Premier Mortgage Group

Mortgage interest rates improved on the week as economic data continued to show signs of a slowing economy.  Economic data of note included the second look at Q1 GDP, which was expected to show annualized growth of 2.1%.  Instead, Q1 GDP grew by just 1.8%.  Weekly jobless claims increased by 10k on expectations that they would fall by 9k.  April Durable Goods Orders fell by 3.6% on expectations that they would fall by 2.0%.  April Pending Home Sales fell by 11.6% on expectations that they would fall by 1.8%.  Pending Home Sales fell by 26.5% from April of 2010.  Also of note, S&P downgraded Italy’s credit outlook to negative and manufacturing activity in China slowed.  The Treasury auctioned $99 billion in 2 Year Notes, 5 Year Notes, and 7 Year Notes this past week and the auctions were met with strong demand.

The Dow Jones Industrial Average is currently at 12,464, down about 50 points on the week.  Crude oil futures are currently trading at just over $100 per barrel, up about $1 per barrel on the week.  The Dollar weakened versus both the Yen and Euro on the week.

Next week look toward Tuesday’s Consumer Confidence Index, Wednesday’s ISM Manufacturing Index, Thursday’s weekly jobless claims, and Friday’s employment report for May as potential market moving events.  All markets are closed on Monday for Memorial Day.

Events European and domestic have conspired to push the Almighty Indicator to its lowest level in six months: the 10-year T-note has broken to 3.05%.

April data still arriving shows a substantial air pocket, which the usual suspects discount as the temporary effect of gasoline prices and supply-chain disruptions after Japan’s 3/11. There’s more to it than that: the Chicago Fed’s national index dropped from +.32 in march to -.45 in April, and -.70 would signal new recession. 1st quarter GDP was widely expected to be revised up from 1.8% but was not, and the consumer spending account was revised down a half-point. Last week’s new unemployment claims were supposed to unwind a quirky rise, but popped up to 424,000.

The song on the broken record here: housing. April pending home sales tanked 11% (versus -1% forecast), down 26% year-over year. The FHFA reported that as of March, homes in 47 states plus DC had lost value in the last year, and national prices are back to 2003 levels. Housing is not waiting for jobs; this economy cannot heal when the entire nation is worried about its most important asset.

Europe. To understand this moment in Europe, watch HBO’s new “Too Big To Fail.” The presentation is better than the book — better than any of the books or news shows describing the run-in to Lehman and AIG. The splendid cast nails the characters, and conveys the visceral fear that overtook each of these immensely powerful personae.

Two key lessons: How could these people not see the dominoes lined up behind each one as it went down? Second, although none of the players today gets a shred of credit, at the last possible minute, under stress found only in combat (and even there, you get to shoot back) they found the wisdom and courage to set a firebreak.

Many Americans, maybe most, still doubt the need for that firebreak, dismissing the whole post-Lehman affair a bailout of banks and the rich. Most Europeans today are in the same spectacular self-serving denial and ignorance.

The analog, Europe to Lehman, is cover-your-eyes close. The Western financial system failed in July 2007, descending into the greatest bank run of all time, institution-on-institution. The Fed for the next 14 months used every imaginable tool to support the system, but only bought time until the dominoes ran their course: Fannie and Freddie at Labor Day 2008, followed in a fortnight by Lehman, then instantly by AIG. Perfesser Bernanke told Paulson that the Fed was exhausted, and Congress would have to supply cash. Congress did, in time; and Bernanke and Paulson found the clarity and guts to pour $100 billion into the filthy hole of AIG to stop the run.

The euro experiment failed last year. Insolvent Greece, Ireland, and Portugal have been supported by the European Central Bank, which has bought their bonds and accepted them as collateral from their banks. The ECB last week said that it is at its limit, exposed to some $300 billion of Club Med IOUs. Any “restructuring” will make the ECB insolvent, needing many billions of pan-European taxpayer money to re-capitalize.

The other dominoes are lined up: Spain with 45% unemployment of those aged 29 and younger, and a gaping hole in its banking system, Italy the most indebted of all, 120% of GDP. The dominoes are linked, just as here, by banks packed with each others’ sovereign paper. Soon, perhaps very soon, Europe will have to decide whether to firebreak outside Greece, or let that hopeless case go as we did Lehman.

