DAILY REAL ESTATE NEWS

August 21, 2012

Why mortgage rates are rising

Commentary: To foster recovery, something has to give, but what? By Lou Barnes
Inman News®

Two things this week: Explain the sudden rise in Treasury and mortgage rates, and then provide a simple tool for understanding budget issues in the election. Nuthin' to it.
In the last two weeks the 10-year T-note has run up from 1.45 percent to 1.85 percent, taking many mortgages from below 3.5 percent to above 3.75 percent.
Explanations offered by sharpies: The economy has turned for the better, no longer sliding toward recession. Or because the Fed will not soon begin QE3, either because the economy is better, or because it won't do any good, or because of the election, or because of internal politics. Or rates have risen because Europe might save itself.
Put all that eyewash in a bucket. Then dump the bucket. July's 0.8 percent upwobble in retail sales is not a "turn" -- not with the Philly and N.Y. Feds' indices sinking, not with the National Federation of Independent Business optimism index returning to recession threshold, not with eurozone gross domestic product (GDP) going negative, and not with China verging on distress. The Fed may not act now, but inflation is tipping again below the Fed's target, and a solid majority at the Fed does not want to risk deflation or a run-up in long-term rates.
When there is no "fundamental" economic explanation, look to "technical" -- chart patterns reflecting the emotional condition of the herd. For nine months prior to April, the 10-year traded 2 percent (mortgages 4 percent to 4.25 percent). Then 10s fell in a straight line to 1.5 percent, wandered at 1.6 percent in June, and then spent July in the 1.4s. At yields like these, nobody makes money on the rate; you make money when bond prices rise (yields falling more). A month with no buyers to take prices higher, and a few in the herd begin to take profits, then many, and so prices will fall (rates rising) until low enough that they can rise again. Tens might go all the way back to 2 percent, might stop here, but rates are not going all the way back down until something ugly happens.
From that complexity to something simple: the budget. (Note: In the long run, the yield on 10s and the budget are linked. Heh-heh.)
Democrats say the Republicans are cruel, want to rob the poor to benefit the rich, and that Medicare and Social Security will be fine if rich people pay more taxes. Republicans say the nation is broke, Democrats will never stop spending and taxing, and besides, we've got ours. Each party offers to play a shell game with no pea.
We have to pay money for all the social goodies, and yet have to pay a social cost if we cut the goodies. Today we borrow 41 cents of every dollar we spend, and we spend $80 billion each day. Something has to give, but what?
Any time you hear a politician's pitch this fall, here's the pea to put under all the shells: What's the politician's proposal as a percent of GDP?
Since World War II, federal spending has run about 20 percent of GDP, and revenue about 18 percent, a perpetual but modest deficit ... until the Great Recession.
Spending is now 24 percent of GDP, and revenue 15 percent. The revenue decline is partly the result of the recession; reversal of the Bush tax cuts would not get revenue past 17 percent of GDP. That recession shortfall is the reason recovery is so desperately important.
Rather worse, social-goody spending will take total spending over 30 percent of GDP in the next decade, health care doing 85 percent of the damage. Worse yet, our borrowing ability will be tapped out in a very few years. At the current pace ... two years. If that. Then markets will pull our plug.
Many of my friends on the Left are soaked in European tax-rate propaganda, 35 percent to 50 percent of GDP, but are blind to nationalized healthcare, railroads and so on, all requiring higher taxes and spending, and with intractable deficits.
Republicans envisage a dinky government, 18 percent of GDP, but are utterly dishonest about the social cost, and are resistant to deep cuts in defense. Democrats refuse to consider any upward limit on GDP, or a budget deficit smaller than 3 percent of GDP.
The Bowles-Simpson "Co-Chairs Proposal" caps spending at 22 percent, eventually 21 percent, and raises revenue to 21 percent. Please read it.
Mr. Politician, don't tell me what's wrong with the other guy's deal. Please do tell me what you want to do, and your GDP metric, and consequences. Then compromise.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.

