by Calculated Risk on 3/30/2006 02:11:00 PM

The MBA noted this week that 28.7% of mortgage applications were for ARMs. That number seems very high and I'm wondering why borrowers are still using ARMs.

In the weekly Freddie Mac interest rate report, 'the 30-year fixed-rate mortgage averaged 6.32 percent' and the 'one-year Treasury-indexed ARMs averaged 5.41 percent' for the previous week.

Ignoring borrowing costs (slightly higher for ARMs), borrowers would save 0.91% in interest payments the first year by using an ARM. The margin on the ARM is 2.79%, so the current fully adjusted rate would be 7.62%. Usually the interest rate adjustment is capped to 1% per year, so the ARM borrowers would be paying 6.41% next year and 7.41% the following year (assuming rates stay steady).

So when would an ARM make sense? Here are some ideas:

1) If the borrower is only going to own the home for one or two years.

2) If borrowers expects interest rates to decline - the yield on the One Year treasury would have to decline from 4.8% to an average of 3.5% over the course of the loan to break even.

3) If the borrower is leveraging themselves into a more expensive home, expecting the extra home price appreciation to make up for the higher payments in the future.

None of these reasons make much sense to me in the current environment.

by Calculated Risk on 3/29/2006 11:43:00 AM

The LA Times reports: Economists Predict State Slowdown

A slowdown in the California economy will begin late this year and continue for the next two years as a cooling housing market leads to job losses in construction and related industries, according to the latest UCLA Anderson Forecast, to be released today.

But there is no evidence that a recession is near, the widely watched quarterly forecast said.

A few tidbits:

"We see the housing crunch as a force that will slow growth, not stop it," said Christopher Thornberg, senior economist and author of UCLA's state forecast.
...
Now, the trend is becoming clear: The housing boom that has driven the state economy has peaked and is starting to soften, Thornberg said.

"The only debate now is how hard a landing there will be and what will it mean for the general economy," said Thornberg,
...
Over the last two years, construction jobs have made up nearly a fourth of all new payroll jobs in the state — "far above any normal level," Thornberg said.
...
As many as 200,000 jobs in construction and related fields will be lost in the state, including contractions in real estate sales and mortgage banking positions, the report said.
...
Although UCLA forecasters have consistently been more pessimistic about the housing boom and California's economy than many other analysts, their views are notable because they were among the first economists to predict the 2001 recession.
...
"There is no justification for the prices we're seeing now," Thornberg said.

He predicts that annual home-price appreciation will slow to 6% by the end of this year and will flatten in 2007.

He also sees a 27% decline in home sales this year and next

by Calculated Risk on 3/29/2006 10:10:00 AM

The Mortgage Bankers Association (MBA) reports: Mortgage Application Volume Ticks Up


Click on graph for larger image.

The Market Composite Index, a measure of mortgage loan application volume, was 571.7, an increase of 1.2 percent on a seasonally adjusted basis from 565.0 one week earlier. On an unadjusted basis, the Index increased 1.0 percent compared with the previous week but was down 15.0 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index increased by 2.7 percent to 404.1 from 393.6 the previous week whereas the Refinance Index decreased by 1.0 percent to 1558.4 from 1574.5 one week earlier.

Mortgage rates increased:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.36 percent from 6.31 percent ...

The average contract interest rate for one-year ARMs increased to 5.83 percent from 5.68 percent ...

Change in mortgage applications from one year ago (from Dow Jones):

Total	-15.0%
Purchase	-14.3%
Refi	-16.1
Fixed-Rate	-4.3%
ARM	-33.4%

ARM activity has fallen 33% from last year. ARM rates will probably rise again next week with the increase in the FED Funds rate.

Purchase activity is off 14% from last year. This provides further evidence that housing is slowing and suggests that the substantial drop in February New Home Sales was not a statistical anomaly.

by Calculated Risk on 3/29/2006 01:32:00 AM

The extended comment period on the "Interagency Guidance on Nontraditional Mortgage Products" ends March 29, 2006. Currently there are twenty two responses although some are just requesting an extension. Here are some excerpts from the America's Community Bankers response:

We do not believe the Proposed Guidance is necessary because depository institutions already employ sufficient controls to confirm that these necessities are fulfilled.

