David Olson

FOCUS ISSUE FOR THE WEEK: This was the week of the triple whammy—the biggest earthquake and tsunami in Japanese history which shut down several of their atomic energy plants, continued strife in the Middle East which sent oil prices up, and continued debt problems in Europe.  These negatives caused industrial production and consumer sentiment to fall.  The main positive trends were a further decline in initial claims for unemployment and a decline in interest rates.

MORTGAGE MARKET SUMMARY: Housing starts fell to their lowest level since April 2009 and inflation increased.  But the unexpected decline in interest rates including mortgage rates will likely cause refinances to rise in the coming weeks.  For the week there were 10 positive trends offset by 14 negative trends.  The Dow Jones Industrial Average retreated from 12,044 last week to 11,858.  It was down 4.30% from its most recent peak of 12,391 on February 18.

Positive Trends

• Initial claims for the unemployed fell to 385,000 during the week ending March 12, down from 401,000 the prior week.  Continuing claims for the week ending March 5 fell to 3,706,000 from 3,786,000 the prior week.

• The ten year Treasury yield fell to 3.27% on March 18, down from 3.40% the prior week and a peak of 3.77% in February 9, but still far above the 2.38% it reached on October 7, 2010.  This suggests that world events are scaring funds back to the U.S. and there is growing pessimism about the economy as investors sell stocks and buy more bonds.  The European Union said on March 16 there might be a nuclear catastrophe in Japan.  Stock prices around the world also fell.

• The 30 year FRM yield also retreated to 4.76% on March 17 down from 4.88% the prior week according to the Freddie Mac survey.

• The Philadelphia Fed’s Business Outlook index rose to 43.4 in March, up from 35.9 in February.  This index represents national manufacturing and is a precursor of the more inclusive NAPM index which comes out later.  This shows continuing growth in manufacturing.

• The Empire Manufacturing Index rose from 15.4 in February to 17.5 in March. This shows improvement in manufacturing in the east coast.

• The National Association of Home Builders index rose from 16 in February to 17 in March which is a very slight improvement but still shows a very weak prognosis for home building.  The number 50 represents a neutral forecast for housing.

• Leading indicators produced by the Conference Board rose 0.8% in February up from 0.1% in January showing upward momentum in the economy.

• The Federal Reserve’s Open Market Committee voted to keep their policy unchanged this week. The target rate for overnight funds remains 0.25%.  According to Chairman Ben Bernanke, “The economy is now on firmer footing while the labor market is improving gradually and household spending and business investment are expanding.”  But the economy is still not meeting its dual mandate of low unemployment and low inflation.

• David Stevens, currently serving as head of FHA, has accepted a position at chief of the Mortgage Bankers Association starting in May replacing John Courson.  Stevens was formerly employed at Wells Fargo Mortgage and Freddie Mac.  One of the biggest issues facing the mortgage industry is the future of Freddie Mac and Fannie Mae which Congress is planning to wind down.

• Spencer Bachus, Chairman of the House Financial Services Committee, said on March 16 he plans to introduce a bill to replace the single chairman of the Consumer Financial Protection Bureau with a five-member commission of representatives from both parties.  He views the CFPB as the most powerful agency ever created and therefore requires a balanced committee to head it.

Negative Trends

• Greg Ip, a writer for the Economist Magazine, said the world economy is now suffering from a triple whammy with the shutdown of much of the Japanese economy from the earthquake and tsunami, the protests in the Middle East, and the continuing European debt crisis.  If these three crises continue over one month, world GDP could be depressed.  More likely however, there would just be a slowdown in the world economy since world GDP has strong momentum.

• The sharp increase in the price of oil to over $100/barrel caused the University of Michigan consumer sentiment survey to fall almost 10 points last week to the lowest level in five months.  The shutdown of several nuclear power plants in Japan caused natural gas prices to increase.  So far the Japanese recent series of earthquakes haven’t caused world oil prices to surge further upward, although oil ended the week at $101.62/barrel..

• According to a poll of a group of economists conducted by the Wall Street Journal in early March, the unemployment rate in November 2012 will be 7.7%. This will be the highest rate at a Presidential election since the Carter-Ford contest in 1984.  The poll projects GDP to grow 3.4% this year.

• Congressional Republicans this week plan to introduction legislation that will reduce the role of Fannie Mae and Freddie Mac.  The bill will wind down the GSE’s combined $1.5 trillion mortgage portfolio.  Already this portfolio is set to decline by 10% annually.  Other plans would eliminate the GSE’s federal affordable housing goals and gradually raise the guarantee fees that they charge.

• According to Tom Friedman’s recent book, How, Flat, and Crowded, the global economy is facing the following serious impediments to economic growth:  rising ocean levels due to global warming, growing scarcity of many commodities, especially oil, growing population density, and loss of many species of animals and plants.  Actions to stem these trends will slow down economic growth.

• Housing starts fell to a 479,000 annual rate in February, down from a revised 618,000 level in January.  This is the lowest level of new starts since April 2009.  But this preliminary figure will likely be revised up about 20,000 next month and therefore be in line with the level attained over the prior several months.  Housing permits were stronger than starts.  The housing market is probably at a trough right now and should be picking up through the rest of the year.

• The PPI rose to a 1.6% annual rate in February, up from 0.8% in January.  This was much higher than expected and was the biggest one month increase since June 2009.  However, the core PPI rose only 0.2%.  All the increase was in energy and food.

• The MBA mortgage application index for the week ending March 11 fell 0.7%, down from an increase of 15.5% the prior week.

• Prices of imports rose 1.4% in February and rose 6.9% since February 2010. Much of the increase was driven by higher energy and commodity prices.

• Americans’ equity in their homes slipped in 2010 to $6.3 trillion down from $6.7 trillion in 2009.  That brought their share of equity in real estate to 38.5% last year, down from 39.5% the prior year.  Back in 2005 at the cyclical peak, their share of equity was 59.7% before the big decline in home prices.

• Elizabeth Warren, a special adviser to the Secretary of the Treasury in charge of setting up the Consumer Protection Agency, has been touring the country to get support for the agency from consumer banks.  The Republican Party would like to weaken this agency.  The House approved a bill last month to cut the new bureau’s funding this year nearly in half.  The bureau is supposed to get its full powers in July and have a Senate-confirmed director by then.  The new director will have jurisdiction over a wide array of firms, including mortgage brokers.  It will police the entire mortgage industry.  It is unlikely that the Senate would approve Warren as director since Republicans strongly oppose her.

• The CPI rose 0.5% in February, up from 0.4% in January.  It rose 2.1% from a year ago which is slightly higher than the Federal Reserve Bank’s target of 2%.  The core CPI remained unchanged at 0.2%.  Higher prices for energy and food drove the increase.

• Industrial production fell 0.1% in February, down from a revised 0.3% increase in January.  Capacity utilization fell to 76.3% in February, down from a revised 76.4% in January.  Both of these indicators are likely to be revised upward next month so shouldn’t be taken too seriously.  There were upward revisions of both indicators this past month.

• The major result of the Japanese catastrophe is a hold on the further development of atomic power worldwide which was to be the main path to green energy and the best way to reduce demand for oil.  So indirectly, the Japan situation will cause oil prices to rise in the future.

CONCLUSION: This was a bad week for the world economy, especially with the continued high price for oil caused by political turmoil in the Middle East and the Japanese earthquake.  This means slower growth in GDP than expected earlier.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.