By Chris Isidore, CNNMoney.com senior writer
September 27 2007: 12:30 PM EDT
NEW YORK (CNNMoney.com) -- The mortgage bomb hit the demand for new homes even harder than expected in August, leaving the nation's builders with their weakest level of sales since the summer of 2000, when the nation was struggling with a stock market collapse, rising interest rates and a looming recession.
And the government's latest snapshot of the battered housing market, released Thursday, may actually be understating the problem: It does not account for the rising cancellation rates or sales inducements that builders have reported in recent months.
New home sales hit a 7-year low in August in the face of problems in the mortgage market.
According to the Census Bureau, new homes sold at an annual pace of 795,000 in August, down 8 percent from the revised 867,000 sales pace in July.
It was the slowest pace of sales since June 2000, as legions of buyers had trouble finding mortgages or selling their existing homes. Economists surveyed by Briefing.com had forecast that sales would fall to a pace of 825,000.
The report also showed the median price of a new home fell 7.4 percent from year earlier levels to $225,700 in the month, as prices were pressured by both the problems in mortgage finance and the excess supply of homes on the market.
The inventory of new homes on the market rose to an 8.2 month supply, as the glut of completed homes without a buyer was near a record high, with 180,000 completed homes listed for sale, just off the record high of 182,000 set in May of this year.
The July report wasn't the only month revised lower by the Census Bureau; it also dropped its sales estimates for May and June, leaving sales 34,000 below the previous estimates.
The decline in sales came despite a pickup in sales in the Northeast and Midwest compared to July. But the South, which accounts for nearly half of the nation's new home sales, saw a nearly 15 percent drop from July levels, while sales in the West declined more than 20 percent. Sales in each of the four regions were off more than 10 percent from year-earlier levels, and nationwide the pace of sales is down 21.2 percent from a year ago.
This is just the latest sign of trouble for the housing market. On Tuesday, a report from the National Association of Realtors showed the pace of existing home sales dropped in August for the sixth straight month to their lowest level in five years.
And the new home sales report likely did a better job capturing the turmoil in the real estate market in August, as it is based on contracts for new homes signed in the month. The existing home sales figures are based on when a deal is closed, typically a month or two after the contract is signed.
The new home sales report, besides serving as a leading indicator of the overall housing market, is closely followed because of the importance of construction to the overall economy. The home building boom helped support the nation's economic and employment growth during 2003 to 2005.
But economists are growing increasingly concerned that the current weakness could become a large enough drag on the economy to help tip the nation into recession. The latest report on gross domestic product, also released Thursday, shows investment in housing subtracted 0.6 percentage points from the nation's overall growth in the second quarter.
Still, as weak as the new home sales report is, experts caution it could actually be masking other signs of weakness. Builders have reported significantly higher cancellation rates for buyers who have signed a contract but then back out of the sale. So demand could be weaker than the report suggests.
Also about three quarters of builders surveyed by their trade group report offering incentives, such as paying for closing costs or offering additional features on a new home for free, in order to maintain demand. So the drop in prices could actually be more severe than the report indicates.
The nation's major home builders have been hammered by the downturn in both home sales and prices in the last year. On Thursday, KB Home (Charts, Fortune 500), the nation's No. 5 home builder, reported a loss in its most recent quarter, compared to a solid profit a year ago, as the company warned it expects conditions to worsen through 2008.
Lennar (Charts, Fortune 500), the nation's No. 1 home builder by revenue, posted a bigger than expected loss Tuesday.
In addition, No. 2 homebuilder D.R. Horton (Charts, Fortune 500) and No. 3 Centex (Charts, Fortune 500) both reported losses far bigger than Wall Street had expected, while No. 4 Pulte Homes (Charts, Fortune 500) and No. 6 Hovnanian Enterprises (Charts, Fortune 500) both have reported losses for the last two quarters and analysts project losses for at least the next year.
Thursday, September 27, 2007
Wednesday, September 26, 2007
Mortgage Risk no one is talking about
Here is what no one in the media is talking about--partly because they lack the intelligence with specifics with the hybrid ARM's. Most of the people who took out "prime loans" chose the popular "Pay Option ARM." Here's the catch, the rates on most of them was 1.75% with the remainder being attached to your note--negative amortization anyone--and these ARM's reset at five years.
So, in effect, you have thousands and thou----millions and millions of people who took on these types of loans in the past couple of years who are paying 1.75% and the remainder 4.25% (6-1.75=4.25) being added to the end loan. So if you live in an area with high appreciation then you will fare better than those whose markets have softened because in effect, you will owe more than you paid for the house because of the "negative amortization.
Needless to say, we still have a few years when these rates reset and most lenders have discontinued offering the Pay Option ARM. So, what loan program do these people refinance into because they can't afford their home at a 6% interest rate?
So if you want to be a realtor anytime soon, now is the time to get your license and move to last year's overheated markets because there will be a lot of homes for sale!
So, in effect, you have thousands and thou----millions and millions of people who took on these types of loans in the past couple of years who are paying 1.75% and the remainder 4.25% (6-1.75=4.25) being added to the end loan. So if you live in an area with high appreciation then you will fare better than those whose markets have softened because in effect, you will owe more than you paid for the house because of the "negative amortization.
Needless to say, we still have a few years when these rates reset and most lenders have discontinued offering the Pay Option ARM. So, what loan program do these people refinance into because they can't afford their home at a 6% interest rate?
So if you want to be a realtor anytime soon, now is the time to get your license and move to last year's overheated markets because there will be a lot of homes for sale!
Tuesday, September 25, 2007
Tuesday Market Conditions
9/25/2007
Treasury prices improved overnight as bonds in Europe saw improvements on continued worries about earnings and credit which triggered safe haven buying.
German business confidence was weaker-than-expected adding a bid to bonds. U.S. Treasury futures opened on a strong note as well. Prior to the release of August existing home sales and September consumer confidence data, the 10-year note yield traded as low as 4.567% and mortgage prices were up +6/32. U.S. equity markets opened lower on earnings concerns and housing market woes.
At 10:00 AM the National Association of Realtors reported that August existing home sales fell 4.3% to an annual rate of 5.50M units from 5.75M units in July. The report is in line with expectations. Also at 10:00 this morning the Conference Board reported that September consumer confidence slipped to 99.8 from 105.6 in August, much lower than expectations. This survey covers 5000 households to ascertain the level of consumer confidence and has 2 components- current conditions and expectations for the future. The index is 60% weighted by expectations and 40% by current conditions as expectations are considered a better leading indicator than the current conditions are. The bond market held its earlier gains after the release of these reports.
The S&P/Case Shiller national home price index reported today that prices of single-family homes across 20 U.S. metropolitan areas was down again in July. Miami showed the largest decline followed closely by Tampa and New York City. The composite month-over-month index fell 0.4% in July from June and down 3.9% from a year ago. It certainly looks like the housing picture is going to get worse before it gets better.
The problems with the subprime mess have spread more fear in Europe as was evidenced by the run at the troubled British mortgage bank, Northern Rock. It is clear that the credit crisis is not confined to the U.S. The European Central Bank has intervened heavily in the interbank market since the early part of August to help lower short-term lending rates and help spur banks to lend to one another. While we saw credit spreads tighten over the past 2 weeks in Europe, fears of a continued credit crunch and nervousness over the housing data jolted the markets today and spreads turned wider. It appears that comments from the IMF that the credit crisis will hurt economic growth in the U.S. and abroad have spooked the European markets.
Concerns over corporate earnings and slowing growth are evident today with earnings warnings from Lowe’s Cos. and Target. Also adding to economic growth concerns and continued housing woes was the report from home builder Lennar of a weaker-than-expected quarterly loss. Losses were expected to be about $0.50 per share versus the reported loss of $3.25 per share. The deadlock continues between the UAW and GM. The strike, if extended, will put added pressure on the labor market and the economy. The problems at GM will spread to other companies such as auto parts suppliers. Without GM up and running, the suppliers have much to lose. If the strike continues into next month we can expect it to reflect negatively on the ISM manufacturing index and payrolls data. It appears that the UAW is looking to GM to concede on the issue of job security. The two groups go back to the negotiating tables this morning.
The dollar is weaker against the yen and euro. Gold is down and crude is down
Treasury prices improved overnight as bonds in Europe saw improvements on continued worries about earnings and credit which triggered safe haven buying.
German business confidence was weaker-than-expected adding a bid to bonds. U.S. Treasury futures opened on a strong note as well. Prior to the release of August existing home sales and September consumer confidence data, the 10-year note yield traded as low as 4.567% and mortgage prices were up +6/32. U.S. equity markets opened lower on earnings concerns and housing market woes.
At 10:00 AM the National Association of Realtors reported that August existing home sales fell 4.3% to an annual rate of 5.50M units from 5.75M units in July. The report is in line with expectations. Also at 10:00 this morning the Conference Board reported that September consumer confidence slipped to 99.8 from 105.6 in August, much lower than expectations. This survey covers 5000 households to ascertain the level of consumer confidence and has 2 components- current conditions and expectations for the future. The index is 60% weighted by expectations and 40% by current conditions as expectations are considered a better leading indicator than the current conditions are. The bond market held its earlier gains after the release of these reports.
