Interest Rate Roundup

Wednesday, November 25, 2009

New home sales jump 6.2% in October

We just got a look at how the new home market fared in October. Here's a recap:

* New home sales spiked 6.2% to a seasonally adjusted annual rate of 430,000. That was up from 405,000 a month earlier and above forecasts for a reading of 404,000. The readings for the past few months were also revised higher by a net 7,000 units.

* Regionally it was a mixed bag. Sales fell 5.1% in both the Northeast and the West. They plunged 20% in the Midwest, but soared 23.2% in the South.

* The raw number of homes for sale continues to decline. It dropped to 239,000 from 250,000 in September. You have to go all the way back to May 1971 to find a lower level of new home inventory. The months supply at current sales pace indicator of inventory fell to 6.7 from 7.4. That's the lowest since December 2006. Meanwhile, the median price of a new home dipped 0.5% from a year earlier to $212,200.

The evidence continues to show stabilization in the housing market. Not a huge new bull market, mind you. But an end to the relentless flood of bad news we saw in 2006, 2007, 2008, and 2009.
In October specifically, sales rose by a greater-than-expected 6.2%. Home prices dropped by the smallest margin in almost a year. And the supply of new homes continued to plunge. New home inventory is now plumbing depths we haven't seen in 38 years. If you're looking for a sign that builders will need to start swinging their hammers again soon, this is it.

Elevated unemployment, tighter credit standards, and an ongoing influx of foreclosed, existing homes will ensure the recovery remains anemic. But it will be a recovery nonetheless.

Monday, November 23, 2009

October existing home sales blowout

Sorry for the delay -- Had to do a video segment on the existing home sales numbers with CNBC, which can be viewed here. As I said in various forums six months ago, I believe the housing market has started to turn -- in construction, sales, inventory, but not in pricing (yet). The numbers continue to validate that thesis.

Specifically, existing home sales soared 10.1% in October. That was much better than the 2.3% increase in sales that was expected. At 6.1 million units, the seasonally adjusted annual rate of sales was the highest since February 2007.

Importantly, the supply of homes for sale dropped again -- by 14.9% year-over-year to 3.57 million. That is the lowest level since January 2007 and good for about 7 months of inventory at the current sales pace (down from 8 a month earlier). We are still oversupplied, and that's why median home prices fell 7.1% from a year earlier. But the excess inventory mountain is clearly shrinking.

We will clearly see some give back or "hiccup" in the numbers over the next couple of months as the lagged impact of the tax cut uncertainty makes its way into the numbers. But with the credit extended and expanded, the Fed continuing to manipulate the mortgage market, and the supply overhang shrinking, my forecast of stabilization remains on track. Or in plain English, the massive housing bust earthquake is behind us -- any setbacks from here on out will be more like mild aftershocks.

Thursday, November 19, 2009

MBA: Q3 mortgage performance deteriorates ... again

The Mortgage Bankers Association's figures on home loan performance just keep getting worse and worse. Here is what things looked like in Q3 2009:

* The overall mortgage delinquency rate surged to 9.64% in Q3 2009 from 9.24% in Q2 2009 and 6.99% a year earlier. Once again, this is a fresh record high for the data series, which goes back 37 years. For some historical perspective, the recent low for the delinquency rate was 4.31% in Q1 2005.

* Breaking it down by loan type, the subprime DQ rate rose to 26.42% from 25.35% a quarter earlier and 20.03% a year earlier. The prime-only DQ rate climbed to 6.84% from 6.41% in Q2 2009 and 4.34% a year earlier.

* And how about the "new subprime" behemoth -- the Federal Housing Administration? Delinquency rates there continue to march higher, rising to 13.9% from 13.62% a quarter earlier and 12.27% a year earlier. That's the worst FHA credit performance in U.S. history. The increase occurred despite a large increase in the overall number of FHA loans, which should lower the delinquency rate, all else being equal.

Like I said last quarter, the FHA program has become the "go to" place for borrowers who previously might have taken out subprime or Alt-A loans. By keeping lending standards incredibly lax (3.5% down payments anyone?) FHA is playing with fire. Grab your wallets taxpayers!

