Archive for the ‘Market Monitor’ Category

by: Tim McLaughlin

With high water marks on the radar screen for 2011 (the end of the Treasury purchase program, Fed induced inflation measures, and employment/economic recovery concerns), we will be watching the early warning signs from the Federal Open Market Committee even more closely than we have in the past for indications of what’s to come and the Fed’s mindset on how they react.

On Wednesday, as expected, the first FOMC meeting of the year was uneventful but it still gave everyone in the press something to jabber about. The statement was almost identical to last month’s (which was identical to the month before). The Fed acknowledged stronger economic data and that commodity prices has risen (a new addition to the verbiage). The statement continued to reference that “[core] inflation is somewhat low” relative to the mandate and an unemployment that is “elevated.” The recovery is continuing, but remains “too slow to sufficiently improve the labor market.” Business spending in software and equipment is rising and household spending has increased. In addition, the “money statement” that the benchmark rate will be “exceptionally low for an extended period” remained in the verbiage as well.
The takeaways for our trading desk were as follows:
• Bottom line: No real surprise. The statement shows that the Fed has set a very high hurdle for conditions under which they would change their policy rhetoric and we’re still a long way from a “hawkish Fed”. Just see the opening sentence “economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions”

• Maintained rates unchanged 0% to 0.25%, unanimously 11-0 with no dissents (first time in a while there were no dissents)

• Maintained QE2 plan unchanged at $600B until June including MBS reinvestment (MBS reinvestment a key for our industry).

• Economy recovery is continuing but recovery has been “insufficient” to reduce joblessness

What this means to us? All in all, positive. Stay the course. Maintain interest rates. As the economy and employment improves and/or as inflation starts to ramp up, that is when we will need to watch closely to see how that impacts Fed decisioning, which in turn impacts interest rates.

by:Tim McLaughlin

There was a web based discussion a couple of weeks back; the talking points which were shared with me by trading partners on the street, which was entitled “Is Real Estate Finally a Good Investment”? Essentially, the moderators of the discussion pointed to three underlying reasons why Real Estate Investment, in certain scenarios, makes feasible sense right now (taking a traders mindset into account):

• Hatred of the “Asset”: Hatred of an asset is often the precursor to contrarian interest, and being contrarian is at the heart of many investment strategies. To paraphrase Warren Buffett, “be fearful when others are greedy and greedy when others are fearful”. Mr. Buffett backed that idea when he invested in the stock market in the teeth of the financial crisis in late 2008 and early 2009. Remember, Gold was hated for years (termed as “dead money”) before it recently became an attractive asset class once again and skyrocketed in value.
• Smart Money is Buying: John Paulson, the hedge fund manager who made $20 billion betting against the housing bubble in 2007-2010, stated in a speech late last year: “If you don’t own a home buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.” Why is Mr. Paulson so adamant? Because he believes long term interest rates are not going to get much lower. They have, in fact, risen since he gave that speech, but they remain remarkably low by historic standards. Low rates and the expectation that home prices will rise is his basis of this sound argument
• Demand is Coming Back: Supply isn’t as out of whack as it was at the height of the crisis. At the end of Nov, home builders reported 197K new homes on the market, the lowest level since 1968, according to Yardeni Research. The National Association of Realtors reports that the inventory of existing homes for sale fell 4% to 3.71M homes, which represents a 9.5 month supply at the current sales pace, down from a 10.5 month supply in October. And that timeline appears to be falling.

Albeit, no one will really know when the “best” point in time is/was to buy or invest until it has already come and gone. But with “value” inventory and low interest rates, more and more observers think the time is now.

The Housing Market in 2011
by: Tim McLaughlin

As we enter the New Year, the two biggest questions we hear are “what will happen on the housing front in 2011” and “what are the expectations for interest rates”? There is a lot of chatter about this, not only in our industry, but in the broader markets as well.

Strictly speaking from a market perspective, there are five general factors that appear to be driving how the housing market will develop in 2011:

• Employment:Certainly, it stands to reason that the higher the employment rate in this country, the healthy the housing market will be with new, willing entrants. Today’s employment data report was a good start to the year, with the headline unemployment rate dipping down to 9.4% (down 0.4%). Some noise in the data release, but hopefully a positive sign of things to come.

• The Foreclosure Process: How long it will take to process, list, sell, and clear all the pending foreclosures will have a direct impact on the housing sectors inventory level. “Robogate” stalled the process in 4Q10, but with foreclosures once again being processed at the beginning of the year, the sooner we clear the existing inventory of foreclosures, the quicker we normalize the housing market.

• Regulatory Changes:The future of Fannie/Freddie, the Dodd/Frank Act, Risk Retention, Compensation Rules -> all items that you may have heard about directly or on the periphery that will shape the way business is conducted and will indirectly impact the Real Estate sector in the year ahead.

• Underwriting Guidelines: 90+% of production is now connected to some type of government agency. In order for that to change, private lenders are going to have to step up lending within (or outside) the existing box we now work within.

• Interest Rates: A lot of interest rate projections are based on what the economy does in 2011, and there is an inverse relationship between the recovery in the market and rates. Most economists project that if the economy stays cool, interest rates will trend lower. The hotter/quicker the economy recovers, the more interest rates will rise. The important takeaway is that rates are still at historical lows, with Fixed Rates loans starting with a 4 in many cases, and hybrid ARM’s still in the 3+% range.

by:Tim McLaughlin

An exciting year, as rates declined to historical lows, and then began to climb a touch the last 45 days of the year (albeit, still low compared to historical benchmarks).

