Archive for November, 2010


Mortgage Market Trends for week ending November 5, 2010

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The Federal Reserve was front and center this past week. Everyone knew that would be the case, but the Fed ruled the financial pages anyway. First, Fed officials did the obvious: they announced that the federal funds rate – the lending rate between banks – would be held at 0 percent to 0.25 percent. Later, Fed officials did something else obvious: they announced that the Federal Reserve was going to pump even more money into our sluggish economy. 

On the latter, the Fed will purchase an additional $600 billion in long-term Treasury bonds over the next eight months. It will also reinvest up to $300 billion in Treasury bonds, using proceeds from earlier investments. This is the famous “quantitative easing” that has so preoccupied economists and the commentators for the past month. The purpose of quantitative easing is twofold: (1) to increase the money supply, and thus stave off deflation; and (2) to keep interest rates low and increase the amount of loanable funds. 

So what does this mean to us? The Fed is counting on more lending at lower interest rates. However, we wouldn’t necessarily count on it. As we’ve noted in past editions, increasing the money supply is inflationary. To date, most of the inflation has been in financial investments, namely stocks and commodities. Though the official consumer price measures say there is no inflation, most of us know otherwise – especially after a trip to the grocery store or gas station. In short, lower mortgage rates are not a given. 

Nor is it a given that lending volume will increase. Most of us have experienced the trials and tribulations of adhering to Fannie Mae’s and Freddie Mac’s underwriting standards, which are frustratingly (and we think unnecessarily) stringent. On the one hand, the Fed is encouraging homeowners to refinance; on the other hand, the Federal Housing Finance Agency – which oversees Fannie Mae and Freddie Mac – is making it difficult to refinance. Talk about a catch-22. 

The good news is that we could see a break in the logjam. A survey from the structured finance technology firm Principia Partners found that three out of five asset-backed and mortgage-backed securities investors plan to increase their activity in the securitization space over the next 12 months. That means more diversity in the mortgage market, which should increase mortgage offerings, and, just as important, increase offerings that are conflated with less stringent, more market-oriented underwriting standards.
In the meantime, mortgage rates continue to hold historical lows, but we think the risk that they won’t continue to hold these lows is increasing. Yes, more money can mean cheaper money, but it can also mean more expensive money if inflation takes hold in a serious way. At the least, we think interest-rate volatility will increase, making the waiting game more perilous. We see little upside in delaying refinancing or purchasing a home; there are simply too many unknowns lurking about that could spoil even the best-laid plans.

Base Building

The Census Bureau reported last week that the percentage of households that owned their homes has fallen to an 11-year low, at 66.9 percent. Homeownership had peaked at 69 percent in 2004. The historical norm, dating back to 1970, is around 65 percent. The drop in homeownership is actually good news, in that we are taking yet another step toward a more normalized market. With new home construction at a multi-year low, we could be forming a sturdy base from which growth can arise over the next decade. 

Of course, foreclosures remain the Damocles sword that could imperil any growth prospects by swamping the market with inventory. Some of the predictions are onerous (especially those from RealtyTrac), but we think we see a permanent reprieve nonetheless. Fannie Mae and Freddie Mac reported that the percentage of delinquent mortgages they hold continues to fall, with Fannie reporting a sixth-straight monthly decline and Freddie reporting a fourth-straight monthly decline. This news suggests that more mortgage holders have the financial wherewithal and the desire to service their loans and stay in their homes. 

We might be in the minority, but we think the positive data trend that has developed over the past couple months will produce a steady, if not significantly improved, housing market for 2011.

Graph Courtesy from NY Times in an article by Lynnley Browning  November 5, 2010.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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iTrulli Pasta Class with Chef Patti Jackson

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Last Saturday my wife and I attended a pasta making and cooking class at iTrulia. This NY Times two star restaurant  is the epitome of a neighborhood restaurant serving Italian food from Apulia (which forms the heel of Italy’s boot) using the finest ingredients found locally and imported from Italy.

Located on a side street (122 East 27th Street between Lex & Park) i Trulli’s hands-on Chef Patti Jackson creates homecooked meals with virtually everything produced on site. The owner’s mother, Dara Maravilla, makes nearly all the pasta and can be seen doing so daily from 11am through about 4pm.

Unfortunately, Dara was not feeling well on Saturday, so it was up to Patti to cook and entertain the 15 or so “students” that attended the hands-on pasta class and lunch.