The S&P/Case Shiller national home price index reported today that prices of single-family homes across 20 U.S. metropolitan areas was down again in July. Miami showed the largest decline followed closely by Tampa and New York City. The composite month-over-month index fell 0.4% in July from June and down 3.9% from a year ago. It certainly looks like the housing picture is going to get worse before it gets better.
The problems with the subprime mess have spread more fear in Europe as was evidenced by the run at the troubled British mortgage bank, Northern Rock. It is clear that the credit crisis is not confined to the U.S. The European Central Bank has intervened heavily in the interbank market since the early part of August to help lower short-term lending rates and help spur banks to lend to one another. While we saw credit spreads tighten over the past 2 weeks in Europe, fears of a continued credit crunch and nervousness over the housing data jolted the markets today and spreads turned wider. It appears that comments from the IMF that the credit crisis will hurt economic growth in the U.S. and abroad have spooked the European markets.
Concerns over corporate earnings and slowing growth are evident today with earnings warnings from Lowe’s Cos. and Target. Also adding to economic growth concerns and continued housing woes was the report from home builder Lennar of a weaker-than-expected quarterly loss. Losses were expected to be about $0.50 per share versus the reported loss of $3.25 per share. The deadlock continues between the UAW and GM. The strike, if extended, will put added pressure on the labor market and the economy. The problems at GM will spread to other companies such as auto parts suppliers. Without GM up and running, the suppliers have much to lose. If the strike continues into next month we can expect it to reflect negatively on the ISM manufacturing index and payrolls data. It appears that the UAW is looking to GM to concede on the issue of job security. The two groups go back to the negotiating tables this morning.
The dollar is weaker against the yen and euro. Gold is down and crude is down
Tuesday, September 18, 2007
Foreclosure numbers are misleading
9/18/2007
Every day we hear another news report that says "foreclosures at an all time high."
This is very misleading to the average consumer. Foreclosure notices are sent to people who are 90 days behind--not actually losing the house and moving out.
So news writers have to word it like "foreclosures zoom out of sight" versus "125,900 people were sent notices that they are 90 days behind on their payment." See which is catchier?
So, be careful what you read and do your homework as to not be fooled.
Every day we hear another news report that says "foreclosures at an all time high."
This is very misleading to the average consumer. Foreclosure notices are sent to people who are 90 days behind--not actually losing the house and moving out.
So news writers have to word it like "foreclosures zoom out of sight" versus "125,900 people were sent notices that they are 90 days behind on their payment." See which is catchier?
So, be careful what you read and do your homework as to not be fooled.
Monday, September 17, 2007
Sad but true--adults have selective memory
Caught in a toxic mortgage
Meet the Olivers: good credit and low risk. So why are they in danger of losing their home? How to get deep in mortgage September 17 2007: 11:54 AM EDT
NEW YORK (CNNMoney.com) -- It seems surprising that Kurt and Vicki Oliver could lose their home to a bank foreclosure. They had great credit, long-term employment and excellent assets and income.
But their main problem wasn't a usual symptom of troubled borrowers: job loss, divorce, personal problems or health reasons. Instead, they say, it was a bad mortgage from a fast-talking broker.
Kurt and Vicki Oliver
They almost lost their Bangor, Penn. home because of a toxic mortgage.
It was done very neatly, according to the Olivers. They never knew what hit them until it was too late - the process was that confusing
"We thought we understood it," said Vicki, "but we only understood what they wanted us to understand."
What they thought they were getting was an interest-only, adjustable-rate loan, where only the interest had to be paid for the first five years at 1 percent for the first year and no more than 4 percent during the first five years.
That would immediately lower their monthly payment from the $1,800 they were paying - which included escrow payments for property taxes and mortgage insurance - to about $1,100 and then to about $1,350 when the rate gradually rose to 4 percent.
Instead, they say, their interest rate remained at 1 percent only for the first 30 days, and then their payment quickly ran up to $2,100 a month.
In early 2005, when they bought their three-bedroom, one-and-a-half-bath ranch house for about $235,000 in Bangor, Penn., they were solvent and comfortable with a near six-figure household income. They were newlyweds, each with adult children from previous marriages.
They put a lot of money down on their home - about $130,000. Even today, they say they've never missed a house payment.
Nearly a year after they bought their home, Kurt's mom fell ill with Alzheimer's disease. Vicki quit her job to take care of her and later started a home-based Internet business selling candle-related products. The couple took out a second mortgage to free up some cash.
Shortly after that, they say they received a phone call from an independent mortgage broker asking if they were interested in lowering their interest rate to 1 percent. Who wouldn't be?
"I was a little skeptical but I asked, 'How can we do that?'" said Vicki.
She said the broker made it sound like they were getting an interest-only adjustable rate mortgage (ARM) with a very low introductory teaser rate that would afford them some breathing room.
They say the term, "negative-amortization loan," wasn't mentioned, but that's what they got instead. That meant the Olivers weren't paying off any of the loan principal. In fact they weren't even paying the full amount of the interest, which meant the principal would actually increase each month.
The Oliver's loan, as they soon learned, had a true, stated annual percentage rate (APR) of 7.15 percent, so if they paid 12 installments based on the 1 percent payment rate, their balance grew by more than 6 percent a year. The APR on the new loan was also higher than on their old fixed rate of about 6 percent.
They never suspected anything was wrong with the mortgage until the statement arrived after their first payment, and the amount they owed had jumped.
"We called and left voice-mail messages with the broker," said Vicki, "but they didn't call back." She called again and again until, she said, she realized the Provo, Utah-based broker was avoiding her.
Making matters worse, the couple's mortgage servicer was American Brokers Conduit, a division of American Home Mortgage, which filed for bankruptcy protection earlier this summer. When Kurt solicited help from American Home, he said, "I got an email back. It said because of their circumstances they can't do anything."
A spokeswoman for American Home Mortgage told CNNMoney.com she couldn't comment on any individual cases and could not say whether the company was doing any kind of mortgage modification or mitigation.
After several attempts to make contact by phone, CNNMoney.com was not able to speak with the independent broker, and he did not respond to an email request for comment. When an attempt was made recently to access the broker's Web site, the page reads that it is "temporarily closed."
The Olivers say they don't have the cash to fund a legal battle, where they could make the case that they were victims of predatory lending.
Last Tuesday, the Federal Trade Commission issued a warning to lenders about "potentially deceptive" mortgage advertisements that give borrowers a false impression of the cost of home loans. The FTC has enforced rules in the past against such deceptive advertising and returned more than $300 million to consumers.
The Olivers' biggest complaint is how badly they feel they were misled. "The broker out-and-out lied to us," said Vicki, even on the Truth-In-Lending disclosure statement. On the Olivers' copy it states, "If you pay off your loan early you will not have to pay a penalty."
But according to the couple, an addition to their contract called for a penalty of six months interest if 20 percent or more of the loan was paid early.
At one point they put their house on the market, but the housing slump made it impossible to sell and get all their debt out.
The Olivers finally chose to refinance back into a conventional 30-year fixed, which they got last week from Countrywide Financial (Charts, Fortune 500). Their new rate of around 6.5 percent results in a payment of $2,155 a month, including mortgage insurance and property taxes.
That's about $350 a month more than they were paying before they got the phone call from the mortgage broker. But with the fixed rate they at least know their interest won't go up, and their balance will drop instead of rise each month.
And the fees and transactional expenses of refinancing twice: loan origination, credit report, underwriting, processing, application/administration and title insurance - plus the prepayment penalty of $7,500 - came to about $20,000, most of which was added to the principal.
"It's going to kill us," said Kurt. "We're just scraping by."
Now the sad part is that I see these types of clients all the time. They want to buy the home of their dreams--so they think--and they don't care about 3 years from now.
People tell us to qualify them and we accommodate--I am surprised all the time that when you tell someone that their debt to income is too high, over 45% of gross income, they are mad that they cannot qualify for the loan. They get up and go to the next mortgage broker until they find someone to tell them yes.
Then they move in to their home and then all of a sudden it's, that broker screwed me. No, you made the decision to accept this risky loan because you could not see 6 months ahead.
I guess it's like everybody's kids make better A's than the next kid and my interest rate is lower than yours.
Meet the Olivers: good credit and low risk. So why are they in danger of losing their home? How to get deep in mortgage September 17 2007: 11:54 AM EDT
NEW YORK (CNNMoney.com) -- It seems surprising that Kurt and Vicki Oliver could lose their home to a bank foreclosure. They had great credit, long-term employment and excellent assets and income.
But their main problem wasn't a usual symptom of troubled borrowers: job loss, divorce, personal problems or health reasons. Instead, they say, it was a bad mortgage from a fast-talking broker.
Kurt and Vicki Oliver
They almost lost their Bangor, Penn. home because of a toxic mortgage.
It was done very neatly, according to the Olivers. They never knew what hit them until it was too late - the process was that confusing
"We thought we understood it," said Vicki, "but we only understood what they wanted us to understand."
