Premier Mortgage Group

On the surface all is quiet. Since the first week of April the 10-year T-note has not traded above 2.05% or below 1.93%. 1.95% this morning. Thrill-a-minute. Low-fee mortgages have been 4.00% for three weeks (depending on down payment and credit.) The Dow has had 100-point days, but is just yo-yo-ing below the 13,200 top.

In widely scattered patches of exuberance, innately good housing markets are turning — not bottoming, turning. In attractive places with scarce land, in-migration, good economies (global, IT, government, healthcare…), and looking back at their distress curves, the dead-drop in listings last year has resulted now in competing offers and modest increases in price. However, do not confuse these places with the rest.

New data are disquieting, but nothing scary. March orders for durable goods fell hard, down 4.2% even excluding volatile categories, and the multi-year chart shows gentle but unmistakable weakening. New weekly claims for unemployment insurance have departed the 350,000 range for 385,000, but historically it’s a jagged chart, not necessarily marking trend-change. Q1’12 GDP arrived at 2.2% annualized versus the 2.5-3.0% forecast, but consumers came in on target, plus 2.9%. The one figure in the GDP report that hinted at sub-surface conditions: the Fed’s favorite inflation measure, the “personal consumption expenditure core deflator” jumped from 1.2% in Q4’11 to 2.2% in the first 90 days this year. That’s “core,” excluding the gasoline pop.

Enter the Fed’s post-meeting comments. Lost in misunderstanding Fed politics (the distracting regional-Fed country-hawk bird-brains), and in suspended hopes for QE3, and in a meaningless collection of long-range forecasts, and in guessing at what the Fed will do after 2014…, lost was this: “Inflation has picked up somewhat….”

Then Perfesser Bernanke was asked about new stimulus, including the Fed’s interest in inducing higher inflation, the darling proposal of Paul Krugman and his loyal propeller-heads. “That would be very reckless.”

Thank you. As hammered at here last week, the Fed has neither the intention nor capacity to inflate-away our debt burden. Nor in the presence of 2%+ core PCE will the Fed even embark on something as mild as QE3.

Here in the US a frozen Fed is not so bad. The greatest single strength of the US economy is its adaptability, based on national acceptance of Schumpeter’s “creative destruction,” no matter what pain it brings. With the possible exception of German-hive collective adjustment, no other economy on Earth approaches US tolerance for the pain of changing course. We do get on with it, and today’s improvements in labor, manufacturing, exports, and housing — no matter how tepid — are testimony.

Elsewhere, disturbance on the surface understates the roiling trouble deep below. Only 90 days ago, Frau Merkel seemed to have dragooned the rest of Europe into a new austerity treaty. This austerity has not even begun (Spain and Italy have already extended deadlines), but non-German economies have fallen out from under forecasts. Euro-zone PMI (just like ours, the descendent of the “purchasing managers’” survey) went negative in March at 49.1, deeper to 47.4 in April.

We used to refer to the European “periphery.” Now it’s just Germany and non-Germany. Even the Dutch government collapsed last week under budget and recession pressure, and the next president of France will not be seen in Merkel’s lap. The non-Germans groveled last winter, desperate for German-allowed ECB bailouts. Now, like so many excessive borrowers who have discovered that they own the bank, Europe is refusing austerity and demanding growth measures.

However, welded to the euro while in desperate need to devalue, there are no growth measures available except for the ECB to take on even more junk sovereign paper and/or reflate in the same manner Bernanke called “reckless.” The ECB and the Bank of Japan are near the end of their supply of cans to kick, one thing clear: hope like hell that US inflation subsides, so that the Fed can prevent a US stall while worst comes to worst elsewhere.

Mortgage interest rates were mostly flat on the week on mixed economic data.  Economic data stronger than expected included March Retail Sales, February Business Inventories, March Building Permits, and March Leading Economic Indicators.  Economic data weaker than expected included the April Empire State Manufacturing Index, the April NAHB Housing Index, March Housing Starts, March Industrial Production, weekly jobless claims, March Existing Home Sales, and the April Philadelphia Fed Business Index. Spainis still in the news facing austerity cuts to reduce its budget deficit.  There is increased speculation that the Fed will implement a third round of quantitative easing.  Markets will be closely watching the FOMC announcement next Wednesday for any hit of another round of easing.  On a positive note, the IMF increased its forecast for global economic growth this year and for 2013.

