Ben Exits, and the Money Still Flows

Today is the last day that
Ben Bernanke will spend as Chair of the central bank.  He has led the US
through some of the most challenging economic times that this generation has
faced.  With Mr. Bernanke at the helm the Fed implemented Quantitate
Easing, a program designed to keep longer-term interest rates low to
encourage everyone to spend money that they didn’t have in an attempt to
stimulate economic growth.  They did that at first by selling shorter-term
debt instruments and eventually by just printing money.  Did it work?
I think so.  Would it have been better to just let things ride?  I
dunno.  I thought so back in 2008, but there’s no way to really tell
now.  I think that our economy could have gotten much worse (just look at
the world around us and pick a country for comparison) than it did.  And
it didn’t, so kudos to you Mr. Ben.

As of this week’s FOMC meeting, the Fed has reduced it’s Bond buying spree from
$85B to $65B.  Since the announcement at the end December that they were
going to taper the purchases, Stock values have declined around 4% as a
whole, and with a decrease of over 200 points this morning (DOW),  Stocks
look to finish their worst January performance in years.  Conversely, Bond
prices have increased commensurately and with that brings a reduction in interest

Economic data has had little impact on Bonds this morning.   Personal
Incomes have not come risen (v. the 0.2% rise expected).
But we won’t let a lack of income ruin our fun though (I mean after all,
borrowed money is cheap right now); Personal Spending rose 0.4%,
above the 0.2% anticipated.  The Core Personal Consumption Expenditures
reading (a different way to show how much we spend and a way the Fed likes
to track inflation at the consumer level) actually rose
year-over-year by1.2%.  Policy makers like to see these numbers
between 2-2.5% to show an expanding economy.  So while the Fed further cut
it’s participation in Quantitate Easing this week by another $10B per
month, if Inflation continues to “underperform”, the egress QE may
not be as swift going forward.

GDP Ain’t What it Used to Be

The final GDP report for 2013 was reported today, showing that our economy increased 3.2% from October through December.  This was a better than the anticipated increase of 3%, but below the third quarter’s strong 4.1% growth.  That was the good news.  Pending home sales declined 8.7%, well over the 0.2% decline anticipated.  Meaning that there are far fewer homes under contract than everyone would like.  Part of that might have to do with the increase in jobless claims: 19,000 more people requested their first unemployment check last week.  And you’ve probably heard by now, but yesterday the Fed reduced their bond purchasing by an additional $10,000,000,000 per month, now only spending 65,000,000,000 per month purchasing longer term treasury notes and mortgage backed securities.

Stocks and bonds seem to have liked the news.  Stocks are up over 100
points (DOW), and our Mortgage Bonds have spent most of the day up 25 basis points.  Technically speaking we are in a nice holding pattern.
Providing that stocks don’t rebound as quickly as they dropped off (stocks are down 4% for the month of January) rate should stay here put.

Passing the Torch

No news out again
today.  Today the baton will pass from Ben to Jan (so to speak) after
the close of this, Ben Bernanke’s last Fed meeting.  Many expect that the
FOMC will taper their Bond purchases for the second month in a row, committing
to buying only $65,000,000,000 per month of the debt instruments.  Some have brought
up the fact that the decrease in purchasing participation is really only
having an effect in name only.  Because new mortgage activity has slimmed
dramatically as interest rates have risen, a $65B purchase is actually a larger
percentage of market share than it was six months ago when the Fed was
gobbling up $85B per month.  While understand the math, I believe
that it’s the perception of the participation, not the percentage of
participation that will influence the investors’ image of the
economic landscape.  And with no Q&A after the conclusion of
today’s session, it will indeed be up to the imagination of traders to
determine the motivation any action (or lack thereof) until the
meeting minutes are released three weeks from now (it takes a while to make it
decipherable for us non-PhDs).

A Peso for My Thoughts?