What they thought they were getting was an interest-only, adjustable-rate loan, where only the interest had to be paid for the first five years at 1 percent for the first year and no more than 4 percent during the first five years.
That would immediately lower their monthly payment from the $1,800 they were paying - which included escrow payments for property taxes and mortgage insurance - to about $1,100 and then to about $1,350 when the rate gradually rose to 4 percent.
Instead, they say, their interest rate remained at 1 percent only for the first 30 days, and then their payment quickly ran up to $2,100 a month.
In early 2005, when they bought their three-bedroom, one-and-a-half-bath ranch house for about $235,000 in Bangor, Penn., they were solvent and comfortable with a near six-figure household income. They were newlyweds, each with adult children from previous marriages.
They put a lot of money down on their home - about $130,000. Even today, they say they've never missed a house payment.
Nearly a year after they bought their home, Kurt's mom fell ill with Alzheimer's disease. Vicki quit her job to take care of her and later started a home-based Internet business selling candle-related products. The couple took out a second mortgage to free up some cash.
Shortly after that, they say they received a phone call from an independent mortgage broker asking if they were interested in lowering their interest rate to 1 percent. Who wouldn't be?
"I was a little skeptical but I asked, 'How can we do that?'" said Vicki.
She said the broker made it sound like they were getting an interest-only adjustable rate mortgage (ARM) with a very low introductory teaser rate that would afford them some breathing room.
They say the term, "negative-amortization loan," wasn't mentioned, but that's what they got instead. That meant the Olivers weren't paying off any of the loan principal. In fact they weren't even paying the full amount of the interest, which meant the principal would actually increase each month.
The Oliver's loan, as they soon learned, had a true, stated annual percentage rate (APR) of 7.15 percent, so if they paid 12 installments based on the 1 percent payment rate, their balance grew by more than 6 percent a year. The APR on the new loan was also higher than on their old fixed rate of about 6 percent.
They never suspected anything was wrong with the mortgage until the statement arrived after their first payment, and the amount they owed had jumped.
"We called and left voice-mail messages with the broker," said Vicki, "but they didn't call back." She called again and again until, she said, she realized the Provo, Utah-based broker was avoiding her.
Making matters worse, the couple's mortgage servicer was American Brokers Conduit, a division of American Home Mortgage, which filed for bankruptcy protection earlier this summer. When Kurt solicited help from American Home, he said, "I got an email back. It said because of their circumstances they can't do anything."
A spokeswoman for American Home Mortgage told CNNMoney.com she couldn't comment on any individual cases and could not say whether the company was doing any kind of mortgage modification or mitigation.
After several attempts to make contact by phone, CNNMoney.com was not able to speak with the independent broker, and he did not respond to an email request for comment. When an attempt was made recently to access the broker's Web site, the page reads that it is "temporarily closed."
The Olivers say they don't have the cash to fund a legal battle, where they could make the case that they were victims of predatory lending.
Last Tuesday, the Federal Trade Commission issued a warning to lenders about "potentially deceptive" mortgage advertisements that give borrowers a false impression of the cost of home loans. The FTC has enforced rules in the past against such deceptive advertising and returned more than $300 million to consumers.
The Olivers' biggest complaint is how badly they feel they were misled. "The broker out-and-out lied to us," said Vicki, even on the Truth-In-Lending disclosure statement. On the Olivers' copy it states, "If you pay off your loan early you will not have to pay a penalty."
But according to the couple, an addition to their contract called for a penalty of six months interest if 20 percent or more of the loan was paid early.
At one point they put their house on the market, but the housing slump made it impossible to sell and get all their debt out.
The Olivers finally chose to refinance back into a conventional 30-year fixed, which they got last week from Countrywide Financial (Charts, Fortune 500). Their new rate of around 6.5 percent results in a payment of $2,155 a month, including mortgage insurance and property taxes.
That's about $350 a month more than they were paying before they got the phone call from the mortgage broker. But with the fixed rate they at least know their interest won't go up, and their balance will drop instead of rise each month.
And the fees and transactional expenses of refinancing twice: loan origination, credit report, underwriting, processing, application/administration and title insurance - plus the prepayment penalty of $7,500 - came to about $20,000, most of which was added to the principal.
"It's going to kill us," said Kurt. "We're just scraping by."
Now the sad part is that I see these types of clients all the time. They want to buy the home of their dreams--so they think--and they don't care about 3 years from now.
People tell us to qualify them and we accommodate--I am surprised all the time that when you tell someone that their debt to income is too high, over 45% of gross income, they are mad that they cannot qualify for the loan. They get up and go to the next mortgage broker until they find someone to tell them yes.
Then they move in to their home and then all of a sudden it's, that broker screwed me. No, you made the decision to accept this risky loan because you could not see 6 months ahead.
I guess it's like everybody's kids make better A's than the next kid and my interest rate is lower than yours.
Monday Market Conditions
9/17/2007
Pressure in the rate markets again this morning as traders and investors, once totally sure what the Fed will do tomorrow are chickening out as the time shortens.
It is the same every FOMC meeting, everyone is sure what the Fed will do until the time they do it, then the weaker shorts or longs are dumped. The 10 yr note is testing its key support at 4.50% this morning; a break and close above 4.50% won't look good to the technical traders as in doing so it will also crack a longer term trend line and the 20 day moving average. We still see just 25 BPs with a statement implying the Fed will stand ready to adjust to market conditions as they unfold ("data dependent" as they say).
This morning the August NY Empire State manufacturing index hit lower than forecasts at 14.7 from 25.1 in August; economists projected the index would drop to 18. The index measuring the manufacturing outlook for six months from now eased to 48.8 from a two-year high of 50.4 in August, the measure of new orders fell to 13.6 from 22.2 in August. A gauge of shipments fell 5.1 from 28.8, the report showed. The index of inventories rose to 3.2 from minus 2.2. The index of prices paid for raw materials climbed to 35.1 this month from 34.4 in August. A measure of prices received increased to 11.7, the highest since February, from 3.2. Most believe the decline in manufacturing will be slow if at all due to export demand as the dollar declines.
A run on England's Northern Rock Plc: the U.K. mortgage lender bailed out by the Bank of England last week, tumbled to a seven-year low in London trading after customers lined up at branches across the country to withdraw their savings. Unnecessary panic, but panic nevertheless. Bank of England Governor Mervyn King has spent the past month trying to stay above the fray as the U.S. subprime-mortgage collapse roiled credit markets. Now he's getting dragged in, whether he likes it or not.
Looks more like the credit crisis is easing more; today the 1 mo LIBOR rate is at 5.50% that's down from 5.90% at its peak a week ago, and down 11 basis points from Friday.
Greenspan is all over the place with his interview last night on CBS's 60 minutes and all through the day with snippets on CNBC; this evening at 9:00 CNBC will have an hour long interview. Greenspan is selling his new book. He admitted last night that he didn't see the correlation of the lax mortgage lending and low interest rates in the past few years and its impact on the credit markets. He defended his lowering of rates to 1.0% on the FF rate in light of the lack of inflation pressures which exist today but not then. He has taken heat recently for keeping rates so low that it was the cause of the recent crisis in credit and the sub prime mess. This is America and what we do best is to look to blame someone any time a problem exists and it isn't just confined to the financial markets. One thing that jumped out last night was he made a comment that in his vision inflation will be the next battle front. Did you know: Greenspan is left handed, and that he hand wrote his entire book while in the bath tub? (water on the brain?)
The next conundrum: If Bernanke and his colleagues aim to avoid the mistake of 1998 (not lowering quick enough) and opt for caution, they risk a recession. If they push ahead with big rate cuts and growth proves resilient, they could find themselves with rising inflation, fueled by record oil prices and a slumping dollar.
Technically, so far the 10 yr note has tested support at 4.50% and has successfully held it.
Pressure in the rate markets again this morning as traders and investors, once totally sure what the Fed will do tomorrow are chickening out as the time shortens.
It is the same every FOMC meeting, everyone is sure what the Fed will do until the time they do it, then the weaker shorts or longs are dumped. The 10 yr note is testing its key support at 4.50% this morning; a break and close above 4.50% won't look good to the technical traders as in doing so it will also crack a longer term trend line and the 20 day moving average. We still see just 25 BPs with a statement implying the Fed will stand ready to adjust to market conditions as they unfold ("data dependent" as they say).
This morning the August NY Empire State manufacturing index hit lower than forecasts at 14.7 from 25.1 in August; economists projected the index would drop to 18. The index measuring the manufacturing outlook for six months from now eased to 48.8 from a two-year high of 50.4 in August, the measure of new orders fell to 13.6 from 22.2 in August. A gauge of shipments fell 5.1 from 28.8, the report showed. The index of inventories rose to 3.2 from minus 2.2. The index of prices paid for raw materials climbed to 35.1 this month from 34.4 in August. A measure of prices received increased to 11.7, the highest since February, from 3.2. Most believe the decline in manufacturing will be slow if at all due to export demand as the dollar declines.
