Tuesday, January 29, 2008

WEEK OF JANUARY 21, 2008—IS CREDIT EASING?

The credit crunch may be easing as the Federal Reserve dropped their overnight fed funds rate 0.75 percent and the government readies a stimulus package for low and middle-income households. The easing signs include a falling Prime Rate (now 6.5 percent), falling mortgage rates and indexes that determine adjustable rate mortgages. The 30-year conforming fixed rate dropped briefly to a 4.875 percent low last week, for instance, before rocketing up to 5.25 percent later in the day when stocks rallied.

ARM indexes also continued to decline, with the 1-year and 6-month LIBOR indexes falling to 2.81 percent and 3.15 percent, respectively. Other ARM indexes that adjust more slowly—such as the MTA and COFI—should also trend lower in the weeks to come

One important ingredient of a stimulus package will be raising the conforming loan limits for Fannie Mae and Freddie Mac. The National Association of Realtors has urged President George W. Bush and Congress to help homeowners and the national economy by loosening constraints on Fannie Mae and Freddie Mac as an integral part of a federal stimulus package currently being discussed.

NAR has been calling on Congress and the administration to increase the loan limits for Fannie Mae and Freddie Mac from the current ceiling of $417,000 to $625,000 for single units. “This change will permit more families to enter the housing market by making more mortgages available with lower interest rates. Increased home sales will lower inventories and immediately start stabilizing the housing market and the economy,” said NAR Prez John Gaylord.

In addition, NAR has been actively advocating for quick passage of the Federal Housing Administration Reform bill. A reformed, modernized FHA program would offer a safe and affordable alternative to subprime mortgages, which are widely blamed for the current high rate of foreclosures and credit crunch.

The NAR estimated that lifting the GSE loan limit to $625,000 would lower interest payments for consumers who get new “GSE jumbo” loans, reduce the supply of homes on the market by one to one-and-one-half months, strengthen home prices by two to three percentage points, and increase economic activity by $42 billion. An additional NAR report shows that increasing conforming loan limits could help reduce foreclosures by 140,000 to 210,000 and result in an additional 348,000 home sales.

We also believe the quickest way to help the housing market is to increase conforming loan limits, since most higher-priced regions need more than a conforming loan to purchase or refinance homes. In fact, the U.S. Office of Housing Enterprise Oversight (OFHEO) estimates that 15 percent of outstanding loans are jumbo, non-conforming, and 70 percent of jumbo mortgages have adjustable rates. It is those mortgages that have suffered the most from the credit crunch, with rates as high as 1 percent above normal.

Copyright © 2008

Tuesday, January 22, 2008

WEEK OF JANUARY 14, 2008—INFLATION AND GROWTH

December’s inflation figures are both good and bad news. Wholesale (PPI) and retail (CPI) inflation were up 6.2 percent and 4.1 percent, respectively, in 2007 though they showed little change in December. The higher inflation was mainly because of soaring energy prices, with CPI retail energy prices rose a huge 17.4 percent, followed by transportation and medical care in 2007.

It was good news because it showed that 2007 had a booming economy (rising prices mean rising demand), and bad news because it has hurt consumers’ pocket books, while inflation fears have kept the Federal Reserve from reducing short-term interest rates faster. In fact, economic growth in 2007 is on course to equal 2006 Gross Domestic Product growth of 2.8 percent, even if fourth quarter ’07 drops to 2 percent from Q3’s 4.9 percent growth rate.

It seems that Chairman Bernanke in his latest remarks, at least, has got the message that the Fed should move faster in reducing interest rates, if it wants to slow the rate of mortgage defaults and give 2008 a boost.

Only such an action can spell relief to the mortgage and real estate industries. Even the underlying interest rates on prime credit Option ARMs now exceed 7.5 percent, due to the LIBOR, MTA, and COFI ARM indexes in use.

Relief does seem to be on the way with a reduction in fixed interest rates. The conforming 30-year fixed rate is now down to 5.25 percent with an approximate 1-point origination fee, and some jumbo products have edged into the 5 percent range. That is close to its 40-year low last reached in 2004, for those who remember.

This has spurred a surge in mortgage applications, with the Mortgage Bankers Association reporting an application increase of 32 percent and 28 percent, respectively, over the first 2 weeks in January. Its Conventional Loan Purchase Index increased 10.5 percent while the Government Purchase Index (largely FHA) jumped 17.6 percent in the week ending January 11.

The greater purchase activity is a sign that lower interest rates may be spurring higher home sales. On an unadjusted basis, the MBA’s Purchase Index actually increased 45.2 percent over that time.

Inflation moderated in December, as both the PPI and CPI core rates increased just 0.2 percent, in part because consumer spending has slowed significantly. December’s retail sales were the main culprit, falling for the first time in 6 months. But sales were up 4.2 percent for all of 2007, slightly ahead of inflation.

