We’ll be back on Wednesday July 5th 2006. Hoping for good weather.
We’ll be back on Wednesday July 5th 2006. Hoping for good weather.
There’s a bit of irony in the fact that mortgage rates have been trending downward for the past ten years yet so have underwriting standards. Lower mortgage rates tend to bring customers to the lenders so why on earth would you loosen lending guidelines?
One possible explanation is the growing market share of mortgage brokers who bring in the business to the lenders. Over 70% of mortgage originations today start with a mortgage broker. This in-and-of-itself isn’t necessarily a bad thing. Upper management has placed emphasis on speed and cost but seems to have had little concerns about future risk.
Here’s the results of a recent Federal Reserve survey:
The Federal Reserve released their The April 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices [FRB] last month [hat tip to Mish] and the general pattern showed that lenders were continuing to relax their underwriting standards. In fact, most respondents to the survey reported easing of their lending standards giving more aggressive competition as a primary motivator.
It will be interesting to see if the July report shows the same trend. We are already starting to see increased sensitivity to underwriting on a first hand basis in our appraisal practice. Mortgage brokers have been hiring us after lenders have been rejecting the ususal appraisal fodder they have been submitting for the past five years.
Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related images(s).
Inspired by Greenspanspeak, and transitioning to Bernankespeak, the Wall Street Journal continues a well-executed tradition of graphically interpreting what the Fed really means.
Inflation is a concern but they don’t seem as intent on raising rates indefinitely. August is looking pretty definite as far as rate increases go.
The federal funds rate has been raised 17 consecutive times since June 2004 by 25 basis points and is at its highest level in 5 years [WaPo].
As a relief to many, the FOMC specifically recognized that housing does play a significant role:
Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
I still contend that the full thrust of the cooling of the housing market is not fully borne out in the stats and we are headed for more economic weakness in 2007. The use of the dreaded “R” word will accelerate. Merrill Lynch economists say there is now a 40% chance of a recession in 2007 [Calculated Risk].
That could mean rate cuts next year but thats only good news to housing if job creation doesn’t deteriorate too much.
Given worthy competition, I don’t see much of a chance to win, but its definitely fun to be a finalist.
On a global scale, modest North American urban growth is in sharp contrast to patterns seen in Asia with China expected to be 50% urbanized (city versus rural) by 2015.
The US coasts are expected to see the largest growth over the next 10 years. That comes as little surprise and consistent with the significantly higher housing appreciation rates seen in the west and the northeast over the past 10 years.
Here is an amazing interactive map [BBC] that shows the global population patterns from 1955 projected through 2015.
However, according to the census bureau, despite the macro trends for urban renewal, including new urbanism, the suburbs are actually flourishing as homeowners look for cheaper housing and better schools. The top five fastest growing cities were suburban (defined as having less than 200,000 in population).
New York remained the nation’s largest city, with 8.1 million people. The city has added 135,000 people since 2000, but it lost 21,500 from 2004 to 2005, more than any other city.
Detroit, with its struggling economy, has lost 65,000 people since 2000, the most of any city. Philadelphia, which has lost about 50,000 manufacturing jobs since 2000, has lost 54,000 people during the same period.
San Francisco, with the highest real estate prices in the country, has lost 37,000 people since 2000, according to the Census Bureau.
Getting Graphic is a semi-sort-of-irregular collection of our favorite housing-related chart(s).
Washington Post-ABC News Consumer Comfort Index Survey (last 12 months)
Washington Post-ABC News Consumer Comfort Index Survey (1986-2005)
The housing boom could be defined as the period from 1997 to 2005 with a break in 2001 when we saw a recession and 9/11. In the past 5 years, I have always wondered, although the housing sector was setting records, why it seemed that consumers remained anxious even though they were doing ok financially? Of course, I could have been alone in this regard.
The Washington Post-ABC News Consumer Comfort Index Survey seems to bear this out. The participants are asked 3 questions in this rolling average survey. They rate the:
The annual results of the survey shown have been negative as shown in the chart above and this has carried through to 2006.
The survey doesn’t answer the question, but it does show how cranky all of us have been.
Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).
If the Federal Reserve raises the federal funds rate today for the 17th consecutive FOMC session, then this will be the longest period of tightening in 50 years.
In Neil Henderson’s Tighter, Tighter: When Will Fed Increases Start to Pinch? [WaPo], he asks the question: So why isn’t the economy choking by now?
The answer? Money is still pretty cheap.
The Fed directly controls the interest rate banks charge one another for overnight loans, a benchmark known as the federal funds rate. That rate indirectly influences borrowing costs throughout the economy. The central bank uses its influence over rates to try to keep the economy growing at a sustainable pace without igniting inflation. Tighter credit dampens spending, making it harder for businesses to raise prices. Easier money does the opposite.
In contrast to the campaign of the past 25 months, the Fed has previously acted much more aggressively, pushing interest rates much higher and much faster to battle hotter inflation — and causing much more economic pain in the process.
Homeowners have not felt real pain yet. According to the Mortgage Banker Association, foreclosures and delinquencies actually fell year over year in the first quarter. However, the stats are expected to erode as higher energy costs and adjustable rate mortgage rate resets start to inflict more pain.
I think we are at the point of parity, and today’s expected increase along with an increasing probability of one in August could be seen in the history books as the beginning of a period of overshooting.
Here’s a list of articles discussing the Federal Reserve’s rate move tomorrow at the close of the 2-day Federal Open Market Committee meeting. Oil-based inflation concerns have kept the pressure on the FOMC to keep raising rates.
In an interesting article by Paul J. Lim: What the Fed Is Up to, and Why You Shouldn’t Fret [NYT] he makes the case that the likely Fed interest rate increase tomorrow and possible increase in August will have little impact on long term investors.
Recession is a concern for 2007 and many economists are already predicting that the Fed is overshooting and will have to cut rates soon to avoid slipping into a recession. This may be good for housing if there is not irreparable damage caused by the next 1-2 rate cuts. Housing markets have been cooling for much of this year.
However, the economy is doing well now with corporate profits up. With higher energy costs, and signs of inflation, the Fed’s hand is forced to raise rates now.
Some investors may be paying close attention to the Fed because they think that once it pauses, the stock market will have an all-clear sign to resume its bull run. That was certainly the case in 1995, when the Dow Jones industrial average rallied more than 40 percent in the 12 months after the last Fed rate increase that year.
Sam Stovall, chief investment strategist at Standard & Poor’s, recently studied what he called the “plateau period,” or the time between a Fed rate increase and the first in a new series of interest rate cuts.
He concludes, with some caveats, that the average time between the last rate hike and the next rate cut is about 5.5 months. If August is our last rate hike, it looks like the 1st quarter of 2007, could be the point were the Fed is forced to cut rates if the economy stalls.