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Wall Street Journal

Mortgages May Now Cost An ARM And A Leg

September 29, 2005 | 10:49 pm | |


A sign that lenders are growing concerned with the housing market, some have raised their requirements [WSJ], especially specialty financing products like option ARMS and interest only mortgages. These moves come as the Federal Reserve has begun to raise concern about rising risk levels in the housing market but has been careful not to upset the housing market [Matrix].

Consumer Reality Distortion, Or Is It?

September 29, 2005 | 7:58 am | |

survey A survey [WSJ] by Royal Bank of Canada’s RBC Capital Markets unit of 1001 consumers found that most owners think their homes will continue to appreciate and the housing boom has not affected their spending patterns.

The results of this survey seems to indicate that consumer perceptions of their spending habits contradicts the Fed’s pronouncement that the consumer is driving the economy through extracting equity from their homes.

The sample was spread across geography, gender and income brackets, to make it representative of the general U.S. population. The survey’s margin of error was plus or minus 3%.

  • Only 10% of homeowners polled said they believe that rising real-estate values had affected their spending.

  • 85% of homeowners surveyed said they had experienced real-estate gains in the past three years

  • 70% saw gains of more than 10% in the past three years

  • 50% had extracted funds through home equity loans

  • 60% expect home values to rise at least 5% annualy for the next 3 years.

  • 3% expect home values to fall over the next 3 years.

  • 60% said rising energy costs were causing them to reign in spending.

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The Real Storm On The Horizon Is Rita, Not Inflation

September 22, 2005 | 7:30 am | |

As noted in the Investor’s Soapbox submitted by Lehman Brothers yesterday [Barron’s Online], inflation fears may be overblown:

Even though oil prices are still very high, the mere fact that prices have become less volatile and, by extension, less surprising, is contributing to the recent simultaneous increase in oil and S&P 500 prices. There are three other contributing factors are also at work.

First, the current combination of oil prices, monetary policy, and fiscal policy is collectively not tight enough to cause a recession.

Second, in the face of rising energy costs, corporate profitability has been more resilient than initially expected.

Third, despite high energy prices and some pass-through, broad-based measures of core inflation are not apt to accelerate to dangerous levels.

Indeed, the leading indicators of inflation point to low but positive levels of core inflation in the months ahead, just as they did a couple of years ago when many investors were worried about deflation.

One of the pass-throughs besides oil prices include building materials. Builders may get squeezed because they expect to have a limited ability to pass through higher costs to the consumer who they feel are nearing peak levels of affordability [REJ].

Despite the recent actions by the Fed, the bond market rose yesterday [WSJ], concerned that we are headed for an economic slowdown, influenced by Katrina and further damage by Rita. Rising bond prices would hold down long-term (including mortgage) rates.

In other words, the weakened economy does not allow producers to pass through all their increased costs to the consumer. The bond market views the price volatility of fuel and building materials as a drag on the economy, which could dampen the inflation-risk. However, the Fed does not agree.

Redux: 11’s the Charm?: The Fed Raises Rate To 3.75% [Matrix]

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Redux: 11’s the Charm?: The Fed Raises Rate To 3.75%

September 20, 2005 | 10:31 pm | |

See prior post on Fed action [10’s the Charm?: The Fed raises the rate by 25 basis points to 3.5% [Matrix]]


The Fed raised the federal funds 25 basis points for the 11th time since June 2004 [FRB].

From Fed press release

Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility.

The Fed appears to be more concerned about Katrina’s impact on inflation than on economic growth [WSJ].


Despite Katrina, Inflation Threat Allows No Rest For The Weary

September 20, 2005 | 8:09 am | |

Although we are recovering from yesterday’s annual Talk Like A Pirate Day, we are now facing the outcome of today’s Federal Open Market Committee’s meeting. Its widely expected that the Fed’s policy of raising short term rates regular 25 basis points will continue, but it may skip this increase in one of the few remaining meetings this year [WSJ]. This would be the 11th increase in the federal funds rate since June 2004.


