Weekly Mortgage Market Update

Mortgage Bankers Association for the week of October 28, 2009

Market Composite Index: (loan application volume) decreased 12.3 percent on a seasonally adjusted basis from one week earlier

Refinance Index: decreased 16.2 percent from the previous week

Purchase Index: decreased 5.2 percent from one week earlier.

Refinance Share of Mortgage Activity: decreased to 62.3 percent of total applications from 65.0 percent the previous week.

ARM Refinance Activity: increased to 6.9 percent from 6.4 percent of total applications from the previous week.

MBA outlook: (Excerpted from mbaa.org)

New home sales increased in August, for the fifth consecutive monthly increase. The first-time homebuyer tax credit likely helped boost sales since a larger share of home sales tended to be concentrated in lower-priced homes. New home sales have been up about 30 percent since reaching a record low in January. Total existing home sales fell slightly for August but were still about 13 percent higher than their record low in January despite the decrease.

For existing homes, the number of homes available for sale has declined about 16 percent from a year ago. The months’ supply decreased to 8.5 in August from 9.4 months in July, which makes this the lowest level since April 2007 and a significant decrease from the 11.3 months observed in April 2008. However, rising foreclosures continue to add to inventories, and many owners and investors who, after holding these properties off the market for the past year, may start listing their properties if the market begins to recover

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The official figures indicate recession has ended

From the Commerce Department

The US economy grew at an annual pace of 3.5% between July and September,its first expansion in more than a year, helped by a substantial government spending. Durable manufactured products soared at an annualized rate of 22.3%, led primarily by the cash for clunkers scheme lifting car sales.

The housing market also improved, with spending on housing products up 23.4%, its largest quarterly jump in 23 years. Thanks to the home buyers tax credit.The trickle down effect of a new home often means new appliances, lumber and roofing as new owners upgrade. Work. The whole downstream home industry was given a boost.

Your Economy On Steroids
The big picture is great, but is it sustainable.

The massive stimulus of the past year was enough to lift the US economy up and into the sunlight.The Obama Administration is pulling back from the enormous stimulus of the past year. This recovery has been propped and it was a job well done.... now the economy has to find its own footing.

1. Credit Markets: The mortgage purchase program is almost over and the Fed is phasing out its purchase plan. To what extent the banks and other lenders are willing and able to buy and sell credit remains to be seen.
2. Commercial Property: Banks are still facing increasing residential foreclosures and now commercial property failures. Office buildings as well as shopping malls and many apartment buildings that were bought in the last five years, will be looking to refinance. High vacancy rates, renegotiated rents and evaporated equity make these prospects look bleak as they step up to lenders, hat in hand. Many properties are now underwater and the banks are not likely to want more bad paper.
3. Manufacturing: The big car firms have already reported a sharp fall in September sales following the conclusion of the popular $3bn cash for clunkers scheme at the end of August and helped by a cheap dollar.
4. Home Buyers Tax Credit: Congress is considering extending the program due to expire Nov 1. Without it, I think we will see more price drops and fewer sales. Happily, the Mortgage Bankers Association feels sure it will be extended and perhaps increased to $15,000.

The conclusion is that we still have strong headwinds and that any recovery will be a feeble at first. The case for another leg down, or a W recession, looks weaker now. The challenge looking foreward is to get organic growth. If we dont pull back to too fast and the Govt remains vigilant and ready to re-stimulate if necessary, we will emerge lean and ready to forever forgo that bloated debt driven demand that got us here in the first place.

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Tracking The Bond Markets for Direction

Bill Gross, who runs the Pimco Bond Fund is considered one of the gurus of the bond markets. Investors know this and so the Pimco Bond Fund is huge. If Pimco buys or sells bonds or mortgage backed securities, it can move the market.

Recently, Gross sold off 30 billion dollars of mortgage backed securities. He notes that mortgage backed securities have been increasing in value (good to hear) and he thinks that now is the time to take profit. *Chart: The Fed has now purchased about $945 billion in agency-backed MBS through the week ended October 14.

Federal Reserve's Mortgage Purchase Program

The secondary mortgage markets have been frozen and thats a big reason why there has been little money available for home loans. To keep the markets moving the Obama Administration has been buying up mortgages to keep the markets liquid.

The Fed started buying agency-backed mortgages in January in to bring down mortgage rates. Since then, it has bought the majority of agency MBS on the market. Recently the Fed has decided to wind down the mortgage purchase programs.Once the Fed stops buying mortgages, the fall in demand will lead to a drop in MBS prices.

Why Do We Care
Expect interest and mortgage rates to rise.

Too much supply and not enough demand means prices go down, and yields had to go up to attract investors. Basically, this is a test to see if the banks and the marketplace have reached a point where they can begin to function without Govt stimulus. Lets hope the Fed stays close to the exits.

