Real Estate: Still Gloomy

Housing has been a source of concern for regulators, bankers and consumers for more than a year now, and signs of improvement are nowhere to be seen. According to the latest NAR report, existing home sales dropped 2.2% in December to a seasonally adjusted annual rate of 4.89 million units, compared to 5.00 million in November, down 22% year-over-year. Total existing home sales for 2007 came in at 5,652,000, down 12.8% when compared to 2006 results but still the fifth highest level on record. The inventory of unsold homes currently on the market is more than twice the normal supply. The December level was the highest in history for that month. The median price for a single-family home dropped 1.8% in 2007, the first decline since the NAR started tracking prices in 1968. Looks like it can only get better from now on but who knows, so many problems need to be solved first.

By the way, the latest Fed rate cut has helped bring down mortgage interest rates: on average, the 30-year fixed home loan carried an interest of 5.48% this week, the lowest level in almost 4 years. It stood at 5.69% last week. 15-year fixed-rate mortgages dropped to 4.95%, from 5.21% last week, 5-year adjustable-rate home loans averaged 5.13%, compared to 5.40% a week ago, and one-year ARMs stood at 4.99% this week, compared to 5.26% last week. Lenders are expecting a refinancing boom.

The Fed Panicked

A 0.75% rate cut - both the discount rate and the Fed Funds rate. 1 week before a scheduled Fed meeting. This is huge. A cut like this would be remarkable even at a normal meeting, but Bernanke chose to slash rates at an emergency meeting. He must have been really scared about the stock market and the economic prospects if he couldn't wait for another week. This feels disappointing. The last time the Fed slashed rates at an unscheduled meeting was after the terrorist attacks of Sept. 11, 2001. It's just plain wrong to go this far, Bernanke is sending the wrong signals and tinkering with economic fundamentals that will greatly impact businesses and the lives of individual consumers. Well, at least those who wanted a 1% cut will be happy - the Fed will meet on Jan. 30 and it might cut some more then. For the time being, happy 3.5% Fed Funds Rate.

The Perfect Storm

Housing starts dropped 14% in December to an annual rate of 1.006 million, the lowest pace since 1991. Construction fell 25% in 2007, its biggest drop since 1980. Permits dropped to 8.1% in December, and 25% for the entire 2007, the biggest decline since 1974. Construction of single-family homes dropped 2.9%, and multifamily homes dropped 40%. Homebuilders are scaling down construction while they wait for the surplus inventory on the market to sell. Well at least there’s some hope that that will happen. Mortgage rates continued to drop this week, 30-year fixed-rate mortgages averaging 5.69%, the lowest in more than 2 years. 15-year fixed-rate mortgages averaged 5.21%, down from 5.43% last week. 5-year hybrid ARMs carried an interest of 5.40%, compared to 5.63% last week. 1-year adjustable home loans fell from 5.37% to 5.26%. Unfortunately, banks are reluctant to lend money to borrowers. Weak retail sales in December, which dropped 0.4% from the previous month, would suggest that consumers are feeling strapped and unlikely to start house-hunting just yet. This looks like a perfect storm for the economy, and we’ve run out of ideas – and financial innovation.

Mortgage Rates In The First Week of 2008

Mortgage interest rates began the year at a 4-week low, according to Freddie Mac’s weekly survey of mortgage lenders. 30-year fixed-rate home loans averaged 6.07%, down from 6.17% last week. 15-year fixed-rate mortgages carried an interest rate of 5.68%, compared to 5.79% a week ago. 5-year adjustable mortgages dropped from 5.90% to 5.78%, and one-year ARMs were at 5.47%.

Analysts attribute the drop in interest rates to a series of bad news about the economy and pessimistic expectations about the new year. However, the consumer confidence report picked up in December for the first time in 5 months. I wonder if it’s all holiday cheer or a long-term trend. Either way, mortgage interest rates got even better, for those who can qualify for a loan.