The Dow Jones Industrial Average is currently at 13,063, down slightly on the week.  Crude oil spot prices are currently at $103.58 per barrel, up 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 and FOMC announcement, Thursday’s jobless claims, and Friday’s first look at Q1 GDP as potential market moving events.

Long-term interest rates have stabilized safely in the Fed-controlled zone,10-year T-notes 2.00% and mortgages 4.00%. Stocks and other markets hope for QE3, perhaps as early as next week’s Fed meeting, but that move will likely wait for either weaker global economic data, or inflation falling toward deflation, or both.

US data is softening — not anywhere near a new double-dip conversation, but not accelerating to self-sustenance, either. March retail sales did okay, up .8%, but the housing recovery ballyhooed since winter has been exposed as a promotional feature: new starts fell 5.8% in March, new permits rose (but nobody gets a paycheck for one of those), and sales of existing homes fell 2.6%. One theory: diminished inventories of listings have crimped sales. Uh-huh. “Saudis Buy, Destroy Science For 200MPG Cars!”

Inventories are down, but prices in many markets are firming, and the combination encourages sales. Local is local, but Colorado Front Range listings year-over-year are down 40% and sales are up at least 15%. In an unquantifiable development, beneficial for the moment, some 5.5 million distressed homes sit in formaldehyde, embalmed by new state and federal impediments to foreclosure and sale. This inventory is concentrated in Sand States. Instead of rapidly selling and clearing these markets, it may be a long-term benefit to convert them into National Sacrifice Zones… park rangers, tours, T-shirts, postcards and all.

While we all wait on the Fed, and to see if Club Med peoples will overthrow their ICU physicians, intent on hooking patients to more maintenance machinery while standing on their oxygen hoses, a moment for — BOO! — inflation.

The financial Right and many long-cycle thinkers (who still don’t understand the 1970s) are certain that the Fed’s QE inevitably will cause inflation, executing the perpetual conspiracy of government to inflate away debt. Meanwhile the Left says economic recovery would be easy if only the Fed would induce 4% or 5% inflation.

In simplest terms, a central bank’s job in a too-hot economy is to drive interest rates far enough above inflation to cool it off; and in a too-cold economy, far enough below to warm it up. The Fed’s normal tool is the ultra-short-term, “Fed funds” rate; however, at 0% since 2008, and core inflation at 2%, the Fed can’t get “far enough below” to induce recovery. Standard far-enough models today say the Fed should be 6%-8% below zero. Short-rate policy frustrated, the Fed has instead in the last three years pulled long-term rates below inflation: that’s been a partial effect of QE, assisted by the Fed’s commitment to keep the Fed funds rate close to zero at least through 2014, and as of last September further assisted by “Operation Twist,” letting short-term Treasurys run off its balance sheet and buying long-term ones.

Hence the 10-year T-note at 2%, at least 1% below CPI, when its yield in an ordinary economy should be 2% above. To have that effect, the Fed has had to buy all new long-term Treasurys — some argue more than the new issuance.

The economy depends on a lot more IOUs than Treasurys. Suppose markets saw the Fed allow or induce an inflation run-up. If the Fed continued to buy long Treasurys, those rates could stay under control. However, other long paper — corporates, munis, mortgages — would begin to roar in yield and soon become unsalable at all.

The Fed for the moment has the “yield curve” under control. Partly because of its low-rate assurances and purchases, but every bit as important because it promises to keep inflation in bounds. Both Right and Left are wrong. In the debt-soaked modern world, completely unlike the 1970s, owners of IOUs will defend themsleves. By selling. At the first whiff of tolerated inflation, fists will pound on Mr. Sell Button, and rising rates will choke the inflation that would rob IOUs of value. Deflation and default ensue.