A run on England's Northern Rock Plc: the U.K. mortgage lender bailed out by the Bank of England last week, tumbled to a seven-year low in London trading after customers lined up at branches across the country to withdraw their savings. Unnecessary panic, but panic nevertheless. Bank of England Governor Mervyn King has spent the past month trying to stay above the fray as the U.S. subprime-mortgage collapse roiled credit markets. Now he's getting dragged in, whether he likes it or not.
Looks more like the credit crisis is easing more; today the 1 mo LIBOR rate is at 5.50% that's down from 5.90% at its peak a week ago, and down 11 basis points from Friday.
Greenspan is all over the place with his interview last night on CBS's 60 minutes and all through the day with snippets on CNBC; this evening at 9:00 CNBC will have an hour long interview. Greenspan is selling his new book. He admitted last night that he didn't see the correlation of the lax mortgage lending and low interest rates in the past few years and its impact on the credit markets. He defended his lowering of rates to 1.0% on the FF rate in light of the lack of inflation pressures which exist today but not then. He has taken heat recently for keeping rates so low that it was the cause of the recent crisis in credit and the sub prime mess. This is America and what we do best is to look to blame someone any time a problem exists and it isn't just confined to the financial markets. One thing that jumped out last night was he made a comment that in his vision inflation will be the next battle front. Did you know: Greenspan is left handed, and that he hand wrote his entire book while in the bath tub? (water on the brain?)
The next conundrum: If Bernanke and his colleagues aim to avoid the mistake of 1998 (not lowering quick enough) and opt for caution, they risk a recession. If they push ahead with big rate cuts and growth proves resilient, they could find themselves with rising inflation, fueled by record oil prices and a slumping dollar.
Technically, so far the 10 yr note has tested support at 4.50% and has successfully held it.
Thursday, September 13, 2007
Thursday Market Conditions
9/13/2007
Rate markets started a little soft early this morning as the stock index futures were rallying ahead of the 9:30 open.
Interest rate markets made a strong move and are now adjusting to the coming FOMC meeting. The bond market became overbought technically, and with the FOMC meeting looming heavily some of those over optimistic buys are being closed out with nice profits. The Fed is likely to cut rates by just 25 basis points, not 50 as some have been espousing recently; the Fed won't want to show fear as it faces a declining economy and the prospects of having to lower rates again in Oct (and possibly again before the end of the year). The counter-balance to moving just 25 BP will likely come in the accompanying statement at the conclusion of the meeting; expect the Fed to keep talking inflation fears but ratchet up the view that the economy may be slowing more than what the FOMC thought six weeks ago at the last meeting.
Weekly jobless claims were up 4K to 319K last week, a little better than the 9K increase expected. The measure of layoffs has shown gains in 6 of the last 7 weeks as last week's large -22K (rev'd from -19K) decline pulled the level back below a comfortable level of 320K. New hiring seen in continued claims fell 6K in the week as the 4-week average reached a new 20 month high. Some very minor relief after the employment report last Friday sent recession chatter running.
At 1:00 this afternoon Treasury will re-open the 10 yr note issued in August to sell another $8B; foreign investors will not be too interested as they usually don't like re-opens, nevertheless the demand for the small $8B will be closely watched for demand strength with the yield at these lows.
At 2:00 Treasury will report the August budget data; estimates are for a deficit of $85.0B. The fiscal 2007 budget deficit (which ends at the end of this month) will be the smallest in four years as the economy was doing well for most of the fiscal year and tax revenues were up; it would have been nice if the spending gorge had been kept in check though. Congress and the administration spent money like they actually had it to spend; in terms of managing the budget, Washington doesn't give a ---- about it except to blame everyone else for the pork spending.
The equity markets opened strong at 9:30 and interest rates continued to increase as the exuberance lessens after the recent decline in rates. The decline in job growth in August shocked markets but now after three days the shock is wearing off and some of those buys based on a potential 50 BP cut are getting second thoughts. It is still all about the Fed and the coming cut. Some relaxation in the credit crisis this morning with the 1 mo LIBOR rate declining a little and talk that some big investors are now sniffing around in the commercial paper market; yesterday PIMCO said it was looking.
The dollar traded near a record low against the euro last night, but is stronger now than at the end of the day yesterday. The theory: speculation of slowing U.S. economic growth will prompt the Federal Reserve to cut interest rates, reducing the appeal of assets denominated in the U.S. currency. The dollar may have its longest losing streak since October 2004 as investors increase bets the Fed will lower its target rate on Sept. 18. The euro also gained after a report showed inflation in France, the second-largest of the 13 economies sharing the currency, unexpectedly quickened last month.
Rate markets started a little soft early this morning as the stock index futures were rallying ahead of the 9:30 open.
Interest rate markets made a strong move and are now adjusting to the coming FOMC meeting. The bond market became overbought technically, and with the FOMC meeting looming heavily some of those over optimistic buys are being closed out with nice profits. The Fed is likely to cut rates by just 25 basis points, not 50 as some have been espousing recently; the Fed won't want to show fear as it faces a declining economy and the prospects of having to lower rates again in Oct (and possibly again before the end of the year). The counter-balance to moving just 25 BP will likely come in the accompanying statement at the conclusion of the meeting; expect the Fed to keep talking inflation fears but ratchet up the view that the economy may be slowing more than what the FOMC thought six weeks ago at the last meeting.
Weekly jobless claims were up 4K to 319K last week, a little better than the 9K increase expected. The measure of layoffs has shown gains in 6 of the last 7 weeks as last week's large -22K (rev'd from -19K) decline pulled the level back below a comfortable level of 320K. New hiring seen in continued claims fell 6K in the week as the 4-week average reached a new 20 month high. Some very minor relief after the employment report last Friday sent recession chatter running.
At 1:00 this afternoon Treasury will re-open the 10 yr note issued in August to sell another $8B; foreign investors will not be too interested as they usually don't like re-opens, nevertheless the demand for the small $8B will be closely watched for demand strength with the yield at these lows.
At 2:00 Treasury will report the August budget data; estimates are for a deficit of $85.0B. The fiscal 2007 budget deficit (which ends at the end of this month) will be the smallest in four years as the economy was doing well for most of the fiscal year and tax revenues were up; it would have been nice if the spending gorge had been kept in check though. Congress and the administration spent money like they actually had it to spend; in terms of managing the budget, Washington doesn't give a ---- about it except to blame everyone else for the pork spending.
The equity markets opened strong at 9:30 and interest rates continued to increase as the exuberance lessens after the recent decline in rates. The decline in job growth in August shocked markets but now after three days the shock is wearing off and some of those buys based on a potential 50 BP cut are getting second thoughts. It is still all about the Fed and the coming cut. Some relaxation in the credit crisis this morning with the 1 mo LIBOR rate declining a little and talk that some big investors are now sniffing around in the commercial paper market; yesterday PIMCO said it was looking.
The dollar traded near a record low against the euro last night, but is stronger now than at the end of the day yesterday. The theory: speculation of slowing U.S. economic growth will prompt the Federal Reserve to cut interest rates, reducing the appeal of assets denominated in the U.S. currency. The dollar may have its longest losing streak since October 2004 as investors increase bets the Fed will lower its target rate on Sept. 18. The euro also gained after a report showed inflation in France, the second-largest of the 13 economies sharing the currency, unexpectedly quickened last month.
Wednesday, September 12, 2007
Subprime problem
9/12/2007
In the old days you were required to come up with a down payment of 20% to buy a house. Then the smart people at mortgage insurance (MI) companies figured out a way to avoid the 20% down rule. They would let you put less money down but make you pay for their insurance on you in case you default. Pretty smart, you pay their policy on you.
Now the sub prime people do not require mortgage insurance and this is why their are so many companies losing so much money in the "sub prime mess."
There is no one to blame and no insurance to cover the losses. What you will see in the future is that if any sub prime lenders are left--right now most of them have LTV's capped at 80%, duh, 20% down payment required again--they will have MI.
MI is expensive but relative. So, once again the people with the lowest credit scores will continue to pay the most money for homes.
With so much emphasis on credit--it's your Adult Report Card--then why don't we educate our young ones better?
In the old days you were required to come up with a down payment of 20% to buy a house. Then the smart people at mortgage insurance (MI) companies figured out a way to avoid the 20% down rule. They would let you put less money down but make you pay for their insurance on you in case you default. Pretty smart, you pay their policy on you.
Now the sub prime people do not require mortgage insurance and this is why their are so many companies losing so much money in the "sub prime mess."
There is no one to blame and no insurance to cover the losses. What you will see in the future is that if any sub prime lenders are left--right now most of them have LTV's capped at 80%, duh, 20% down payment required again--they will have MI.
MI is expensive but relative. So, once again the people with the lowest credit scores will continue to pay the most money for homes.
With so much emphasis on credit--it's your Adult Report Card--then why don't we educate our young ones better?
Monday, September 10, 2007
Monday Market Conditions
09/10/2007
After the huge improvement in interest rates on Friday, the bond market is starting the day holding the gains but taking a breather and not improved much.
