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ARM’ed But Ready To Get Fixed

August 24, 2005 | 11:00 pm | |

scale

As the yield curve flattens, that is the spread between long term rates and short term rates is negligible, homeowners are considering making the move from ARM’s to Fixed mortgages [Note: Paid Subscription].

As the supply of fixed mortgages increases when people shift from ARMs because of the flat yield curve, it could mean upward pressure on mortgage rates (ie bond prices down, yields up). Why borrow at a rate for 1 or 2 years when you can have the same rate for 30 years? The effect of the shift in the market is greater in moving from ARM to fixed since roughly 70% of fixed rate mortgages are securitized and 25% of ARM’s are.

But wait! There’s more potential confusion.

The demand for mortgage-backed securities from foreigners is still strong since their yields provide a greater return for investors than treasury notes generally do. Higher demand, means higher bond prices, means lower yields, means long term rates could stay at low levels for a while.



Lies, Damn Lies, And Government Statistics: Part II

August 21, 2005 | 12:07 pm | |

Go to the prequel of this post Lies, Damn Lies, And Government Statistics: Part I

And here is another post of the same topic concerning PPI Well, Maybe The Inflation Threat Is Not That Bad After All?

…After I finished my post on this topic last Friday, I came across yet another significant statistic that we should be uncomfortable with. Daniel Gross wrote an excellent article on productivity stats that suggests that the stats have even confounded Greenspan.

productivity
Source: New York Times


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Going Dutch

August 21, 2005 | 11:21 am | |

bubble

In today’s New York Times article, Professor Robert Shiller “>voices his concern about a real estate bubble. Professor Schiller is well-known for predicting the last stock market correction and possibly influencing Fed Chairman Greenspan’s use of the phrase irrational exuberance, the name of Professor Shiller’s subsequent book.

According to the article, origins of a housing bubble began with the Dutch about 400 years ago. Recently, a Dutch economist, Piet M. A. Eichholtz, a professor of Maastricht University, used Mr. Schiller’s method for converting actual sales into an index and found that the housing market saw a series of booms and busts. They found that in the long run, there was no long term trend and that prices match gains in personal income.

Mr. Shiller has a Norwegian housing index and a US Index that shows a similar pattern and is concerned that the recent run-up shows we are in a bubble.

shillerindex
Source: New York Times


To his critics, he says that housing charts generally go back to the 1970’s and stock market charts go back almost a century.


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The Wealth Effect: Stocks vs. Housing

August 19, 2005 | 8:12 am | |

With the discussion today comparing stocks versus real estate, its worth taking another look at a research paper from a few years ago: Comparing wealth effects: the stock market versus the housing market [Note: PDF] written by professors Case, Quigley & Shiller. In their abstract they state:

We find a statistically significant and rather large effect of housing wealth upon household consumption.

The wealth effect is defined as:

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.

The impact on consumer spending is more than double when tied to the value of their home rather than their stock portfolio. This has broad implications for the economy and is likely of significant concern to the Federal Reserve in their recent policy of reigning in the threat of inflation.

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Well, Maybe The Inflation Threat Is Not That Bad After All?

August 18, 2005 | 2:32 pm | |

Yesterday, the Bureau of Labor Statistics released the CPI figures for July and while core inflation was relatively flat, energy and housing saw large gains. The concern was that oil was threatening to fan the flames of inflation. The PPI Report

A day later that concern seemed a bit exagerated as…economists expressed little concern [Note: Subscription] that the higher prices producers are paying signal broad inflation.

Economists also pointed to Tuesday’s consumer-price report, which showed a modest 0.5% advance in July, with the core rate increasing a benign 0.1%.

In addition, the producer-price index for intermediate goods rose 1%, largely because of energy-cost pressures, and the core intermediate index fell 0.1%, the third consecutive monthly decline.

What is the Producer Price Index? In other words, CPI measure price changes to the buyer while PPI measures price changes to the seller.

Rising oil prices appear to be slowing economic growth and placing investor concerns of inflation at ease for now.

Economic stats seem to be more volatile than ever. For example, core cpi would have been even lower had it not been for the rise in auto prices, yet this does not correlate with recent record auto sales due to aggressive discounting. Economists have long complained about the reliability of auto sales and later revisions. Accounting for about one-sixth of US jobs, so the impact of these stats affects the reliability of the overall numbers significantly.

What does all this mean? Many believe the Fed has at least 3 more increases in it before the end of the year. This doesn’t seem to mean that mortgage rates are bound to increase.

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Bond Market Likes Core Inflation Stats

August 17, 2005 | 7:49 am |

The US Labor Department released their CPI report which indicated that U.S. CPI was up 0.5% in July, largely on energy costs. CPI (Inflation) is up 3.2% over the past year, as compared to 2.5% over the prior year. Still historically low but a cause for concern. Housing accounts for 40% of overall CPI.

CPI7-05

It is interesting to note that the previous [table from the BLS.gov site] the year over year change in CPI was actually much higher in February through March.

bankrate8-05

Core inflation, which excludes food and energy costs however, was virtually flat at 0.1%. With core inflation rates so low, the bond market now seems to view rising energy costs as predictive of softer future spending, and less of a red flag for inflation.

This may influence long-term mortgage rates to stay at low levels since bond investors still don’t appear to be overly concerned about inflation at this point. Mortgage rates have actually trended down since the end of the first week of August.

