David Olson

FOCUS ISSUE FOR THE WEEK: The best news of the week was continued low interest rates projected by the Fed, higher new home sales, rising pending home sales, falling interest rates, and a slight rise in consumer confidence.  This was offset by slower GDP growth, rising initial claims for unemployment, further declines in average home prices, rising prices for oil and gold, further depreciation of the dollar, and declining mortgage originations.  This suggests continued slow growth in the economy mainly due to the lack of a recovery in housing.  So the big news for the week was the Fed continuing its QE2 policy and more evidence of a decidedly subpar economic recovery.

MORTGAGE MARKET SUMMARY: The Mortgage Bankers Association’s index of loan applications decreased 5.6 percent in the period ended April 22. The group’s gauge of purchases plunged 14 percent, the biggest decline since May, and the refinancing measure fell 0.6 percent.  The prospect of more foreclosures and further declines in home prices may keep potential buyers on the sidelines. Unemployment at 8.8 percent and strict lending requirements mean any recovery in the housing market may take years to unfold.

The DJIA rose to 12,810 for the week, up 2.4% from 12,506 last week.  For the week there were 13 positive trends offset by 16 negative trends.

Positive Trends

• Ben Bernanke, chairman of the Federal Reserve, announced that the bank would complete its $600 billion bond-buying program in June and continue to maintain low interest rates for now.  He believes underlying inflation is subdued.  Commodity prices are currently rising but will head back down.  The impact of the announcement was to send the dollar down vs. the euro and pound.  Gold and silver were up and the ten-year Treasury yields receded.

• New home sales were at a 300,000 annual rate in March up from 270,000 in February, an all-time low.  This was higher than expected but is still a little lower than the sales rate in December and January.  At the current sales pace, there is a seven month inventory.  According to the Wells Fargo chief economist, sales of homes priced under $400,000 are strong across the U.S. but not for homes priced over $400,000.  Also, there is a $50,000 difference in price between the average new house and average existing house which is hurting sales of new homes.  Housing is not responding to the low interest rate strategy of the Fed.  We are experiencing a very slow but steady recovery in the housing market.

• Pending home sales rose 5.1% in March, up from 0.7% in February. This was higher than expected according to the National Association of Realtors.

• The consumer confidence index by the Conference Board rose to 65.4 in April, up from 63.8 in March. It is moving up very slowly.

• The University of Michigan survey of consumer sentiment for April rose to 69.8 from 67.5 in March. But it was below the level in the earlier three months.

• New orders for durable goods increased 2.5% in March up from 0.7% in February.

• The ten-year Treasury yield fell to 3.29% on April 29 from 3.39% the prior week.

• The 30 YFRM from the Freddie Mac survey fell to 4.78% from 4.80% the prior week.

• It is cheaper to buy a home than rent one in 39 of the nation’s 50 largest cities, reported Trulia, a research firm. The ten cities where it is most advantageous to buy than rent are:  Las Vegas, Phoenix, Arlington, TX, Fresno, Miami, FL, Mesa, Jacksonville, Sacramento, Detroit, and Omaha.  The cities where it is most advantageous to rent vs. buy are:  New York, Fort Worth, Kansas City, Memphis, and Los Angeles.

• The national occupancy rate rose for a second consecutive month in March to 93.5% reported Axiometrics of Dallas, Texas.  Effective rents, nationally, increased 1.77% in 1Q11.  Annual effective rents rose 5.02% in March.

• The Department of Energy reported that U.S. gasoline consumption was down 1.6% from a year ago and down 4% from 2000.  But consumption in the rest of the world (especially China and India) is soaring which is causing world oil prices to rise.

• Originations of jumbo loans are likely to rise between now and October 1 when Fannie and Freddie stop making loans over $625,000.

• In March, personal income rose 0.5%, up from 0.4% in February. Personal spending rose 0.6%, compared to 0.9% in February.  PCE core prices rose 0.1%, somewhat slower than 0.2% in February.  These figures were close to expectations.

Negative Trends

• GDP for 1Q11 came in at 1.8% which was as expected by most economists recently.  This was down from 3.1% in 4Q10.    The cause for this slowdown is a rise in energy costs, severe weather, and a wider trade deficit.  Earlier in the quarter, there were expectations of a 3% GDP growth.  The big question is what will happen during the remainder of the year.  Most economists expect the growth rate to return to a 3% pace.  The GDP deflator was 1.9% which is not alarming.  Since the recovery began in mid-2009, the U.S. has grown at an average annual rate of 2.8%.  This is far below the growth rates in developing economies and slow compared to past U.S. recoveries.  It appears that spend-thrift fiscal policy and huge new regulatory costs and mandates are causing this very slow recovery.

• Initial claims for unemployment rose to 429,000 for the week ending April 22. This was up from 404,000 the prior week and considerably higher than during the prior four weeks.  The four-week moving average moved up to a 409,000 level and also was up for the past three weeks in a row.  This signals very slow improvement in the unemployment rate for the near term.  On the positive side, continuing claims for unemployment fell to 3,641,000, down from 3,709,000 the prior week.