Little Optimism For 2008

This is the first post for this year. 2007 was tough, and a lot has changed since last January. Many believe the housing and capital markets may never be the same again. There’s hope for improvement later this year, and yet there’s some fear that things may get worse before they get better. November housing data, released at the end of December, gives little reason for optimism. New-home sales dropped 34.4% on year-over-year basis, the largest drop since 1991. The median price was down 0.4% on a yearly basis to $239,100. This number doesn’t account for builder incentives, which means that the actual prices have dropped even more. Sales of existing homes were up 0.4% compared to the month before for the first time since February – this sounds like a piece of good news but it’s hard to classify it as a turnaround point. Fewer homes were sold in November than the previous month: 46,000 homes sold compared to 55,000 in October. The supply of unsold homes currently on the market would take 10 months to sell at the current pace.

Mortgage interest rates ended the year nearly where they started, with the 30-year fixed-rate mortgage averaging a little above 6.1%. This, however, happened after interest rates topped 6.7% in the summer and the Fed lowered its benchmark interest rate by 1% with three consecutive rate cuts. Forecasts for 2008 range from extremely bearish to modestly bullish, but most are pretty cautious and somewhat vague. Happy New Year and let’s hope it’s a good year.

Countrywide’s Loan Production Plunges

Countrywide’s home loan production dropped 40% year-over-year in November, the lender announced Thursday. Loan fundigs were up 5% compared to October’s results, quite a feat amid all the trouble the mortgage lending sector is experiencing currently. Countrywide almost eliminated origination of subprime home loans and significantly reduced adjustable-rate mortgages. Delinquencies rose from 4.57% in November 2006 to 6.34% last month. In October, 5.89% of Countrywide loans were delinquent.

Mortgage interest rates climbed up from record lows after the Fed’s rate cut, and this week 30-year mortgage rates averaged 6.11% - still some of the lowest rates for this year, but above 6% nevertheless. The rate dropped below 6% briefly last week. 15-year fixed-rate loans were at 5.78%, up from 5.65% a week ago. 5-year ARMs averaged 5.78%, compared to 5.75% last week. Interest on one-year adjustable home loans increased from 5.46% last week to 5.50%. Which way rates go from here will depend on a number of factors, including the market for Treasuries and the job market.

Mortgage Interest Rates At 6-month Low

Freddie Mac’s weekly survey of interest rates shows the 30-year mortgage dropped from 6.24% to 6.20% for this week, the lowest since mid-May. The low for this year was 6.14% in early March, and rates kept climbing pretty steadily for a while, reaching 6.73% back in July. This made many analysts think that interest on 30-year fixed home loans is about to go through the roof topping 7% by the end of the year. Turns out they didn’t foresee the August credit crunch and well, no one counted in the Fed rate cuts. I assume now it’s safe to say interest rates won’t be nearing 7% until the end of the year in any case. With all the mess in the housing market and the two GSEs in trouble as well, the Fed may yet cut again at its meeting on December 11^th – they’ve thrown the dollar stability out the window anyway, so why not prop up the Real Estate sector for a while. Furthermore, oil will most likely hit $100/barrel by the end of 2007, rate cut or not (it’s at $97-$98 right now and forecasters say it will keep growing) due mostly to the dollar’s weakness: China plans to “diversify” its reserves, and OPEC is considering pricing oil in another currency. It may all look like doom & gloom but this is reality. Financial innovation, anyone?

PIMCO’s Bill Gross expects more rate cuts

Bill Gross, the chief investment officer of the world’s largest bond fund, said the Fed “cannot afford to let homes go down by 10 to 15 percent”, so it will inevitably cut rates. Gross expects the Fed Funds rate to fall to 3.5%. He estimates the total cost “of subprimes and Alt-As and basically garbage loans” at $1 trillion. Gross has been calling on the Fed to act to save housing for months, but apparently his bailout scenario doesn’t even incorporate such economic indicators as the dollar exchange rates and inflation. He warns that $250 billion in non-prime loans are about to default and those could hurt banking giants like Merrill Lynch and Citigroup. Hey, in fact that’s already happening.

According to Gross, reducing the Fed Funds rate to 3.5% will result in 30-year fixed mortgage rates dropping to 5.0-5.5%, which will magically solve all the problems in financial markets. A simple solution, isn’t it? What’s the Fed waiting for? His monthly market commentary gives a nice analysis of the economic situation at the moment, but I don’t think a drastic rate cut is a solution. When the Fed cut rates in September, mortgage interest actually increased instead of dropping. Perhaps a drastic cut will actually lower the 30-year mortgage rates, but it may also wreak havoc in other sectors of the financial market and it will most probably result in monster inflation. Gas at $5/gallon, anyone? Blame financial innovation, not interest rates.

