A random walk down IRR street ...
* The Mortgage Bankers Association's purchase index has gotten a bit frisky right along with Treasuries. It popped up to 427.30 in the week of April 27, the highest since the week of January 5.
Every other recent indicator has pointed to poor April home sales -- March pending contracts, April builder confidence, etc. Does this recent rise indicate that a big rebound is in store? Color me skeptical. I would bet dollars to donuts that even if mortgage APPLICATIONS are up, mortgage APPROVALS (and therefore, actual purchase agreements) are rising by a smaller amount, if at all. That's a side effect of the tighter lending standards we've seen companies implement since the subprime meltdown began.
* All of that said, if bonds were to REALLY break out of their recent coma to the upside, it could help support the housing market. The long bond has been trading in a range roughly bounded by 110 on the low end and 114 on the high end since September 2006.
In yield terms, let's call it 4.5% to 4.8% on the 10-year Note. A significant move below 4.5% -- and especially 4.4% -- would likely lead to a sharper spike in purchases. The problem: I don't see that happening with inflation still elevated and liquidity pouring out of every nook and cranny here in the U.S. and abroad.
* Speaking of excess liquidity, anybody catch the New York Times story today about commercial mortgage lending? Titled “A Warning on Risk in Commercial Mortgages,” it basically pointed out that lenders are doing the same stupid things with commercial mortgages that they did with residential mortgages! A key quote:
“Low interest rates and an abundance of investment capital have led to heady times for buyers and sellers of office buildings, hotels and other income-producing property. Buildings have traded at record prices and loan terms have become increasingly generous, with many buyers putting little or no equity into the deals."
The story goes on to talk about how ratings agencies that grade bonds backed by pools of commercial mortgages are seeing several warning signs in commercial deals. Among them:
Lenders are handing out many more interest-only loans than in the past … building owners are making overly optimistic forecasts of future rent growth ... and landlords aren’t setting aside large enough reserves for taxes, insurance, and other costs.
Jim Duca, a Moody’s managing director, put it this way: "Underwriting has gotten so frothy that we have to take a stand ... The industry was heading to Niagara Falls."
Am I the only one who thinks these lenders must be dumber than a bag of hammers? I mean, residential mortgage defaults are soaring, residential foreclosures are skyrocketing, and residential subprime firms are going out of business left and right. The reason: Companies made too many high-risk residential mortgages on properties whose values were wildly, artificially inflated by all the easy money.
Yet commercial lenders are apparently doing the same thing in their arena ... and expecting things to work out just fine. What's that famous quote? That the definition of insanity is doing the same thing over and over and expecting different results?
* Rising tax collections are allowing the U.S. Treasury to scrap 3-year Treasury Note sales. The 3-year note disappeared in 1998, then was resurrected in 2003, and now, is going away again. Three-year note yields reacted by ... not reacting. They were recently up 1.2 basis points, little changed from where they were before the news came out.
* ADP says the economy didn't create much in the way of jobs in April -- just 64,000. That's the lowest level since July 2003. The consensus for Friday's "official" jobs report is a gain of 100,000. My take: It doesn't matter which indicator you look at. They all basically point to the same trend: The U.S. is currently the global economic caboose rather than the global growth engine it was during the 1990s.
* Lastly, Bloomberg published a great story today called "Rents Peak in Housing Glut; New York Escapes Decline." In a nutshell, the story details how a glut of units in both the for-sale and for-rent market is causing rental growth rates to slow and apartment REIT stocks to slump.
Why do we have such a large glut of rental property? Because speculators snapped up hundreds of thousands of condos, town homes, and single-family properties during the boom. Their, ahem, ingenious, well-thought-out plan was to flip them quickly for thousands of dollars in profit.
Unfortunately, the bubble popped, leaving many stuck with property they couldn't sell. They've been bleeding cash month-in and month-out ever since. So they're now dumping those properties on the rental market to bring in some cash, even if it's not enough to cover their monthly mortgage payments.
I've been forecasting this trend to unfold for some time. Here's a piece on the subject from last fall. Here's a separate New York Sun piece from several weeks back that resulted from a conversation with Dan Dorfman. And here's a post I put up the other day on the latest vacancy stats. Enjoy.