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Friday, August 3, 2012

August 3, 2012

Uncertainty to temper economic growth

Panelists: Housing sustainability depends on private secondary market By Andrea V. Brambila
Inman News®

SAN FRANCISCO -- While housing has been a bright spot for the economy lately, real estate professionals should not expect runaway growth anytime soon, according to panelists at today's Real Estate Connect conference in San Francisco.
"I think the market we have today is going to be a market that is going to be somewhat sustained," said Joel Singer, executive vice president of the California Association of REALTORS®. "Time is important, if for no other reason than personal balance sheets get healed. There will be growth in the next couple of years, though it's obviously not going to be dynamic."
Bill Emmons, assistant vice president and economist at the Federal Reserve Bank of St. Louis, emphasized that the economy as a whole was "not too broken to be fixed" but that the recovery is "just going to look a lot different than we're used to."
"We're at a slower growth rate, so we're pretty much always on the verge of a slowdown or a recession. Something coming from Europe or domestic origins can knock us down," Emmons said.
Housing will be one of the better sectors of the economy, Singer said, but he cautioned that the economy as a whole was at risk in the next six months. Calling the downturn "financially created," he said a revamp of the financial system was in order.
"I think we have to be very, very concerned about the policy issues," Singer said. In particular, he noted that some 95 percent of mortgages originated are owned or guaranteed by the federal government.
"We're the only first-world country with a nationalized housing market," said Amy Brandt, CEO of Vantium Capital.
Patrick Stone, president and CEO of Williston Financial Group, said that uncertainty surrounding two controversial regulations -- the qualified mortgage (QM) and the qualified residential mortgage (QRM) -- is an impediment to the development of a private secondary mortgage market.
QM would establish standards for borrowers' "ability to pay" the mortgages they seek, while QRM would establish certain baseline standards for safe underwriting and require lenders to retain a 5 percent minimum ongoing stake in any loans they originate that don't meet QRM requirements.
The regulations are under the aegis of the Consumer Financial Protection Bureau (CFPB), which recently postponed action on both rules after protests from REALTORS®, builders, banks, unions and consumer groups.
"Everything's on hold until we can get clarity (from) CFPB," Stone said. The bureau needs to define exactly how the regulations will work, the debt-to-income and loan-to-value ratios that will be allowed, and FICO score requirements, he added.

"We are walking off the plank into some deep water. So until these things get resolved there will be no private secondary market," Stone said.
Singer said he expects the transition to a bigger private secondary market will be "very choppy" and will "take a while." The presidential election, another source of uncertainty, is unlikely to bring about any meaningful change, he added.

Uncertainty also surrounds financial markets worldwide, panelists said. The eurozone crisis "is a real and present danger" and could send "shock waves" through the global economy, Emmons said.
"The Fed is worried about Europe," he added.
World economies are now interdependent, Brandt said, and "I don't think our political systems and financial systems have adapted to that yet."
Nonetheless, turmoil abroad has spurred a flight to the relative safety of U.S. Treasury bonds and mortgage-backed securities that fund most mortgage loans. That is "one of the reasons we're able have low mortgage rates," Emmons said.
Real estate itself is now considered a safe bet for many investors, the panelists said, with some adding that they've put their own money into properties.
"To me, hard assets are the place to be," Singer said. High affordability and low interest rates mean this is a "once in a generation opportunity in terms of real yields," he added.

Citing Facebook's sinking stock price since its initial public offering, Brandt said investors are less confident about investing in businesses.
"There has sort of been a fundamental disconnect in how we value companies. There are more investors saying, 'I don't know how to value this company, but I can buy this house.' So much of what drives the economy is people's perceptions," she said.
For now, real estate is considered "safe," but "how long that persists is a big question," she added.
Emmons cautioned that "we're going to have a lot of volatility (in the economy) for the next five years or so." He advised agents to "be aggressive, stay focused" and "don't be in a rush."
While the Fed has made clear that it will keep interest rates low until at least 2014, Brandt questioned the sustainability of the current housing market rally after that point.
"When the Fed starts to raise the rates, how do we sustain the current absorption rate? Without a private market, I think you're going to have a hard time" maintaining growth, she said.
Both Brandt and Emmons anticipate home prices will remain flat in the next few years, partially because consumers are still in the process of unloading debt and partially because of coming changes expected to disrupt the financial system. Stone anticipates prices will rise, albeit slowly.
On the jobs front, Stone struck an optimistic tone and said that U.S. exports, particularly of grain and petroleum products, are rising and the nation is set to become a net exporter of natural gas in a few years.
The U.S. is "positioned to be a breadbasket and energy center," Stone said.