If Greece is let go, as an object lesson and a hole too big versus benefit, Europe will instantly face its dominoes: re-capitalize its banks and the ECB to cover the Greek loss, picking up something like $1.5 trillion in Club Med paper, or….

Germany’s call. Say to hell with it. German taxpayers cover German banks, and go back to some version of deutschemark with any nation that can afford our company.

Whichever way Germany goes, firebreak or sauve qui peut, cash is already running to the US for safety. Either way, the European economy slows and slows the world, deflation back in play, interest rates to the floor.

Notes to charts, which are nothing short of incredible. These show two separate accounts: 90-day-plus delinquencies not yet in foreclosure, and homes in foreclosure process. Adding the left scales, together there are roughly four million homes headed for distressed resale. This total does NOT include homes already foreclosed and in REO inventory (large debate about that group, somewhere between 500,000 and 800,000).

In the top chart the color-coded aging-scale reflects how long a loan has been 90-days or more delinquent: purple = one year or more, 40% of total (!). In the second chart the coding shows the time in foreclosure process, no payments made, but not yet taken in foreclosure: amber = 24+ months, 31% (!!). www.calculatedriskblog.com.

Mortgage interest rates were flat again on the week despite economic data mostly weaker than expected.  Economic data weaker than expected included the May New York Empire State Manufacturing Index, April Housing Starts, April Building Permits, April Industrial Production and Capacity Utilization, April Existing Home Sales, the May Philadelphia Fed Business Index, and April Leading Economic Indicators.  The Philadelphia Fed Business index fell to 3.9 on expectations that it would come in at 17.5.  This is the lowest reading since October of 2009.  Leading Economic Indicators fell for the first time since February of 2009.  April Housing Starts fell 10.6% on expectations that they would increase by 2.8%.  On a positive note, weekly jobless claims fell by 29k on expectations that they would fall just by 16k.

The Dow Jones Industrial Average is currently at 12,568, down almost 30 points on the week.  Crude oil futures are currently trading at $99.13 per barrel, down slightly on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Tuesday’s New Home Sales, Wednesday’s Durable Goods Orders, Thursday’s second look at Q1 GDP and weekly jobless claims, and Friday’s Personal Income and Outlays and Pending Home Sales Index as potential market moving events.

The Great Indicator, the 10-year Treasury note, for the second week held all of its straight-line gains since early April, from 3.60% to 3.15%.

Despite the Fed mumbling about reversing extraordinary ease, some decade ahead, despite all sorts of positive media spin, despite LinkedIn’s post-IPO value of $10 billion (649 times earnings), global investors are buying US Treasurys for safety.

Low-fee Mortgages touched 4.625% for the first time in six months, refi applications up, purchase ones sinking 3% last week. April housing starts fell 10.6% and permits 4%, both versus expectations for gains. Sales of existing homes fell .8% from March, as reported from NAR’s highly questionable, seasonally adjusted lipstick factory.

Industrial production was flat in April, but distorted by parts-supply interruption in Japan. Although the Philly Fed index crumped from 18.5 in April to near-breakeven 3.9 in May, manufacturing is still a bright spot.

This week’s Baghdad Bob Prize to the Mortgage Bankers’ Association economist Jay Brinkman. After announcing no improvement in 1^st quarter mortgage delinquencies, he said, “Outlook is good. Market is on the mend.” American troops are not in Baghdad (camera pans around corner, to US M-1s under the crossed swords… Boom!). They are not there at all (Boom!).

We have certainly foreclosed through a lot of the weakest households and worst loans. But, what will happen to the next at-risk layers, given widespread price declines resuming, foreclosure dumping, and limited credit for absorption?

Next, a tale in two parts, sovereign debt in the US and in Europe. All kinds of people now ask, anxiously, if Congress will fail to raise the debt limit. A few hope we won’t. One local real estate proprietor last week, nice man, frustrated, clueless: “They have enough money.”

Of all the devils whom you consult at 3:00AM, parading across your bedroom ceiling, drop that one. The debt-limit hostage crisis dates at least to 1982. Republicans will use the lever as best they can, a Democratic-controlled government paralyzed, both parties afraid of the public — and then will extend the limit.