The stock market trading in the futures markets prior to the 9:30 open was better taking away the stock market/treasury market rotation (DJIA fell 250 Friday). There is no real economic releases today, and not much on the economic calendar until Friday so trade will continue to be driven recession outlook and more importantly, the $120B of commercial paper that must be rolled over in the next few weeks (the Fed does allow commercial paper as collateral at the discount window, a significant relaxation). Many are now concerned that the credit crisis is actually bigger than the estimates and forecasts, with dire consequences to the economy that would be more severe than a simple "normal" recession. While we wouldn't take total exception to the increasing concerns about the financial system, we are not yet ready to jump off the bridge yet.
Today with no scheduled news, the market will be directed by how the equity market performs. The technical's in the rate markets are reaching near term overbought reads on all of the momentum oscillators; possibly some consolidation at these levels, but the bullish trend will remain in tact as long as the bellwether 10 yr note doesn't climb back over 4.50%. The Fed is going to cut 25 BPs on the 18th, that and at least another 25 BPs is already discounted in the present levels.
Atlanta Fed's Lockhart is talking on the economy now, nothing of substance yet; SF's Yellen goes at 11:00 at an economic conference and Dallas' Fisher hits at 1:00. Fed Gov Mishkin will talk later tonight at 7:30 on the economy. Coming on the heels of Fri.'s brutal job number, the Fed's take will be paramount to form opinions on the coming policy meeting. Philly's Plosser already talked down the significance of the decline in jobs this weekend, but many believe the FOMC now has the cover to cut. Bernanke will talk tomorrow in Germany.
With the FOMC meeting next Tuesday, and not much economic data until Friday this week, the bond and mortgage markets will pay attention to the equity market and move inversely with it. Also always in the background is the potential for more shoes to drop in the credit markets.
Washington Mutual's CEO Killinger is calling the current housing crisis "the perfect storm". Countrywide has been in the headlines this weekend cutting jobs, but that isn't real news given the circumstances. WAMU has so far dodged the spot light but they won't for much longer, no one in the business is going to escape the housing depression (yes depression); Wells and other huge banks might be able to cover up the problems as they have access to all the money they need, but they too will pay the same price as recent headliners.
After the huge improvement in interest rates on Friday, the bond market is starting the day holding the gains but taking a breather and not improved much.
The stock market trading in the futures markets prior to the 9:30 open was better taking away the stock market/treasury market rotation (DJIA fell 250 Friday). There is no real economic releases today, and not much on the economic calendar until Friday so trade will continue to be driven recession outlook and more importantly, the $120B of commercial paper that must be rolled over in the next few weeks (the Fed does allow commercial paper as collateral at the discount window, a significant relaxation). Many are now concerned that the credit crisis is actually bigger than the estimates and forecasts, with dire consequences to the economy that would be more severe than a simple "normal" recession. While we wouldn't take total exception to the increasing concerns about the financial system, we are not yet ready to jump off the bridge yet.
Today with no scheduled news, the market will be directed by how the equity market performs. The technical's in the rate markets are reaching near term overbought reads on all of the momentum oscillators; possibly some consolidation at these levels, but the bullish trend will remain in tact as long as the bellwether 10 yr note doesn't climb back over 4.50%. The Fed is going to cut 25 BPs on the 18th, that and at least another 25 BPs is already discounted in the present levels.
Atlanta Fed's Lockhart is talking on the economy now, nothing of substance yet; SF's Yellen goes at 11:00 at an economic conference and Dallas' Fisher hits at 1:00. Fed Gov Mishkin will talk later tonight at 7:30 on the economy. Coming on the heels of Fri.'s brutal job number, the Fed's take will be paramount to form opinions on the coming policy meeting. Philly's Plosser already talked down the significance of the decline in jobs this weekend, but many believe the FOMC now has the cover to cut. Bernanke will talk tomorrow in Germany.
With the FOMC meeting next Tuesday, and not much economic data until Friday this week, the bond and mortgage markets will pay attention to the equity market and move inversely with it. Also always in the background is the potential for more shoes to drop in the credit markets.
Washington Mutual's CEO Killinger is calling the current housing crisis "the perfect storm". Countrywide has been in the headlines this weekend cutting jobs, but that isn't real news given the circumstances. WAMU has so far dodged the spot light but they won't for much longer, no one in the business is going to escape the housing depression (yes depression); Wells and other huge banks might be able to cover up the problems as they have access to all the money they need, but they too will pay the same price as recent headliners.
Friday, September 7, 2007
Pinot
The Dow Jones Inexpensive Pinot Noir Index
In a tasting of American Pinot Noir around $20 or less from the 2005 and 2006 vintages, these were our favorites. We paid less than $20 for Mondavi, Willamette Valley and Frei, but their more-representative prices are higher.
VINEYARD/VINTAGE
PRICE
RATING
TASTERS' COMMENTS
Robert Mondavi Winery 2005 (Carneros)
$23.00*
Very Good
Best of tasting. The real thing: rich, with deep, Bing cherry fruit, gentle tannins and a long, dry, pure-fruit finish. Good balance of fruit, acidity and weight. Could age a bit.
Frey Vineyards 2006 (Mendocino)
$15.99
Very Good
Best value. Ephemeral and very fine, with some nice Burgundy-like funkiness to add character. Very real and special. It's organic, with no detectable sulfites, so make sure it has been kept well, and drink it soon.
Willamette Valley Vineyards "Whole Cluster Fermented" 2006 (Willamette Valley, Ore.)
$22.00*
Very Good
Jammy and jazzy, like Beaujolais, and just as delightful. Pure, clean, lovely fruit that says, "Let's party!"
Beringer Founders' Estate 2005 (California)
$9.99
Good/ Very Good
Light, pleasant and very easy, bursting with fresh cherry fruit. Fun. Repeat favorite.
Bogle Vineyards 2005 (Russian River Valley)
$11.99
Good/ Very Good
Especially good with food. Lovely, simple fruit, nicely dry with a dash of lemon, happy to be a supporting player in a meal. A good name in value-priced wine.
Chateau St. Jean 2005 (Sonoma County)
$19.99
Good/ Very Good
Rich, with some depth, mouthfeel and earth. Bigger and more serious than most, requiring more substantial food.
Francis Coppola "Diamond Collection, Silver Label" 2006 (California)
$17.00*
Good/ Very Good
Pleasant and comforting, with an easy delivery of black cherries and cranberries. Charming. Can take a chill. Reliable name.
Frei Brothers "Reserve" 2005 (Russian River Valley)
$22.50*
Good/ Very Good
Quite pleasant, with lovely, ripe fruit. Some richness, earth and minerals. Real wine. Repeat favorite.
Sipino (Yamhill Valley Vineyards) 2005 (Willamette Valley, Ore.)
$16.99
Good/ Very Good
Interesting. It starts with lots of juicy blackberries, but then turns slightly viney and herbal, in a good, true way. Very drinkable, but also complex enough to hold interest.
NOTE: Wines are rated on a scale that ranges: Yech, OK, Good, Very Good, Delicious, and Delicious! These are the prices we paid at wine stores in New Jersey and New York.
*We paid $19.99 for Mondavi, $18.29 for Willamette Valley, $18.99 for Coppola and $19.99 for Frei Brothers, but these prices appear to be more representative. Prices vary widely.
--Melanie Grayce West contributed to this column
In a tasting of American Pinot Noir around $20 or less from the 2005 and 2006 vintages, these were our favorites. We paid less than $20 for Mondavi, Willamette Valley and Frei, but their more-representative prices are higher.
VINEYARD/VINTAGE
PRICE
RATING
TASTERS' COMMENTS
Robert Mondavi Winery 2005 (Carneros)
$23.00*
Very Good
Best of tasting. The real thing: rich, with deep, Bing cherry fruit, gentle tannins and a long, dry, pure-fruit finish. Good balance of fruit, acidity and weight. Could age a bit.
Frey Vineyards 2006 (Mendocino)
$15.99
Very Good
Best value. Ephemeral and very fine, with some nice Burgundy-like funkiness to add character. Very real and special. It's organic, with no detectable sulfites, so make sure it has been kept well, and drink it soon.
Willamette Valley Vineyards "Whole Cluster Fermented" 2006 (Willamette Valley, Ore.)
$22.00*
Very Good
Jammy and jazzy, like Beaujolais, and just as delightful. Pure, clean, lovely fruit that says, "Let's party!"
Beringer Founders' Estate 2005 (California)
$9.99
Good/ Very Good
Light, pleasant and very easy, bursting with fresh cherry fruit. Fun. Repeat favorite.
Bogle Vineyards 2005 (Russian River Valley)
$11.99
Good/ Very Good
Especially good with food. Lovely, simple fruit, nicely dry with a dash of lemon, happy to be a supporting player in a meal. A good name in value-priced wine.
Chateau St. Jean 2005 (Sonoma County)
$19.99
Good/ Very Good
Rich, with some depth, mouthfeel and earth. Bigger and more serious than most, requiring more substantial food.
Francis Coppola "Diamond Collection, Silver Label" 2006 (California)
$17.00*
Good/ Very Good
Pleasant and comforting, with an easy delivery of black cherries and cranberries. Charming. Can take a chill. Reliable name.
