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October 16, 2009
Long-term rates rose again this week, the 10-year T-note and mortgages continuing the spurt that began last Friday, to 3.46% and just shy of 5.25% respectively.
As always, economic optimism was the cause. In legitimate good news, retail sales rose in September, only .5% net of cash-for-clunker effects, but beat the forecast decline and have been stable for three months. Also, new claims for unemployment insurance have continued their glide-path decline, now about 150,000 weekly below the April peak at 668,000, but still 200,000 weekly above anything resembling health.
The stock market took off when Chase reported positive 3Q earnings -- nevermind entirely due to bond trading, loans-on-books contracting another $28 billion, yields from loans falling. And for Chase and Citi and other reporting banks, serious analysts doubted the adequacy of new reserves for losses (which, if minimized, puff earnings).
The Dow broke above 10,000 after the Fed released the minutes of its September meeting, ten pages of pure sunshine, alleging every trend improving. 10K was a nice recovery from the pit of March, but the first time so high was ten years ago; falling back under today on lousy results from BoA, GE, and IBM.
Either the Fed is off rocker, or cheerleading, or these people are mistaken: www.nfib.com has posted its October small-business survey (“SBET”), and it’s a post-May “L”, stuck at the worst sales/earnings/employment responses ever found (surveys began in 1973). At www.hoisingtonmgt.com, Lacy Hunt’s newest quarterly insists that the Fed has stopped short, that a return to recession is inevitable, and that we are firmly on Japan-track. Hunt is one of the few who has had this cycle right since 2002.
The Fed’s minutes and a speech by deeply respected vice-chair Donald Kohn both describe a better economy aided now by housing, of all things. The Fed staff also notes modest recovery in consumer spending, the benefits of higher stock prices and growth abroad, and asserts “improved financial conditions” (a surprise to anyone applying for a loan), but Kohn says “Improvement has been most evident in the housing sector.”
Kohn points to sales of new and existing homes “On an uptrend since early this year... inventories pared substantially... construction of single-family homes has risen markedly... several measures of house prices have increased in recent months... and survey data suggest homebuyers think prices will rise....”
Ummmm... really?
In places, I suppose. Much of the country never bubbled, and several regional housing markets are okay. However, home sales are down from 7 million in 2005 to 4.5 million now, foreclosures then too low to measure, now at least one-third distressed. New construction was 2 million, now “recovered” from 480,000 last winter to 550,000.
In the newest delinquency data at Fannie and Freddie (through June) 90-day+ loans are still rising .2% per month, from 1.18% in 2Q’08 to 3.48% in 2Q’09. The only material change in foreclosures: the show has been frozen by Administration and Congressional demands for loan modification as the sole strategy. Here in Colorado, early to the foreclosure party in ’03, way ahead of the Bubble Zones and near recovery now, September year-over year completed foreclosures rose only 5%, but foreclosure starts jumped 75%. That’s recession damage, overbuild and subprime resolved here, but pig after pig going into the python and nothing coming out the back.
Housing damage to the economy is still deepening: households underwater have lost their net worth and faith in the future, will walk away in big numbers, and will not contribute to economic expansion. All will continue until prices rise, and prices cannot rise until the supply of buyers and credit matches a hopeless oversupply of sellers.
The Fed’s view of housing as engine of economic growth does not square with the data, nor with the view out my window, nor yours. Much as the Fed has been the only effective agency of government in this crisis, it had housing and mortgage credit wrong all the way into it. Blind then, wishful now.
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