Interest Rates Fall Sharply

Interest on 30-year fixed mortgages averaged 6.26% this week, down from 6.33% a week ago, according to Freddie Mac. This is the lowest reading in five months and fairly close to the lows for this year. A year ago, 30-year fixed home loans stood at 6.31%. 15-year adjustable-rate loans carried an interest of 5.91%, down from 5.99% last week. Last year this time, 15-year ARMs were at 6.02%. 5-year ARMs averaged 5.98%, compared to 6.03% last week and 6.05% a year ago. 1-year adjustable home loans fell to 5.57% from 5.66% last week.

A RealtyTrac report showed that foreclosures have almost doubled in the third quarter, compared to Q3 2006. Although RealtyTrac numbers tend to be somewhat higher than other agencies’, you get the idea. Foreclosures were up 30% from the previous 3 months and according to RealtyTrac’s CEO James Saccacio, foreclosure activity is likely to “increase over the next year in many markets”. He also mentioned that August and September “were the two highest monthly foreclosure filing totals” since January 2005 when RealtyTrac began issuing the report.

Mortgage rates this week

Mortgage interest rates dropped this week after two consecutive increases, according to Freddie Mac data. 30-year fixed-rate mortgages carried an interest rate of 6.37%, down from 6.42% a week ago. 15-year fixed-rate mortgages averaged 6.03%, down from 6.09%. 5-year adjustable rate mortgages were at 6.11% compared to 6.15% last week. One-year adjustable home loans carried an interest of 5.58%, down from 5.60%.

A year ago, 30-year mortgages had an interest rate of 6.30%, 15-year fixed loans were at 5.98%, 5-year ARMs averaged 6.00% and 1-year ARMs carried an interest of 5.46%. Back then, however, the Fed Funds rate was higher. Well, this is supply and demand, and there ain’t much of the former in mortgage lending right now, so rate cuts can’t help borrowers. I’m reading a lot of grim forecasts for the months ahead, does the Fed (or anyone for that matter) have other fresh ideas?

Rates On Fixed Mortgages move up

According to Freddie Mac’s weekly survey, 30-year fixed-rate mortgages averaged 6.42% in the week ended September 27. 15-year fixed-rate mortgages carried an average interest of 6.09%, up from 5.98% a week ago. Adjustable-rate mortgages declined this week, with the 5-year ARM dropping to 6.15% from 6.21% a week ago and the 1-year adjustable home loans at 5.60%, down from 5.65%. The demand for ARMs has dropped dramatically recently, as consumers try to escape adjusting loan payments and look for the safety of fixed-rate loans. Home loans are mostly used for refinancing, rather than home purchases, and the result is a 7-year low in new home sales in August. According to the U.S. Census Bureau and the Department of Housing and Urban Development, sales of new, single-family homes dropped 8.3% on a monthly basis in August to a seasonally-adjusted annual rate of 795,000.

Financial data for August doesn’t fully reflect the impact of the crisis that occurred mid-month, so we can expect even gloomier results when the business and economic stats for September are released.

Mortgage Applications Decline

Mortgage applications dropped 2.8% last week, according to the Mortgage Bankers’ Association. Refinance applications increased 3.3% and the purchase index declined 8.3%. Apparently consumers are waiting for better news from the lending industry, and they’re probably disappointed with the latest interest rates. U.S. subprime problems are affecting banks worldwide, and it’s not just the hedge funds and BNP Paribas. In latest news, Switzerland’s second-largest bank, Credit Suisse Group, is cutting staff in its mortgage-backed securities unit. No units are being closed yet, but staff is reduced drastically. Subprime securities, until recently the bankers’ favorite toy, are not attractive anymore. The credit crunch and the ongoing financial turmoil have revealed mechanisms and interlinks in international finance that caught many by surprise. Economists are saying there’s more trouble ahead, but I guess many have already learned the important lessons. Perhaps the world is changing.

The Fed cuts rates

We had some doubts, but finally the Fed did cut rates – by half a percentage point, to 4.75%. And what we have now is plenty of opinions on what’s next. According to economists, the Federal Open Market Committee (FOMC) is likely to cut rates again before the end of this year, at least by .25%. The next cut could happen as early as October, at the next Fed meeting. Analysts seem to believe that the rate cut will be only a temporary relief to mortgage lenders. For borrowers, interest rates may change little, or not at all, depending on their loan terms and the index their interest rate is pegged to.