* The percentage of mortgages entering the foreclosure process resumed its climb, rising to a record high of 1.42% from 1.36% a quarter earlier. The overall percentage of mortgages in any stage of foreclosure climbed to 4.47% from 4.3%. Just over 14 out of every 100 loans in the U.S. are now distressed in one form or another, the most ever.

* Regionally, delinquency rates were still the worst in Mississippi at 14.4%. Nevada was a close second at 14%, followed by Georgia at 12.93% and Michigan at 12.64%. Florida had the highest percentage of loans in foreclosure at 12.74%, followed by Nevada at 9.44%.

Lousy mortgage performance continued into the third quarter. Both delinquency and foreclosure rates rose to new all-time records, with deterioration virtually across the board. The FHA loan program is now joining the Alt-A and prime markets in the woodshed, which just goes to show how silly it is to maintain lax lending standards in the midst of the worst housing downturn on record. Even the CEO of home builder Toll Brothers, Robert Toll, yesterday called FHA "a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money."

Going forward, aggressive modification programs and a nascent stabilization in the housing market will eventually lead to a turn in performance ratios. But this process will play out with a lag. And it goes without saying that nothing can change the fact we binged on real estate as a country ... and now we're paying a heavy price.

Wednesday, November 18, 2009

October housing starts, permits tank

We just got the latest data on housing construction activity. Here's a recap:

* Overall housing starts plunged 10.6% to a seasonally adjusted annual rate of 529,000 in October from 592,000 in September. That was much worse than the 600,000 units that economists were expecting. Building permit activity was also weak. Permitting activity dropped 4% to 552,000 from 575,000. Economists were expecting a reading of 580,000.

* By property type, single family starts more than reversed the strong gain in September, falling 6.9%. Multifamily starts tanked 34.6%, though it's worth pointing out how volatile MF figures can be. Single family permits dropped 0.2%, while multifamily permits fell 17.9%.

* What about the regional breakdown? Negative across the board for starts. They fell 8.5% in the West, 9.6% in the South, 10.6% in the Midwest and 18.8% in the Northeast. Building permit activity was marginally better, with declines of 5.8% in the South and 6.7% in the West. Permits were flat in the Northeast and up 2% in the Midwest.

Here's the housing mantra I want to keep repeating: "Three steps forward, two steps back." That is how I have said the housing recovery would play out, and that is, in fact, how it's progressing. The latest starts figures are no exception. Perhaps out of fear of the expiration of the home buyer tax credit, builders pulled back on both starts and permits in October. The hit was particularly severe in the volatile multifamily sector. But even the single family market fell in a ditch.

As bad as the monthly report was, however, starts are still above the absolute low for this cycle (479,000 in April for overall starts, 357,000 for single-family). Builders also have just 251,000 new homes for sale. That's the lowest level since November 1982, which tells me a pick up in construction is inevitable.

On the demand front, the tax credit has been extended and expanded. The Federal Reserve's manipulation of the mortgage market is keeping financing costs down. And improving affordability in many markets -- thanks to plunging prices -- is slowly bringing buyers out of the woodwork.

So yes, the bubble days are long gone. They won't be coming back for several years. But I still believe we will see a slow, steady recovery in sales ... a gradual decline in the number of homes on the market ... a tepid rebound in home construction ... and broad-based stabilization in home prices as we head later into 2010. Yesterday's NAHB report, and this morning's construction data, makes sense when viewed in that context.

Tuesday, November 17, 2009

NAHB index flat in November

The National Association of Home Builders just released its latest builder sentiment index. The reading came in at 17. That was unchanged from a downwardly revised 17 in October and slightly below the 19 number economists were expecting.

Among the sub-indices, the one measuring present single family sales was unchanged at 17. The prospective buyer traffic sub-index held at 13, while the sub-index measuring expectations about future sales rose to 28 from 26. Regionally speaking, it was a mixed bag. The Northeast index dropped sharply to 19 from 25, but the West index jumped to 19 from 14. The Midwest index fell to 14 from 17, while the South index was unchanged at 17.

