Interest Rate Roundup

Monday, April 30, 2007

Investment home sales, prices tank

The National Association of Realtors conducts a survey every year on purchase activity in the vacation and investment home markets. It's no big surprise, but both investment home buying activity and median prices plunged in 2006. Here are some of the key findings from the just-released figures ...

* Market share: Investment and vacation home transactions accounted for 36% of overall sales last year, down from a record 40% of sales in 2005. Investment share alone slumped to 22% from 28%.

* Volume: Vacation home sales reportedly gained 4.7% last year, while primary home sales dropped 4.1% and investment home sales plunged 28.9%.

* Prices: Vacation home median prices declined 2% to $200,000 from $204,100 a year earlier. Median investment home prices dropped much more sharply -- 18.3% to $150,000 from $183,500.

Monday morning rundown...

It's hard to keep up with the economic calendar on days like today. But I'll do my best to recap what we've just learned ...

* Personal income rose 0.7% in March, while spending gained just 0.3%. Income was a bit hotter than expected, spending a bit weaker. An inflationary indicator buried in the report called the core PCE was flat, vs. expectations for a 0.1% gain.

* The Chicago Purchasing Manager's Index took a header in April -- falling to 52.9 from 61.7 a month earlier. However, the inflation measure embedded in that report -- the "prices paid" subindex -- surged to 64.9 from 59.1 in March. That's the highest reading since August.

* It continues to be a tale of two construction markets -- with residential building weak and commercial building activity hanging in there. In March, private residential construction spending dropped another 1%, while private non-residential construction spending gained 2.4%. A few notable standout sectors: Hotel spending was up a hefty 13.2%, while spending on amusement facilities jumped 9.4%.

Treasuries are getting frisky on the weak growth figures, even though the inflation indicators were a mixed bag (one lower than expected, one higher than expected). The U.S. Long Bond was recently up 21/32, while 10-year Treasury yields were down 5 basis points to 4.64%.

Friday, April 27, 2007

Answering some unanswered questions from earlier

Just to wrap up some of the open questions I posed earlier, the DXY did indeed hold support ... barely ... and the bonds did close down on the day (4/32 on the long bond future). We didn't get a convincing breakout in the euro or pound, but we didn't get a convincing rejection of these key levels, either.

I guess it will be up to next week's heavy economic calendar to give us some closure. March personal income and spending is due out on 4/30, April ISM manufacturing is due out 5/1, and April nonfarm payrolls and unemployment rate stats are due out on 5/4. Have a good weekend everyone!

Housing, rental vacancy rates climb again

Every quarter, the Census Bureau reports data (PDF link) on housing and rental vacancy rates. These key indicators measure the underlying health of the housing and rental markets. In the first quarter ...

* The homeowner vacancy rate, which measures the percentage of homes for sale that are sitting empty, climbed again. It rose to 2.8% in Q1 2007 from 2.7% in Q4 2006 and 2.1% a year earlier.

This is a fresh record high for the series. The increase we're seeing is a clear side effect of all the real estate speculation in recent years. Investors snapped up tons of condos, townhomes, and single-family houses during the boom. They are now trying to unload many of these unoccupied, excess homes.

The elevated vacancy rate should keep the pressure on home prices. After all, if you're trying to sell an empty house you don't live in, you're going to be a more motivated seller. You're going to price it lower just to move the darn thing, rather than keep the price high and get stuck paying the mortgage and other expenses for months on end.

* The rental vacancy rate also popped up -- to 10.1% in Q1 2007 from 9.8% in Q4 2006 and 9.5% a year earlier. This indicator measures what percentage of the nation's stock of rental property is sitting empty. It hasn't been higher than this since Q2 2004.

I believe this, too, is a side effect of the housing bust. Many investors who planned to buy and flip property haven't been able to sell. So they're dumping those properties on the rental market to cover their cash flow losses. This should help to suppress growth in rental rates.

* Lastly, the nation's homeownership rate dropped to 68.6% in Q1 2007. That's the lowest level since Q4 2003. Low affordability and tighter mortgage standards are to blame here.

Will the dollar index hold?

Here's a chart of the Dollar Index, an index that measures the performance of the buck against six major world currencies. The euro is the most heavily weighted (57.6%), following by the yen, pound, Canadian dollar, Swedish Krona, and Swiss Franc. As you can see, the DXY is at critical technical support -- shown by two lines in this chart. Will it hold? Will it break?

Doggy GDP report for Q1 '07

So much for the U.S. economic miracle. Q1 2007 Gross Domestic Product grew even less than expected -- 1.3% versus the 1.8% forecast. That was the slowest rate of growth since Q1 2003. Meanwhile, inflation was stronger than expected. A classic case of Stagflation Lite. More details:

* Residential investment was a major drag again, down 17% at an annualized rate (the rate of decline was somewhat lower than the previous two quarters, however, when it came in at -19.8% and -18.7%). Personal consumption gained 3.8%, led by a 7.3% rise in durable goods spending. Government spending rose just 0.9%, dragged down by national defense spending. Exports were weak (-1.2%) while imports were up modestly (+2.3%)

* Inflation was anything but tame. The overall GDP price index surged at an annualized rate of 4%, the most since Q1 1991. The core GDP price index popped up to 3% from 2.3% a quarter earlier. Meanwhile, the personal consumption expenditures index (another measure of price inflation) climbed 3.4%, up from 1% in Q4 2006. And the "core" PCE index gained 2.2%, up from 1.8% a quarter earlier.

* I said yesterday that a greater-than-0.5% variance from expectations could ignite some real fireworks in the markets. Well, the dollar is getting clubbed and the euro is tying its all-time high as I write. The pound is also up more than a cent, and other currencies are rising against the buck.

