30 Year Mortgage
The divergence between the NAHB index and other housing indicators has continued to suggest that sentiment was “getting ahead of itself" and as Citi's Tom Fitzpatrick warns would suggest that the qualitative nature of the overall housing recovery is less robust than one would like. Housing should pause/consolidate possibly even for most of this year as the weather argument that is trotted out by so many commentators does not seem to hold up to even a basic examination with the worst data coming from the West Coast. Simply put, Citi warns, we think housing sentiment got carried away as it did into 1994 and 1998 post the housing/savings and loan crisis of 1989-1991.
Reality will reassert itself in 2014, with lemmings, flippers, and hedgies getting slaughtered as the housing market comes back to earth with a thud. The continued tapering by the Fed will remove the marginal dollars used by Wall Street to fund this housing Ponzi. The Wall Street lemmings all follow the same MBA created financial models. They will all attempt to exit the market simultaneously when their models all say sell. If the economy improves, interest rates will rise and kill the housing market. If the economy tanks, the stock market will plunge, creating fear and killing the housing market. Once it becomes clear that prices have begun to fall, the flippers will panic and start dumping, exacerbating the price declines. This scenario never grows old.
The Fed's announcement Wednesday to begin the tapering of its bond buying program (to our surprise) has been followed by a spike in the US 10 year yield; however, Citi's FX Technical group cannot help but feel that we have seen this dynamic play out before.
Who Is Going To Buy The US Debt If This War Causes China, Russia And The Rest Of The World To Turn On Us?Submitted by Tyler Durden on 09/07/2013 15:51 -0400
Yesterday we implied a difficult question when we illustrated the huge size of US Treasury bond holdings that China and Russia have between them - accounting for 25% of all foreign held debt - implicitly funding US standards of living (along with the Federal Reserve). The difficult question is "Can the U.S. really afford to greatly anger the rest of the world when they are the ones that are paying our bills?" What is going to happen if China, Russia and many other large nations stop buying our debt and start rapidly dumping U.S. debt that they already own? If the United States is not very careful, it is going to pay a tremendous economic price for taking military action in Syria.
There are very few segments of the U.S. economy that are more heavily affected by interest rates than the real estate market is. When mortgage rates reached all-time low levels late last year, it fueled a little "mini-bubble" in housing which was greatly celebrated by the mainstream media. Unfortunately, the tide is now turning.
After everything that Barack Obama, the U.S. Congress and the Federal Reserve have tried to do, there has been no real economic recovery and now the U.S. economy is suddenly behaving as if it is 2009 all over again. A whole host of recent surveys indicate that the American people are starting to feel a bit better about the economy, but the underlying economic numbers tell an entirely different story. If we were going to have an "economic recovery", it should have happened in 2010, 2011 and 2012. Now we are rapidly approaching another major economic downturn.
In almost every asset class, volatility has made a phoenix-like return in the last few days/weeks and while equity markets tumbled Friday into month-end, the bigger context is still up, up, and away (and down and down for bonds). From disinflationary signals to emerging market outflows and from fixed income market developments to margin, leverage, and valuations, here is the 'you are here' map for the month ahead.
Is a $400,000 house with NINJA loan normal? How about a $200,000 REO with missing appliances, a dead yard, a long list of maintenance and no financing? Maybe normal is a $300,000 flip after the flipper fixed everything and colored up the yard, and did some upgrades to the interior. Some may suggest that normal is more like a $300,000 sale with a 5.5% fixed rate and 20% down. Then again, it may be more normal if this $300,000 sale is financed with a 3.5% down FHA loan at 4%. Of course, all of the above is actually referring to the same house. So what is normal? At the moment, we know prices are going up in certain markets, and so are sales. Mortgage rates are higher now than when QE3 started in September 2012. Investors are gobbling up everything in sight in their favored target markets. As an example, they are buying 30% of the houses in Southern California, 38% in Phoenix and 53% in Vegas. First time buyers do not stand a chance. The percentage of home ownership is declining. Are policy makers happy with these results? Are these intended or unintended consequences of public policies?
It’s easy to be pessimistic over the future prospects of liberty when major industrialized nations around the world are becoming increasingly rife with market intervention, police aggression, and fallacious economic reasoning. The laissez faire ideal of a society where people should be allowed to flourish without the coercive impositions of the state is all but missing from mainstream debate. In editorial pages and televised roundtable discussions, a government policy of “hands off” is now an unspeakable option. It is presumed that lawmakers must step up to “do something” for the good of the people. Thankfully, this deliberate false choice will slowly but surely bring the death of itself. Illogical theories can only go on for so long before the push-back becomes too much to handle. For those who desire liberty, it’s a joy that the statist economic policies of the Keynesians become even more irrational as the Great Recession drags on. The two following examples will illustrate this point.
While today the association of real estate advertising agents known as the NAR will tell us that the home market is improving - an economic observation which we will completely ignore as any data out of the NAR is now proven to be manipulated and fraudulent, a far better indication of the ongoing implosion in the housing market, and more importantly - the sheer powerlessness of the Fed to do anything about it - came out of the latest weekly Mortgage Brokers Association, which showed that refi applications were down 4.8% W/W, while purchases slid 2.9%, after collapsing 8.4% in the past week. This has taken the Purchase Application index back to the September lows, which just happens to be the lowest print in 16 years. And while this in itself would be ok if not exactly good, it took place at a time when the 30 year mortgage rate was down to all time record lows! In other words, Bernanke's sole prescription to fix the broken housing market diagnosis - low mortgage rates, has now been proven to be a complete disaster, even as Obama does everything in his power to get debt repudiation for deadbeats (at the expense of everyone else of course) and fails. So: what's the next plan?