The"three steps forward, two steps back" housing market recovery remains on track. But as I've noted numerous times, it won't be a robust rebound. The home buyer tax credit is helping bolster demand, as is the Federal Reserve's manipulation of the mortgage market. Improving affordability in many markets -- thanks to plunging prices -- is also bringing buyers out of the woodwork.

But the bubble days are long gone, and won't be coming back for several years. Instead, we'll see a slow, steady recovery in sales ... a gradual decline in the number of homes on the market ... a tepid rebound in home construction ... and broad-based stabilization in home prices as we head later into 2010. The latest NAHB report makes sense when viewed in that context.

Monday, November 16, 2009

THAT's all the bang Bernanke got for his ... er ... buck?

Holy cow! That didn't last long. Look at this intraday chart of the Dollar Index. If that's all the bang Bernanke can get for his ... er ... buck, the dollar is sicker than even I thought (and that's saying something)!

The surprise of the day: Bernanke actually acknowledges the dollar decline

The text from Fed Chairman Ben Bernanke's speech in New York was just released. For a change, he actually mentioned the dollar and suggested that its movements could factor into policy decisions. That has led to a bounce in the Dollar Index from its daily low. The operative text is below:

"The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability."

At the same time, Bernanke essentially promised to keep the same policies in place that are leading to a dollar decline. Specifically, he added:

"The Federal Open Market Committee continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. Of course, significant changes in economic conditions or the economic outlook would change the outlook for policy as well. We have a wide range of tools for removing monetary policy accommodation when the economic outlook requires us to do so, and we will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability."

So the question now becomes, "Is talk enough for more than a bounce in the buck?"

Wednesday, November 11, 2009

More dollar drama -- and the core reason for the carry trade

There's a lot of chatter on the dollar front today. Treasury Secretary Tim Geithner told a group of Japanese reporters that he "believe[s] deeply that it's very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar."

The Asia-Pacific Economic Cooperation forum is also up in arms about the falling greenback, according to the Wall Street Journal. Policymakers are reportedly prepared to give President Barack Obama an earful when he travels to Asia later this week. In the words of one delegate:

"Nobody in Asia, and only some in Europe, will speak publicly about their worries, but they are worried ... The world -- not only APEC, but the world -- needs direction and the only country that can provide this direction is the United States. This can only be achieved through a stable U.S. currency."

But in a candid moment, the Thai Finance Minister Korn Chatikavanij admitted that his country has wasted $15 billion trying to keep the baht from appreciating against the buck. And he verbalized what currency investors all know about the sorry state of the U.S. economy:

"But there is not much you could do to correct what is reality. The fact is when you've got that much debt ... the only effective way of repaying that debt is basically devaluing your currency."

In other words, all this is talk. The U.S. likely won't do anything about the dollar decline as long as it remains orderly ... which virtually guarantees at some point that the decline will NOT remain orderly.

By the way, if you're wondering why the dollar is being sold in so many carry trades, the answer is quite simple. It's the cheapest currency on the block to borrow! Three-month dollar LIBOR rates were recently 0.27%. That’s less than the 0.32% cost of borrowing Japanese yen ... the 0.61% rate to borrow money in pounds sterling ... and the 0.68% rate for euro-based loans. In other words, as long as the Fed continues to keep the taps wide open, leveraged global investors are going to get drunk off of the cheap money.

Tuesday, November 10, 2009

Mishkin is an idiot

I'm sorry, I can't make it any more plain than that. To argue that financial bubbles aren't dangerous, and that the Fed shouldn't try to combat them -- which is what ex-Fed governor Frederic Mishkin just did in the Financial Times -- is monumentally stupid. Can this guy be serious? Haven't we seen what a huge disaster the Fed's "Don't fight bubbles when they're inflating -- just 'mop up' when they pop" approach has been? I seriously hope sitting members of the Fed don't believe this claptrap.