Here's something else to consider: While the bonds initially surged on the weaker-than-forecast growth figures, they are now FALLING a on the stronger-than-expected inflation data. This could be significant -- the first time in a while we've seen both the dollar AND bonds sell off in a while.

The key question now: Where do all the markets close?

Thursday, April 26, 2007

Looks like I picked the wrong week to stop sniffing glue

I love that quote from the movie Airplane, and it certainly applies to this week! Between all my normal work and everything else, I didn't even have time to blog today. That hurts given all the home builder earnings reports, mortgage lender earnings reports, crazy interest rate and currency moves, and more. Since it's already late in the day, I'll just cover a few things quickly ...

* Tomorrow is a potentially huge day for the currency and interest rate markets. You see, the dollar has been getting beaten like a rented mule for weeks on end. Meanwhile, bonds have bounced and interest rates have slipped a bit -- not by much, but enough to get noticed. The basic forces driving these trades: The economy is weak here and strong overseas ... The Fed is on hold, or even prepared to cut, while foreign central banks are in full-scale hiking mode.

Within the last 36 hours, those trends started to reverse; The dollar caught a bid and bonds sold off. This is happening with the dollar challenging multi-decade lows against the pound and all-time lows against the euro.

That makes tomorrow's U.S. GDP report for Q1 2007 extremely important. The consensus of economists polled by is for 1.8% growth, down from 2.5% in Q4 2006. If this number comes in 0.5% or so on either side of that mark, we could see a major move -- up in the dollar, down in bond prices if the economy was stronger than expected ... down in the dollar, up in bond prices if the economy was much weaker. And if the move is down, it would likely send the dollar through several key technical levels for once and for all. So fasten your seatbelts.

* I'll sum up the batch of home builder earnings reports thusly: The news pretty much stunk. But the stocks all rallied because one company said that things might, kind of sort of be getting ever so slightly better in a few places. You have to admire Wall Street's tenacity. They love to bottom fish in these stocks -- even though doing so last summer proved anything but rewarding.

* One reason I wasn't around as much today was that I had to tape a segment for CNN's Open House show. If you're interested, you can catch it this Saturday morning at 9:30. I covered current market conditions, while an expert from, Greg McBride, talked about tips for home buyers and mortgage holders.

Wednesday, April 25, 2007

New home sales disappoint, but signals more mixed

New home sales were just released. Here's my take on the numbers and what they mean ...

* Overall sales rose, but by a smaller margin than expected. The seasonally adjusted annual rate of sales climbed 2.6% to 858,000 in March from 836,000 in February. That compares with a forecast gain of 5% among economists polled by Bloomberg. Sales were down 23.5% year-over-year.

* We did get some good news on home prices. The median price of a new home rose to $254,000 in March, up 6.4% from a year ago.

* On the inventory front, there were 545,000 homes for sale in March -- up ever-so-slightly from 544,000 a month earlier. However, supply dipped 1.4% from a year ago, while the “months supply at current sales pace” indicator fell to 7.8 last month from the 16-year high of 8.1 in February.

Overall, this new home sales report looks better than yesterday’s existing home report. But there are signs weather played a big role in boosting the sales figures. One example: New home sales reportedly exploded by 50% in the Northeast region between February and March. In less weather-sensitive regions, sales were down slightly (-2.7% in the South and -0.9% in the West). By contrast, the existing home sales report showed declines in all four geographic regions (a sign that more than just bad February weather was behind the weakness in March existing home closings).

Somewhat surprising is the greater-than-6% year-over-year gain in median home prices. That’s the biggest rise since June 2006. Actual on-the-ground observations continue to show that builders are using lots of incentives and base price cuts to move inventory. So it’s tough to say whether these figures truly reflect what buyers are paying. But on its face, it’s a strong number.

As for inventories, they remain much higher than normal – Supply typically ranged from about 260,000 to 380,000 units during the 1980s and 1990s versus 545,000 now. Builders are cutting back sharply on home construction, with housing starts down about 23% YOY in March. But it will take even-deeper construction cuts, lower prices, and more incentives to get supply more closely aligned with the reduced level of demand. I’m not expecting a lasting recovery until sometime later in 2008.

Some stories to chew over this fine morning

Existing home sales were a biggie yesterday, with news that activity fell much more sharply than expected. I shared a few comments on the topic with the Washington Post and the Sun-Sentinel.

Next up: New Home Sales at 10 a.m. The sales rate probably bounced back by a few percentage points from February, which was the worst month since July 2000. I say that because we had a slight pop in the Mortgage Bankers Association's purchase application index index in March, as well as better weather. But the big picture outlook for housing remains weak, regardless of what happened last month.

In other news, here's a great story on Bloomberg about "liar loans" -- known by their more P.C. name "stated income mortgages." It was an open secret during the boom that both mortgage brokers and borrowers lied all the time about incomes. It was the only way to push loans through the system; if real income figures had been used, the loans would have been kicked back as unaffordable by the underwriters.

These loans DO have a legitimate purpose -- to help self-employed borrowers or non-U.S.-citizens, who have difficulty documenting income in the traditional manner, buy homes or refinance outstanding mortgages. Unfortunately, they morphed into yet another "affordability product" used to keep volumes up as short-term interest rates rose and housing activity slowed.

Low or no-doc loans accounted for $276 billion, or 46%, of all subprime mortgages in 2006, versus just $30 billion in 2001, according to the story. Surprise, surprise -- the default rate on those mortgages was a hefty 12.6% in February, compared with just 1.5% on full-doc prime loans.

