Tuesday, June 30, 2009
Friday, June 26, 2009
What happens when drivers of foreclosures are different
"Rising unemployment is complicating the Obama administration's effort to reduce foreclosures and stabilize the housing market.
"The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say.
"The Obama foreclosure-prevention plan was "built around the subprime crisis model, not the unemployment crisis model," said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.
"The Obama program provides financial incentives to mortgage-servicing companies and investors to reduce mortgage-related payments to 31% of monthly income.
"But many borrowers don't have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years."
Thursday, June 25, 2009
Another good auction, this time of 7-year Notes
Wednesday, June 24, 2009
Fed keeps rates unchanged, doesn't change debt purchase targets, gives no clarity on "exit strategy"
"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
"The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen."
My take? The Fed essentially punted, striking out the middle ground. Policymakers said the economy is improving, but they gave no hint they would throttle back on monetary stimulus. They threw a bone to the inflationists with a comment about rising commodity prices, but then said those worrywarts should essentially be ignored. They referenced their extraordinary programs to purchase Treasuries, mortgage backed securities and agency debt, but provided no clarity or details about an exit strategy.
I can't help but think of that old Magic 8-Ball response: "Reply hazy, try again." The Fed isn't offering much clarity about what it will do next because it doesn't seem to know.
The market reaction: Long-term bonds are getting whacked, with the bond futures down about 15/32 at last count. The dollar index is at its high of the day, up 70 bps to 80.54. Stocks are giving up early gains, while gold is fading somewhat.
Five-year note auction pretty strong
New home sales fall 0.6% in May
* New home sales dipped 0.6% to a seasonally adjusted annual rate of 342,000 from 344,000 in April. The numbers are a disappointment, considering economists were expecting sales of 360,000. Results for the past few months were also downwardly revised by 32,000 units.
* Regionally, sales jumped 28.6% in the Northeast and 18.6% in the Midwest. They inched up 1.3% in the west, but fell 8.5% in the South, the nation's largest new home market (184,000 units sold at a seasonally adjusted annual rate vs. 80,000 in the West ... 51,000 in the Midwest ... and 27,000 in the Northeast).
* The raw number of homes for sale continued to decline, falling to 292,000 from 299,000 in April. That's the lowest reading going back to March 2001. The months supply at current sales pace indicator of inventory dipped to 10.2 from 10.4.
* The median price of a new home rose 4.2% last month to $221,600 from $212,600 in April. On a year-over-year basis, prices were down 3.4%, the best YOY showing since December.
Digging into the May new home sales figures, you see that sales rose in three out of four regions of the country. But they declined sharply in the South, the country's biggest new home market, so overall sales were a disappointment. On the other hand, for-sale inventory continues to decline -- a definite plus. And the year-over-year rate of home price depreciation eased markedly.
Overall, the story remains the same: The housing market is gradually stabilizing, but showing no sign whatsoever of a vigorous rebound. The biggest issues going forward remain unemployment and interest rates. The supply of new homes for sale is back in line with the long-term historical average. But if potential buyers are losing their jobs, and financing costs are going up, builders are going to have a tough time moving product.
Tuesday, June 23, 2009
Two-year Note auction strong
The problem isn't really demand for shorter-term debt, however. The question is whether longer-term bonds will continue to find buyers.
May existing home sales climb 2.4% in May
* Existing home sales gained 2.4% to a seasonally adjusted annual rate of 4.77 million units from 4.66 million in April. That was slightly below forecasts for a reading of 4.82 million and down 3.6% from 4.95 million a year earlier.
* Single-family sales climbed 1.9%, while condo and cooperative sales rose 6.1%. Regionally, sales were mixed. They rose 3.9% in the Northeast and 9% in the Midwest. But transaction volume was unchanged in the South and down 0.9% in the West.
* The raw number of homes for sale fell 3.5% to 3.798 million units from 3.937 million in April. That was also down 15.3% from a year earlier. The months supply at current sales pace indicator of inventory dropped to 9.6 from 10.1, with single family inventory falling to 9 from 9.5 and condo inventory slipping to 15 from 15.4.
* The median price of an existing home rose 3.8% to $173,000 from $166,600 in April. That was down 16.8% from $207,900 in the year-ago period.