So inflation isn’t to be feared if it means an economy that is growing along with inflation. The lower interest rates we are seeing this year should mean better growth and inflation.

Copyright © 2008

NAR WANTS CONFORMING LIMITS RAISED

The National Association of Realtors has urged President George W. Bush and Congress to help homeowners and the national economy by loosening constraints on Fannie Mae and Freddie Mac as an integral part of a federal stimulus package currently being discussed.

We believe that any stimulus package must address housing issues and increasing the conforming loan limits for these two government-sponsored enterprises,” said NAR President Dick Gaylord. “The increase in loan limits would not only improve liquidity in the mortgage marketplace, but also boost homebuyers’ confidence levels, resulting in increased sales and economic activity.”

NAR has been calling on Congress and the administration to increase the loan limits for Fannie Mae and Freddie Mac from the current ceiling of $417,000 to $625,000. “This change will permit more families to enter the housing market by making more mortgages available with lower interest rates. Increased home sales will lower inventories and immediately start stabilizing the housing market and the economy,” Gaylord said.

In addition, NAR has been actively advocating for quick passage of the Federal Housing Administration Reform bill. A reformed, modernized FHA program would offer a safe and affordable alternative to subprime mortgages, which are widely blamed for the current high rate of foreclosures and credit crunch.

The NAR estimated that lifting the GSE loan limit to $625,000 would lower interest payments for consumers who get new “GSE jumbo” loans, reduce the supply of homes on the market by one to one-and-one-half months, strengthen home prices by two to three percentage points, and increase economic activity by $42 billion. An additional NAR report shows that increasing conforming loan limits could help reduce foreclosures by 140,000 to 210,000 and result in an additional 348,000 home sales.

“This is the quickest way to help the hurting housing market,” said Gaylord. “As the potential for an economic recession increases and the fragile housing market continues to teeter, raising loan limits and reforming FHA would immediately impact the marketplace without the need for any new, complex federal programs or tax dollars. We strongly urge Congress to take these actions, in any stimulus plan, to stabilize the housing market and protect homeowners.”

Copyright © 2008

Wednesday, January 9, 2008

WEEK OF DECEMBER 31, 2007—THE JOBS REPORT

Just 18,000 ‘seasonally adjusted’ payroll jobs were created in December, and the unemployment rate rose from 4.7 to 5 percent. But seasonally adjusted means just that—payrolls were steady, there were 18,000 more jobs than the norm in December. So in fact it is good news, both because the economy is still creating jobs and the Federal Reserve will have to drop interest rates another notch in January with little fear of inflation.

The 5 percent jobless rate also concerned some, but in fact it was at 5.4 percent in 2005, 4 years after the end of the last recession. The winners were service-related jobs in professional, technical, health-care and food services. The losers were in manufacturing and construction, which continued to shrink payrolls, according to the Labor Dept.

It is really how quickly the Fed drops its rates that will determine how soon the housing market recovers. The Fed’s 17 consecutive rate increases over 2 years are what precipitated the current credit crunch, and that is why it is providing almost unlimited lines of credit to member banks.

The current easing has caused some of the ARM indexes to drop, which will help those in the most trouble. The most common Libor and MTA ARM indexes have fluctuated wildly—from as low as 1 percent in July 2004 to 4.5 percent today. The increase of 3.5 percent—over the same period that the Fed raised their rates 4.25 percent—is the main cause of the rising ARM default rate.

The rest of the week’s data was mixed. November’s existing-home sales rose slightly to 5 million annualize units. Existing sales have been stable for three consecutive months with inventories down slightly to 10.3-months’ supply, signaling a possible bottom. New-home sales are still falling, but have a smaller 9.3-month inventory of homes for sale.

MANUFACTURING AND SERVICE SECTORS-- The December purchasing manager’s index (PMI) for manufacturing activity declined for the first time since January 2007, while the service-sector’s PMI continued to expand fairly robustly. This is in line with the unemployment report that showed a continued shift away from manufacturing to more service sector jobs.

CONSUMER SENTIMENT—The consumer outlook on business conditions, employment, inflation and stock prices “improved marginally”, according to the Conference Board. “Declines in recent confidence measures are comparable to those in the aftermath of hurricanes Katrina and Rita in 2005,” said one economist, when energy prices last surged as much.

Real estate will revive when the credit markets revive. Interest rates are trending downward, with the 30-year conforming fixed rate now at 5.5 percent for an approximate 1-point origination fee. Jumbo rates are still higher than normal—about three-quarter percentage points higher. It is when jumbo rates drop to within one-quarter percent of conforming rates that the credit crunch will have disappeared. But declining interest rates have already stabilized existing-home sales. Another rate drop by the Federal Reserve at their January 30 FOMC meeting should help to bring down jumbo interest rates as well.

Copyright © 2007