Tuesday, April 24, 2007

March existing home sales -- Ugh!

I just returned from doing a CNBC segment on today's March existing home sales report. Here's the scoop if you missed the numbers ...

* Total sales fell a sharp 8.4% to a seasonally adjusted annual pace of 6.12 million from 6.68 million in February. March’s sales rate was down 11.3% from the same month a year ago and the lowest since June 2003.

* Median home prices fell again – down 0.3% from March 2006. That’s the eighth month in a row that prices declined from a year ago, the longest such stretch on record.

* For-sale inventory remains the real bugaboo. The total number of homes for sale came in at 3.745 million units, down slightly (1.6%) from February but up a sharp 17% from the same month a year ago. On a months supply at current sales pace basis, inventories are running at 7.3 – just shy of the October cycle high (7.4)

No amount of lipstick can make this pig of a home sales report look pretty. Sales dropped sharply. Prices fell again. And inventories are closing in on the 14-year high set in late 2006. No doubt, crummy weather had an impact on the figures. But sales were poor in all regions, down 6.2% in the South, down 9.1% in the West, down 8.2% in the Northeast, and down 10.9% in the Midwest. That tells me a lot more is at work here – namely, that affordability is still poor, that speculators have left the building, and that tighter mortgage standards are starting to knock marginal buyers out of the market.

Supply is still the biggest problem in my book. We’re seeing three forces keep inventory levels high – and I doubt they’ll go away anytime soon:

1) The “March of the Re-Listers” – They’re the people who tried to sell last year and couldn’t. They pulled their homes from the market over the holidays, but now they’re putting them back on the MLS again to capture the seasonal upswing in activity we see every spring.

2) Lots of our nation’s homes are in “weak hands” – 40% of the homes sold at the tail end of the boom were bought as investments or second homes. Those owners are more likely than owner-occupants to try to sell and cut their losses when the market turns south.

3) Forced sales due to foreclosures -- A company called RealtyTrac tracks monthly foreclosures – They surged 47% from a year ago to around 149,000 in March. That’s the highest reading yet for this series, which data goes back to January 2005. As mortgage defaults and foreclosures rise, more motivated sellers (banks, mortgage lenders, etc.) will dump the homes they've repossessed on the market.

Looking ahead, April could prove to be another weak month. The National Association of Home Builders index recently dropped to 33, leaving it just above the multi-year low of 30 set in September 2006. Also, the Mortgage Bankers Association’s purchase application index just slumped to a two-month low.

Monday, April 23, 2007

Some things to ponder ahead of March home sales

This week is a big one for those of us who watch the housing and mortgage markets closely. That's because we'll get March existing home sales tomorrow and March new home sales on Wednesday. Economists polled by Bloomberg are looking for a 4.3% month-on-month decline in used home sales and a 5% rise in new home sales.

Until then, here are a couple of things to ponder ...

* Moody's Investors Service now expects cumulative losses on the 2006 crop of subprime mortgages to be worse than previously forecast. It expects 6% to 8% of loan principal will be lost, up from a previous estimate of 5.5% to 6%. Oops.

* Countrywide Financial CEO Angelo Mozilo is complaining about how regulatory efforts to tighten standards on subprime loans will cause foreclosures to rise. His argument: That forcing lenders to qualify borrowers using fully indexed mortgage rates, not artificially low teaser rates, will prevent lenders from refinancing borrowers out of the high-risk loans they took out in the past couple of years. According to Bloomberg, it's an "inadvertent attack on liquidity exactly when it shouldn't happen."

So let me get this straight: The same mortgage industry that made reckless loans to borrowers with bad credit during the biggest housing bubble in history ... that fought regulators tooth and nail over potentially tightening restrictions in the past couple of years ... that roundly IGNORED the "guidance" issued on high-risk home equity and subprime lending ... and that is now suffering immense losses because of it all ... is complaining about a crackdown. Officials would rather regulators allow them to squeeze even MORE profits out of these hapless borrowers by refinancing them into NEW subprime loans -- thereby artificially propping up asset (home) prices and helping them (lenders, that is) avoid the financial consequences of their inadvisable, past business practices.

My take: The solution to past reckless lending isn't more reckless lending. We have to get back to a place where people can afford homes at sensible prices using sensible financing. We have to let the foreclosure process play out, let the lending industry take its lumps for behaving irresponsibly, and let the market excesses be wrung out. I'll have much more on this topic over time.

Friday, April 20, 2007

An early peek at March sales in my area

I've mentioned before that a local real estate brokerage firm here in Palm Beach County, FL provides detailed market statistics for the area -- on sales, inventory, days on market, and more. The information comes out a few days before the official Florida Association of Realtors figures.

So how did things look in March? Not so hot. According to the data just posted ...

* Sales were down 35.8% year-over-year (979 in 2007 vs. 1,526 in 2006)

* Inventory surged 25.3% YOY (24,029 in 2007 vs. 19179 in 2006).

* Median price was down just a smidge -- 1% to $287,000 from $290,000 a year ago. But average days on market surged to 140 from 88 a year earlier.

The inventory is the real killer here. That 24,000+ figure is a fresh cycle high. I blame the re-listers, the folks who couldn't sell last year giving it the old college try again this spring. But with more than two years of housing supply on the market, we're going to have a lot of disappointed sellers come the end of the key spring real estate season.

Thursday, April 19, 2007

RealtyTrac: Foreclosures hit a new high

One other bit of news that broke yesterday when I was out: Foreclosures are ramping up again, per RealtyTrac.

Monthly foreclosure filings hit 149,150 in March, up 14% from February and up a hefty 46.8% from a year ago. That's a new high for the series, which dates back to January 2005. California, Florida, Texas, and Michigan topped the list of states with the most filings.