The Home Buyers tax credit is due to expire. Congress is considering extending and possibly expanding this program. Its been a help by soaking up supply..

Home resales in September showed the largest monthly increase in 26 years as buyers bought before the tax credit for first-time owners expires. Sales jumped 9.4%, according to NAR.

The FHAA index measures repeat sales on homes financed through Fannie Mae or Freddie Mac. Although Prices were down 3.6% in the past year, and were down 10.7% from the peak, they rose in four of nine regions, fell in four and were flat in the other

Momentum

If we can offset the higher rates which are likely to tamp down sales with a $15,000 home buyers tax credit, we may be able to keep homes moving. At 20% of the economy, its crucial that the real estate markets remain on a positive track.

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Are the Stock Markets Telling Us Something

The Housing Market and a W Shaped Recession

Another green shoot. Home prices reported by the Case-Shiller home price indexes, rose in July in 18 of the 20 metropolitan areas covered. Its been reporting declines for 16 consecutive months. The good news is that the pace of declines continues to slow. Their ten-city index peaked in 2006 and has declined 33.5% similarly, 20-city MSA has declined 32.5%.

Confirming Trends
These are stock market investments based on the Case Schiller index. I checked how they were doing and they do confirm investors general opinion of a recovering real estate market Note how the Up (UMM) shares are doing well. These market tools are investments in their own right, but they are also trend confirming tools. Since their inception in June, UMM has is up 35%, while DMM is down nearly 25%, reflecting investor expectations for the housing in the near future, that home prices will continue to rise as we begin to work our way out of this great recession Looking at the Dow REIT index, you see similar strong moves to the upside. Markets often get ahead of themselves, but they are expressing a strong confirmation that people are beginning to look past the bust and are betting on the future.

Recovery Alphabet
V shaped Recovery: A strong downtrend followed by a strong up snap back. Historically, the deeper the recession the stronger the recovery.
L Shaped Recovery: Most economists think that this recovery will be more like an L shaped recovery. A strong downtrend followed by a flat line - patient on life support.
U shaped recovery: A soft landing.
W shaped recovery: A downtrend followed by what looks like a recovery, only to go back into decline either because Govt stimulus was pulled too soon or because there is more bad news in the pipeline before the final uptrend.

Too Early?
Yes. The markets enthusiasm is emotional, we raised the flag because we avoided a great depression, and we are clearly on the upswing. But the banks are in no position to finance a strong recovery. And the consumer (70% of our economy) is in no shape to come to the rescue either. In 2001, it was 18 months before we saw positive job growth and that means more foreclosures and more office vacancies.

Office buildings and shopping centers are coming up for refi between now and 2012. The banks are looking at more loans, perhaps a trillion dollars, that are underwater and may never fully recover. In the residential markets the option ARMs or liar loans will reset at the same time.

My own take...we are in the early stages of an L shaped recovery. But the housing sector recovery will depend on the continuation of stimulus packages. If the tax credit is not extended and the mortgage purchase program is pulled too soon we may find ourselves taking another leg down. This economy is very much in the hands of policy makers. Bernanke was a student of the great depression and has noted that Federal programs were pulled too soon and bad policy exacerbated what might have been a bad recession into a unmitigated disaster. We need to internalize that lesson. On a positive note, the Economist made the observation that the one thing America does brilliantly...it fixes itself

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The report, released last week is another green shoot pushing upwards. Home prices in the U.S., as measured by the S&P Case-Shiller home price indexes, rose in July over the previous month, as 18 of the 20 metropolitan areas comprising the benchmark saw saw a boost to real estate values. For the 16th consecutive month, every region saw year-over-year declines, but the pace of those declines continues to decelerate, according to the Wall Street Journal. The ten-city index is down 33.5% from its mid-2006 high, while the 20-city index has declined 32.6%.

UMM and DMM
Confirming the stats market shares built to be reflective of moves in home prices acted as they should. These market tools are investments in their own right, but they are also trend confirming tools. MacroShares Major Metro Housing Up Trust (UMM) and Major Metro Housing Down Trust (DMM). In relatively heavy trading Tuesday morning, UMM had gained more than 3%, while DMM was down by about the same amount.

Since their inception in June of this year, UMM has jumped by nearly 35%, while DMM is down nearly 25%. Recently, DMM was trading at a discount to its net asset value of about 17%, while UMM was trading at a 24% premium. While such large spreads would be alarming for most exchange-traded products, in this case it simply reflects investor expectations for the U.S. housing market (specifically, that home prices will continue to rise over the next five years).

If you look at the price action of the UMM vs the DMM, you can see investor perception that homes will continue to rise. Looking at the Dow REIT index, you see similar strong moves to the upside. Personally, I think the markets are ahead of themselves but they are a strong confirmation that people are beginning to look past the bust and are betting on the future.

Early?