Bond investors are starting to demand higher yields on the widely held consensus that the after-effects of Katrina will be inflationary. In fact, the yield curve, once flattening, is now reversing with the spread between lower short term rates and higher long term rates increasing.

Views of economic growth haven’t necessarily changed, but rather the rate of inflation alongside the growth has. Fuel and building material data will be skewed this fall, further adding to the confusion. This will likely provide upward influence to mortgage rates.

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S&P: Housing Appreciation Will Ease Gradually, Modestly, Step-By-Step, Bit-By-Bit and Slowly

September 19, 2005 | 10:18 pm | |

There was another prominent article this week on the housing market. Like the previous post covering today’s article in the Wall Street Journal, S&P released a study of the US Housing market that suggests that prices will decelerate and stabilize. A crash is not likely.

The bubble should end with a fizzle, not a bang, said S&P Chief Economist David Wyss

The average US home price is a record 3.1 times the average household income up from 2.6 times in 1960. Home ownership is 69.4%, also a record.

Most price appreciation is located in California, northeast and Florida. S&P estimates that it would take a 30% decline in national home prices to start even a modest recession, although they think that this is unlikely.

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IXNAY On Sales Price, Its The Cost Of Ownership

September 19, 2005 | 9:15 pm | |

There is interesting commentary provided in the Bubble Trouble? Not Likely article seen in today’s most emailed article in today’s Wall Street Journal based on a recently released research paper: Assessing High House Prices, Bubbles, Fundamentals, and Misperceptions [PDF]

Many feel the current market feels like a housing bubble as evidenced by its rapid growth in housing prices, rising spread between sales prices and rents and the increasing gap between sales prices and income, but is it?

While house prices over the last decade have gone through the roof, the annual cost of owning a house has not. The annual cost of owning, not the price of the house itself, is what homebuyers should (and do) consider when contemplating a purchase.

In our appraisal practice, we observed this change in dynamic about two years ago. Buyers are shopping payment, not price.

Charles Himmelberg, a research economist at the Federal Reserve Bank of New York, Chris Mayer, a Professor of Real Estate at Columbia Business School and Todd Sinai, an associate professor of Real Estate at Wharton calculated housing costs in 46 housing markets since 1980 against rents and found that in nearly all the markets covered, the annual cost of owning a home in 2004 was no higher than the median cost of owning a home over the prior 25 years. This is primarily due to historically low mortgage rates.

This study covers the single family market, NOT the condo market

The authors indicated that condos were much easier to build and more responsive to demand. However, in markets where there was a scarcity of land and more government restrictions, prices were less likely to fall. “For example, even in the face of strong population growth, Houston and Dallas have seen no real house-price increase over the last 30 years.”

Some of the hottest areas like Portland and Miami, costs were 12% to 13% above their 25 year average while other hot markets like LA, Boston and New York were 3% above their 25 year average.

In the late 1980’s, the ratio was 52% in New York, 37% in Boston and 42% in LA, far higher than today.

The study surmises that the housing market does not appear to be based on unreasonable expectations for future growth but that high growth markets are especially vulnerable to mortgage rate fluctuations.

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Consumer Sentiment Lowest Since ’92: Fed Likely To Stay The Course

September 16, 2005 | 9:47 pm | |


The University of Michigan Consumer Sentiment Index fell to its lowest level since 1992, below post-9/11. The drop was attributed to the Hurricane Katrina ravaged Gulf Coast region and record gasoline prices [Subsc.]

Retail sales fell 2.1% in August [Subsc.], the largest decline in 4 years. Auto sales fell 12%.

Despite the spike in gasoline prices, the drop in retail sales and auto sales and flat core inflation, the Fed still sees that inflation is still a threat. At what point will the bond market come on board? These factors can also make the argument that we are near an economic slowdown and inflation is not a threat. Raising short term rates could further weaken the economy. All this could bode well for mortgage rates if economic conditions remain the same.

The Fed is expected to raise the federal funds rate on Tuesday because it believes the economic malaise that seems to be gaining momentum, is temporary. The bond market seems to agree, seeing a slight 0.01% uptick in mortgage rates over the past two weeks.