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Will Oil Grease The Inflation Wheel?

August 16, 2005 | 9:31 pm |

The Mortgage Bankers Association’s chief economist, Douglas Duncan said that the trigger for price declines is always the loss of jobs and doesn’t see a slowdown in employment, “not until 2006.” He predicts that 2005 will set records “and only an unexpected roadblock of monumental size will slow its pace”

Well, we may have a potential roadblock, sort of. Oil Prices have often been a trigger for inflation and higher long term rates such as mortgages.

Then why isn’t it happening now?

Well, here’s a thought…after adjusting for inflation, we are still well below inflation-adjusted oil prices that peaked at $94 per share in 1980. Core inflation is still within the Fed’s confort zone but energy prices are rising.


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Residential Mortgage Standards Hold; Non-Traditional Mortgage Use Increases

August 16, 2005 | 2:03 pm | |

There has been a lot written about how lending standards have eased which has help promote the rise in housing prices with non-traditional loans. The Federal Reserve released a report that said US banks eased terms for commercial and industrial loans while residential loans remain unchanged. [Note: Subscription] 20% of domestic banks saw increased demand for mortgages.

The good news is that restrained lending requirements, especial on investor properties, will help keep price growth in check. However, The Fed report seems to contradict the recently released report by the Mortgage Bankers Association [Note: Subscription] which said that lending standards continued to slide.

The Fed Report also said that use of non-traditional mortgages continues to rise.
[Matrix] piggyback loans

Nontraditional mortgage products include adjustable rate mortgages with multiple payment options and interest-only mortgages.

Interestingly, the lenders reported that less than 15% of the mortgages were non-traditional, which is less than the impression given in the media right now. Still, its of concern because highly leverage buyers are less able to weather a market downturn if one were to occur.


Yield Curve Enters Kitchen Table Talk

August 12, 2005 | 11:57 pm |

According to Investopedia.com a yield curve is a “graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates. For bonds, it typically compares the two- or five-year Treasury with the 30-year Treasury.”



Yield curves have loudly entered the economic discussions. If you grab the red line [Note: Java] in the yield chart, you can see how short term and long term rates have changed in relationship to one another over time.

The traditional economic model for banks is being turned on its head. Banks typically borrow at lower short term rates and lend at higher long term rates, capturing the spread. Since the yield curve is flattening, there is little difference between both rates creating bottom line pressures for lenders.

However, in a recent article in American Banker [Note: Paid Subscription] suggests that the yield curve, when inverted, could actually spell lower mortgage rates next year.

John Herrmann, chief economist at Cantor Viewpoint, a unit of Cantor Fitzgerald …Mr. Herrmann’s outlook is somewhat contrarian. Most economists expect rates to rise as the economy strengthens. But Mr. Herrmann told MSN that mortgage rates could be headed lower – perhaps to 5.25% by the end of the year and eventually “grinding down to 5%” next year.

A deceleration of economic growth, competitive pressure in the mortgage industry, and a trend toward tying 30-year mortgage rates and hybrid loan rates closer to the five-year Treasury rate than the 10-year are all contributing factors, he said.

His reasoning? Without housing, economic growth is way below potential.

More on yield curves to come…


10’s the Charm?: The Fed raises the rate by 25 basis points to 3.5%

August 9, 2005 | 1:50 pm |

FRB: Press Release–FOMC statement and Board discount rate action–August 9, 2005

The Fed does it again. It was surprising to me that they still used the phrase “with robust underlying growth in productivity” since productivity cooled off in the second quarter [Note: Subscription]. However, jobs data improving, it seems more likely that the Fed will continue to raise rates.

However, this doesn’t seem to mean much higher mortgage rates are imminent. The demand for bonds has kept bond prices high and yields low [Note: Subscription] (which most mortgage rates are tied to).

All this ties to real estate through mortgage rates. More on the yield curve to come…



Economically Speaking, Its Beige

August 9, 2005 | 1:01 pm | |

What is the Beige Book and why is it Beige? Prior to 1970 it was red and not intended for public reporting. Perhaps the color was not considered neutral enough for economic reporting – beige seems to be about as neutral as you can get. In 1983, the Beige Book became a public report.

More digging to do on the latter, but here’s the latest…well, not exactly hot off the presses¦Federal Reserve: Beige Book–New York–July 27, 2005

Basically, economic expansion is now more moderate than earlier this year, including retail sales and labor costs and productivity. It is interesting that one of the items that has kept mortgage rates (long term rates) in check for so long has been the fact that productivity has outpaced economic growth. As a result, large corporations have been more likely to refrain from hiring new employees. The limited growth in employment has kept long term rates in check as investors are less concerned about the threat of inflation.

Construction and real estate were robust across the region, but the rate of price increases has slowed. This doesn’t mean prices are falling, it means that the rate of appreciation is slowing.


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Yuan Inflation?

August 8, 2005 | 10:06 am |

Inflation seen as key to Fed policy.

Tomorrow marks the likely 10th 1/4 point increase in the Federal Funds rate since June 2004 and with the jobs report showing growth, an increase seems almost certain.

The Chinese currency [Yuan] was recently strengthened by 2%, which could reek havoc with the housing market if allowed to float as much as 40% to which would be needed to benefit the manufacturing sector. The US would see a competitive advantage in manufacturing, allowing prices to increase, placing upward pressure on rates, tempering activity in the housing sector.

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