We saw another month of modest improvement in the housing sector in May. Existing home sales rose, led by the Midwest region. Sales were particularly strong in the condo sector, while the supply of homes on the market dipped. The biggest fly in the ointment continues to be pricing. It remains weak, with yet another double-digit decline from year-earlier levels showing up in the data.
Stepping back for a moment and looking at the big picture, it's clear that the housing sector is no longer in freefall. But neither is it rebounding strongly. We're seeing modest declines in inventory, modest improvement in sales, and some tentative signs of stabilization in pricing. But that's it. And that should come as no surprise. We just experienced the longest, largest housing bubble in U.S. history. As a result, the recovery process will be a long, drawn-out affair.
Another thing to keep an eye on: Mortgage rates. They didn't begin to rise significantly until late May. Since the existing home sales figures are based on contract closings, rather than contract signings, the impact of higher rates wasn't captured in this report. We'll likely see housing demand trail off as we head deeper into the summer unless financing costs ease back.
Thursday, June 18, 2009
Tsunami of Treasury issuance next week
Muddled market; LEI/Philly surprises
UPDATE: Leading Economic Indicators surged 1.2% in May, the biggest increase in any month going back to March 2004. The Philadelphia Fed index was also much better than expected at -2.2 vs. a forecast of -17. The new orders subindex jumped to -4.8 from -25.9, while the employment subindex increased more modestly to -21.8 from -26.8. The look-ahead index (which measures expectations for growth six months out) hit 60.1, the highest since September 2003. Before that, you won't find a higher reading since February 1993.
Tuesday, June 16, 2009
Securitization changes coming down the pike
"Lenders would be required to retain at least 5 percent of the risk of losses on each package of loan pieces, known as an asset-backed security.
"The employees and contractors who originate loans would be paid gradually, and they could get less if borrowers started to default.
"The proposal also takes aim at ratings agencies such as Moody's and Standard and Poor's, which investors rely upon to evaluate the quality of asset-backed securities. Those agencies would be required to make clear to investors that the securities are riskier than traditional investments such as corporate bonds.
"These changes address the market at the heart of the financial crisis, but they make up only a small piece of the administration's blueprint. The plan would give the Federal Reserve new powers to restrict the risks taken by large financial firms. It would create a new authority to dismantle firms that fall into trouble and a separate agency to protect consumers of financial products such as mortgages and credit cards."
Housing starts surge 17.2% in May; Permits rise
* Total housing starts rose 17.2% to a seasonally adjusted annual rate of 532,000 from 454,000 in April. Building permits gained 4% to 518,000 from 498,000. Economists were expecting 485,000 starts and 508,000 permits.
* By property type, single family starts rose 7.5% to 401,000 units. Multifamily starts soared 61.7% to 131,000. Single family permits popped 7.9% to 408,000, while multifamily permits dipped 8.3% to 110,000.
* As far as the regional breakdown is concerned, starts gained across the board. They inched up by 2% in the Northeast, rose 11.1% in the Midwest, climbed 16.8% in the South, and surged 28.6% in the West. In the permits world, activity was up 2.3% in the South, up 3.8% in the West, up 5.7% in the Northeast, and up up 8.9% in the Midwest.
Housing starts continue to show extraordinary volatility, with large double-digit moves month in and month out becoming the norm. The biggest swings continue to be found in the multifamily market. If you can believe the data, MF starts plunged 49.4% two months ago only to soar 61.7% in May. Hmmm.
What I find more interesting is that we've had three straight months of gains in the less-volatile single-family arena. In fact, the 7.5% monthly increase in May was the biggest rise since January 2006. This adds to evidence that the housing market is no longer falling apart. Instead, much lower home prices are helping to stabilize demand and bring down inventories in some of the hardest-hit regions of the country. That, in turn, is bringing some builders out of the bunker.
Still, anyone expecting a rip-roaring rebound in the housing sector is going to be disappointed. Tighter lending standards, rising mortgage rates, and a dismal employment market will all combine to drag out the turnaround timeline, and ensure the recovery remains a muted one.
Monday, June 15, 2009
They're from the government and they're here to help
"Government spending as a share of the economy has climbed to levels not seen since World War II. The geyser of money has turned Washington into an essential destination for more and more businesses. Spending on lobbying is up, as are luxury hotel bookings in the capital.
"President Barack Obama has vowed to reduce the government's role in the private sector as soon as possible. Federal Reserve Chairman Ben Bernanke says most of the central bank's emergency programs will be unwound within a few years. But a recent Wall Street Journal poll of economists found that only 16% believed the federal government would be able to meet its goal of ending rescue programs soon without fundamentally altering the competitive landscape of the private sector.