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Flipping over 1031 Exchanges

September 14, 2005 | 10:09 pm | |

According to an interesting article in today’s WSJ article “A real estate speculator’s surprise,” many real estate investors don’t understand the proper use of 1031 exchanges [Note: Pd. Sub.]

A person who sells real estate can defer capital gains obligations by rolling their gains into a similar piece of property. Also called a like-kind exchange.

The problem is that many investors are flipping their properties so frequently, especially in certain markets like Miami and Las Vegas, that the IRS can interpret their activity as a business, and therefore subject to other taxes. This could catch many of these investors by surprise, especially if the boom cools and the margins on flips evaporates.


Economic Shock Absorbers More Powerful Than Any Found On A Hummer H2

September 6, 2005 | 9:52 pm | |

The economy is still cookin’ with gas

Well maybe a Hummer H2 isn’t a helpful analogy, but it got your attention. Many of us are walking around thinking: “Hurricane Katrina has turned out to be the largest US natural disaster that may cost us as much as $100B (4x Hurricane Andrew, the next largest), yet why does the economy still seem to be moving along, other than much higher prices at the pump?

Mortgage rates are still falling and the housing market continues to move upward. In fact, there is some speculation that the Fed will pause their regular increases in short term rates, albeit only temporarily.

Source: WSJ

The WSJ surmised today that it was due to three “Vital Shock Absorbers:” [Note: Paid Sub.]

  • Fuel Stockpiles – created to keep the erratic supply of fuel from harming the economy in the 1970’s
  • Temp Firms – allowed for placement of workers who lost their jobs from the storm
  • Fed’s Credibility – our faith in the decisions made by the Fed

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Riding The Storm Out: Housing Boom May Continue For A While

September 5, 2005 | 11:19 am | |

There was a great article in the New York Times today that provided some logic as to why Katrina could extend the housing boom further.

There have been signs lately that the intensity of the housing boom was waning as outlined in a WSJ story [Note: Paid Sub.] or could it simply be because its August? 😉

The shortage of building supplies and rising fuel prices as a result of the storm are thought to temper the economy, dragging down long term rates as inflation threats are diluted. The outlying areas around the devastated region are already seeing a surge is rental demand as people were displaced from their homes.

We can already see a damper in mortgage rates, which dropped sharply last week.

In another good article in last week’s New York Daily News [no, not because I was in it] that provided similar logic. Higher costs are keeping a damper on inflation, which keeps long-term mortgage rates low.

What I find so fascinating about all this is how different the economy is today as compared to the last oil crises in the early 70’s. Bond investors see a slowing economy as the answer to keeping inflation in check. Corporations are forced to absorb much of the higher operating costs that come along with rising fuel and material costs due to foreign competition. That in turn keeps a reign on hiring and payroll.

There is already speculation that the Fed will not raise short-term rates in their next session due to concern that the economy could slip back into a recession.

And the housing market keeps going…


Lumbering Giant Wants [2] Help [x 4]

September 1, 2005 | 10:47 pm | |

There has been a heated debate between the US and Canada over the tariffs being assigned to softwood imports into the US. In 2002, the US implemented these tariffs, which are reportedly contrary to the NAFTA agreement. [Note: Sub.] A 3-person arbitration board ruled that the US must refund over $5B in tariffs collected from imported Canadian softwood. The US lost the appeal on the ruling but still has refused to refund tariffs already levied.

There has been a lot of controversy surrounding the softwood tariff debate. Canada exports more than 50% of the lumber they produce to the US and the US will need more lumber as a result of Hurricane Katrina and the on-going housing boom. Look for rising prices for construction supplies as a result.
[Casper Star Tribune]
[National Post]

The housing boom has placed a significant pressure on the availability of lumber for construction. Wood exports from Canada are a significant source of lumber for the US and a major export of Canada.

In light of Hurricane Katrina’s extensive damages to the gulf area housing stock of Lousiana, Mississippi and Alabama, demand for construction supplies are expected to increase significantly and at least one advocate for affordable housing wants the tariffs removed.

Lets hope these two allies and neighbors can resolve their differences and get this crises resolved soon.

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