by Calculated Risk on 5/10/2006 10:01:00 AM

The Mortgage Bankers Association (MBA) reports: Mortgage Application Volume Down


Click on graph for larger image.

The Market Composite Index, a measure of mortgage loan application volume, was 562.1, a decrease of 5.8 percent on a seasonally adjusted basis from 596.8 one week earlier. On an unadjusted basis, the Index decreased 5.2 percent compared with the previous week and was down 27.1 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index decreased by 3.9 percent to 416.5 from 433.3 the previous week whereas the Refinance Index decreased by 8.8 percent to 1427.4 from 1565.6 one week earlier.

Mortgage rates were mixed:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.61 percent from 6.57 percent ...

The average contract interest rate for one-year ARMs decreased to 6.04 percent from 6.08 percent ...

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

Total	-27.1%
Purchase	-20.7%
Refi	-36.9%
Fixed-Rate	-19.4%
ARM	-41.0%

Purchase activity is off 20.7% from the comparable week last year.

by Calculated Risk on 5/09/2006 10:06:00 PM

Housing may be slowing, but ...

Click on graph for larger image.

This graph shows the number of licensed Brokers and salespeople in California for each March.

The California Department of Real Estate reports the total number of agents in California is now 490,861, up 0.9% from last month, and up 10% from last March. The number of licensed salespeople has risen 80% since March 2000. The number of Brokers has increased almost 26%.

... the pace of new licensees has not slowed.

by Calculated Risk on 5/09/2006 08:31:00 PM

I've made an effort to limit the number of political posts on this blog. This will be an exception ...

As an introduction, I'm a lifelong Republican and former youth delegate to the RNC (when I was in college). The GOP sent me an email today and I've posted excerpts on Angry Bear: The GOP Talking Point.

I'm ready for a change.

Now back to economics ...

by Calculated Risk on 5/09/2006 02:15:00 PM

I've just read the Citigroup May 9th Consumer Update. To say Citigroup remains bullish on the US economy (and homebuilders too) is an understatement.

I must be missing the fun with the "recreational debt creation", but lets check a few numbers. Real residential construction grew 5.8% over the last year, from $584.1 Billion in Q1 2005 (annualized) to $618.2 Billion in Q1 2006 (in 2000 dollars). GDP grew 3.5% over the same period ($10.999 Trillion to $11,381.40 Trillion in 2000 dollars).

If residential construction had been flat, GDP would have been around 3.1%. So Citigroup's number is technically correct (less than 0.5 percentage points of GDP growth came from growth in residential construction), but that is still a substantial contribution to GDP growth.

And what if residential construction falls 10% this year (a common estimate)? All else being equal that would put real GDP growth at around 2.6%. And that is excluding any impact from the loss of the "wealth effect" and the loss of housing related employment.

It is true that personal interest income has been rising almost as fast as mortgage interest payments. The general idea is simple: as strapped homeowners reduce their personal consumption expenditures, other consumers will take up the slack with their additional interest income.

However, it seems likely that consumers receiving substantial interest income tend to save more - and as interest rates rise, the savings rate will increase - so its not a one for one substitution for consumption. Besides, the primary concern for housing is the marginal homeowner with an ARM. As rates rise, these homeowners might be forced to sell, increasing the supply of houses for sale and eventually putting pressure on prices - and reversing the wealth effect.

There is much more in the Citigroup report, but suffice to say Citigroup didn't convince me. I remain concerned about the impact of the housing slowdown on the general economy.

by Calculated Risk on 5/08/2006 10:48:00 PM

Every week Dr. Altig calculates the market expectations of future federal funds rate hikes based on the options on federal funds futures. This weeks post is especially interesting. Expectations are for another 25 bps this Wednesday and then for a pause, at least through the August meeting.


Click on graph for larger image.

This graph shows the daily odds of various Fed Funds rates after the August 8th meeting.

An extended pause is somewhat surprising since most of the recent economic data has been fairly positive. Even the data for the housing market hasn't been terrible - and the housing slowdown hasn't impacted employment significantly yet.

Inflation also appears to be moving higher - as an example the Dallas Fed's trimmed mean PCE inflation rate was an annualized 3.7% in March and 2.4% over the last 6 months - above the high end of the Fed's informal target of 2.0%.

For the FED to pause, they must expect housing will weaken further in the near future. There were a couple of commentaries today suggesting that the housing slowdown is spreading: see Dimartino: Bubble's bursting on all fronts and Housing slowdown appears to be spreading nationwide. Further evidence of a housing slowdown was provided after market hours by Dominion Homes, when they reported a Q1 loss:

Douglas Borror, chief executive officer of the company, said, "Based on the level of sales we are currently experiencing, we do not expect that 2006 will be a profitable year."