For some, however, the new rate may bring a big improvement for their monthly payments. Bank of America, for example, reacted immediately on the news, cutting its prime lending rate. Rates on credit cards are expected to drop, too.

Investors fear that the rate cut will have a negative impact on the dollar and the bond market, potentially driving the economy into a recession. Gold and stocks rose significantly after the cut was announced.

In other news, Accredited Home Lenders and Lone Star have amended their merger agreement. The new price for Accredited stock is $11.75, well above its market value at the moment.

Banks won’t borrow at the discount window

The Fed’s offer to lend at 5.75% to banks wasn’t exactly embraced this week, as only a total of $2 billion was borrowed. Most interestingly, the borrowers were four major banks – Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., and Wachovia Corp., each borrowing $500 million, to show solidarity with the Fed’s attempt to help the financial market. The problem is, the ones in need of financing are smaller companies, such as mortgage originators, hedge funds and their like, who generally borrow from some of the above mentioned, because they can’t borrow directly from the Fed. Banks, however, do not wish to have anything to do with mortgage companies at the moment, because the latter are very much likely to default on any loans extended to them. Therefore, the Fed’s move didn’t help anyone much.

According to an article on Bloomberg.com, all four banks had access to cheaper credit, so it’s definitely not urgent need for liquidity that made them borrow from the Fed.

Housing starts lowest in 10 years in July

When the housing starts report came out yesterday, no one was surprised that housing starts dropped last month. It is only natural that in a market like the one we’re seeing today builders are unwilling to begin work on new projects. What was surprising is how much they actually declined. Starts dropped 6.1% to an annual rate of 1.381 million, from 1.47 million in June. That is 20.9% below July 2006 levels and lower than the 1.4 million forecast. Permits dropped 2.8% to an annual rate of 1.373, the lowest since late 1996. Builder sentiment is at the lowest level in years, and for good reason: inventories aren’t moving, despite significant price cuts. Although many would like to buy a house, it’s getting harder to find financing and there’s fear that further price declines may drain all equity out of a home.

Mortgage interest rates increased somewhat this week, but they’re still below the highest readings for this year. 30-year mortgages carried an interest of 6.62%, up from 6.59% a week ago. 15-year fixed-rate mortgages were at 6.30, compared to last week’s 6.25. 5-year adjustable mortgages averaged 6.35%, up from 6.33%, and interest on 1-year ARMs was at 5.67%, a little higher than a week ago, when it averaged 5.65%

Mortgage rates drop, BNP Paribas freezes securities funds

BNP Paribas, the biggest French investment bank, said it cannot value the assets in three of its asset-backed securities funds and is therefore temporarily suspending redemptions. The funds have lost $0.9 billion in the past three weeks, almost a third of their value in July. BNP Paribas said in a statement that, “regardless of their quality and credit rating”, it is impossible to value the assets because they don’t get any bids from investors. Approximately a third of the funds’ investments are backed by subprime paper but the panic in the U.S. credit market itself has caused much of the problem. Other funds are also losing value or being frozen by financial institutions in the current market, because the underlying assets cannot be sold at what would be considered fair prices.

Amid such problems in the financial markets, interest rates dropped this week, with the 30-year fixed home loan declining to 6.59% from 6.68% last week. The 15-year adjustable-rate mortgage averaged 6.25%, down from 6.32% a week ago. 5-year adjustable mortgages carried an interest rate of 6.33%, compared to last week’s 6.29%. 1-year ARMs were at 5.65%, up from 5.59%.

Fannie asks regulators to raise financing cap

Fannie Mae has reportedly asked the Office of Federal Housing Enterprise Oversight (OFHEO) to increase the maximum amount of loans it can hold in its portfolio. Fannie says this will help stabilize the market and provide financing for potential home buyers. The mortgage giant is required to keep mortgage holding at or below $727 billion. Freddie Mac, Fannie’s smaller sibling, is also subject to a similar limitation. Shares of Fannie Mae gained more than 10% on the news and closed at $62.50 on Monday.