However, if the Agencies intend to issue a final regulation on alternative mortgage instruments, it should be substantially modified before adoption. We believe that the Proposed Guidance imposes excessive regulatory burdens and restrictions that may impede an insured depository institution from offering the widest array of products available to serve their communities responsibly, without demonstration of a corresponding benefit to consumers.
...
We also believe that it is unreasonable to impose on insured depository institutions restrictive guidelines for alternative products that do not apply to non-regulated brokers and lenders.

I expect more responses to be filed on Wednesday.

by Calculated Risk on 3/28/2006 10:42:00 PM

UPDATE: Kash has a great post today: The True Fiscal Nightmare

The following graph shows the US Government General Fund Revenues and Outlays since 1992 in real terms (2000 dollars).


Click on graph for larger image.

The CBO is the source for all budget data. Revenues in 2005 have almost reached 1998 levels in real terms.

The upturn in 2005 was mostly related to significantly higher corporate taxes. Corporate taxes increased from $189 Billion in 2004 to $278 Billion in 2005 (nominal). It is doubtful that corporate taxes will continue to rise at such a rapid rate.

As Bruce Bartlett wrote today: Bush Tax Cuts Don't Pay For Themselves

It seems to me that the normal cyclical expansion after the end of the recession in 2001 has done far more to raise revenue than any Laffer curve effect. Revenues are simply returning to trend, nothing more.

In short, there is very little likelihood that revenues are rising because the 2003 tax cuts or would fall if they are not extended.

For outlays there has been a surge in spending since 2000. Most of the increase in real spending has been related to Defense and Medical expenditures (Medicare and Medicaid). And these spending increase don't include the impact of Bush's prescription drug benefit - so medical spending will even be worse going forward.

Part of the reason real outlays were flat in the '90s was because declining defense spending offset increases for medical spending (see graph for 1992 to 2000). From a demographics perspective this period was also very favorable (see The Best of Times).

This should offer some guidelines for fiscal policy: 1) reverse some or all of the Bush tax cuts (or at least let them expire), 2) reduce spending on defense, and 3) meaningful healthcare reform.

by Calculated Risk on 3/28/2006 12:43:00 PM

Joshua Bolten, the Master of the Budget Disaster on July 14, 2005:

"The U.S. budget deficit is falling, and it is falling fast."

Meanwhile back in the real world, the US General Fund deficit will set a new record this year of close to $600 Billion. More Bolten:

"...the budget deficit is forecast to continue to fall, to $162 billion in 2009, or 1.1 percent of GDP - less than half the size of the average deficit over the last 40 years."

This statement isn't just wrong, its dishonest. Until about 20 years ago, the Unified budget deficit and the General Fund deficit were about the same size. When Reagan (following the advice of the Greenspan Commission) upped the SS payroll tax, SS started running huge surpluses. These surpluses are not included in the General Fund. But Bolten is using the Unified Budget - and masking the General Fund deficits with SS surpluses. Over a period of 40 years Bolten should be comparing to the General Fund deficit as a percentage of GDP, not the Unified Budget deficit. That is dishonest.

Besides, Bolten was also wrong. The way things are going, the US might have a $1 Trillion General Fund budget deficit in 2009 (probably more like $800 Billion).

Boltie, you're doing a heck of a job!

by Calculated Risk on 3/28/2006 01:48:00 AM

The NYTimes Science Section has a series of articles on the Avian Flu today.

On the Front: A Pandemic Is Worrisome but 'Unlikely'

Having observed A(H5N1) for many years in Asia, he thinks it is unlikely that the virus is poised to jump species, becoming readily transmissible to humans or among them. Nor does he believe the mantra that a horrific influenza pandemic is inevitable or long overdue. He points out that the only prior pandemic with a devastating death toll was in 1918, and he says that may have been "a unique biological event."

"For years, they have been telling us it's going to happen — and it hasn't," said Dr. Farrar, director of the Oxford University Clinical Research Unit at the hospital in Vietnam. "Billions of chickens in Asia have been infected and millions of people lived with them — we in Asia are intimate with our poultry — and less than 200 people have gotten infected.

"That tells you that the constraints on the virus are considerable," he continued. "It must be hard for this virus to jump."

At the U.N.: This Virus Has an Expert 'Quite Scared'

...Dr. Nabarro describes himself as "quite scared," especially since the disease has broken out of Asia and reached birds in Africa, Europe and India much faster than he expected it to.