Here we have one Treasury, one tax code, one banking system, and a rather large but single-issuer national debt. Treasury (and mortgage) yields are falling partly from successful QE2, partly from economic slowdown, but at the moment in largest part because Europe is making another run at falling apart.

The immediate catalyst: the European Central Bank said yesterday that in the event of any restructuring of Greek debt, even something as mild (and useless) as extending maturities, the ECB would no longer accept Greek bonds as collateral. In addition to the $340 billion in direct debt (largely held by German and French Banks), the ECB has floated $126 billion to support Greek banks. Greek 10-year debt reached 16.5% overnight, and 2-year 25.1%.

The strong in Europe have demanded Greek austerity to protect the banks of the strong, but Greece has reached economic and political exhaustion. We may be a weekend away from a New Drachma trading at 30 cents on the euro, or some can-kicking longer time. The ECB’s panicked threat to pull the plug on Greek banks says shorter is more likely than longer.

In the grand scheme, Greece does not matter. However, dominoes do. The rest of Club Med and the whole European banking system are all lined up.

Here, take heart. A Euro-crater would slow the global economy, but cash would race to the dollar and Treasurys. All currency collapses in a hundred years have helped us.

Draw any lesson you wish about profligate living beyond means, and about financial pretense, but do not assume that Euro-default means the same for us. One nation, one Treasury, one tax-collector, one budget — we won’t like the sacrifice, we don’t know which party’s ideas will prevail, and the fix will neither be tidy nor final, but we are not headed down Europe’s road to default. We have structure, means and will.

NOTES ON ECONOMY AND HOUSING
From the desk of Premier Capital Markets
Local Analyis Below

There are several stories in the employment chart, below. First, the ever-so-gradual overall improvement; and second, the dramatic change in US employment since 1990. Bad news, good news: in the last twenty, difficult years, American incomes stagnant, US labor has become more competitive with the rest of the world, now showing in improved US manufacturing — the strongest sector rebound of any (second chart below).

The National Federation of Independent Business has surveyed small businesses since the early ’70s. Its overall “optimism” index has rolled over in the last two months, since 2008 never getting much better than the bottom of recessions in the last 25 years. However, internal indices (sales, compensation) have held up better — the rollover in the optimism index may be more general anxiety than weakening of actual conditions.

The New York Fed has begun to publish a quarterly report on credit conditions, and finds a “healing” underway. True to a degree: new delinquencies are falling. However, the amount of distress is huge, the work-off rate is slow, and any new slowdown in the economy will add to new delinquencies. The charts below are unique, extraordinary visuals on the type and extent of credit trouble all across the economy: first the dollar composition of all consumer credit outstanding; second the percentage of each category performing and not; and third, the dollar amount of new delinquency.

The housing charts are painful. CoreLogic is one of the two best-supported home-price studies (the other is www.FHFA.gov House Price Index; Case/Shiller a distant third), and it’s newest chart follows. Eight-straight monthly year-over-year declines.

A mortgage-only picture of delinquencies. Yes, they have topped, but “healing” in this category is a reach by the New York Fed.

For all friends grumpy about Fannie and Freddie, buying the political Right notion that they were the source of all mortgage evil… have a look at the real history of default. The Wall-Street manufactured “Private Label Securities”, NON-Fannie/Freddie MBS, created a default whirlpool by 2007 that sucked in “A” paper of all types.

LOCAL ANALYSIS

Similarities are beginning to pile up, comparing the end of the last miserable cycle for housing to this one. It’s still early, but a reassuring convergence is developing.

Length The previous tough time for Front Range housing began in 1983, bottomed in 1988-89, and prices did not begin a general rise until 1991. This downturn began in 2002, and is probably bottoming now. Length is important: incomes rise with inflation (they define each other), and the longer that home prices stay flat or down, the more purchasing power accumulates. Stretches of eight to ten years are a long time.

Causes The ‘80s specifics were different, but the music was the same. The downturn began with an oil bust and deepened into population out-migration, net negative until the end of the decade. Neither of those factors are in play today (the Colorado population has grown by 800,000 since 2000). However, the tech bust in 2001 had its parallel in the 1985 bankruptcy of Storage Tek. Jobs in the 2000-2010 decade are a matter of debate, but appear not to have grown at all.