Regulators generally try to prevent the two GSEs from controlling too large a part of the market, because of the potential consequences for the broader economy. Allowing Fannie to keep more loans in its portfolio, or raising the cap on ‘conforming’ loans would probably be good for the market, but I don’t think regulators find the thought of permitting Fannie and Freddie to grow even larger very appealing. It’s a well-known fact that in some areas nearly all loans are ‘jumbo’ because the median is well above the $417,000 limit for a ‘conforming’ loan financed by Fannie Mae, so there must be something inherently wrong with the classification in general. While setting ‘local’ limits for ‘conforming’ loans sounds impractical, there must be something that can be done to make the system more realistic.

Another thing that could help spur the market would be a rate cut, but choosing the right policy in the current circumstances is a very complex problem which the Fed will have to resolve on its meeting this week. Most analysts believe that the Fed fund rate will remain at 5.25% where it’s been for more than a year, but a cut is likely sometime by the end of 2007. Much will depend on how the economy behaves, including such indicators as inflation, employment, the dollar, and the whole range of housing-related problems. Housing prices are another concern that needs to be addressed. They grew beyond any reasonable limits during the housing boom, so in the long term, a drop in prices would be considered a good thing. Providing more financing, or cheaper financing, would only slow that process down.

Mortgage rates at the second-highest level this year

30-year fixed-mortgage rates averaged 6.73% the week ending Thursday, a notch lower than this year’s high of 6.74% and up sharply from last week’s 6.63%. Analysts say that this is due to strong economic and employment data, but some publications suggest that employment data may be skewed by tricky calculations and adjustments. 15-year fixed-rate mortgages carried an average interest rate of 6.39% this week, up from 6.30 a week ago. Five-year adjustable-rate mortgages also increased, from last week’s 6.29% to 6.35 this week. One-year adjustable mortgages stood at 5.71, unchanged from last week.

A year ago, 30-year fixed-rate mortgages carried an interest of 6.74%, 15-year fixed home loans were at 6.37%, five-year adjustable-rate mortgages were at 6.33% and one-year adjustable mortgages averaged 5.75%.

Rates are expected to remain close to the current levels throughout the rest of the year, and the Fed is unlikely to cut the Fed Fund rate. Higher rates will have an adverse effect on the slumping housing market, which seems to already be affecting the financial markets at large and, according to this publication, newspapers and various types of smaller businesses as well.

Mortgage-backed securities get downgraded

As troubles in the subprime lending sector are beginning to cause major problems to hedge funds that invested in mortgage-backed securities, rating agencies are now downgrading these papers.

Moody’s announced negative rating actions on 431 securities originated in 2006 with an original face value of $5.2 billion. 399 of these were downgraded and another 32 were placed on review. The rating actions were caused by loan performance deterioration which was due to a slowing home price appreciation and aggressive underwriting practices.

Standard & Poor’s (S&P) announced that it will change the way it evaluates the securities. The full impact of this will be seen in a few months, probably resulting in an increase in interest rates to subprime borrowers and losses for investors. S&P said that 612 classes of mortgage-backed securities, totaling more than $12 billion in debt, have been put on CreditWatch and most of these will be downgraded in the next few days. Ratings of Collateralized Debt Obligations, or CDOs, are also being reviewed.

According to the agency, losses on the mortgages backing these securities exceed anything that’s happened before. I guess we should assume that no one knows what a situation like this will lead to, and, most importantly, how to deal with the problem. It could result in a really big bust for the financial markets, and the dollar is already falling.

Mortgage interest rates edge down as worries over inflation ease

According to mortgage giant Freddie Mac, rates on 30-year fixed-rate mortgages dropped to 6.63%, down from last week’s reading of 6.67. Frank Nothaft, Freddie Mac’s chief economist, said the drop in interest is in part due to “a moderation in core inflation”. 15-year fixed rate mortgages averaged 6.30%, down from 6.34 last week, while five-year adjustable home loans stood at 6.29, compared to 6.30 a week earlier. One-year adjustable mortgages rose to 5.71%, up from 5.65 a week ago.

Mortgage applications showed a slight increase last week, according to the Mortgage Bankers Association. The mortgage application index was up 0.1%, as refinancing dropped 2.6% while purchase applications increased 2.0%. Not really a great summer home-buying season.