The latest on the yen, the yuan, the economy, housing, and more

Kids sure are resilient -- stomach problems one day ... nothing the next. I love it. Now, let's get down to business. Lots of developments to discuss on the interest rate, currency, and housing fronts this morning. In no particular order:

* The Japanese yen has finally gotten a bit jiggy. It's up for the third day in a row -- about six-tenths of a percent -- following the release of a services sector index. It rose more than expected, reigniting concern that the Bank of Japan will hike interest rates.

* The Chinese economy exploded in the first quarter -- up a greater-than-expected 11.1%. The forecast called for 10.4% growth, in line with what was reported in the previous quarter. That led to concern about more Chinese rate hikes and pushed the Chinese yuan to its highest level since the country began to let its currency climb in July 2005.

* But here in the U.S., the economic malaise continues. Initial and continuing jobless claims, for instance, are holding around multi-week highs.

* In the housing sector, D.R. Horton reported an 85% drop in fiscal second quarter profit, a 37% plunge in home orders, and an $81.2 million charge to write down land inventory and deposits. Pulte Homes said it will lose between 34 cents a share and 38 cents a share in its first quarter. Write downs and charges ranged from $130 million to $140 million, while new orders dropped 21%.

* Interest rates, on the other hand, have seen a sharp decline in the past few days. There's a bit of a flight-to-quality bid coming back in due to the yen rally and the hiccup in Chinese markets tied to the red-hot GDP report. The "tame" CPI also eased inflation fears. Longer-term, however, it's clear that both bond yields and bond prices remain rangebound. Let's call it 110-115 on the continuous long bond future and 4.50%-4.80% or so on the 10-year note yield.

My take on this whole situation? The U.S. is certainly not in recession. But the ongoing problems in housing are acting as a big drag on growth. Meanwhile, global economies are going on their merry way without us and inflation remains above the Fed's comfort level. I've heard the "Stagflation-lite" label bandied about to describe where we sit. I think that's right on target.

Wednesday, April 18, 2007

callin' it in from home today

Ugh. Nothing more fun that waking up to a sick kid. Since I'll be taking care of my littlest girl today, I'm not planning much in the way of posts. A few things that caught my eye, though ...

* The Mortgage Bankers Association's purchase application index fell back below the 400 mark in the most recent week. Its 4/13 reading of 396.5 is the lowest since the week of 2/16 (381.4). Before that, we haven't seen a reading this low since the week of 12/22 (390.2).

* The U.S. dollar continues to be the world's doormat, with the British pound breaking through the $2 level yesterday before consolidating some of those gains today. The New Zealand dollar also touched 20+ year highs.

* What's going on? The U.S. Fed is afraid to raise rates, despite the fact inflation is well above its stated comfort zone, because the housing market is in the toilet. Meanwhile, both economic growth and inflation is surging overseas. So, foreign central banks are hiking interest rates. That's driving sovereign yields above U.S. yields in some countries, and closing the gap between foreign yields and U.S. yields in others. As a result, capital is migrating to foreign countries and away from the U.S. dollar.

Tuesday, April 17, 2007

CPI delivers a positive surprise

The March Consumer Price Index hit the tape earlier this morning. For a change, this inflation report was tamer than expected. While the overall CPI rose 0.6%, the "core" CPI gained just 0.1% (expectations called for a 0.2% rise). The year-over-year rate of core inflation cooled to 2.5% from 2.7%.

If you look at the meat of the figures, you see that medical care turned in a smaller increase this month (0.1%) than we've seen for a while. Apparel prices were also down sharply (1%), while the recent string of large tobacco price increases came to an end (prices were up just 0.2% after rising 1% in February and 3.1% in January).

Of course, the ultimate question is whether the CPI will remain tame with pipeline inflation (intermediate and crude PPI) up, the dollar falling (the dollar index is down another 24 bps to 81.83 this morning), and energy prices on the rise once again.

The latest read on home construction ...

March housing starts and permits figures were just released. Here's what they show ...

* Overall starts increased 0.8% to a seasonally adjusted annual rate of 1.518 million units from 1.506 million units in February. The March figure topped expectations for a reading of 1.495 million. Single family permits were up (2%), while multifamily permits were down (-3.8%)

* Building permit issuance climbed 0.8% to 1.544 million from 1.532 million. The story here was the same -- single family permits were up 1.4%, while multifamily permits were down 0.7%.

* Year-over-year readings were still deeply in negative territory. Starts were down 23%, while permits were off 25.9%.

The March starts and permits figures were clearly above expectations. But is that really "good" news for the housing industry? Not necessarily. A key reason: Inventories are extremely high in the new home market. There were 546,000 new homes for sale as of February, just shy of the all-time high of 573,000 in July 2006. On a months supply at current sales pace basis, we're sitting on 8.1 months of inventory. That's the most since January 1991. We also have a glut of existing homes.

To get the supply/demand situation in better balance, we'll need to see inventories come down. That, in turn, will require an even lower level of housing starts over time.

One other thing: If you look at the regional breakdown of starts last month, most regions were weak (Northeast -6.1%, South -2.7%, West -7.7%, etc.) But starts in the Midwest exploded higher -- by 44.5%. Could this be yet another case of weather skewing the figures? Maybe.

Monday, April 16, 2007

More mortgage default and foreclosure news...

A couple of quick hits this afternoon ...

* reports that 168,829 homes entered the foreclosure process during Q1 2007. That's a 103% increase from 83,154 homes a year earlier.