"The intervention helped stabilize the economy, but could slow growth in the long-run. Some economists and business leaders worry the intervention will result in rules that hamstring the way some businesses operate, and that it will sustain unproductive zombie firms and burden the next generation with debt or inflation."
Tuesday, June 09, 2009
In New York this week ...
Thursday, June 04, 2009
More on labor, the deficit, and the dollar
Meanwhile, yesterday was a day of revenge for the dollar bulls. The dollar took off and gold fell after Fed Chairman Ben Bernanke said all the right things in an appearance before Congress. He talked a lot about the risk of rising deficits, and the need for fiscal and monetary restraint at some point. But if you believe that this "Helicopter Ben" Fed, the administration, and Congress will actually DO anything (rather than just TALK about these risks), you -- dear reader -- are far more optimistic and trusting than I am.
Or as Pimco Chief Investment Officer Bill Gross put it in his most recent monthly outlook this week:
"While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat."
Wednesday, June 03, 2009
ADP, Challenger reports show tepid labor market
Meanwhile, the ADP employment report showed the economy shedding 532,000 jobs in May. That was ever-so-slightly worse than the -525,000 forecast of economists polled by Bloomberg. April's reading was revised higher to -545,000 from -491,000. The May decline was the smallest since November.
Bottom line: The labor market still looks tepid/lukewarm, but it's not getting worse.
Tuesday, June 02, 2009
Currency traders "selling Geithner"
Pending home sales surge 6.7% in April
* Pending sales jumped 6.7% in April. That compared with forecasts for a 0.5% gain and it comes on the heels of a 3.2% rise in March. In fact, it's the biggest monthly gain since October 2001.
* The pending sales index, at 90.3, is the highest since September 2008 (90.9). It gained 3.2% year-over-year.
* Regionally, pending sales rose in three out of four areas. They gained 1.8% in the West, 9.8% in the Midwest and a hefty 32.6% in the Northeast. Sales dipped 0.2% in the South.
Pending sales of existing homes turned in a very respectable performance this April. The monthly gain was the single-largest in more than seven years, led by a hefty 33% pop in the Northeast. What's going on? Some buyers latched on to lower home prices, lower mortgage rates, and tax breaks as reasons to get to work again in the housing market.
Still, the large pop in pending sales of used homes contrasts sharply with the lackluster 0.3% rise in new home sales. That suggests deeply discounted used homes are providing stiff competition for home builders, and gaining market share at their expense. More importantly, mortgage rates are now starting to rise sharply. This could put a damper on sales as we head into the summer. Bottom line: Conditions have improved in the housing market, but it's certainly not all smooth sailing ahead.
The embarassing state of Sino-U.S. affairs
Anyway, if you're interested in hearing China lecture the U.S. about its fiscal policies, take a crack at this Bloomberg story ...
"Yu Yongding, a former central bank adviser who acted as the interviewer for the China Daily newspaper, told Geithner: “I worry about details. We will be watching you very carefully.”
Or how about these gems from the Washington Post, which notes that despite Geithner's happy talk, China is not pleased with the way events are unfolding:
"Geithner's remarks stand in sharp contrast to the commentary in China's official propaganda papers.
"An editorial in the English-language China Daily said it will be "regrettable if [Geithner] underestimates and shuts his ears to voices from China's civil society," noting that there are worries that "Washington's mushrooming deficit, generated by massive government borrowing to fuel its economic recovery plan . . . will undermine both the dollar and U.S. bonds."
"The Global Times, which is affiliated with the Communist Party, said an online poll found that 87 percent of respondents believe China's dollar-assets are unsafe. The paper concluded, "Ordinary Chinese people are discontent with the declining value of China's huge foreign exchange reserves denominated in U.S. dollars."
"And the Economic Information Daily, which is part of the official New China News Agency and affiliated with the State Council, in a headline demanded to know of Geithner: "How do you propose implementing fiscal discipline? How will you maintain the stability of the dollar after the crisis?"
Today will be an interesting day. The dollar attempted to stabilize yesterday, rallying off its lows. But the Dollar Index is now getting pasted again -- down 42 bps to 78.74 as I write. Gold is up about $7 an ounce, but still below yesterday's high.