Losing control of the yield curve is the ultimate nightmare. That is what has happened to Club Med. One day you can sell only short paper, and later even that only at a discount, no matter what the central bank does. Inflation is neither help nor direct hazard; the hazard is failure to live within means, all else is consequence.

Not a normal market: this picture is a Fed-controlled 10-year.

The Fed watches lots of things. However, QE1, QE2, and Twist came in response to the two dips of PCE to 1%. The drop underway I think is too shallow for the Fed to QE3, but the danger in Europe (and possibly China) may be grave enough for premature trigger.

Mortgage interest rates improved slightly this past week as China’s economy appears to be slowing and Europe’s debt crisis persists. In China, first quarter GDP and imports were weaker than expected. In Europe, Spain’s 10 year note yield spread over Germany’s 10 year note yield increased to its largest level since late November as Spain struggles to cut expenses. Also, the European Central Bank’s financing for Portuguese lenders rose to a record level in March. Portugal will receive 78 billion euros in aid from the International Monetary Fund and the European Union. Economic data this past week was limited. News of note included Thursday’s weekly jobless claims which increased 13k on expectations that they would fall by 2k. The University of Michigan Consumer Sentiment Index was weaker than expected. The March Consumer Price Index was in line with expectations. Also of note, the Treasury auctioned $66 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds, which was met with mixed demand from markets.

The Dow Jones Industrial Average is currently at 12,913, down about 150 points on the week. Crude oil spot prices are currently at $103.41 per barrel, up slightly on the week. The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Monday’s Retail Sales, Tuesday’s Housing Starts and Industrial Production, and Thursday’s jobless claims, Existing Home Sales, and Philadelphia Fed Survey as potential market moving events.

Another week in these odd times, public policy and theoretical economics completely dominating markets….

Fed leadership, Vice Chair Yellen and NY Fed prez Dudley, gave same-day speeches which clarified the following: 1) the do-nothing, hawkish regional-Fed presidents’ club is alone in its treehouse; 2) if anything, the Fed has not done enough since 2009; and 3) the Fed’s commitment to ease through 2014 is more likely to be longer than shorter.

The Fed takes cover under its Congressional mandate, saying “unemployment is too high,” which is true. But the greatest danger lies overseas: industrial production in the EU had the worst month in two years, China’s economy is slowing faster than expected, and Japan is… who knows. The Fed cannot risk a US stall now.

Bonds already had the hint, the March spurt in rates fizzled-out last week. Stocks got the more-easing message, too, a mid-week rally pulling the thing out of an incipient trench. There is some perversity in this stock market response. The Fed would be this easy only if badly worried about domestic and global risks, and a risky economy is unfriendly to stocks. Yet stocks still responded happily to the Fed’s promise of action. Nice to know somebody still has faith in the Fed.

New domestic data tentatively confirmed the weakness in March payrolls. Weekly claims for unemployment insurance have risen from a sustained stretch sub-350,000 to 367,000 and then 380,000 in the last two weeks. Short term, not big, but not good. And the NFIB’s small-business survey in March unwound months of gains, following the pattern of the 2011 spring swoon.

Housing. Kick any Wall Streeter today, and he’ll say, “Housing has bottomed. Hit me for something else.”

What would the turn look like, if really underway? My own back yard has turned in just the last 60 days. The Front Range of Colorado never had a housing bubble: we danced with the Technology Fairy 1999-2001, afterward built too many houses, and made too many stupid loans, but all of that was over by 2004 when we led the nation in foreclosures. Long time ago. We have the 6th-lowest level of mortgage delinquency of any state in the US. Our rental vacancy rate spiked to 12%, now below 5% for the first time since ’99 (0% in Boulder!). Rents are moving up quickly. State population in the last dozen years has risen from 4.1 million to 5 million, and we’re short of land to build (you could drop Rhode Island in here and never find it, but we are maniacs for “open space” reservations). Building permits have been off 85% since ’07. Unemployment is down to 7%-ish. Our listed inventory of homes evaporated by 40% since last year. Buyers have lost their fear, the only problem finding something to show them.

Does your local market look like that? Mister housing-has-bottomed? Eh?

As perfect as our set-up, are prices rising? In rich, government- and tech-payrolled, land-starved Boulder County, yes. At last. Enough to unlock sellers? Ummmm… later.

