|
November 13, 2009
Long-term rates are behaving very well, despite all the inflation and dollar grumbling in the background (been wrong, still wrong). Low-fee mortgages are very close to crossing into the high fours.
In an unexplained oddity, the retail mortgage spread to the 3.45% 10-year T-note is the tightest since the Crunch began in 2007. Theoretically, as the Fed reduces its purchases of MBS, mortgage rates should begin to float away from the 10-year. Two explanations: purchase mortgage demand has crashed 28% since early October, hence less supply coming to market; and second, economic data is settling into an “L”, at last beginning to convince investors that the Fed is a long, long way from a rate hike.
In this cycle I’ve become suspicious of almost all analysis from investment houses either trying too hard to sell recovery or to frighten clients into protective action; and from traditional economists trying to force this unique event into historical pattern. This week we got five new reports, all survey based, all from disinterested parties -- a good, solid, real-time snapshot of the recovery, housing, and the true state of credit.
On the second Tuesday of each month comes the small-business survey by the National Federation of Independent Business (www.nfib.com, “SBET”). In early November it found an “L” across sales, earnings, compensation, inventories, and credit, values still as low or lower than any since the survey began in 1974.
Housing data from mortgage insurers PMI and MGIC is especially useful: they have no tilt, neither to optimism or pessimism, and are most concerned about prices (steady or rising prices, and MI companies thrive; if prices fall, too many claims on defaulted loans...). Their big reports are quarterly, often with useful monthly updates.
MGIC’s newest Housing Market Summary (www.mgic.com, “Guides,” then “Market Trends”) boils down the nation into 73 MSAs: 41 are rated either soft or weak, none strong, the remaining 32 “stable” (these adjectives all refer to price trend). However, of the 32 stable ones, 19 are described as “softening,” and not one of the 73 is improving.
PMI’s brand-new 3rd Quarter Economic and Real Estate Trends (www.pmi-us.com) shows a sharp increase in price risk: of its 49 signal MSAs, 20 project a 90% or better chance of lower prices in the next two years, five with a 75% or greater probability, and only 11 rating less than a 33% chance of price decline.
PMI also rates homes in each MSA for affordability, based on local incomes versus prices and interest rates, and found the greatest affordability its history. If so, why the huge excess of sellers over buyers? The unemployed do not buy. Another segment is too demoralized to buy no matter how low prices go. However, I believe the largest cause of no-buy is mortgage credit, vastly too tight.
The Fed released two reports on credit: one the monthly G-19 on consumer credit (www.federalreserve.gov, right side of home), the second the quarterly Senior Loan Officers’ Survey (hit “Economic Research” on top toolbar, then “Surveys and Reports,” then skip past the stale icon from 1998 to the new one just below).
Consumer credit in October contracted for a record eighth-straight month, the percentage decline deepening to a 7.2% annual negative rate. The Fed’s records going back to 1943 show nothing like this experience.
The Senior Officers’ survey is one of the Fed’s most predictive. The onset of widespread tightening in credit standards always coincides with recession, and the retreat from tightening signals recovery. However, the current reports are badly distorted. Although the fraction of banks tightening has fallen from loan-category peaks over 70% last winter to 15% in some, not one single bank reports easing credit “considerably” in any category, and zero to 5% per category eased “somewhat.”
Thus a relentless ratcheting of credit standards is unrelieved, finally so tight that few bother to apply, yet the Fed’s survey endlessly and cluelessly recites “low demand for credit.” Somebody in authority needs to connect these dots, and right quick. |