Yes. We have the commercial recasts and the option ARMs to get through. The markets enthusiasm is emotional, we raised the flag because we avoided a great depression, but now thee is more reality to face. The good news, The Economist made an observation I loved. American is brilliant at fixing itself.

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Extend the Home Buyers Tax Credit

The tax credit has been a significant boost to sales. NAR reports that sales have jump to 5.1 million from about 4.5 million annualized home sold in the past few months prior to the stimulus. New home sales are also up from mid 300,000 to 400,000.

The median existing home price as of August was down 12.5% compared to nearly 20% fall early in the year. Unfortunately the housing stimulus package is set to expire. *A settlement, and not the contract signing to buy, must occur by the end of November.

Consider that it was Bernanke that said one of the causes of the great depression was stimulus and Government supports being pulled too soon. We still have too big problems first bginning to show. First the Option ARMs. These are mortgages taken during boom times and designed to allow people to pay interest only or principal only monthly payments. These mortgages will reset to market rates between now and 2012. They can double the monthly payment and more foreclosures are expected to come from this area, expected to be at least as large as the sub prime market that imploded. Second, many shopping centers and high rise office space is also being recast between now and 2012. Same problem, evaporated equity made worse by declining rental income. When we loss jobs companys either shrink expenses or simply go out of business.

Realtytrac reports that foreclosure filings totaled nearly 938,000 in the third quarter, up 23% from the year-earlier quarter and up 5% from the second quarter. 1 in every 136 U.S. housing units received a foreclosure filing during the quarter. California accounted for more than a quarter of the country's foreclosure filings in the quarter, up 19% from the year-earlier quarter. Some commercial indexes are off 50% and the banks are not really in a position to refinance these properties.

Extend the Home Buyers Tax Credit
It Worked

NAR thinks the cost is about $10 billion if it was extended trough the middle of next year. This would coincide with the expected recovery of housing prices and help put a solid floor under that projection. 10 Billion isnt much when you think about the amount of money thrown at the banks and insurance companies. NAR rightfully points out that this doesnt include the job growth or taxes collected from rising sales spurring more economic activity.

NAR expects that the total picture is a revenue positive income source for the federal and local governments. I dont argue the need for the TARP to float the financial system, but I would like to see a little come our way too.

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Weekly Mortgage Market Update

Mortgage Bankers Association for the week of October 14, 2009

Market Composite Index: (loan application volume) decreased 0.1 percent from the previous week

Refinance Index: increased to 67.4 percent of total applications from 66.3 percent the previous week.

Conventional Purchase Index: Increased 13.2 percent from one week earlier, which puts the index at its highest level since January

Refinance Share of Mortgage Activity: Increased to 66.3 percent of total applications from 65.3 percent the previous week.

ARM Refinance Activity: increased to 6.2 percent from 6.1 percent of total applications from the previous week.
MBA outlook: (Excerpted from mbaa.org)

The MBA expects Purchase originations to rise gradually as home sales pick up and prices stabilize before beginning to appreciate in 2011 and later.

Refinance originations will also increase because of the downward trend in mortgage rates and the success of Home Affordable Refinance Program (HARP). Refinances will taper off as we enter 2010 as mortgage rates start to rise.

Median home prices for new and existing homes are expected to continue their decline this year, falling about eight percent and 13.0 percent, respectively. Prices should stabilize by mid-2010 and post a slight increase for all of 2010

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Freddie Mac Weekly Update

30-year fixed-rate mortgage: Averaged 4.87 percent with an average 0.7 point for the week ending October 8, 2009, down from last week when it averaged 4.94 percent. Last year at this time, the 30-year FRM averaged 5.94 percent. The last time the 30-year FRM was lower was the week ending May 21, 2009, when it averaged 4.82 percent.

The 15-year fixed-rate mortgage: Averaged 4.33 percent with an average 0.7 point , down from last week when it averaged 4.36 percent. A year ago at this time, the 15-year FRM averaged 5.63 percent. This is the lowest the 15-year FRM has been since Freddie Mac started tracking it in 1991.

Five-year indexed hybrid adjustable-rate mortgages ARMs: Averaged 4.35 percent this week, with an average 0.5 point, down from last week when it averaged 4.42 percent . A year ago, the 5-year ARM averaged 5.90 percent. The 5-year ARM has not been lower since Freddie Mac started tracking it in 2005.

One-year Treasury-indexed ARMs: Averaged 4.53 percent this week with an average 0.5 point, up from last week when it averaged 4.49 percent. At this time last year, the 1-year ARM averaged 5.15 percent.

Freddie Sayz

Long-term mortgage rates eased further this week, said Frank Nothaft, Freddie Mac vice president and chief economist. Interest rates for 30-year fixed-rate loans were the lowest since mid-May; 15-year FRMs were at a record low since data were first collected in 1991 and 5-year ARMs also hit an all-time record starting in 2005. Compared to a year ago, consumers could shave almost $134 off their monthly mortgage payments on a 30-year fixed-rate loan for $200,000 by refinancing.

