February 20, 2009 — The government’s plans to spend hundreds of billions of dollars to goose the economy, plus hundreds of billions more for housing and mortgage markets, failed to produce much enthusiasm. Equity markets swooned this week while gold returned to the $1,000-per-ounce level, and the president’s newly-announced plan to help homeowners in trouble generated as much controversy as his stimulus package.
Mortgage rates held firm throughout considerable market turbulence. The holiday-shortened week saw HSH’s overall average for the cost of mortgage money — our Fixed-Rate Mortgage Indicator (includes conforming, jumbo and ‘expanded conforming’ interest rates) — rise by three basis points to land at 5.79%. The FRMI’s 5/1 Hybrid counterpart rose by a lone basis point to 5.55%. Conforming FRM rates eased to an average 5.22%, while 30-year FRM jumbos rose by eight basis points.
It’s hard to find much to be excited about in the economic data which came to light this week. Local surveys of February manufacturing activity in New York State and the Philadelphia Federal Reserve’s district were uniformly awful, with the Philly area putting in its weakest showing since 1990.
Industrial Production slipped back by 1.8% during January, dragged down by that weak manufacturing sector and slower output from mining concerns. Rising utility output (+2.7%) held up the headline figure to some degree, but the increase in energy usage was probably more related to the spate of fairly cold weather which persisted across the country during the month, rather than increasing use by business concerns. The percentage of factory floors in active use eased to 72% as demand continues to fall.
After sliding for months (sparking fears of deflation in some circles) prices appear to be steadying. The aggregate cost of goods imported into the US did decline in January, falling by 1.1%, but that was the smallest decrease in six months. The price of goods destined for export from our shores rose by 0.5%, a pretty fair reversal from December’s 2.2% decline and the first increase since last July.
Almost as if on cue, the Producer Price Index sported a 0.8% rise in January, about four times the expected increase in costs upstream of the consumer. There was also some firming of prices in the earlier stages of production, but the general trends there are still fairly muted; there’s little reason to expect any burst of inflation just yet.
That said, the Consumer Price Index bumped 0.3% higher for the month. Gasoline prices stopped falling in January and have reversed to some degree, influencing prices higher, but even the ‘core’ measure of inflation which excludes food and energy costs rose by 0.2%, its biggest lift since August. It’s unclear whether this is some leftover influence from the $150/bbl oil mess last year, or simply a stabilizing trend after a fast downward plummet. We’ll need to see over the next couple of months whether inflation is finding new legs.
Good news is still hard to come by with regards to housing. However, low (if erratic) mortgage rates do seem to be having at least some effect. The National Association of Homebuilders index of member sentiment moved one tick higher in February to land at 9, up from a record low in January. Not much improvement, but some, and three out of the four regions in the survey noted improvement (the Northeast being the exception, but we suspect weather issues played a role there). The survey noted that “traffic of potential buyers” climbed to 11, it’s highest number since October.
Of course, that’s at least a minor hopeful sign that some homes will be sold. Unsold inventories of new homes have been slowly and steadily declining for well over a year, but there’s still more than enough to go around. Due to that, Housing Starts are languishing, with just 347,000 new units begun in January, the lowest annualized number since the Census Bureau began this series in 1959. New Home sales have been much weaker than their existing home sales counterparts; we think at least some of that is because inventories of the most desirable homes are depleted, leaving only harder-to-sell stock available. At some point — and probably not that far into the future — at least some new housing will need to be built, but building permits for future activity declined as well.
As mortgage rates eased off last week, applications for mortgages increased, and the “application for purchase” index reported by the Mortgage Bankers Association of America saw its first lift in a month. Refi activity, of course, flared much higher, but we are more encouraged at signs of some homebuying activity.
Another minor note of optimism could be seen in the Index of Leading Economic Indicators, which showed a rise of 0.4% in January, the second consecutive increase in this gauge. Admittedly, the rise was a minor one, but it has been a good long while since there were back-to-back positive figures. We’ll take that as a good sign, even if the indicator may better reflect the present environment as opposed to being a reliable forecasting tool.
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Optimism among consumers hasn’t returned by any means, but at least the ABC News/Washington Post poll of Consumer Comfort climbed off its bottom. The -49 mark seen during the week ending February 15 could proved to simply be a Valentine’s Day rush, but did represent the highest number since mid-January. Weekly Unemployment claims held steady a 627,000 during the week ending February 14. The number remains uncomfortably high, but some leveling off is certainly welcome.
The combination of the stimulus bill and the newly-announced housing rescue plan may ultimately have some benefit for at least some people and some portions of the economy. The “refinancing” part of the Homeowner Affordability and Stability Plan which will allow for at least some low-, no- and slightly-underwater borrowers, could prove helpful, at least to those “lucky” enough to have a loan owned wholly by Fannie Mae or Freddie Mac. We’re even encouraged by some of the “loss sharing” provisions in the “loan mods” portion of the program. A lot of the final details won’t be known for nearly two weeks, but what has been revealed so far has unleashed a firestorm of criticism from consumers as well as at least one cable TV reporter.
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Soapbox Alert: Here’s where we take issue with HASP. While “investors” have been criticized for their refusals to take substantial losses when they modify loans, it’s important to point out that “investors” include personal IRA holdings, 401Ks, and pension plans, too. These aren’t big, bad banks — they’re people like you, Mr. or Ms. Middle Class, who are truly innocent victims of the market. You are being asked to shoulder an enormous load — and huge losses — simply because you were nice enough to want to invest in mortgages so that others could by homes. Shame on you for refusing!
We also don’t see anything to like in either of the “incentive” provisions. Paying servicers $1000 per year for up to three years because the borrower made payments on time is ludicrous. Servicers exist to service loans. What additional services will they perform to warrant a bonus?
Equally infuriating is the perverse incentive by which the government will reduce, by as much as $5,000, the outstanding balance of the loan for a loan-modified borrower. Not only might these loans be modified at taxpayer expense; the borrower will also receive more favorable loan terms (perhaps permanently) and get their loan balance reduced by $1,000 per year — all for failing to meet their contractual obligations in the first place.
We’ve asked this before and we will keep asking: Where do the folks who have lived up to their obligations go to sign up for a similarly sweet deal for simply making payments?
Perhaps worst of all: the government is prepared to implement these loan mod plans even after reports that as many as 55% of them will fail after as little as six months!
We’ll get off the soapbox now (though we’ll have more to say, later, in our blog); it’s possible that the administration will take heed and revise the program before crucial details are revealed by March 4. Mortgage markets are being seriously changed, and not all for the better — and we haven’t even discussed the forthcoming ‘cramdown’ legislation for bankruptcy cases. By the time all this shakes out, we’ll be interested to see if the nine million borrowers targeted in the program truly do get helped. If history — especially recent history — is any guide, we’ll spend a lot of money and land well short of those goals.
Probably no good news out next week, but we’ll be watching some home price indexes (still falling due to the influence of low-priced foreclosures, no doubt) but are hoping for a pleasant surprise in existing home sales (probably not new home sales, though). A revised GDP figure for the 4th quarter is due, along with consumer sentiment and the ISM reports. After a brutal week in the markets this week, next week has just got to be better, but mortgage rates probably don’t budge much.
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