Frei Brothers "Reserve" 2005 (Russian River Valley)
$22.50*
Good/ Very Good
Quite pleasant, with lovely, ripe fruit. Some richness, earth and minerals. Real wine. Repeat favorite.
Sipino (Yamhill Valley Vineyards) 2005 (Willamette Valley, Ore.)
$16.99
Good/ Very Good
Interesting. It starts with lots of juicy blackberries, but then turns slightly viney and herbal, in a good, true way. Very drinkable, but also complex enough to hold interest.
NOTE: Wines are rated on a scale that ranges: Yech, OK, Good, Very Good, Delicious, and Delicious! These are the prices we paid at wine stores in New Jersey and New York.
*We paid $19.99 for Mondavi, $18.29 for Willamette Valley, $18.99 for Coppola and $19.99 for Frei Brothers, but these prices appear to be more representative. Prices vary widely.
--Melanie Grayce West contributed to this column
Credit scores
09/07/2007
Bottom line. If your credit score is between 500 and 619 you better be prepared to put down at least 10% if not 20%.
Indy Mac just announced that they are no longer underwriting subprime loans. Saxon, part of Morgan Stanley, is capped at 80% max LTV, and rates start in the double digits.
Prime borrowers are fine. The DU Flex 100 loan is still available with LP or DU approval.
Bottom line. If your credit score is between 500 and 619 you better be prepared to put down at least 10% if not 20%.
Indy Mac just announced that they are no longer underwriting subprime loans. Saxon, part of Morgan Stanley, is capped at 80% max LTV, and rates start in the double digits.
Prime borrowers are fine. The DU Flex 100 loan is still available with LP or DU approval.
Friday Market Conditions
09/07/2007
Any debate about the Fed cutting rates on the 18th (or before) is finished now.
The Fed will cut rates as we have been saying, and it isn't likely to be just one cut as we thought until this morning. The August employment report sent shock through the markets as non-farm payroll jobs actually declined for the first time since August 2003. Market consensus was for job growth to increase by 120K, with many looking for 100K; job s declined by 4K in August. Turning the other cheek, the market got slapped again with revisions lower in June and July. June NFP jobs were originally reported at +126K, now revised to +69K; July was revised from +92K to +68K. The overall unemployment rate did stay unchanged at 4.6%; average hourly earnings were up 0.3%, in line with forecasts.
Recession coming? That is the topic the markets will wrestle with for the next few months. That is also what the Fed will be pondering. Given the decline in the jobs market today; unless we see huge upward revisions to it next month, a recession is now looking more of a possibility. At the moment it is just a possibility, but when the job losses in the mortgage lending area and in other financial institutions such as banks hit the data, the jobs picture will look even weaker.
The report this morning takes a cut from the Fed away from the idea a cut would be done to assist the financial markets in the credit crisis to the view the Fed has to cut because the economy is slowing rapidly. Until this morning the argument that as long as job growth continued a recession was unlikely, is out the window. Although it is just one month, and some are already saying it is an anomaly, the economy is slowing and the Fed is now way behind the curve in terms of its assessment of the future. With the housing sector in depression and now jobs declining, the Fed will have to step up quickly. Home builders and construction are falling like rocks, home prices have, and will, decline, foreclosures and mortgage delinquencies will likely increase even with assistance given to refinancing and lower rates, and now goods producing sector showed a decline in jobs in the details this morning, payroll declines in manufacturing (-46K) and construction (-22K).
Benny B and other Fed officials have to be talking now about at least 50 basis points in cuts over the next two Fed meetings. The US economy is declining, as the Fed itself indicated; but the slide appears to be a more steep slope than thought. One rate cut isn't going to do it. The Fed is now in a catch-up mode; a Bernanke miss of huge proportions unless today's employment report was just a blip----which we do not think is likely. AND, it isn't just the US: if the US slides the rest of the world is going to go with us. This morning the IMF has already said the global economy will contract.
If there is any good news this morning it is in the realm of refinancing some of the coming re-sets on the sub primes and ARMs. Lower interst rates and possibly some assistance from FHA should help salvage some of the potential delinquencies and foreclosures. (We believe one way to help is for Congress to allow the FHA to extend amortization of re-fionanced sub primes that are deserving to 40 yrs; there is precedent for it going back to the late 60s; keep the term to 30 yrs but amortize over 40 yrs---those mortgages won't last more than 10 yrs anyway).
The 10 yr note will likely test its key resistance at 4.40%; the lowest yield seen since August of 2005. A break below that may give us a run to 4.00% if economic data continues to decline. The dollar is taking a real beating today as interest rates decline.
Any debate about the Fed cutting rates on the 18th (or before) is finished now.
The Fed will cut rates as we have been saying, and it isn't likely to be just one cut as we thought until this morning. The August employment report sent shock through the markets as non-farm payroll jobs actually declined for the first time since August 2003. Market consensus was for job growth to increase by 120K, with many looking for 100K; job s declined by 4K in August. Turning the other cheek, the market got slapped again with revisions lower in June and July. June NFP jobs were originally reported at +126K, now revised to +69K; July was revised from +92K to +68K. The overall unemployment rate did stay unchanged at 4.6%; average hourly earnings were up 0.3%, in line with forecasts.
Recession coming? That is the topic the markets will wrestle with for the next few months. That is also what the Fed will be pondering. Given the decline in the jobs market today; unless we see huge upward revisions to it next month, a recession is now looking more of a possibility. At the moment it is just a possibility, but when the job losses in the mortgage lending area and in other financial institutions such as banks hit the data, the jobs picture will look even weaker.
The report this morning takes a cut from the Fed away from the idea a cut would be done to assist the financial markets in the credit crisis to the view the Fed has to cut because the economy is slowing rapidly. Until this morning the argument that as long as job growth continued a recession was unlikely, is out the window. Although it is just one month, and some are already saying it is an anomaly, the economy is slowing and the Fed is now way behind the curve in terms of its assessment of the future. With the housing sector in depression and now jobs declining, the Fed will have to step up quickly. Home builders and construction are falling like rocks, home prices have, and will, decline, foreclosures and mortgage delinquencies will likely increase even with assistance given to refinancing and lower rates, and now goods producing sector showed a decline in jobs in the details this morning, payroll declines in manufacturing (-46K) and construction (-22K).
Benny B and other Fed officials have to be talking now about at least 50 basis points in cuts over the next two Fed meetings. The US economy is declining, as the Fed itself indicated; but the slide appears to be a more steep slope than thought. One rate cut isn't going to do it. The Fed is now in a catch-up mode; a Bernanke miss of huge proportions unless today's employment report was just a blip----which we do not think is likely. AND, it isn't just the US: if the US slides the rest of the world is going to go with us. This morning the IMF has already said the global economy will contract.
If there is any good news this morning it is in the realm of refinancing some of the coming re-sets on the sub primes and ARMs. Lower interst rates and possibly some assistance from FHA should help salvage some of the potential delinquencies and foreclosures. (We believe one way to help is for Congress to allow the FHA to extend amortization of re-fionanced sub primes that are deserving to 40 yrs; there is precedent for it going back to the late 60s; keep the term to 30 yrs but amortize over 40 yrs---those mortgages won't last more than 10 yrs anyway).
The 10 yr note will likely test its key resistance at 4.40%; the lowest yield seen since August of 2005. A break below that may give us a run to 4.00% if economic data continues to decline. The dollar is taking a real beating today as interest rates decline.
Thursday, September 6, 2007
9/06/2007 WSJ article
Conventional MortgageHas Lenders Competing
By JILIAN MINCER September 6, 2007; Page D6
While subprime and jumbo mortgage loans are drying up, there is plenty of cash flowing to borrowers with stellar credit who want conventional fixed-rate mortgages.
Banks and credit unions are battling for these customers with fee waivers, competitive interest rates and a willingness to negotiate on rates that have dropped in the past three months.
"I've talked to many banks who are anxious to lend," says James Chessen, chief economist for the American Bankers Association in Washington. "A good credit risk will always have access to funds at the best rates in the market."
This summer's subprime crisis has tightened lending standards, making it extremely difficult for borrowers with less than perfect credit to get a mortgage, especially if they are stretching to afford their first home.
Even consumers with solid credit scores and high incomes are now finding it more difficult and more expensive to find jumbo mortgage loans, which are loans of more than $417,000. A mortgage that large is often necessary on either coast because of high home costs.
But individuals with good credit and a down payment are in the driver's seat at a time when the average 30-year fixed rate mortgage on a loan of less than $417,000 was 6.5% yesterday, according to Bankrate.com's benchmark 30-year fixed rate. The bigger the down payment, the more the borrower's negotiating strength.
One reason for the current strong market for conventional, or "conforming," mortgages is that there is plenty of cash to lend because "investors are willing to invest in these sectors," says Joe Rogers, executive vice president at Wells Fargo Home Mortgage.
They know, he says, that borrowers need to meet standards set by Fannie Mae and Freddie Mac, the government-sponsored housing finance agencies that purchase conventional mortgages and repackage them into mortgage bonds to sell to investors.