"That rampant, explosive spread," he said, "and the dramatic way it's killing poultry so rapidly suggests that we've got a very beastly virus in our midst."
...
But he repeatedly said that he is more scared than he was when he took the job in September. In October, he predicted that the virus would reach Africa, where surveillance is so poor that deaths of chickens or humans could easily go undiagnosed for weeks. Last month, he was proved right.

The infection of millions more birds in many more countries "has led to an exponential increase of the load of virus in the world," he said. And influenza is a fast-mutating virus. Each infected bird and person is actually awash in minutely different strains, and it takes lengthy genetic testing to sequence each one — so if a pandemic strain were to appear, "it might be quite difficult for us to pick up that change when it happens."

From the Chickens' Perspective, the Sky Really Is Falling

"If you're a chicken," Dr. Julie Gerberding, director of the Centers for Disease Control and Prevention, said at a recent conference on avian flu, "this is a pandemic."
...
By some estimates, more than 200 million domestic chickens, ducks and geese have already either died of the disease or been killed on the order of public health authorities to prevent its spread.

At least there is some good news; I'm not a chicken.

by Calculated Risk on 3/25/2006 02:15:00 PM

From Leslie Berkman at The Press-Enterprise - a few quotes:

"There are an awful lot of analysts and think tanks out there telling everybody in the world the sky is falling, and they have been consistently wrong," said John Karevoll, an analyst with DataQuick.

Karevoll questioned the Department of Commerce home-sales statistics, which he said are based on a small sampling projected over a national market. February is an extremely slow month and not good for making predictions, he said.

Karevoll and other analysts said the performance of the housing market in March will better indicate the trend.

These seem like reasonable arguments, except February is typically not that slow of a month. The monthly rankings are as follows over the 2000-2005 period (listed in order of number of transcations):

Top months: March, May, April, June (the Spring buying season)
Middle Months: August, July, February, October, September
Slow Months: January, November, December.

"One month doesn't count," Alan Nevin, chief economist for the California Building Industry Association, said of the Commerce Department February results. He called the cooling of the national housing market "miniscule."

I agree that one month doesn't count and February may be revised significantly. But I think the MBA Purchase Index shows there has been a double digit percentage drop in transactions from late last year. That is not "miniscule".

Chris Thornberg, senior economist for the UCLA Anderson Forecast, also was unimpressed by the reported February drop in national new-home sales.

"What I see is that the overall sales numbers are high, but they do seem like they have peaked and they are beginning to trend down slowly," he said.

And from the Commerce Department:

Steve Berman, survey statistician for the U.S. Department of Commerce, said that finding has a statistically large margin of error. More significant, he said, is that in the 12 months ending in February, the nation's new-home sales declined 13.4 percent.

Berman said concerns about February being an atypical sales month are unfounded because the department's sales numbers are adjusted for seasonal differences so they will project an annual trend.

Berman said, according to his figures, national new-home sales have been declining since reaching a record level in July.

New-home sales in February, he said, represents "a significant drop but still a historically high number. Is the sky falling? Not really."

The sky may not be falling, but as both Berman and Thornberg point out: housing sales are clearly trending down.

by Calculated Risk on 3/24/2006 02:34:00 PM

The following graph is an update to my previous post and includes the data for February. Its important to note that New Home Sales data can be heavily revised and February is just one data point.


Click on graph for larger image.

The white periods are recessions as defined by NBER. The New Home Sales economic indicator is now flashing yellow.

I'd be very concerned if New Home Sales fall below about 1.05 million units annual rate for several months.

by Calculated Risk on 3/24/2006 10:00:00 AM

According to the Census Bureau report, New Home Sales in February were at a seasonally adjusted annual rate of 1.08 million. January's sales were revised down slightly to 1.207 million.


Click on Graph for larger image.

NOTE: The graph starts at 700 thousand units per month to better show monthly variation.



The Not Seasonally Adjusted monthly rate was 92,000 New Homes sold, slightly higher than the revised 91,000 in January.

On a year over year basis, February 2006 sales were 15.5% lower than February 2005.



The median and average sales prices are steady.

The median sales price of new houses sold in February 2006 was $230,400; the average sales price was $296,700.



The seasonally adjusted estimate of new houses for sale at the end of February was 548,000. This represents a supply of 6.3 months at the current sales rate.

The 548,000 units of inventory is another all time record for new houses for sale. On a months of supply basis, inventory is significantly above the level of recent years.

This report is very weak, except for the median and average prices. One month does not make a trend, but New Home Sales have fallen in six of the last seven months.