I think there might be another rate hike in June unless inflationary pressures ease.

by Calculated Risk on 5/08/2006 11:39:00 AM

Here is the cover from this month's Harper's Magazine:



THE NEW ROAD TO SERFDOM
An Illustrated Guide to the Coming Real Estate Collapse

UPDATE: Professor Thoma posted a cartoon from the China Daily last week that is very similar to the Harper's Magazine cover.

by Calculated Risk on 5/06/2006 09:19:00 PM

CNNMoney reports: Buffett: Real estate slowdown ahead

On the real estate bubble

Buffett: "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets. ... The day traders of the Internet moved into trading condos, and that kind a speculation can produce a market that can move in a big way. You can get real discontinuities. We've had a real bubble to some degree. I would be surprised if there aren't some significant downward adjustments, especially in the higher end of the housing market."

On mortgage financing

Munger: "There is a lot of ridiculous credit being extended in the U.S. housing sector."

Buffett: "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year's 10Ks, and look at their balances of 'interest accrued but not paid,' you'll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt]."

by Calculated Risk on 5/05/2006 01:51:00 PM

Catherine Reagor writes in The Arizona Republic: Risky ARM mortgages come due

Thousands of people used the non-traditional mortgages last year to afford a house in the Valley, where home prices increased nearly 50 percent from 2004. They're paying for that decision today.
...
Arizona incomes aren't climbing at the same rate, meaning many of those already struggling to pay their mortgages could wind up losing their homes in the months ahead.

Arizona's housing market could be hurt more than other areas of the country by a fallout from rapidly rising rates on ARMs.

Economists say nearly 40 percent of all home loans in metropolitan Phoenix are adjustable. Nationally, about 30 percent of all mortgages are ARMs.
...
"Record numbers of people lured by low initial teaser rates have taken out adjustable-rate mortgages that are putting them in vulnerable positions as rates rise," said Jay Luber, a vice president with First Horizon Home Loans in Phoenix.

Lured? No, homeowners were just taking then Fed Chairman Alan Greenspan's advice:

"... many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade.
...
American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
Alan Greenspan, Feb 23, 2004

In the Arizona Republic article, Ms. Reagor notes:

The number of people making late payments on ARMs in Arizona climbed during the second half of 2005.

At the end of the year, almost 10,000 homeowners across the state were behind on their payments for adjustable mortgages. That is almost double the rate from last summer, according to the Mortgage Bankers Association of America.
...
Last year, strapped homeowners were able to sell quickly for hefty profits or refinance into ARMs with artificially low teaser rates. As a result, foreclosures were at nearly record lows.

But now, a growing number of people are so stretched they are spending more than they earn.

First American Real Estate estimates that $297 billion worth of adjustable-rate mortgages issued nationally in 2005 and 2004 could end up in foreclosure.
...
"If interest rates continue to go up and housing prices don't, more people will be squeezed," said Elliott Pollack, an Arizona economist and real estate investor.

"When the next recession rolls around, many people are going to be set up for a very bad situation."

by Calculated Risk on 5/04/2006 11:52:00 PM

From the San Francisco Chronicle: 30-year mortgages at 6.59%, approaching a 4-year high

Chris Thornberg, senior economist at the UCLA Anderson Forecast, thinks the housing market will decline no matter what happens with interest rates.

"The overall cooling bubble will far and away dominate any kind of interest-rate effects," Thornberg said. Rising interest rates "are just one tiny little (impact), like a guy standing in the middle of a hurricane throwing a bucket of water."

His predictions for the housing market are pessimistic.

"The market's already cooling. It's going to continue to cool and will get downright chilly by the end of the year," Thornberg said. "Appreciation will come to a stop and you'll continue to see overall unit sales falling."

by Calculated Risk on 5/04/2006 03:22:00 PM

For the first seven months of the 2006 fiscal year (starts Oct 1st), the National Debt has increased $423 Billion. The previous nominal record was $385 Billion for the first seven months of fiscal 2005.


Click on graph for larger image.

April was a strong revenue month for obvious reasons. As a percent of GDP, the deficit has improved slightly over the last few years.

The annual increase in the debt is running around 4.5% to 5.0% of GDP. This is a classic "structural budget deficit" or "high employment deficit" - something most economists believe should be avoided.

Meanwhile, from Bloomberg: U.S. Budget Deficit Will Be `Well Below' Forecast, Adams Says

"We think that this year's number will actually come in well below the estimate," Tim Adams, undersecretary for international affairs, told reporters today in Hyderabad, India. "Revenues are sufficiently strong. We think the actual number for 2006 will be closer to what we saw last year."

Anyone else experiencing a little déjà vu?

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

Joshua Bolten, July 14, 2005

Same speech. Different year. New record annual increase in the National Debt.