A few days ago we presented an analysis by ConvergEx showing that due to the very close historical correlation between home prices and employment, it is the Fed's view that the only way to stimulate employment (aside from such BLS shennanigans as pretending that despite the natural growth of the labor force by 90k a month to keep up with population, those willing to work are in fact declining) is to raise home prices. Raising home prices be definition means either reducing supply - an event which is proving impossible with shadow inventory in the millions and rising, even as thousands of new delinquent mortgages appear each day while homebuilders keep on chugging out new homes that remain vacant for years, or increasing demand. It is the latter that the Fed targets, by attempting to make mortgage rates ever cheaper via LSAP, Operation Twist or other Treasury curve interventions that attempt to push down long-dated yields ever lower. This works in theory. In practice, however, as the chart below demonstrates, the Fed's entire ZIRP-targeting policy over the past several years has been one abysmal failure (for everyone expect those with immediate access to the Fed's zero interest rate capital - i.e., the Primary Dealers). As proof of this we present the following chart, which maps the SAAR in New Home Sales against the 30 Year Fannie Cash Mortgage. What appears very clearly on this chart is that despite ever declining mortgage rates, there is simply no interest in home turnover, and sales are at record low levels due to lack of demand, and lack of desire to sell into a bidless market, in essence causing the entire housing market to halt.
MBS Monetization Expectations Good For Massive 0.04% Plunge In Mortgage Spread, Sure To Unleash Refi Tsunami... Or NotSubmitted by Tyler Durden on 10/21/2011 10:07 -0400
Anyone who actually read Daniel Tarullo's speech yesterday setting the stage for a new round of MBS monetization would be forgiven to expect a major drop in mortgage rates. After all the Fed board member said, "by increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates." There is no way he can be wrong, after all he is a Fed member (although no Ph.D., instead he has an uber-valuable J.D.). And there is no way the market can not be pricing in what is now obvious. So how does the 10 Year UST- 30 Year mortgage spread look like this morning post the "pricing in" - well it is tighter. By a whopping 0.04%! Surely this epic move in spreads will be the catalyst that unleashes hundreds of billions in refinancing activity and pushes the value of the US mortgage market higher by trillions of dollars. Or not. As the second chart below demonstrates, Operation Twist, whose purpose incidentally was just what Tarullo is suggesting less than 2 months after QE3 Lite came on the scene, has now been a total disaster. As the Mortgage Brokers' Association reported on Wednesday, the MBA mortgage applications index was down 15% in the week ended Oct. 14. This was the year's biggest decline! Worse, the refi index was down a massive 17% in the week! What does this mean? Well, that we have reached a point where prevailing rates on Mortgages have absolutely no impact on either refis or home prices at this point: anyone who could have refied, has already done so, probably many times over. Everyone else is simply not eligible. But yes, MBS monetization will sure help... all those banks that have loaded up on MBS in anticipation of just this (like Bill Gross as we first speculated back on October 11) to sell them right back to the US taxpayer. And, of course, all those who have been wisely stocking up on precious metals in anticipation of just this latest episode of Fed idiocy. Remember: as we have been saying since day 1: the Fed knows only one thing. To Print. And it will. Over and over and over.
Remember when the Chairman did a quick drive by with the much price in Operation Twist, and the market came, saw, and plunged? That was a week ago? Two? Well, as we have been predicting since December 2010, that was merely the appetizer, or as we phrased it the same as last year's July QE Lite to last year's August QE 2. Confirming both our speculation, and the realization that Bernanke knows only how to print more money and nothing else, were his first public remarks since the launch of Op. Twist, at a Cleveland Fed forum last night in which he said that "the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly... Bernanke indicated a willingness to push deeper into the realm of unconventional policy if economic growth remains anemic. ""If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation," Bernanke said. The comment was made in response to a question about a recent decline in market-based inflation expectations, which policymakers see as a good gauge of future inflation trends." And since the key "deflationary" metric that he looks at, as wrong as it may be, is the stock market, looks for stocks to resume trading with schizophrenic abandon, surging ever higher on increasingly bad economic data. Of which we will have a lot.
The real issues of my generation have unfortunately been glossed over. There have been the occasional articles chronicling how lifetime earnings are adversely affected for those who come out of school into a recession, but this downturn has already had a duration above and beyond the norm, and at present doesn’t appear to be ending any time in the near term. Meanwhile, the bills are stacking up, and even those of us who are working from Generation Neutral are starting to be concerned that the debts we signed on for at 18 will live to haunt us well longer than our worst projections. There is beginning to be a certain resigned malaise hanging over us, and as capitalism is a system predicated on growth and a healthy amount of optimism in the future, this is yet another headwind to our economic and even psychological well being...I’ve yet to figure out what will break our apathy, as our misspent optimism still keeps us believing, however fleetingly, that this too shall pass. The day that we collectively realize that better days aren’t coming could well be too late, but the debts amassed during our optimistic youth will still continue to knock on our door. If our generation doesn’t have it better than our parents’, I wonder what the narrative we tell our children will sound like.
Confusion continues to reign supreme over what the French rollover plan does for the various entities. The details and mechanics are a bit sketchy, but I have attached the proposal that I found, and will use that as a basis for the analysis. As I go through the details, and incorporate the latest rating agency comments, the conclusion remains the same – this is a good deal for the Participants, a mediocre deal for the Troika, and punitive to Greece.