Two philosophers have remarked incisively on speed. Stephen Hawking: “Time is what keeps everything from happening at once.” Then, Satchel Paige’s description of Cool Papa Bell: “He was so fast he could flip off the light switch and be in bed before the room got dark. One time he hit a line drive right past my ear. I turned around and saw the ball hit his ass just as he slid into second.”

Housing is the polar opposite of Cool Papa Bell.

Here in Colorado, the 1980s were tougher than this patch, and in Boulder we had all the same, lovely conditions as above by the spring of 1990, and the first, timid price increases in nine years. It then took 18 months for prices to begin to rise on the far side of town. Bottom is one thing, better another, recovery something else entirely.

MGIC’s newest guide to their underwriters described 73 metro areas this way: 26 of them “stable,” 25 “soft,” 22 “weak”, and not a single one “strong.”

Even if bottoming, and if surviving the release of held-back foreclosures, it will be a long time before recovery takes the brake off the economy, and puts heat on the Fed.

Mortgage interest rates improved this past week on today’s March employment report despite losing ground earlier in the week.  March non-farm jobs increased by only 120k on expectations that they would increase by 201k.  Non-farm private jobs increased by only 121k on expectations that they would increase by 224k.  Earlier in the week, though, the minutes from the Fed’s March 13 FOMC meeting were released.  The minutes indicated that there would not be a third round of quantitative easing unless the economy backslides.  As a result, mortgage rates increased after the minutes were released.  Other news of note included February Construction Spending, which mas much weaker than expected.  The March ISM Manufacturing Index was slightly stronger than expected and the March ISM Services Sector Index was slightly weaker than expected.  Weekly jobless claims fell to its lowest level since April of 2008.  Spain’s Prime Minister stated that its economy is in “extreme difficulty”, renewing the possibility of another bailout.

The Dow Jones Industrial Average finished the week at 13,060, down by about 150 points.  Crude oil spot prices finished the week at $103.31 per barrel, up slightly on the week.  The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Thursday’s International Trade, weekly jobless claims, and Producer Price Index along with Friday’s Consumer Price Index as potential market moving events.

Since mid-March markets have assumed a better US economy, moving to self-sustaining ground, the 10-year T-note spiking from 2.00% to 2.35%, mortgages up almost the same amount.

The primary basis for the improved attitude: the Fed’s announcement in March that QE3 was on hold. Then this week’s release of the Fed’s March meeting minutes again plunked the bond market, rates rising, an odd reaction to the same news, like a couple of guys losing five bucks on the instant-replay of a Kentucky kid dropping a 3-pointer.

Never mind. Today’s payroll figures for March arrived at half the forecast, only 120,000 jobs. In thin, Passover-Easter trading, the 10-year is back to 2.05%, mortgages near 4.00%, some even below. Analytical cautions: it’s only one month’s report in a guesstimate series often revised. Some observers found optimism in the stability of government payrolls last moth for the first time in two years. There is no double-dip evidence: the twin ISM reports for March arrived as-had-been, 53.4 manufacturing and 56.0 service sector; and auto sales are the best in four years.

I have no hard-data proof, but it is clear in sidewalk conversations with civilians that we are less afraid — less concerned that there is another bottom to fall out. I think stronger economic activity is flowing from those not badly harmed by the Great Recession at last tip-toeing out of their bunkers.

Enough with the positives. This is only one poor payroll report, but the strength everyone was happy with was only three months’ worth, and warm-winter months at that. Local government payrolls face deeper cuts as pension and benefit promises hit reality walls, and jobs lost in this sector have been among the very best. We have austerity ahead at the Federal level, no matter what, no matter who in November.

The effect of austerity on already rocky economies is plain in Spain, trying to cut its budget by the same GDP percentage as the US at the end of 2012 (US equivalent, $500 billion). Even before these cuts take effect, Spain’s economy is spiraling toward implosion, unemployment so high (officially 23% and rising; youth near 50%) that tax revenue is falling out from under budget cuts, and adding to loan defaults.

The US is not in a euro-trap; although we cannot devalue, we can QE.