* A new Lehman Brothers report suggests 20% to 30% of borrowers who took out subprime ARMs last year will be unable to refinance when the artificially low teaser period ends. The biggest problem? Lenders are cutting back on the loan-to-value ratios they'll lend at. Lehman believes 7% to 15% of the 2005 crop of borrowers will also have trouble refi-ing into a new mortgage.

* Last but not least, Dataquick is reporting that 46,760 notices of default were sent to California homeowners in Q1. That was up 148% year-over-year to the highest level in a decade.

Get used to these kinds of headlines -- we're going to be reading a lot of 'em for some time to come.

NAHB index falls again

The National Association of Home Builders' confidence index is in for the month of April. The results are not good ...

* The overall index slumped to 33 this month from 36 in March. That missed forecasts for a reading of 35. It was also down substantially from a reading of 51 in April 2006.

* All three sub-indices declined. An index measuring present sales dropped 3 points, while an index measuring expectations about futures sales fell by a hefty 6 points. The index measuring prospective buyer traffic dipped 1 point.

Clearly, this is not a good sign for the housing industry. We are now in the midst of the spring home buying season, and most indicators of housing demand and housing supply are heading in the wrong direction. I've been saying for a while that we wouldn't get a lasting recovery in the housing market until at least 2008. This latest reading only confirms my pessimism.

Inventory on the rise again

Regular readers know that I've been keeping a running tally of inventory for sale in my zip code since June 2005. I use to ask every few days how many properties with at least 2 bedrooms and 2 bathrooms are for sale between $100,000 and $500,000. When I began this exercise, I got 150 "hits." It has been climbing steadily ever since and just this week, it set a new high of 695. I believe what we're seeing is the continuing "March of the Re-Listers," a phenomenon I've discussed several times here.

Regarding the national market, the next major reports we get are the National Association of Home Builders' optimism index for April (today at 1 p.m.) and March housing starts (tomorrow at 8:30 a.m.)

Friday, April 13, 2007

Inflation report #2: Some good, some bad

The Producer Price Index is the second of three key inflation reports that comes out every month. There was a mix of good and bad news in the March report just released. The details ...

* The finished goods PPI gained 1% in March, above expectations for a 0.7% rise. That pushed year-over-year PPI inflation up to 3.2%. At the same time, the "core" finished goods PPI was unchanged, below expectations for a 0.2% rise. Good news? Yes. But ...

* Look further up the inflationary food chain and you see things aren't so rosy. The core intermediate goods PPI rose 0.2%, resulting in a 3.5% YOY gain. And at the earliest stage of production, core crude goods inflation surged 7.7% from February. The YOY inflation rate here is a whopping 24.6%.

That may be why the bond market reaction is fairly muted -- the Long Bond was recently up just 5/32 on this news. Yields have barely budged -- down by about a basis point across all maturities.

In other news, the February trade deficit came in a bit lower than expected -- $58.4 billion vs. a forecast of $60 billion. But the dollar isn't getting much of a bounce from that news. It's basically trading at the same levels it was before the 8:30 data hit the tape.

Dollar on the ropes

While interest rates have been mulling about the last few days in the wake of conflicting economic data (rising jobless claims, worse-than-expected import price gains), the dollar has been anything but stable. In fact, it's getting killed!

* The British pound is thisclose to breaking above its multi-year high of 1.9916 from January 23, 2007. If that happens, the 2 dollars for every 1 pound level will almost certainly fall.

* The euro has broken above every level of technical resistance save one – a peak in December 2004 at 1.3666. It’s currently just over a cent below that (1.3533).

* What about the "high yielders" – the Aussie and the Kiwi. Well, AUD has now cleared a level of resistance from December 1996. If it takes out a small peak in 1990, it’ll be at the highest level since early 1989. Meanwhile, if the New Zealand dollar takes out 0.7466, one last level of resistance from March 2005, it’ll be at its highest level since 1982. Guess I won't be going to visit the Lord of the Rings filming sites anytime soon -- it'll be too darn expensive!

Thursday, April 12, 2007

Import prices plug ugly

Big surprise in the March import price report out this morning -- Prices surged 1.7% between February and March, more than double the 0.8% increase that was forecast. That pushed the year-over-year rate of import inflation up to 2.8%, the fastest since last August.

Now let's be honest -- a lot of the increase stems from rising energy prices. Fuels and lubricants were up 8.4% MOM. And we all know that doesn't matter because none of us drive cars, fly airplanes, or ship goods. But ex-petroleum, import prices were up 0.3% (the biggest gain since December). The ex-petroleum inflation rate is up to 2.9% YOY, the worst since October 2005.

Another interesting trend: We're not seeing as much "imported deflation" from Asia. Prices of Chinese imports rose 0.2% on the month, the biggest gain in quite some time. Prices of Japanese imports were also up 0.1%, the first gain in a while.

Wednesday, April 11, 2007

Fed meeting minutes: Stagflation is here

The minutes from the Federal Reserve Board’s March 20-21 policy meeting were just released. You can read the whole file here, if you're so inclined. But in a nutshell, the Fed admitted that inflation pressures are so persistent and so intense that it can’t afford to cut short-term rates even though the economy is struggling.

Here's the "short" version of the Fed's concern from one part of the minutes:

"The combination of generally weaker-than-expected economic indicators and uncomfortably high readings on inflation suggested increased downside risks to economic growth and greater uncertainty that the expected gradual decline in core inflation would materialize."

And here's the "long" version from another section:

"Additional evidence of sluggish business investment and recent developments in the subprime mortgage market suggested that the downside risks relative to the expectation of moderate growth had increased in the weeks since the January FOMC meeting. At the same time, the prevailing level of inflation remained uncomfortably high, and the latest information cast some doubt on whether core inflation was on the expected downward path. Most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected; that risk remained the Committee’s predominant concern."