Heaven knows we had a real estate overbuild from 2002-2006, just like the one that ended in 1985; and just like that one, the eastern parts of the Metro area and I-25 corridor suffered the most. As in the Bubble, the ‘80s were also a time of very silly lending practices, commercial funding the worst (provided by night-of-the-walking-dead S&Ls), but the worst-ever residential loan type (previous to subprime) was the FHA 245 “graduated payment” and its intentional negative amortization. Known as “Gyp-‘em” loans, they cut broad swaths of carnage.

Foreclosures Just as now, Colorado was a national foreclosure capital from 1986-1990. The FHA had its own Sunday section in the Rocky Mountain News, re-marketing foreclosures, and prices fell as much as 40% in eastern Denver. The current cycle has run longer: Colorado led the nation in foreclosures by 2004; although we have not had anything like the depth of trouble in the Bubble Zones, we have had a consistently high level ever since.

In this department, an important difference from the 1980s: the national economy then was in a healthy recovery. This time, just as we had about foreclosed our way through the tech bust, overbuild, and stupid lending, we got hit by the Great Recession. Had it not been for that, I think by now we’d be well out of our down-cycle.

End of cycle As this one is not over, it’s a tad premature for comparison. However, here are the markers. Rental vacancies grew every year in the ‘80s, reaching 17% by 1989 even in Boulder. It is not an accident that prices began to rise simultaneous with a deep drop in vacancies in late 1990 — near 5%. Metro vacancies are approaching that cycle-end now, although rents have not risen — yet. Another similarity: unit sales (irrespective of type) fell each year from 1983 to 1988, and stayed the same into 1990; this time, unit sales began to crack in 2007, bottomed in the winter after Lehman (’08-’09), had a false-rebound from the homebuyer tax credits, and are now rumbling back on that post-Lehman bottom, only about 50% of normal volume.

Recovery Marker The most important marker: in that rock-bottom of unit sales, 1988-1990, for-sale inventory steadily fell. The same thing is happening now: Longmont inventory has fallen in half in two years. At one point last month, in the whole City of Boulder there were only 39 homes listed below $500,000. At this writing, Louisville has only 76 listings to support annual demand well over 350 purchases. And, as the inventory dwindles, the good and well-priced stuff flies off the shelf, leaving an unusually large collection of one-off, high-ask.

Boulder County markets are in a classic, end-stage emotional standoff, and simply enormous pent-up wish for a new home, or to be out of the current one. Sellers think, “Dump my house — give it away — in this!?” Buyers in perfect reciprocity say, “Buy a house, now!?”

The standoff ends as always, here and everywhere, when a seller emboldened by the quick sale of a similar home asks a higher price, and a small group of buyers — never intending to do so — frustrated by scarce inventory, competes for the new listing.

Real estate is a slow-mover and it can take price increases a year just to move across town. However, the psychology of boat-missing is a beautiful thing: nothing changes the mind faster than waking to a suddenly empty harbor.

Mortgage interest rates were flat on the week as most economic reports were in line with expectations.  Of note, April Retail Sales increased 0.5%, and excluding automobile sales retail sales were up 0.6%.  Both reports were in line with expectations.  Weekly jobless claims fell by 44k, again in line with expectations.  The April Consumer Price Index (CPI) increased by 0.4%, and excluding the food and energy components core CPI was up 0.2%.  Year over year, CPI is up 3.2% and core CPI is up 1.3%.  The April Producer Price Index (PPI), a measure of wholesale prices, was up 0.8%, slightly more than expected.  Core PPI was also up slightly more than expected, up 0.3%.  The University of Michigan Consumer Sentiment Index was reported at 72.4, stronger than the 69.5 expected.  The US Treasury auctioned $75 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds, which were met with mixed demand.

The Dow Jones Industrial Average is currently at 12,651, up slightly on the week.  Crude oil futures are currently trading at $98.87 per barrel, up about $1 per barrel on the week.  The Dollar strengthened versus the Yen and Euro on the week.