Fed politics bore hell out of everyone, but here’s a little help in decoding Fed-speakers, sorting media scare headlines from actual news of Fed policy.

In the last month media have had a blast quoting minor Fed officials saying it’s time to raise rates, no more stimulus necessary, economy’s fine… and so on, whipsawing the stock market, which wants both stimulus and a better economy.

Here is the de-coding tool. The Fed has seven “governors” including the Chairman, appointed by Presidents and confirmed by the Senate; and twelve regional Fed banks located in places proportional to the US economy in 1912. I mean no disrespect to the cities involved. Not much, anyway. The governors all have a vote at every meeting, as does the president of the New York Fed, and four regionals rotate voting privileges.

The over-covered Fed yappers in the last month have all been presidents of regional Fed banks. If you see a headlined Fed statement, look to see if given by a governor, or a regional prez. If regional, ask yourself, big-city, or boondocks? Regional presidents are selected by regional-bank boards of directors (also selecting themselves); the farther into the weeds, the more narrow and remote to today’s global economy.

Thus if you hear from Lacker (Richmond), Plosser (Philadelphia), Bullard (St. Louis), Kocherlakota (Minneapolis), Lockhart (Atlanta), and Fisher (Dallas), know their pinched, insider-promotion, hard-money bias. Kansas City’s Hoenig became the most famous regional blowhard, but his replacement (George) has yet to say anything at all. It is not an accident that the big, coastal-city presidents support an active Fed: their boards are much closer both to centers of US commerce and to continuing global hazard.

The governors and New York, San Francisco, Chicago, Cleveland, and Boston all are all on the Chairman’s page, “far too soon to declare victory.” QE3 odds rose today.

An update of www.calculatedriskblog.com extraordinary, descriptive graphic:

Another view, a study by Jaimovich/Siu (via Tim Duy and Mark Thoma):

Buying a home is exciting, but it can also be intimidating for many first time homebuyers. Breaking the process down into manageable steps can help make it seem less overwhelming.

Although you may be looking forward to getting out there and checking out some houses, the first several steps toward owning your first home have nothing to do with floor plans or countertops. First you’ll need to get your financial affairs in order and figure out if you qualify for a loan. Because this can take some time, it’s wise to begin the process well in advance, even up to a year before you will actually purchase a home.

To help you get started, here are some steps for preparing to buy your first home. By following these steps you can reduce your anxiety and make the process more enjoyable:

1. Define your current financial status. Evaluate your income, expenses, debts, and savings. Knowing where you are at financially will help you figure out if you are in a position to buy a home, and, if not, what you need to do in order to get there.

2. Obtain a copy of your credit report. While you may currently be doing very well with managing your income to pay bills, there is always a chance that some old item or even a mistake is currently showing up on your credit report. By checking early in the process, you can identify issues that need updating or correcting. Go for a report that includes data from the three main credit reporting agencies.

3. Decide how much you can reasonably afford for a monthly house payment. If you currently rent, your monthly rent payment is a good starting point, but you will also need to consider that as a homeowner you will have additional expenses including property taxes, home owners insurance and home maintenance.

4. Look into financing options. Speak with an experienced mortgage lender to determine the best fit for your personal and financial situation. A qualified loan officer can help answer any questions and find the best payment terms and conditions that will work with your budget.

5. Identify what you want in a first home. Make a wish list of your needs and wants for a home, such as the type of home, number of rooms, and amenities. Also think about which locations you are most interested in.

6. Engage the services of a Realtor. Once your financial situation is squared away including your credit status, financing options and monthly payment amount, you’ll be able to provide a Realtor with the basics required to begin your home search. If you don’t know a real estate agent, try asking friends for referrals.

7. Check out several potential homes before making a decision. You should look at quite a few different homes in order to compare and find the one that best meets your needs. Even if you find one you like right away, take the time to look at a few more. That being said, don’t expect to find the “perfect” home with everything on your wish list. Be prepared to make a few compromises.

If you’re ready to begin taking steps on the journey toward your first home, our experienced and dedicated loan officers can help. Contact us for more information about starting the process.