Such low rates are spurring mortgage demand. Mortgage applications surged to a 19-week high over the week ending on October 2nd, according to the Mortgage Bankers Association. Moreover, applications for home purchases were at the strongest pace since the beginning of this year.

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Weekly Mortgage Market Update; Mortgage Bankers Association for the week of October 7, 2009

Market Composite Index: (loan application volume) increased 16.4 percent on a seasonally adjusted basis from one week earlier.

Refinance Index: Increased 18.2 percent from the previous week, following the third consecutive week where the 30-year fixed mortgage rate was below 5 percent, and is at its highest level since mid-May.

Conventional Purchase Index: Increased 13.2 percent from one week earlier, which puts the index at its highest level since January

Refinance Share of Mortgage Activity: Increased to 66.3 percent of total applications from 65.3 percent the previous week.

ARM Refinance Activity: Decreased to 6.1 percent from 6.2 percent of total applications from the previous week.

MBA outlook: (Excerpted from mbaa.org) Third quarter real gross domestic product (GDP) is now expected to increase to almost 3.0 percent annually, with inventory investment and residential construction playing critical roles. Together, these two sectors contributed -2.0 percentage points to the annual rate of change of real GDP in the second quarter. In the third quarter, their contribution will probably add about 1-1/2 percentage points, thus accounting for the bulk of the expected turnaround in economic growth from the second to the third quarters.

The MBA outlook indicates the economy will likely shed jobs for the coming months even as real gross domestic product (GDP) may have started growing in the third quarter, implying another surge in productivity growth during the quarter. The near-term prospects for solid growth in consumer spending, therefore, are not bright, and that constitutes the major downside risk to this month’s forecast.

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Freddie Mac Weekly Mortgage Rate Commentary: Mortgage Rates Low, Increasing Affordability

30-year fixed-rate mortgage: Aaveraged 4.94 percent with an average 0.7 point for the week ending October 1, 2009, down from last week when it averaged 5.04 percent. Last year at this time, the 30-year FRM averaged 6.10 percent. The last time the 30-year FRM was below 5 percent was the week ending May 28, 2009, when it averaged 4.91 percent.

The 15-year fixed-rate mortgage: Averaged 4.36 percent with an average 0.6 point, down from last week when it averaged 4.46 percent. A year ago at this time, the 15-year FRM averaged 5.78 percent. This is the lowest the 15-year FRM has been since Freddie Mac started tracking it in 1991.

Five-year indexed hybrid adjustable-rate mortgages ARMs: Averaged 4.42 percent this week, with an average 0.6 point, down from last week when it averaged 4.51 percent. A year ago, the 5-year ARM averaged 6.00 percent.

One-year Treasury-indexed ARMs: Averaged 4.49 percent this week with an average 0.5 point, down from last week when it averaged 4.52 percent. At this time last year, the 1-year ARM averaged 5.12 percent.

Freddie Sayz

Low mortgage rates are helping to stabilize home sales, said Frank Nothaft, Freddie Mac vice president and chief economist. New home sales in August rose to the highest annualized pace since September 2008 and the inventory of unsold houses fell to the lowest level since February 1983. Although existing home sales fell somewhat in August, it was still the second strongest showing in 23 months. Furthermore, house prices increased for the second month in a row in July, after adjusting for seasonality, based on the 20-city composite S&P/Case-Shiller Home Price index®. Moreover, the increases were more broad-based in July with house prices rising in 17 of these metropolitan areas, compared to 16 in June

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Weekly Mortgage Market Update; Mortgage Bankers Association for the week of September 23, 2009

Market Composite Index: (loan application volume) decreased 2.8 percent on a seasonally adjusted basis from one week earlier.

Refinance Index: decreased 0.8 percent from the previous week

Conventional Purchase Index: decreased 6.9 percent compared with the previous week and was 10.6 percent lower than the same period one year ago.

Refinance Share of Mortgage Activity: increased to 65.3 percent of total applications from 63.8 percent the previous week.
decreased to 6.2 percent from 6.7 percent of total applications from the previous week.

ARM Refinance Activity: increased to 6.7 percent from 6.0 percent of total applications from the previous week.

MBA outlook: Payroll losses trimmed to 216,000 jobs lost. Thats the smallest drop since August of 2008. Unfortunately the unemployment rate has increased from 9.4 to 9.7%, the highest level of unemployment since 1983, according to the MBA press release. It has just about doubled since the beginning of the recession in 2007.

The MBA outlook indicates the economy will likely shed jobs for the coming months even as real gross domestic product (GDP) may have started growing in the third quarter, implying another surge in productivity growth during the quarter. The unemployment rate is not expected to peak until next year.

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