So I had lunch yesterday with my financial advisor and he suggested that I get out of emerging markets.  Ordinarily I just do whatever Brad says because I trust him implicitly, plus he has great hair and drives a fast car.  But when I saw those red numbers staring me in the face I froze up.  With how much effort it takes to sock anything away anymore, the idea of buying high and selling low gave me a great deal of pause.  So I said “hold”.

Then today I read that a report released several hours after my stubborn decision showing a contraction in Chinese manufacturing, further indicating a slowdown in their economy.  Another article explained that the Argentine Peso’s value is plunging after their government started allowing its citizens to purchase more US Dollars.  Headlines proclaim “World Markets Decline”.  Naturally I am sick to my stomach and quickly calculate in my head how much my IRAs would need to lose to keep up with the depreciation of an Italian sports car.  As I am about to actually get out my calculator, I also see another chart showing that the DOW has also declined 500 points in the last three days.  While my heart is beating up in my throat, I come to the realization that I am only 40 years old and have (unfortunately) many years left before I can retire.  There will certainly be many more ups and downs over the ensuing two decades.  Markets ebb and flow and I have “miles to go before I sleep”–and those metaphorical miles certainly wouldn’t come any quicker by driving a sports car, so to speak.

My original point of even introducing that out-of-control editorial is to illustrate the point that when the equity (stock) markets fall, so do interest rates.  Mortgage Bonds have broken back through a ceiling of resistance for the first time in two months and technical signals, as well as the economic factors heretofore discussed, point to lower interest rates on the horizon.

Mortgage Market Movement

Though coming in just below expectations, Existing Home Sales actually rose 1% to an annualized 4.87 million units bought/sold.  Initial Jobless Claims were right in line with forecasts, and there continue to be just over 3 million Americans collecting an unemployment check every week.  On the other side of the planet, Chinese manufacturing has contracted to a six-month low.  Traders are selling equities to gobble up bonds this morning, allowing us to bounce back from yesterday’s sell-off and keeping interest rates range bound.

An Exercise in Futility

FHA released a mortgagee letter yesterday wherein they are again allowing “compensating factors” on manually underwritten loans, granting loan approval to home buyers with no credit and a 50% debt-to-income ratio.  While this sounds at first like the guidelines are loosening up and Mayberry is again open for business–followed by a fish fry, a barn raisin’ and a hoe down, don’t buy into the hype.  So far it’s just a 17 page exercise in futility since FHA doesn’t buy loans, they just make the rules.  You still need a bank who is willing to take the risk and finance the untried applicant and his fanciful charge toward home ownership.  And as much as I think that guy deserves a house without having to pimp himself to the RC Willeys of the world for 12 monthly installments, the fact of the matter is that banks (the ones who actually survived the carnage of the subprime witch hunt) are still a little banged up and will be skeptical to steer into the murky waters for some time to come, even if they did have a Wall Street fund willing to buy the paper.

If you do have “traditional” credit and meet all of the other rules,
FHA loans are still to be had down at 3.75% and while Conventional’s best
offering is at 4.375% for 30 year loans. Fifteen year rates are in the
3.25-3.5% range (APR will be higher, depending on the loan and down payment amounts, and amortization term–as closing costs and the presence of mortgage insurance affect each loan differently.)

The Value of a Quarter Million Dollar Education

The International Labor Organization reports today that global unemployment increased roughly 2.5% from 2012 to 2013, and there are now 202 million individuals out of work.  Closer to home, the Department of Labor shows that Americans’ hourly earnings have only increased 1.9% per year since January 2009, from $22.01 to $24.17 per hour.  At the same time, inflation has risen 2.1% per annum.

After seeing that, you might be thinking that it is time to look for a new job.  Were your grades good enough to get you into Harvard?  Though the cost to attend tops $56,000 per year, they have a $30 Billion endowment fund that might knock a buck or two off if you showed promise.  Harvard graduates’ average mid-career hourly earnings are $57.21 per hour.  So it’d only take you 6779 hours worked (just over three work years) to get your money back!