Next week look toward Tuesday’s Housing Starts and Industrial Production and Thursday’s weekly jobless claims, Existing Home Sales, and Philadelphia Fed Survey as potential market moving events.  Also, the minutes from the recent FOMC meeting will be released on Wednesday.

Financial markets have been on hold this week, the freeze a perfect reflection of widespread uncertainty about the US and global economies.

Long-term Treasury and mortgage rates have held their dramatic, near half-percent drops of the last month, but the declines themselves tend to prevent any further downward movement. A deeper slide will require something new: weaker data here, or Europe finally cracking (see Morgan Kelly, Irish Times), or a China slowdown.

The small-business survey at www.nfib.com weakened slightly in April, but broadly, seven of ten components falling; and confirmed the dive in the March survey. New claims for unemployment insurance improved from last week’s odd surge, but the four-week moving average is the worst since last November. April retail sales picked up a thin .5%, but .3% of the gain was the price of gasoline alone.

Housing is the obvious catalyst for a weaker economy, all of the various measures of prices showing a half-year, sustained decline, near 1% per month. However, it is no longer polite to speak of housing. The Fed does not, the White House does not, and the Treasury Secretary is busy, droning at visitors from China (draw the short straw in Beijing, be sent to listen to Timmy).

There are lots of different home-price measures, now — it’s a growth industry, after all. Try to avoid Zillow. Do pay attention to CoreLogic, RealtyTrac, and the FHFA HPI. CoreLogic’s newest is a fascinating snapshot which separates prices of distressed sales from non-distressed. The gap between the two is much less than I would have thought: nationwide, a 7.5% decline for distressed sales in the last year (most of it in the last eight-straight monthly declines), but non-distressed prices dumped 5.8%.

The dispersion of price declines in the last year says there is a lot more going on than just the collapse of the Bubble Zones. Non-distressed price declines in 32 states include Idaho -8.8%, Minnesota -5.0%, South Dakota -4.8%, Wisconsin -4.3%, Delaware -2.9%, New Hampshire -3.9%, Massachusetts -4.5%, and Maine -6.6%.

Maine? Maine? If there was a Lobstah Bubble, I missed it. What might explain such a diverse, non-Bubble list of states? Unemployment, for one, although we’re all supposed to believe that’s getting better. The second factor is mortgage credit, tighter than ever before, tighter in every state.

After discovery of Bin Laden’s Abbottabad compound, our language has a new noun: an “abbottabad” is a bad thing hiding in plain sight, concealed by government authorities who were supposed to do something about it. The abandonment of housing to credit drought is an American abbottabad, the worst since Hoover’s people allowed runs on banks to continue for three solid years.

In the movie, “The Untouchables,” innocent Costner as Ness, after assembling his band of straight cops asked helplessly, “How will we find the booze?” Sean Connery snapped, “Everybody knows where the booze is!”, and marched across the street to the Post Office where, sure enough, there was booze to the rafters.

Tell a non-borrowing civilian, a reporter, or a government official, credit is too tight, and they say, “Whaddya mean?” Example: the income of every applicant must be established strictly by tax return, no matter how much money they have or how big the down payment, no exceptions for unusual but legal under-reporting of income. “Well, it’s about time, right?” Try not to lose temper. No, better to lose it: General Electric has no taxable income, and so Fannie wouldn’t loan it a dime. That’s not restoration of prudent underwriting; that’s Fannie forted-up in an abbottabad.

More new data: Fannie and Freddie at the end of 2010 owned 287,184 foreclosed homes (they report late — takes a while on fingers and toes). In February the FHA owned another 68,801, rising 5,000 per month. New delinquencies are slowing, best shown in a thorough but optimistic consumer-credit report at the New York Fed (chart below).

However, when this decomposing REO pig leaves the python and hits what’s left of markets… going to be ugly. To absorb that pig, buyers need credit, not abottabad.

Mortgage interest rates improved slightly on the week on mixed economic data.  Employment data was particularly mixed.  Today’s April Employment Report showed that non-farm payrolls increased by 244k on expectations that they would increase by 183k.  Non-farm private jobs increased by 268k, its largest increase since February of 2006, on expectations that they would increase by 200k.  The unemployment rate increased to 9.0% on expectations that it would remain unchanged at 8.8%.  Weekly jobless claims, though, increased by 43k to 474k on expectations that they would fall by 29k.  This is the largest increase in weekly jobless claims since August of 2010.  Also of note, March Construction Spending, the April ISM Manufacturing Index, and March Factory Orders were better than expected.  The April ISM Services Sector Index and ADP Private Employment estimate were weaker than expected.