Bill Hampel, chief economist for the Credit Union National Association, says investors have lost confidence in the subprime loans available to borrowers with weaker credit because so many were issued with poor underwriting standards.
He says credit unions typically sell only 25% to 30% of their loans, and hold the rest. As a result, they are very concerned about ensuring that the borrower can repay the loan down the road. Despite distress elsewhere, first-mortgage delinquencies at credit unions are 0.33% and net charge-offs are 0.02%.
Lending institutions are fighting to win business from consumers with good credit, many of which may be hesitant to buy, refinance or move up in the current housing market.
"It's a very competitive marketplace," says Terry Francisco, a spokesman for Bank of America Corp. in Charlotte, N.C. "We watch our competition closely."
One of the reasons banks want to make conventional loans is that consumers often end up with several products from the lender, including savings accounts, credit cards and checking accounts.
"We find that someone who has a mortgage with us will have about five products in addition to the mortgage," says Mr. Francisco.
Bank of America and other lending institutions are trying to entice borrowers by offering special deals.
For example, Bank of America's "No Fee Mortgage Plus" saves consumers about $3,000 in closing costs, which the bank covers. The interest rate varies among states and customers.
The current demand for home buyers with good credit makes it even more important for potential borrowers to shop around for the best deals. Individuals should check with their local credit union and bank, especially if they have existing accounts with those institutions.
A person's credit score is based on a number of factors, including their payment history, utilization of available credit and mix of debt. The range is from 300 to 850. Anything over 720 is very good and more than 750 is excellent.
Lenders consider not only borrowers' credit score and down payment, but also their debt level when making an assessment. The general standard is a debt-to-income ratio of 28/36. That means a household's monthly mortgage payment shouldn't exceed 28% of its monthly pretax income. Total debt payments, including credit cards, student loans and car payments, shouldn't exceed 36% of the household's pretax income.
Victoria Maldonado has benefited from the current market. She and her fiancé had a good credit score and 20% down payment when they started shopping for a conventional mortgage.
They selected Bank of America because it paid their closing costs. Two weeks later, they closed on their Houston home.
"We had good credit, but what [the bank] offered was awesome," she says.
By JILIAN MINCER September 6, 2007; Page D6
While subprime and jumbo mortgage loans are drying up, there is plenty of cash flowing to borrowers with stellar credit who want conventional fixed-rate mortgages.
Banks and credit unions are battling for these customers with fee waivers, competitive interest rates and a willingness to negotiate on rates that have dropped in the past three months.
"I've talked to many banks who are anxious to lend," says James Chessen, chief economist for the American Bankers Association in Washington. "A good credit risk will always have access to funds at the best rates in the market."
This summer's subprime crisis has tightened lending standards, making it extremely difficult for borrowers with less than perfect credit to get a mortgage, especially if they are stretching to afford their first home.
Even consumers with solid credit scores and high incomes are now finding it more difficult and more expensive to find jumbo mortgage loans, which are loans of more than $417,000. A mortgage that large is often necessary on either coast because of high home costs.
But individuals with good credit and a down payment are in the driver's seat at a time when the average 30-year fixed rate mortgage on a loan of less than $417,000 was 6.5% yesterday, according to Bankrate.com's benchmark 30-year fixed rate. The bigger the down payment, the more the borrower's negotiating strength.
One reason for the current strong market for conventional, or "conforming," mortgages is that there is plenty of cash to lend because "investors are willing to invest in these sectors," says Joe Rogers, executive vice president at Wells Fargo Home Mortgage.
They know, he says, that borrowers need to meet standards set by Fannie Mae and Freddie Mac, the government-sponsored housing finance agencies that purchase conventional mortgages and repackage them into mortgage bonds to sell to investors.
Bill Hampel, chief economist for the Credit Union National Association, says investors have lost confidence in the subprime loans available to borrowers with weaker credit because so many were issued with poor underwriting standards.
He says credit unions typically sell only 25% to 30% of their loans, and hold the rest. As a result, they are very concerned about ensuring that the borrower can repay the loan down the road. Despite distress elsewhere, first-mortgage delinquencies at credit unions are 0.33% and net charge-offs are 0.02%.
Lending institutions are fighting to win business from consumers with good credit, many of which may be hesitant to buy, refinance or move up in the current housing market.
"It's a very competitive marketplace," says Terry Francisco, a spokesman for Bank of America Corp. in Charlotte, N.C. "We watch our competition closely."
One of the reasons banks want to make conventional loans is that consumers often end up with several products from the lender, including savings accounts, credit cards and checking accounts.
"We find that someone who has a mortgage with us will have about five products in addition to the mortgage," says Mr. Francisco.
Bank of America and other lending institutions are trying to entice borrowers by offering special deals.
For example, Bank of America's "No Fee Mortgage Plus" saves consumers about $3,000 in closing costs, which the bank covers. The interest rate varies among states and customers.
The current demand for home buyers with good credit makes it even more important for potential borrowers to shop around for the best deals. Individuals should check with their local credit union and bank, especially if they have existing accounts with those institutions.
A person's credit score is based on a number of factors, including their payment history, utilization of available credit and mix of debt. The range is from 300 to 850. Anything over 720 is very good and more than 750 is excellent.
Lenders consider not only borrowers' credit score and down payment, but also their debt level when making an assessment. The general standard is a debt-to-income ratio of 28/36. That means a household's monthly mortgage payment shouldn't exceed 28% of its monthly pretax income. Total debt payments, including credit cards, student loans and car payments, shouldn't exceed 36% of the household's pretax income.
Victoria Maldonado has benefited from the current market. She and her fiancé had a good credit score and 20% down payment when they started shopping for a conventional mortgage.
They selected Bank of America because it paid their closing costs. Two weeks later, they closed on their Houston home.
"We had good credit, but what [the bank] offered was awesome," she says.
Thursday Market Trends
09/06/2007
Started out weaker in the interest rate markets, prices declined a little at 8:30 on reports that same store retail sales were beating expectations.
The consumer appears to defy most of us that believe the economy will weaken as a result of the housing market decline and sub prime re-sets coming. The better retail sales reports put a slight dent in the solid view we have that the Fed will cut rates in the 18th by 25 BPs. While we will continue our view that the Fed will cut, we have to agree that consumer spending is holding up and in turn will make the FOMC think more about not cutting rates. That said, the Fed should cut a little; it won't increase inflation concerns or set the economy on the path of overheating, a cut will however keep the present low interest rates where they are now----no cut and interest rates will rise given the markets (stocks and bonds) have completely factored in a cut at the present levels.
Weekly jobless claims were expected to decline about 14K, they fell 19K to 318K; last weeks claims were revised up an additional 5K from what was originally reported so the decline is in line with forecasts. Also at 8:30 Q2 productivity was revised to +2.6% from +1.8% on the preliminary read last month; markets were looking for +2.4%. Unit labor costs were revised lower to 1.4% but stand at a strong annual growth rate of 4.9%. The presumed inflation pressure from unit labor costs is a worry at the Fed but likely to be shelved at the September 18 FOMC meeting as the financial problems take top priority.
The last of the economic data today was at 10:00 with the ISM services sector data; expectations were for the overall index to fall to 54.5 from 55.8 in July, the index was at 55.8; new orders index at 57.0 frm 52.8, prices paid at 58.6 frm 61.3, and employment fell to 47.9 frm 51.7.
The MBA released the foreclosure and delinquency data frm July. Sub prime foreclosures are at 2.72%, serious delinquencies at 9.27%; seriously delinquent ARMs at 12.4%. Prime mortgages show a 0.98% delinquency.
The day is punctuated with Fed speakers all over the place; but with the FOMC meeting less than two weeks away we do not expect much juice from any of them. St. Louis' Poole in London at 11:00 on jobs and trade followed by SF's Yellen and Fed Gov Kroszner in SF on Asian banking at 11:30. Atlanta's Lockhart will talk on the economy at 12:25 with a Q&A while Dallas' Fisher talks regional economics in New Mexico at 2:00.
The European Central Bank left interest rates unchanged today, shelving plans for an increase as the U.S. housing slump threatens to curb economic growth. The collapse of the U.S. subprime-mortgage market has made banks reluctant to lend, pushing up the cost of credit and causing turmoil on world financial markets. The ECB earlier today added 42.2 billion euros ($57.7B) in emergency cash to ease a credit drought that had pushed overnight deposit rates to a six-year high. In a left handed way, the decision of the ECB to not increase rates puts additional pressure on the Fed to lower rates on the 18th.
Tomorrow the August employment report at 8:30; the markets should be generally quiet today ahead of the release with some slight selling bias in the bond and mortgage markets. The equity market performance will continue to influence the rate markets; so far today the equity market and bond market are not much change.
Started out weaker in the interest rate markets, prices declined a little at 8:30 on reports that same store retail sales were beating expectations.
