Mortgage Market Week in Review….

by Tom Vanderwell

Mortgage Officer

Author website

Well it’s hard to believe, but another week has flown by.   Rather than spending a Saturday working on mortgage stuff and writing about mortgage stuff, I spent the day taking my 8 year old to a birthday party, cleaning out the garage and getting the pool ready for the season.  It was a good day for that.

But enough about me, it’s time to take a look at what’s happened in the financial markets this week.   Let’s look at a couple of key economic reports/financial news items:

Foreclosures – for the first three months of this year, many of the big banks and Fannie and Freddie had foreclosure moratoriums on.   What does that mean?   Basically that they stopped foreclosing on homes.  But, many of the big banks lifted the moratorium shortly after the 105% refi plan was announced and Fannie and Freddie lifted their ban on March 30.  The reports that I’ve read (and written about on Straight Talk About Mortgages ) show that foreclosures are spiking way up again.    What does that mean?  A couple of things: 1) Our inventory problems aren’t going to go away any time soon.   2) Bank earnings problems aren’t going to go away any time soon.

New Construction –Housing starts and permits both came in at pretty close to historical lows.   But frankly that’s not a horrible thing from a long term standpoint.   Let me explain: We have too much inventory.   In virtually all price ranges and virtually all markets, there are too many houses for sale.   So we don’t need builders building more houses right now because it adds to the inventory problems.    Also, we have a situation where in most markets, the number of foreclosures that are on the market is raising the discrepancy between the cost of existing homes and the cost of building a new home.  According to many of the developers who I’ve talked to, it’s almost impossible, in many markets, to sell a brand new home at a profit because of the pricing pressures.   So, until we can work through the inventory and also address the jobs issues that are putting pressure on the markets, the best thing we can do is reduce the amount of new homes that are being built.   Don’t get me wrong, I’m not talking about custom homes, I’m all for people building new homes.   I’m talking about builders putting up spec homes.  If there are already too many homes, we don’t need to add more.   Keep in mind as well, that individual markets might vary from that, but overall the principle of supply vs. demand needs to be applied.

Factory Utilization – What’s that?  It’s a simple thing.   How close are factories to utilizing all of the available time and man hours that they can?   If you look at the chart on factory utilization that I posted on Straight Talk you can see that currently we’re at just under 70%.   That’s not a very high number.

Consumer Price Index – The”headline” number that came back showed that inflation is currently non-existent but that deflation isn’t a huge immediate concern.   However  if you look at the “core” rate, there were “troubling signs” that inflation isn’t totally out of the picture and that has put a little pressure on the market.

Wells Fargo –announced their earnings for the first quarter of 2009.   It was a good number but there were some serious questions about the numbers behind the numbers.  Let me explain: Their chargeoffs (for bad loans) and their loan loss reserves (money set aside for loans they think will go bad) were both down by 50%.  How could they be down by 50% when the losses in the market are going up?  Two potential reasons:  1) Subjective accounting (how’s that for a nice phrase) or 2) The effects of the temporary moratorium on foreclosures.   Either way, the possibility of that trend reversing itself and losses going up this quarter are pretty good.

Goldman Sachs –So if you are under a lot of pressure to post good earnings and you have a really bad month, what should you do?  How about change your fiscal calendar?   Goldman’s fiscal year used to end on November 30.   Now they have switched to a calendar year basis.  So if you look up their year end numbers, they end November 30.   If you look at their first quarter numbers, they are January, February and March.   What’s missing between them?  Oh yeah, December, the month where they lost a LOT of money.   Isn’t it a coincidence how that happened?

So is it real?  And what difference does it make to the mortgage market?

It seems to me that we’re dealing with a different type of market right now.   There are two scenarios playing out and which one “wins” will have a big impact on the direction of mortgage rates.

• Is the economy turning around?  Is this really the bottom?  If it is, we’re going to see upward pressure on mortgage rates due to increasing inflationary risks and pressure on the value of the dollar due to the amount of government borrowings.   I was reading an article that was addressing this question and made an observation which I thought made sense.   It basically said that if you look at all of the bailout/stimulus money as fertilizer, it’s no wonder we’re seeing some things starting to grow with as much “fertilizer” has been spread recently.
• On the other hand, we’ve got a number of good reports that all have “buts” in them.   Wells had good earnings, but…… Goldman had good earnings, but……   You get the picture.    The stock market has rallied over 20% in the last 5 weeks.   That’s not a sustainable number. If we start seeing signs that this is a “head fake” and the market is really going down further, then expect downward pressure on mortgage rates.

The direction this takes is going to impact not only mortgage rates but a lot of people’s plans and investments going forward.

Thanks for reading!  If you have any questions on it, let me know.