Monday, November 09, 2009

Dollar getting rear end kicked again after IMF, Geithner comments

The G-20 gathering in Scotland over the weekend contained no dollar-supportive talk. If anything, Treasury Secretary Tim Geithner kicked the stool out from under the buck, declaring that "it's too early to lean against the recovery." That's code-speak for "We'll continue our easy money policies in place." Meanwhile, an IMF report (PDF link) that was released in conjunction with the gathering suggests the dollar carry trade will likely continue as the buck is still overvalued. The Dollar Index just hit a new cycle low of 74.94, while gold is up another $14 to $1,109 in the spot market.

Incidentally, I explained why the carry trade was happening and why it should continue almost two months ago. For a refresher, click here.

Friday, November 06, 2009

October jobs down 190,000, unemployment hits 10.2%

The October jobs report was just released. It showed the economy losing 190,000 jobs last month, slightly worse than the -175,000 forecast. However, September's job loss was revised to only -219,000 from -263,000, while August's reading also improved to -154,000 from -201,000. This is the 22nd month in a row that the U.S. economy has shed jobs.

The unemployment rate spiked to 10.2% from 9.8%, well above the 9.9% forecast of economists polled by Bloomberg and the worst reading since April 1983. The "all in" unemployment rate that includes people marginally employed, those working part-time because they can't find full-time work, etc., rose to 17.5%, the highest since they began tracking it in 1994.

Average hourly earnings were a bright spot, up 0.3% against a forecast for +0.1%. But average weekly hours held at 33, tying the worst level in U.S. history (the data goes back to 1964). The diffusion index, which measures how many industries are shedding jobs vs. how many are adding them, weakened to 33.8 from 37.5.

Bottomless pit at Fannie Mae gets bottomless-er

Can a bottomless pit get even more bottomless-er? Fannie Mae is certainly giving it a go! The public/private mortgage firm just lost another $18.9 billion in the third quarter. That's on TOP of $101.6 billion in losses over the past two years. Result: It was forced to ask the Treasury Department for another infusion of money -- $15 billion. That would be on top of the $44.9 billion it has already received. A billion here, a billion there and pretty soon you're talking about real money. It's great to be a U.S. taxpayer, huh?

Thursday, November 05, 2009

10-year TIPS spread hits new cycle high

Helicopter Ben Bernanke is living up to his name, helping create more inflation fears in the bond market. Specifically, the yield curve is steepening again and the 10-year TIPS spread is blowing out to a new cycle high at 215 basis points.

Wednesday, November 04, 2009

Fed keeps "extended period" language, slightly cuts agency debt plan

The Federal Open Market Committee just released its latest interest rate decision and statement. Rates were left unchanged, as expected, at a range of 0% to 0.25%. The Fed also held onto its language pledging to keep rates low for an "extended period." One minor surprise: The Fed said it would reduce the size of its program to buy agency debt to $175 billion from the previously announced $200 billion. The Fed said the move "reflects the limited availability of agency debt." It kept its MBS buying program target at $1.25 trillion. The vote for the policy actions was unanimous.

UPDATE: Treasury yield curve steepening on this news. 2-year yields down 1 basis point, 30-year bond yields up 6 basis points. Implication is that no Fed move raises longer-term inflation risk.

UPDATE2: Lack of dollar defense sending Dollar Index to day's low, off 65 bps to 75.65. NOT a new low yet, but if this sell off gains momentum, look out. Gold is flying, incidentally, up $12 to just shy of $1,100 an ounce.

CNBC says "Sell the dollar?"

That was interesting. CNBC just carried a report from Steve Liesman , the gist of which was (in my humble opinion) "Go ahead ... sell the dollar!" Specifically, Liesman said that unnamed policy officials told him the U.S. government view is that the dollar decline is no big deal. The decline is orderly, it just reflects a retracement of last year's big move, and it's nothing to get all worked up about. Supposedly, there are contingency plans in place should the move get disorderly. But as long as that doesn't happen, no worries. That's how I'm paraphrasing the report, anyway.

Now I'll be the first to admit that the market already "knows" the Fed and Treasury don't care about the dollar. But using a plugged-in reporter to essentially communicate that view publicly, on live financial television, is pretty noteworthy. If the Fed does what I expect them to in a few hours (NOT signal any shift toward tightening) the buck could get creamed here. We'll see ...

