David Olson

FOCUS ISSUE FOR THE WEEK: In his first State of the Union message, President Obama vowed to continue to press for his comprehensive health care bill, provide jobs for the unemployed, and get a bank reform bill. He called for tax cuts for small businesses and a spending freeze. It is up to Congress to pass such legislation. Despite general approval on the part of voters for his speech, it looks like it will accomplish little to end the gridlock that pervades Congress. Support for the Democratic agenda has fallen too far and Republicans see the opportunity to regain seats in the November election by opposing his initiatives. The Administration has launched a road show to gain support for their agenda.

The DJIA fell 1% from 10,173 last week to 10,067. The stock market has essentially been flat for the past three months. There were 15 positive trends this week offset by 6 negative trends.

Positive Trends

• The U.S. economy (GDP) grew at a 5.7% annualized rate in 4Q09. This is up from 2.2% in 3Q09. Most of the increase in GDP came from rebuilding inventories. Growth in personal consumption expenditures and residential investment both slowed down and portend slow growth in GDP in 2010. Without the increase in inventory, GDP would have grown 2.3%. U.S. labor costs rose 1.9% in 2009, the lowest rate since 1982.

• The Chicago PMI (purchasing manager’s index) increased to 61.5 in January up from 58.7 in December. Any number over 50 means growth in this diffusion index.

• The University of Michigan consumer sentiment index grew to 74.4 in January, up from 72.8 in December.

• The confidence indicator of the Conference Board rose to 55.9 in January, up from 53.6. This was more than expected.

• According to Case-Shiller, in November, their seasonally adjusted home price index rose 0.2% after rising 0.3% in October. Their index has risen steadily for the past six months since May 2009 for a total of 3.4%. Their seasonally adjusted index peaked in May 2006 and by November 2009 was down 29.5%. From peak to trough (in May 2009) it was down 31.8%. The average prices have continued to decline from May to November 2009 in only three cities of the 20 covered by this seasonally adjusted index—Tampa, Charlotte, and Las Vegas.

• The FHFA seasonally adjusted home price index rose 0.7% in November after rising 0.4% in October. This index only reflects prices of homes financed by Fannie Mae and Freddie Mac. It excludes refinances, jumbos, subprime, FHA/VA loans, and foreclosures. This index is down 10% from its peak reached in April 2007.

• MGIC Investment Corp., the largest U.S. mortgage insurer, rose 11 percent after the number of clients alerting the company to potential claims fell and the fourth-quarter loss was less than analysts’ estimates. The stock prices of other mortgage insurance companies also rose on the news.

• TIPS (Treasury inflation-protected securities) are priced on January 26 for the consumer-price index to rise just 1.8% a year until 2015. The 10-year TIPS are priced for inflation to run at a 2.3% annual rate.

• The Census Bureau announced that new home sales in December were at a 342k annual rate, down from 370k in November. This measure had been as high as 1,283k in 2005 but averaged around 960k during the period 2000-2008.

• Initial claims for unemployment for the week ending January 23 fell to 470k, down from 478k the prior week. This rate was higher than expected. The 4 week moving average is up the past two weeks. Continuing claims for unemployment have continued to drop. This shows slow improvement in the economy.

• Durable goods orders rose 0.3% in December after declining that prior two months. The worst of the downturn is over and there is a small improvement.

• Ben Bernanki was reappointed to the Federal Reserve by the Senate, 70 to 30. The opponents were from both parties.

• The 30 YFR mortgage measured by the Freddie Mac survey fell from 4.99% last week to 4.98% this week. The 10 year Treasury fell from 3.60% last week to 3.58% this week.

• The U.S. dollar is strengthening against the Euro due to high deficits hurting the bond markets in Greece and Spain, especially. In December, the exchange rate peaked at $1.50/Euro and is now down to $1.39. In January 2009 it was $1.30. As the dollar strengthens there is less pressure for interest rates to rise.

• Credit Suisse recently reported huge disparities in performance by Ginnie Mae issuers—from 23% of the loans seriously delinquent by a bank recently shut down by FDIC to less than 1% at Wells Fargo. Wells also showed the lowest net charge-offs on their loan portfolio in fourth quarter among the major banks at 2.71%.

Negative Trends

• Richard Fairbank, CEO of Capital One says “there is a striking lack of demand for credit” right now so increased spending on marketing won’t produce over all loan growth this year. Far fewer people have equity in their homes that they can borrow against if other loans become hard to pay.

• Existing home sales fell to a 5.45m annual rate in December, down from 6.54m rate in November. This is far lower than expected. This reflects the huge dependence the market had on the tax credit offered first time homebuyers. Since the tax credit has been reinstated, sales should jump again until June 30 but then collapse in July as the credit is removed. The 17% decline in December sales was the biggest one month decline ever recorded by the NAR which publishes the data. Although the number of homes for sale declined from November, sales fell even more causing the December inventory to rise to 7.2 months of supply vs. 6.5 months in November. The share of homes sold to first time homebuyers fell to 43% in December from 51% in November.

• RealtyTrac forecasts that 3 million homes will be repossessed in 2010, up from 2.82 million in 2009.

• According to CoreLogic, home prices nationwide fell 0.2% in November 2009 from October. Including distressed transactions, their housing price index has fallen 30.0 percent nationally through November from its peak in April 2006. Excluding distressed properties, the national HPI has fallen 21.8 percent from the same peak. Note that the 30% decline from the peak is virtually identical to the non-seasonally adjusted estimate by Case-Shiller. CoreLogic expects their index to reach bottom in the spring. CoreLogic doesn’t use seasonal adjustments.

• The Congressional Budget Office predicts a $1.35 trillion federal deficit in the current year, down from $1.4 trillion in 2009. The government will run an aggregate deficit of about $6 trillion in the next decade. According to CBO director Elmendorf, “With such a large increase in debt interest payments on the debt are poised to skyrocket.”

• The Federal Reserve announced it will keep the Fed Funds rate near zero and restated its intention to cease buying mortgage-backed securities after March 31. This will cause mortgage rates to rise in April. Investors say they need a 50 bp increase in spread on MBS yields over Treasuries to entice them to buy. That suggests the 30 YFR mortgage will rise to 5.5% by mid-year. Currently the interest rate on a 30 YFR mortgage is around 5%. Credit Suisse predicts at yearend it will be 5.1% to 5.25%. Mark Zandi predicts 5.75%. However, financial problems in Greece and Spain are causing funds to stream into the U.S. bond market and are keeping Treasury rates low.

Future meetings run by Access Mortgage Research:
17th Benchmark Study Meeting for the Wholesale Channel – in Phoenix, April 2010.
17th Benchmark Study Meeting for the Retail and Consumer Direct Channel – May 2010
Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmtgresearch.com or phone 410-772-1161.