The Dow Jones Industrial Average is currently at 12,744, down about 65 points on the week.  Crude oil futures are currently trading at slightly under $101 per barrel, down almost $13 per barrel on the week.  The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Wednesday’s International Trade, Thursday’s Producer Price Index (PPI), Retail Sales, and weekly jobless claims, and Friday’s Consumer Price Index (CPI) as potential market moving events.

All through the last four weeks, and accelerating in this first week of May, markets have re-priced for a weaker US economy. That process stopped today on a better-than-expected payroll report for April, itself ambiguous.

The important stuff: mortgages have approached 4.75%, the lowest since last fall, taken by the all-market arbiter of reality, the 10-year T-note. That yield collapsed from 3.60% one month ago to 3.15% yesterday, back to 3.20% today on the job data.

Crowd noise has been deafening trough the last two years, in two octaves. The background bass has been certain of an accelerating economy, and someday will be correct. The high-pitched shrieking, rising over the last winter, has been the choir certain of inflation, and accusing the Fed of debasing the currency.

Must be careful, here. The recent leader of the debasing-inflationistas has been Bill Gross, the all-time best bond-fund manager. More impressive: in youth in Las Vegas he succeeded in running a card-counting system and beat 21. Last month he announced he had dumped all Treasurys and gone short. A very bad trade.

If a guy like that can be that wrong… what is happening?  Go to the data. The 244,000 gain in payrolls released today came from the “establishment survey” of businesses, the historical favorite of the Fed, historically for good reason. It is, however, heavily adjusted for seasonality (often inaccurately), and struggles to be a representative sample of businesses, especially as new ones open in expansion cycles, or close in tough ones. The Bureau of Labor Statistics also keeps a survey of households, which in April showed a loss of 190,000 jobs. Take your pick.

The detail resides at www.bls.gov, together with some important tidbits. The average workweek remained unchanged for all workers, which a warming economy and tightening labor market would lengthen. Average hourly earnings gained only 0.1% in April, 1.9% year-over-year — hardly fuel for inflation. Or for anything else. Another measure: the percent of US population at work or looking for it is stuck at 64.2%, the lowest in more than 30 years.

Another job market data stream: weekly filings for unemployment insurance. Volatile, to be sure, but held near 400,000 in the winter and bottomed in the 380s in March. Two weeks ago, 431,000; last week, 474,000 — undoubtedly bloated by some quirk, but deteriorating by any measure.

The Institute for Supply Management www.ism.ws surveys are among the best, near-real-time. In April manufacturing continued to be the economic bright spot, overall 60.4 (very high, 50 is breakeven), and its employment component in the first four months of 2011 has been the best in 38 years. However, the strength in the overall index came from two cycle-enders (inventories and backlogs), and exports, which are at risk to an overseas slowdown. The ISM also surveys the vastly larger service sector (five times as large), which arrived at 52.8, the lowest reading since last August, and the drop from March’s 57.3 was the steepest in the 14-year history of the survey.

On net, the accelerating-recovery people have no case at all, and even the “moderate recovery” line at the Fed is shaky, which they know.

All of the debasement/inflation howling boils down to one thing: how you feel about the Fed’s QE operations. None of the hard data supports the howlers. A lot of bright, caring, and well-informed people see QE as “money-printing,” and with all cordial respect, you are mistaken. It is not what you think. Do all you can to try to understand what is really happening to the Fed’s balance sheet, reserves, and credit creation.

QE2 began as QE1, the market selling bonds in fear of inflation, overwhelming Fed buys, rates rising; QE2 is ending as QE1 did, the Fed pulling so many long-dated bonds out of the market that it has overwhelmed the inflation sellers. The Fed might just get its way after all, and drive long-term rates down far enough to give housing a chance.

Meantime, Mr. Gross, it’s rare chutzpah to go short an asset that the Fed is buying, backed by an infinite balance sheet.