week, then, we face another set of Treasury security auctions, this time to include 10-year notes and 30-year bonds. The big question on most minds will be whether the demand for these longer-term securities will hold up. Based on this last week, we could see demand