The Washington Post weighs in on mortgage fraud

The major papers aren't mincing words, it seems. Here's the Washington Post's latest entry on mortgage fraud, headlined "Housing Boom Tied To Sham Mortgages." The MOST noteworthy section echoes what I have said for some time now ...

"Thirty years ago, most Americans got their mortgages at a savings-and-loan association from bankers who obeyed conservative lending rules. But sweeping changes in the finance world have created a far different system. It has helped raise homeownership to record levels, but many real-estate professionals say it also has led to far looser lending standards.

"Nowadays, instead of poring over paperwork for weeks, lenders often verify loans through electronic underwriting programs in which numbers can easily be tweaked. About 70 percent of Americans get their home loans from independent mortgage brokers, many of whom are paid bonuses for pushing higher-interest loans.

"Close to 90,000 brokers have joined the profession since 2000, according to Wholesale Access, a research firm in Columbia. The field is lightly regulated. Eighteen states do not require criminal checks, the Conference of State Bank Supervisors reports. Undoubtedly, most mortgage brokers are honest, but some have played central roles in recent fraud cases.

"The housing boom brought another change. Mortgages are no longer held for long by banks but are packaged together as massive bonds and sold on Wall Street. Propelled in part by demand for these bonds, companies began offering loans that required little or no documentation of borrowers' income.

"These "stated income" loans were designed for a limited purpose: giving self-employed people a crack at homeownership. But during the boom, the number of such loans exploded to the point that they became a running joke in the industry, earning the nickname "liar loans." Estimates vary widely, but research suggests that they made up a significant portion of all mortgages during the boom -- 58 percent in a study by First American LoanPerformance.

"Mortgage lenders in theory have a right to compare loan documents to a buyer's tax returns, but they rarely do. In the few cases where it has been done, results were startling. In a study published by the Mortgage Asset Research Institute, one lender sampled 100 stated-income loan applicants and found that 90 had exaggerated take-home pay by 5 percent or more and that nearly 60 inflated their pay by more than 50 percent.

"Mortgage originators often neglected extensive document verification because it slowed loan approvals. "Everyone in the mortgage industry is trying to approve loans faster than their competitors," said James Croft, founder of MARI in Reston. "They all offer the same basic rates and the same basic mortgage products. But if I can get the loan faster, that gives me a competitive advantage."

This goes to the crux of the matter. The mortgage securitization process was supposed to make it so banks didn't fail and credit didn't tighten excessively in the event mortgage loans started going sour.

But spreading credit risk out over a wide pool of investors also had a perverse impact: Removing the credit risk from loan originators removed a big chunk of the incentive to care about end loan performance. Loans went from being something you originated, held in your portfolio, and earned interest on over time (and lost money on when borrowers defaulted!) to a hot potato -- one designed to be passed from one party to the next, with each party (originator, wholesale lender, securitizer, etc.) earning its fee, then moving on to the next mortgage. In other words, the focus shifted to loan volume rather than loan quality.

Incidentally, I said months and months ago that many of these problems would come home to roost. Here is just one piece from mid-2006. I wasn't alone, either -- many other sane, rational observers also pointed out the housing and mortgage industry's flaws. It's a shame policymakers didn't do anything about it when they had the chance.

NY Times skewers the "It's always better to buy!" myth

I can't believe my eyes. Right there in the New York Times today is this headline: "A Word of Advice During a Housing Slump: Rent" The article does a fantastic job of skewering the myth that it's ALWAYS a better bet to buy than rent. Some noteworthy comments:

* "It’s now clear that people who chose renting over buying in the last two years made the right move. In much of the country, including large parts of the Northeast, California, Florida and the Southwest, recent home buyers have faced higher monthly costs than renters and have lost money on their investment in the meantime. It’s almost as if they have thrown money away, an insult once reserved for renters."

* "With the spring moving season under way, The New York Times has done an analysis of buying vs. renting in every major metropolitan area. The analysis includes data on housing costs and looks at different possibilities for the path of home prices in coming years.

It found that even though rents have recently jumped, the costs that come with buying a home — mortgage payments, property taxes, fees to real estate agents — remain a lot higher than the costs of renting [emphasis mine]. So buyers in many places are basically betting that home prices will rise smartly in the near future."

* "After the last big run-up in house prices, in the 1980s, a long slump followed. In the New York area, prices peaked in early 1989 and then fell 9 percent over the next three years, according to government data. (Adjusted for inflation, the drop was much bigger.) Not until 1998 did prices pass their earlier peak.

Keep in mind that the 2000-5 boom was even bigger than the ’80s boom and that house prices on the coasts, according to the official numbers at least, have fallen only slightly so far. So it is hard to imagine that prices will rise 5 percent a year, or another 28 percent in all, over the next five years."

Somewhere along the line in the past few years, the word "rent" became a four-letter word. You were an idiot if you didn't buy a house. But the cold, hard numbers in many parts of the country show that renting is a better financial bet unless home prices continue to rise sharply, and the chances of that happening in my view, are about as good as the chances of me hitting the Powerball jackpot.

The sad thing is, a lot of sellers still don't get it. They are still trying to sell at sky-high prices that would leave potential buyers paying much, much more each month than renters are paying for comparable property -- or even the same property itself!

This example I put together from back in September 2006 says it all. By the way, the home referenced in that post is still on the market ... and the asking price still hasn't changed seven months later!

Tuesday, April 10, 2007

Horton CEO wasn't kidding -- these numbers do "suck"

Several weeks ago, D.R. Horton CEO Donald Tomnitz grabbed some headlines by saying "2007 is going to suck, all 12 months of the calendar year." And based on the numbers his company just released, Horton is having no problem keeping that promise. In the fiscal second quarter ...