The consumer appears to defy most of us that believe the economy will weaken as a result of the housing market decline and sub prime re-sets coming. The better retail sales reports put a slight dent in the solid view we have that the Fed will cut rates in the 18th by 25 BPs. While we will continue our view that the Fed will cut, we have to agree that consumer spending is holding up and in turn will make the FOMC think more about not cutting rates. That said, the Fed should cut a little; it won't increase inflation concerns or set the economy on the path of overheating, a cut will however keep the present low interest rates where they are now----no cut and interest rates will rise given the markets (stocks and bonds) have completely factored in a cut at the present levels.
Weekly jobless claims were expected to decline about 14K, they fell 19K to 318K; last weeks claims were revised up an additional 5K from what was originally reported so the decline is in line with forecasts. Also at 8:30 Q2 productivity was revised to +2.6% from +1.8% on the preliminary read last month; markets were looking for +2.4%. Unit labor costs were revised lower to 1.4% but stand at a strong annual growth rate of 4.9%. The presumed inflation pressure from unit labor costs is a worry at the Fed but likely to be shelved at the September 18 FOMC meeting as the financial problems take top priority.
The last of the economic data today was at 10:00 with the ISM services sector data; expectations were for the overall index to fall to 54.5 from 55.8 in July, the index was at 55.8; new orders index at 57.0 frm 52.8, prices paid at 58.6 frm 61.3, and employment fell to 47.9 frm 51.7.
The MBA released the foreclosure and delinquency data frm July. Sub prime foreclosures are at 2.72%, serious delinquencies at 9.27%; seriously delinquent ARMs at 12.4%. Prime mortgages show a 0.98% delinquency.
The day is punctuated with Fed speakers all over the place; but with the FOMC meeting less than two weeks away we do not expect much juice from any of them. St. Louis' Poole in London at 11:00 on jobs and trade followed by SF's Yellen and Fed Gov Kroszner in SF on Asian banking at 11:30. Atlanta's Lockhart will talk on the economy at 12:25 with a Q&A while Dallas' Fisher talks regional economics in New Mexico at 2:00.
The European Central Bank left interest rates unchanged today, shelving plans for an increase as the U.S. housing slump threatens to curb economic growth. The collapse of the U.S. subprime-mortgage market has made banks reluctant to lend, pushing up the cost of credit and causing turmoil on world financial markets. The ECB earlier today added 42.2 billion euros ($57.7B) in emergency cash to ease a credit drought that had pushed overnight deposit rates to a six-year high. In a left handed way, the decision of the ECB to not increase rates puts additional pressure on the Fed to lower rates on the 18th.
Tomorrow the August employment report at 8:30; the markets should be generally quiet today ahead of the release with some slight selling bias in the bond and mortgage markets. The equity market performance will continue to influence the rate markets; so far today the equity market and bond market are not much change.
Wednesday, September 5, 2007
Palestine trends
Just as clothing fashions lag coming to the Palestine area I believe that the housing woes facing Americans in other areas will not arrive here for a long time. Here's why: we don't have rapid appreciation that has impacted the other areas of the U.S. I mean when was the last time someone bought a home on Rambling Rd. and sold it 9 months later for $80,000 more than they paid--never going to happen here and that's a good thing.
Market reactions
09/05/2007
At 8:15 this morning the ADP payroll company came out with their estimate of non-farm payrolls for August.
ADP forecast is for job growth to be a whole lot weaker than what economists are thinking; +38K against +120K, but ADP doesn't include government jobs so we can add another 40K or so to their numbers, but it is still a lot weaker than what markets have thought. That said, ADP's estimates are not to be taken too seriously as they have missed by wide margins in their guesses since they began issuing forecasts. The reaction was selling in the stock index futures and some buying of treasuries. The 10 yr note once again fell to 4.50% but once again has failed to break it (see chart above). Two-year note yields fell more than 7 basis points, to 4.06%. Two-year Treasury notes rose as Eurodollar futures showed corporate borrowing costs are increasing, stoking speculation the Federal Reserve will cut interest rates this month to free up bank lending. LIBOR rates continue to increase ( a new six year high) as banks won't lend and many deals are tied to it; all this leads to more rational why the Fed needs to cut rates; to encourage more inter-bank lending that has all but dried up. The credit squeeze has not been lessened much in the past two weeks.
At 10:00 the NAR released their pending home sales data for July; sales fell 12.2% for contracts signed in July. It is the largest monthly decline since 2001 when NAR started reporting it. Yr/yr pending sales are -16.1%.
August domestic light vehicle sales jumped 9.5% to 12.7 mil, the strongest pace since February. Including imports, light vehicles rose 6.5% to 16.2 mil. The gain was most dramatic in light trucks which rose 13% to 7.6 mil as car sales came in at 5.1 mil. The gains in sales will filter through to retail sales and consumer spending when the data is released.
At 2:00 this afternoon the Fed will release its Beige Book, the details from the 12 Fed districts on the economy. It includes a lot more detail than the headliners that we see through the month so it will get some attention from the markets.
There are still many out there that are arguing against a rate cut in two weeks; they must be hungry for press coverage. The markets have already factored in a cut; if Bernanke doesn't cut by 25 BPs on the 18th the bond market and stock market will take a huge dive. Interest rates will increase at the long end by 20 to 25 BPs, driving mortgage rates up about the same and adding yet another nail in the lid in working out the sub prime problems. A 25 BP cut wouldn't be a signal the Fed has abandoned its inflation fight, nor would it necessarily be seen as a green light for lower rates and a declining economy. It would however, give the markets what they have already discounted and won't spark a significant rally in interest rates.
The weekly MBA mortgage applications index were up 1.3% last week, with purchasing applications edging higher by 0.4% and refis climbing 2.3%. The fixed 30-yr mortgage rate was up at 6.42% from 6.41% while the 15-yr and 1-yr adjustable rate mortgage were flat at 6.10% and 5.62%, respectively.
Technically; the 10 yr treasury, driver for mortgages has continued to find resistance at 4.50%, unable to break it for the past five sessions; and sitting right on it at 10:00 today. Given the recent improvement in interest rates based on the safe haven buying and the view the Fed will cut the FF rate; it will take a lot now to cut through 4.50%. With employment report coming on Friday we don't expect 4.505 to crack. The stock market action will continue to weigh on how the interest rate markets perform.
At 8:15 this morning the ADP payroll company came out with their estimate of non-farm payrolls for August.
ADP forecast is for job growth to be a whole lot weaker than what economists are thinking; +38K against +120K, but ADP doesn't include government jobs so we can add another 40K or so to their numbers, but it is still a lot weaker than what markets have thought. That said, ADP's estimates are not to be taken too seriously as they have missed by wide margins in their guesses since they began issuing forecasts. The reaction was selling in the stock index futures and some buying of treasuries. The 10 yr note once again fell to 4.50% but once again has failed to break it (see chart above). Two-year note yields fell more than 7 basis points, to 4.06%. Two-year Treasury notes rose as Eurodollar futures showed corporate borrowing costs are increasing, stoking speculation the Federal Reserve will cut interest rates this month to free up bank lending. LIBOR rates continue to increase ( a new six year high) as banks won't lend and many deals are tied to it; all this leads to more rational why the Fed needs to cut rates; to encourage more inter-bank lending that has all but dried up. The credit squeeze has not been lessened much in the past two weeks.
At 10:00 the NAR released their pending home sales data for July; sales fell 12.2% for contracts signed in July. It is the largest monthly decline since 2001 when NAR started reporting it. Yr/yr pending sales are -16.1%.
August domestic light vehicle sales jumped 9.5% to 12.7 mil, the strongest pace since February. Including imports, light vehicles rose 6.5% to 16.2 mil. The gain was most dramatic in light trucks which rose 13% to 7.6 mil as car sales came in at 5.1 mil. The gains in sales will filter through to retail sales and consumer spending when the data is released.
At 2:00 this afternoon the Fed will release its Beige Book, the details from the 12 Fed districts on the economy. It includes a lot more detail than the headliners that we see through the month so it will get some attention from the markets.
There are still many out there that are arguing against a rate cut in two weeks; they must be hungry for press coverage. The markets have already factored in a cut; if Bernanke doesn't cut by 25 BPs on the 18th the bond market and stock market will take a huge dive. Interest rates will increase at the long end by 20 to 25 BPs, driving mortgage rates up about the same and adding yet another nail in the lid in working out the sub prime problems. A 25 BP cut wouldn't be a signal the Fed has abandoned its inflation fight, nor would it necessarily be seen as a green light for lower rates and a declining economy. It would however, give the markets what they have already discounted and won't spark a significant rally in interest rates.
The weekly MBA mortgage applications index were up 1.3% last week, with purchasing applications edging higher by 0.4% and refis climbing 2.3%. The fixed 30-yr mortgage rate was up at 6.42% from 6.41% while the 15-yr and 1-yr adjustable rate mortgage were flat at 6.10% and 5.62%, respectively.
Technically; the 10 yr treasury, driver for mortgages has continued to find resistance at 4.50%, unable to break it for the past five sessions; and sitting right on it at 10:00 today. Given the recent improvement in interest rates based on the safe haven buying and the view the Fed will cut the FF rate; it will take a lot now to cut through 4.50%. With employment report coming on Friday we don't expect 4.505 to crack. The stock market action will continue to weigh on how the interest rate markets perform.
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