Each dish was prepared by Chef Patti with the assistance of apron wearing students. Interestingly, lessons learned were much less about exact measurements of the ingredients as it was about the look and feel of the various doughs and the color and consistency of the sauces. After each dish was prepared by Patti/group, we had it as lunch course served from the “real” kitchen. 

The first course was a Cavatelli (little shells) with broccoli rabe and almonds. We all had the chance to feel the consistency of this ultra simple dough ( ratio of 2 cups all purpose flour + 1 cup very hot water) as well as try our hands at making the shape.

Next we worked with whole wheat flour to create whole wheat tonnarelli (pasta similar to spaghetti) with fonduta (rich creamy cheese sauce) and walnuts.

Then we created butternut squash ravioli with a brown butter and sage sauce. Amazing!

Finally, we ended this lunch feast with strudel di mele for desert. Throughout the demonstration Patti would return to the strudel dough and continue to stretch it. Over time it was transformed to a paper thin dough,  four feet by 2 feet, encasing the apple and cinnamon and sugar filling.

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Mortgage Market Trends for week ending October 29, 2010

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Were we smart or lucky? We’d like to think smart, but we won’t discount luck either. We are speaking of the housing sales trend that unfolded after the tax credits expired at the end of April. We noted back in May that we expected sales to dip post-tax credits, and they did. We also noted that we expected sales to rebound once the market became acclimated to standing on its own feet, and that appears to be occurring.

Indeed, sales of existing-homes strengthened across all categories to jump 10 percent in September to 4.53 million annualized units, while sales of new homes rose 6.6 percent to a 307,000 annualized rate. The surge in sales helped push supply down to 10.7 months for existing homes and down to eight months for new homes.

The obvious question is how much discounting was required to stimulate sales? It appears some discounting occurred, when holding sales composition firm. The national median price for existing homes fell 3.3 percent to $171,700, with the average price falling 3.5 percent to $218,200. Meanwhile, the median price for new homes rose 1.5 percent to $223,800, with the average price dropping 1.2 percent to $257,500.

We’ve been vocal in our belief that home prices have stabilized. We stand by that sentiment, even though we wouldn’t be surprised to see some price volatility over the next month or two, thanks to the brouhaha over the foreclosure processes of the large banks and the expectation that foreclosures could swell into 2011.

That said, it’s important to remember that the housing market is much more orderly and stable than it was a year ago. All the malinvestment and all the excesses of yesteryear have percolated to the surface. We know what we are dealing with, which means foreclosures will certainly be handled in manner that won’t be too disruptive to the market. After all, the people selling foreclosed houses still want to sell at the highest price possible; the highest price possible isn’t achieved by flooding the market with inventory.

As for the foreclosure-servicing issues, the NAR warned that a single related court order could take 20 percent of the homes off the market. We’re somewhat circumspect. To be sure, an unfavorable court order could happen, but the pressure is great for it not to. If we were to balance the odds on a scale, we think the scale favors it not occurring.

As for balancing lower or higher mortgage rates, we side with higher. That’s not just our opinion. Bill Gross, a highly respected bond manager at PIMCO, noted this past week that a Fed announcement on additional monetary easing “will likely signify the end of a great 30-year bull market in bonds.” In other words, Gross expects bond prices to fall and interest rates to rise, which would translate into higher mortgage rates.


Let’s Get On With It

The time for waiting has ended. Confidence will return; that is, if it hasn’t already returned. Merrill Lynch reported on Bloomberg this past week that Americans – at least those with a few dollars to invest – are feeling more financially secure today than they were a year ago. Merrill surveyed 1,000 people with investable assets of at least $250,000 and found that 78 percent of those surveyed are confident their economic circumstances will improve in 2011.

For everyone else, confidence is within reach. Claims for jobless benefits unexpectedly dropped last week to a three-month low, an optimistic indicator that the U.S. labor market is on the mend. What’s more, the total number of people receiving unemployment insurance dropped to a two-year low. Meanwhile, consumer spending – a direct measure of consumer confidence – continues to move higher, and could give employers reason to add workers ahead of the holiday shopping season.

We think this latest slate of good news portends a robust economy for the New Year, which is why we think the opportunity to take advantage of historically low mortgage rates and low housing prices is dwindling for this year.

Graph Courtesy from NY Times in an article by Lynnley Browning  October 29, 2010.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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