* Orders plunged 37% to 9,983 units worth $2.6 billion, compared with 15,771 units worth $4.4 billion in the same period of 2006. There was no solace to be found in the regional breakdown, either. Orders dropped in 6 out of 6 areas of operation.

* If you divide the dollar volume of orders by the unit volume for Q2 2006, you get an average price of $276,659. Do the same for Q2 2007 and you get $260,372. That's good for a 5.9% drop.

* Cancellation rates remain in the ozone -- at 32% in the period that ended March 31.

* Chairman of the Board Donald Horton didn't deliver much in the way of positive commentary either. His remarks: "Market conditions for new home sales continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high. Our cancellation rate is essentially unchanged from the prior quarter, but it remains above our historical range as we continue to see an increase in the use of sales incentives in many of our markets. We continue to sell more homes than any other builder, even though the spring selling season has not gotten off to its usual strong start."

Monday, April 09, 2007

Monday morning thoughts ...

Good Monday morning to you all. I hope you had as nice a three-day weekend as I did. Some things I'm watching this morning in interest rate/finance/housing land ...

* Bonds took it on the chin last week due to the March jobs report. That report was definitely stronger than expected, with 180,000 positions added versus expectations for 130,000. Average hourly earnings are up a hefty 4% year-over-year, underscoring the bond market's simmering inflation fears.

* Speaking of inflation fears, the 10-year TIPS spread is up ... again ... to 249 basis points today. That's the highest since the end of August 2006.

* In yet more convincing evidence that the mortgage problems are completely, utterly, totally confined and contained to the subprime world (ha-ha), American Home Mortgage Investment Corp. warned that its first-quarter profit will miss earnings expectations by a country mile. It said investors are just not paying up for bundles of home loans like they used to, including loans with better credit quality than subprime mortgages. It also said it had to boost reserves to cover repurchases of Alt-A loans ... repurchases driven by early borrower defaults.

* The private equity pandemonium continues, with rumors out of Great Britain of a $50 billion+ takeover of Dow Chemical. That would be the biggest buyout deal to date.

Look, I have no problem with takeovers and leveraged buyouts of troubled companies. They help clean up corporate waste, make companies lean and mean, and otherwise boost productivity. It's American capitalism at its best.

But a lot of today's deals involve companies that are in fine shape (Equity Office Properties, anyone?). They seem to be happening just because big money investors have flooded LBO firms with money. In a word, it's just another manifestation of the Money, Money Everywhere trade, where excess liquidity sloshes from investment fad (residential real estate) to investment fad (commercial real estate, LBOs), drives valuations to dumb levels, and then moves on to find the next bubble.

I have some more thoughts on the matter in this piece.

Thursday, April 05, 2007

Big fireworks in the currency markets!

This may be a holiday week here in the U.S. But the market action in the currencies is anything BUT boring. A quick run-down ...

* The Reserve Bank of Australia did NOT raise interest rates this week, choosing instead to wait until after a key inflation report due out on April 24, according to observers. But you know what? That only managed to tank the Australian dollar for a couple of hours. Before long, the Aussie dollar reversed sharply and surged to a new high. If it clears a December 1996 high of 82.1 U.S. cents, it'll be at the highest level in almost 17 years.

* The Bank of England did NOT raise interest rates, either. Instead, it kept them at 5.25%. That caused the pound to dip sharply ... but now, it's trying to rally back. By far the biggest news is that ...

* The euro is breaking out big-time. It was recently up sharply to 1.3428 against the dollar, the highest since March 2005. If it clears that 1.3482 high, the only technical resistance left will be the all-time high of 1.3666 in December 2004.

* Lastly, the yen futures are holding that level I highlighted in this April 3 post.

Now, here's something we simply can't ignore -- the U.S. employment report for March is due out tomorrow. With the dollar getting its head handed to it, the U.S. Fed clearly on the sidelines, overseas economic growth still strong, and overseas central banks still on a tightening track (even if a couple of 'em opted to skip hiking this week), this report could be huge. A weak number could turn this technical breakout into an all-out rout, while a strong number could cause a nasty reversal. What I wouldn't give for a crystal ball!

Wednesday, April 04, 2007

Reis Inc.: Apartment vacancy rates rising

The rolling housing bust is claiming its next victim -- the apartment sector. According to the real estate research firm Reis Inc., the U.S. apartment vacancy rate climbed to 6% in Q1 2007. That's the highest since the second quarter of 2005, when it was 6.5%. Some key comments from a Bloomberg story on the news:

"'Our expectation is the national vacancy rate will rise modestly through the end of 2007,'' Reis Chief Economist Sam Chandan said in a telephone interview. 'We're starting to see a larger number of completions coming on line.'

"The supply of available apartments is expanding at a pace that will accelerate as warmer weather causes construction to pick up. In some markets, demand for rentals is growing so quickly that developers are converting to rentals buildings they had hoped to sell as condominiums, Chandan said.

This development comes as no surprise to me. Construction of traditional apartments has started to pick up. But more importantly, hundreds of thousands of single-family homes, town houses and condos that were snapped up by speculators hoping to flip them aren't moving. They're sitting empty. That "shadow" supply is flooding the rental market, providing real competition to apartment complex owners. Therefore, rental supply is rising, overall vacancies in the traditional apartment sector are climbing, and rent growth is poised to slow.

See this early March post for more details.

Tastes Great! Less Fillin ... er ... Less Growth! More inflation!