FHA is down at 3.75% and Conventional at 4.375% for 30 year loans. Fifteen year rates are in the 3.25-3.5% range (APR will be higher, depending on the loan and down payment amounts, and amortization term–as closing costs and the presence of mortgage insurance affect each loan differently.)

Building a Home?

As I look around my own house, the prospect of owning a brand new home is exhilarating.  Maybe it’s that we have been in our home now for 10 years and the dents, scrapes, gouges, stains, and cracks are starting to add up. So what’s up with “new construction” (as we call it in the biz) across the country?

Of the two graphs shown up top, the upper-most shows the steep decline and slow turn-around of the housing construction market after the pandemic supply of unfinished and vacant, bloated McMansions that dotted the landscape five years ago.  You can see that we are in a healthy, sustainable recovery.  While the National Association of Home Builders laments that Housing Starts were only 50% of “normal” in 2013, they also predict a return to normalcy by late 2015.  Let’s hope things heat in more ways than one for the sector; today’s data show that Building Permits decreased by 3.0% and Housing Starts dropped 9.8% from the month previous.  This is an annualized number and should strip out seasonal abnormalities.

The second graph confirms CoreLogic’s  recent report showing that home prices have regained 90% of the value realized during the peak in 2007.  While defeatists may cry “bubble”, Kiplinger (one of my faves) forecasts 4.2% and 5.2% increase in home values in Salt Lake and Utah Counties, respectively.

Interest rates have improved over the last week. Fifteen year rates are down in the 3.25-3.5% range, while 30 year rates for FHA are at 3.75% and conforming conventional loans are at 4.375% today (APR will be higher, depending on the amortization term, and the loan and down payment amounts–as closing costs and the presence of mortgage insurance affect each loan differently).  The respite from rates hikes is certainly welcome, though in my opinion, temporary

Jobs and Homes

There were only 1.4 million foreclosure filings in 2013, down 26% from 2012, according to
RealtyTrac.  This is the lowest number since the housing crisis began in

In the much-watched labor market, 2000 fewer folks filed for their first
unemployment check last week than the week previous. The Labor department also
reported that the Consumer Price Index rose 0.3% in December.  This is the
biggest gain since last summer, and is due in part to fluctuations
in the price of fuel and other energy sources.  The year over
year CPI index remains at 1.7%, under the Fed’s target rate of 2.0%. This news
a good indication that the economy is picking up, but not so fast that interest
rates will skyrocket in the near future.

FHA drops their rates today to 3.75%, while 4.5% is still the going rate
for Conventional 30 year loans. Fifteen year rates are in the 3.25-3.5% range (APR will be higher,
depending on the loan and down payment amounts, and amortization term–as closing costs and
the presence of mortgage insurance affect each loan differently.)

I would like to think that we can hold this level for a week or
so, allowing Fannie and Freddie to drop back down a smidgen.

1st World Problems

About that “breather” I mentioned yesterday…
Quarterly Earnings reports are starting to come in from some of the DOW heavy hitters and they are better than expected–some for the first time in a long time.  This along with the Producer Price Index (measures inflation at the wholesale level) rising for the first time in three months, and the New York State Empire Index up 3.5 times the expected reading has stimulated a surge in Stocks which has pushed the S&P up to a new all-time intraday high this morning.  Traders and analysts alike are already looking forward to February’s Jobs Report (which is still 23 days away) and discounting last Friday’s low job creation index as an anomaly.

So what does that have to do with the new Targa 4 unveiled at the Detroit Auto Show this week?  Well, what else are you going to do with your bulging portfolio?

Rising Stocks=Falling Bonds=Interest rates did come back up 1/8% as I unfortunately predicted yesterday: 3.875% for government and 4.5% for Conventional 30 year loans. Fifteen year rates are in the 3.25-3.5% range (APR will be higher, depending on the loan and down payment amounts, and amo–as closing costs and the presence of mortgage insurance affect each loan differently.)