• Home prices continued to decline in February for the 8^th consecutive month (using seasonally adjusted numbers) reported Case Shiller. Prices are down 3.3% from a year ago.  Prices fell for 19 of the 20 cities covered in the index.  Only prices in Washington, DC rose.  Ten of the 11 cities that had record lows last month, reported new record lows in February.  Prices in four cities fell below their level in 2000—Atlanta, Cleveland, Las Vegas, and Detroit.  Whereas, prices in Washington DC are currently 80% over their level in 2000.  The overall index is back to the level it reached in the summer of 2003.  Using the unadjusted number, prices are now down 32.6% from their peak in July 2006.  They are down 31.4% from the peak using the seasonally adjusted numbers.  Prices in February were down 1.1% from January (unadjusted).  Prices only fell 0.2% in February using the seasonally adjusted numbers.  Prices are now almost equal to the recent low reached in April 2009 (using the unadjusted numbers) but still 0.5% above the May 2009 low using the seasonally adjusted numbers.  There is very little, if any, good news about housing,” David Blitzer, chairman of the Case-Shiller index committee at S&P, said in a statement. “The 20-city composite is within a hair’s breadth of a double-dip.”  Since the peak in 2006, average home prices in Dallas are down 9.2% and down 58.1% in Las Vegas.  These are the two extremes among the 20 cities covered by the Case Shiller 20 city index.

• Zillow reported that home prices fell in every metro area for the second straight quarter.  Despite these declines, tight underwriting requirements are keeping sales low.  There is still a high inventory of unsold homes and few buyers believe prices have reached the bottom.

• The Conference Board’s March survey found consumers, driven by highly visible increases in gas and food prices, expect a 6.7% inflation rate in the coming year compared with actual year-over-year inflation of 2.7% in March.  Over the past year wages failed to keep pace with prices, so real incomes declined.  That hit to household budget, combined with falling home prices, is putting downward pressure on consumer spending and economic growth.

• Spreading unrest in the Middle East is keeping crude oil prices high.  The price on Nynex closed last Thursday (April 21) at $112.29 and has been over $110 a barrel throughout April.  Regular gasoline across the U.S. averaged $3.85 a gallon on Thursday, about 35% higher than a year earlier according to AAA.  Gasoline prices have more than doubled since Obama took office.  Experts think there is nothing he could do to bring prices down very quickly.  The upside risk is greater than the likelihood of a decline. By April 29, the price of oil was $113.70 on Nynex.  Deutsche Bank is forecasting oil prices to rise to $123 to $128/barrel this year.

• Gold prices rose to a new record on April 29 of $1,561/oz. This was up from $1,508 on April 21.

• The Chinese currency has been appreciating lately.  As of 4-25-11, $1 was worth 6.53 renminbi, down from 6.83 a year ago.  As China lets its currency rise, the less it needs to buy dollars to offset yuan strength.  Other Asian countries that compete with China for exports may also allow their currencies to strengthen against the dollar.  But this should help reduce the U.S. trade deficit.  Exports have been a main contributor to the U.S. growth rate.

• The Euro rose to $1.4809 on April 29, up from $14555 on April 22.  This decline in the dollar stemmed from Bernanke’s statement on April 27 that he is unsure when the economic stimulus policy will end.  Back in mid-February the cost of the euro was $1.35 so the dollar has fallen almost 10% in the past 2 ½ months.  Wells Fargo currency traders think the dollar will continue to decline until the end of June when QE2 comes to an end and the Fed starts tightening again. So far in 2011, the dollar has fallen 8% relative to a basket of currencies.

• Residential mortgage purchase application activity decreased sharply for the week ending April 22 as higher FHA premiums went into effect, the Mortgage Bankers Association reported.  Overall, the Market Composite Index fell by 5.6% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased by 5.6% compared with the previous week. The hit came from purchase applications. The seasonally adjusted Purchase Index fell by 13.6% to its lowest level since February 25, driven by a 26.6% decrease in government purchase applications. The unadjusted Purchase Index decreased by 12.8 percent compared to the previous week and was 28.8 percent lower than the same week one year ago. The four-week moving average fell by 0.8 percent.

• For the first quarter 2011, residential mortgage originations of the top four banks fell 33% from the prior quarter. But compared to 1Q10, originations were up for Wells, Chase, Citi but not BofA.

• The latest New York Times/CBS poll shows that 70% of Americans believe the U.S. is heading in the wrong direction and 57% of Americans believe Obama is to blame for the bad economy.  Also, 75% of Democratic insiders believe Obama’s popularity will be hurt by rising oil prices.  Now that gasoline prices are rising above $4/gallon, if this trend continues, this alone may hurt the reelection of Obama in 2012.

• Flagstar lost $32 million in 1Q11 which was less than the $82 million they lost a year earlier.  The losses stemmed in part from lower margins, lower originations, and lower interest rate lock commitments than they earned in 4Q10.

• Three large home builders reported weak earnings in 1Q11—Pulte, Meritage, and Ryland.  This suggests a double-dip downturn in housing.  In 1Q11, Pulte lost $40 million vs. $12 million a year ago, Meritage lost $6.7 million vs. 2.7 million a year ago, and Ryland lost $19.5 million vs. $14.3 million a year earlier.  DR Horton’s profit rose to $27.8 million from $11.4 million a year ago due to a tax benefit of $59.2 million.  Its revenue fell 18%.

• Industrial production in Japan fell 15.3% in March, the biggest decline on record due to the earthquake and tsunami.  In April, a production recover of only 3.9% is expected.  This suggests negative GDP in the first half of the year.

• The Chicago PMI (purchasing managers index) fell to 67.6 in April, down from 70.6 in March. This suggests a decline in manufacturing in April when the index for the nation is published.

CONCLUSION: Japan, Europe, and the U.S. are struggling economically with only the BRIC nations (Brazil, Russia, India, China) doing well.  Growth in world GDP is continuing to be weak.  The housing industry is having a very slow recovery.

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.