Sorry, those darn Miller Lite ads from the 1970s intruded into my train of thought on the economy. But getting back to business, the latest ISM non-manufacturing index paints the same sorry picture as the ISM manufacturing index. In short, we're seeing less growth and more inflation. The scoop ...

* The overall index dropped to 52.4 in March from 54.3 a month earlier. How bad is 52.4? It's the lowest reading in almost four years!

* New orders dipped to a 7-month low of 53.8 from 54.8 in February. The employment index sank to 50.8 from 52.2. That leaves it at the lowest level since July 2004.

* At the same time, the prices paid index shot up to 63.3 from 53.8. That leaves this key inflation gauge at its highest level since August.

Tuesday, April 03, 2007

How I'm measuring risk appetite

If you buy the idea that the Japanese yen is a good proxy for risk appetite in the market (and I do), then this chart is probably one of the most important ones out there. It shows the performance of Japanese yen futures. A move UP indicates that the yen is rising against the dollar, and that risk appetites are decreasing. A move DOWN means the opposite -- that the yen is falling and that risk appetites are increasing.
As you can see, we're testing the broken downtrend that dates all the way back to last May. should we break through, it would likely be beneficial for asset values. The opposite also holds true. This post helps explain why. For more, you may also want to check out this Currency Currents bulletin (PDF link) from a sharp market watcher by the name of Jack Crooks.

Pending home sales pull off an upside surprise

The February pending home sales index was just released. It showed a gain of 0.7%, following a 4.2% decline in January. That topped consensus forecasts for a 0.5% February drop and my expectation for a decline in the range of 2% to 3%. Geographically, sales were down in the Northeast (-1.3%) and West (-6%), but up in the Midwest (+2.9%) and the South (+4.5%)

Still, the pending sales index is down 14% from its April 2005 peak and down 8.5% from February 2006. Also, as I have continually pointed out, the real headwind for the housing market is for-sale inventory -- both existing and new home inventories remain extremely elevated relative to history. That will likely keep the pressure on home prices for 2007.

Monday, April 02, 2007

Even more overseas rate hikes on tap this week?

While the U.S. markets spin their wheels, I'm seeing some interesting action in a handful of countries overseas.

Take Australia -- the Aussie dollar is flying today, up about a percentage point against the greenback to a decade high. The catalyst was a strong retail sales report. It raises the odds the Reserve Bank of Australia will hike its overnight interest rate again to 6.5%.

Then there's the U.K. --The British pound is up more than a cent against the dollar. In fact, it's rapidly closing in on the $2 level (the point at which 1 pound will equal 2 U.S. dollars -- hope you're travelling to London anytime soon!). The gains stem from speculation the Bank of England will raise its short-term rate later this week.

Incidentally, the Reserve Bank of India also just raised rates to a 4 1/2 year high of 7.75%. Bank lending and economic growth there here have been surging, pushing inflation higher.

Ouch! That March ISM is going to leave a mark ...

The March Institute for Supply Management number just came out. It wasn't pretty. The overall index came in at 50.9, down from 52.3 in February and below the 51.4 forecast.

New orders? Down to 51.6 from 54.9.

Employment? Down to 48.7 from 51.1. That's the lowest since May 2005, when it was also 48.7. We haven't had a worse reading since October 2003.

And what about inflation? The prices paid index surged to 65.5 from 59. That's the worst reading since August 2006.

Hmmm ... Is that economic napalm I'm smelling this morning?

So much for the lack of Alt-A spillover ...

Interesting news out from M&T Bank. The company just issued a first-quarter earnings warning, saying it would make about $1.50 per share to $1.60 per share (Reuters consensus was $1.86). What's the problem? Have a look ...

"Recent, well-publicized problems in the subprime residential mortgage lending market have had a negative effect on the rest of the residential mortgage marketplace, specifically with regard to alternative ("Alt-A") residential mortgage loans that M&T actively originates for sale in the secondary market. Alt-A loans originated by M&T typically include some form of limited documentation requirements, as compared with more traditional residential mortgage loans. Unfavorable market conditions and lack of market liquidity impacted M&T's willingness to sell Alt-A loans in the first quarter.

"At a recent auction of such loans fewer bids than normal were received and the pricing of those bids was lower than expected. In accordance with generally accepted accounting principles, loans held for sale must be recorded at the lower of cost or market value. As a result, the carrying value of M&T's Alt- A portfolio that had been held for sale was reduced by $12 million in the first quarter of 2007, which M&T estimates will result in an after-tax reduction of net income of $7 million in the quarter, or $.07 per diluted share.

"Management of M&T believes that the value of the Alt-A residential mortgage loans it holds is greater than the amount implied by the few bidders presently active in the market. As a result, $883 million of Alt-A loans previously held for sale (including $808 million of first mortgage loans and $75 million of second mortgage loans) were transferred in March to M&T's held- for-investment residential mortgage loan portfolio."

That last part is particularly interesting. M&T is saying it's taking its ball and going home because the mean old market bullies aren't paying enough for its product. Maybe this is just a temporary liquidity crunch, and maybe M&T will ultimately fare better by pulling product now, holding on to it, then selling later when liquidity improves. But I have a sinking feeling this downturn in subprime and the Alt-A market is going to be with us for some time. What if bids keep falling as a result?

Incidentally, M&T also said it would tighten lending standards and that repurchase requests from investors were rising, in part due to an increase in early payment defaults. In other words, Alt-A is seeing many of the same problems as subprime. Is anyone besides Ben Bernanke surprised?

Just a quick update as well: New Century Financial has now officially filed for bankruptcy protection. The company last year made almost $60 billion in mortgages, making it the biggest home loan firm to fail in the subprime shakeout.

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