Tuesday, November 03, 2009

Congress to pressure Fed to keep helping housing? Plus: Why can't our regulators stand up to TBTF banks?

There are a couple of interesting stories worth mentioning this morning. The first is from Bloomberg, which talks about the possibility of Congress pressuring the Federal Reserve to continue its housing and mortgage market support next year.

My take? The idea that the Fed will pull back proactively, or will stand up to political pressure, is a total joke. The Fed has become totally politicized, working hand in glove with the Treasury in the past year. There is no way in you-know-where they'll stand up to pressure to keep supporting the housing market early next year, should that pressure be brought to bear.

More from Bloomberg:

"Federal Reserve Chairman Ben S. Bernanke is gambling that come March, he can stop the purchases of mortgage-backed securities that have propped up the U.S. housing market. Congress may have other ideas.

"The central bank says it must eventually withdraw its unprecedented economic stimulus to avoid a surge of inflation as a recovery takes hold. Plans to buy $1.25 trillion of housing debt are the centerpiece of its program to pull the nation out of the worst recession since the 1930s.

"Bernanke, who convenes a meeting of the Federal Open Market Committee today, is counting on private investors to fill the void left by the Fed when its purchases end. If he’s wrong, he may come under pressure from politicians to maintain support for housing or even extend credit programs for small businesses and consumers. That would threaten the Fed’s ability to conduct an independent monetary policy.

“The nightmare scenario for the Fed would be to see them try to sell their mortgage portfolio, and Congress steps in and tries to stop it on the grounds that the housing market hasn’t fully recovered,” said Ethan Harris, head of North American Economics at Bank of America-Merrill Lynch in New York. “The attempts to influence the Fed in the exit strategy will be pretty strong.”

"The Fed chairman has already come under pressure from lawmakers including Senate Banking Committee Chairman Christopher Dodd of Connecticut and Representative Paul Kanjorski of Pennsylvania, both Democrats, to aid car companies and provide more credit to commercial real estate."

The second article is in the Washington Post. It talks about how the U.K. is trying to shrink the size of its "Too Big to Fail" banks, forcing them to sell off assets and reduced their overall footprint in order to get more aid.

Here in the U.S., though, our regulators continue to suck up to the TBTF companies. The Obama administration has essentially ignored the advice of Bank of England governor Mervyn King, former IMF Chief Economist Simon Johnson, and even one of its own advisers, former Fed Chairman Paul Volcker. They all think it makes sense to tame these behemoths before they blow themselves up again ... and require even more taxpayer-funded bailouts.

More from the Post:

"The British government -- spurred on by European regulators -- is forcing the Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.

"The move to downsize some of Britain's largest banks comes as U.S. politicians are debating whether American banks should also be required to shrink. The Obama administration has maintained that large banks should be preserved because they play an important role in the economy and that taxpayers instead should be protected by creating a new system for liquidating large banks that run into problems. But Britain's decision already is being cited by a growing chorus of experts, including prominent bankers and economists, who want the United States to pursue a similar approach."

Monday, November 02, 2009

Pending home sales surge 6.1% in September

We just got pending home sales figures from the National Association of Realtors. Here's what they looked like:

* Pending home sales surged 6.1% in September. That was much better than the unchanged reading that economists were expecting. It's also the eighth consecutive monthly rise.

* On a year-over-year basis, the pending sales index jumped 21.1% to 110.1 from 90.9. That's the highest index value since December 2006.

* Regionally, pendings were relatively strong. They rose 4.9% in the South, 8.1% in the Midwest, and 10.2% in the West. Sales dropped 2% in the Northeast.

The existing home market continues to heat up, fueled by cheaper house prices and the first-time buyer tax credit. Pending sales have climbed for eight straight months, and contract signings haven't been running this hot in almost three years.

Clearly, buyers were eager to get business done before the credit's November expiration. So I wouldn't be surprised to see some giveback in pending sales over the next month or two. But with Congress set to extend the credit through mid-2010 ... and expand it to a broader pool of potential buyers ... the market should remain fairly well-supported. In other words, the "three steps forward, two steps back" recovery in housing remains on track.

Site Meter