So what does 2011 have in store? There will be a new regulatory environment. There is anticipated to be volatility in the Fixed Income market to start the year. There will be some short sales and foreclosures (hopefully, the tail end).

And there will also be what there always is: buyers…and sellers. People will move, trade up, trade down, get married, look at investment properties, look at vacation homes…and we will be here, as always, to help!

Merry Christmas and Happy New Year from the Weichert Financial Services Secondary Marketing team! All the best.

by:Tim McLaughlin

As the market selloff continues, rates have retraced
sharply in recent weeks from their record low trough in
October this year.

According to the Freddie Mac Weekly Primary Mortgage
Market Survey (PMMS), the average rate for a 30 year
mortgage jumped, at the beginning of the week, to 4.83%
from 4.61% last week. This rate reflects what lenders say
they were offering to well qualified borrowers with 20% down
who paid 0.7% of the loan amount in upfront fees (i.e. -
points). And we have trended even higher than that as the
week has progressed.

Additionally, 5/1 Adjustable Rate Mortgages (ARMs)
jumped to 3.77% from last week’s 3.60%, which is the
highest 5/1 ARM rate since mid July.

This is the fifth week in a row that rates have gone up,
fueling speculation that 4-handle 30 year mortgage rates
may potentially be a thing of the past, and as the new
normal for 1Q11, will see 30 year mortgage rates hover in
the 5.0% range. However, that is all based on supply and
demand, and if the buyers come back to the market as the
New Year rolls in.

This recent climb in mortgage rates is driven by a few
factors: riding the continued news of positive economic
growth, spurring investors to move out of bonds and
securities as Treasury yields surge. In November, retail
sales growth, excluding automobiles, was two times higher
than forecast. Also, the Thomson Reuters/University of
Michigan Consumer Sentiment Index rose to a six month
high in December. And industrial production showed
promising signs of recovery with the biggest gains since
July.

Put simplistically, the extremely sharp uptick in rates is
driven by a number of different variables, but the main driver
is supply and demand. There is ample supply (sellers), but
literally very little/no demand. And what we remember from
Eco 101: when there are significantly more sellers than
buyers, prices fall (fast), and corresponding yields increase.
Is this a year end phenomenon, or will the trend continue
into 2011….time will tell.

5/1 ARM rates at 3.49% – rates are still low. Let us help!

by: Tim McLaughlin

Over the past week, we have continued to see significant volatility on mortgage interest rates. In addition to the reasons for the uptick in rates noted over the past few weeks (GOP dissention, un-unison Fed commentary, US sovereign debt rating concerns, G-20 backlash, corporate year-end profit taking, China inflation concerns), we have seen a couple of new drivers this past week keep the directional uptick flowing:

• After Europe made strides in “resolving” its debt situation, investors left the security of U.S. Treasury debt causing bond yields to rise and mortgage rates to increase along with them
• President Obama’s announced agreement to extend tax cuts are very positive for the economy, which in turn are good for Equities and bad for Fixed Income

In addition to all these drivers, economists and traders are observing that it is hard to decide whether investors are selling Fixed Income securities (thus driving rates higher) because they expect US stimulus to boost growth in 2011, or whether they are bothered by the amount of debt, now and anticipated. Most admit that growth would be far, far more preferable than seeing yields rising due to people thinking that America’s fiscal situation being unsustainable.

So is this a glass half full or glass half empty scenario? Let’s analyze:

• Today, the monthly P&I payment on a $300K mortgage would be $1,520.06 *
• At the end of both 2008 and 2009, the monthly P&I payment on a $300K mortgage was $1,703.37 **

Dissecting this analysis, even though the market has felt extraordinarily volatile the past 4 weeks, the monthly payment on a static 30 year mortgage is ~$183 cheaper than is was 12-24 months ago.
With home prices as affordable as ever, and many existing mortgage holders still in the 5+% to 6+% range, it is still not too late to affordably purchase that home of your dreams, or refinance into a more affordable payment. Let your Weichert Financial Gold Services Manager help and make your holidays a little bit brighter!

by: Tim McLaughlin

Holiday parties are great…the biggest stress, other than finding a babysitter if you have younger children, is what to bring as a gift (you don’t want to arrive empty handed). What should you bring? Tired of bringing/regifting the same old bottle of wine? While it’s relatively easy to come up with a housewarming gift for a friend or family member who has just moved into a new home, it’s sometimes difficult to think of special gifts that will impress your host who has lived in their home for several years. Here are some thoughts to take one less stressful chore out of the holiday season:

• If your host likes photography or treasures photos of the family, a silver plated frame will do the trick. If you have a photo of the family, insert it into one of the frames to add a more personal touch. A gift that will be appreciated year round and gives the receiver free reign to interchange the photos that mean the most.

• You can put together a basket with a couple of holiday hand towels, a bag of potpourri and hand soaps with festive scents. When hosting a gathering, the bathroom is frequently used by guests, yet is often the most neglected room when trying to make the house cozy. Your host will be able to use these to impress guests by infusing holiday décor throughout the home.

• While everyone else is bringing that same old bottle of wine, kick it up a notch by including a set of glassware or an electric wine chiller. Add an even more personal touch by creating photo coasters with some of their favorite snapshots of friends and family.

• A cookbook is a terrific idea, especially if they follow a specific chef on TV. Does their favorite chef have a line of cooking products? Pair the book with their signature sauce or spice to take the gift up a notch.

• Candles always make a nice gift, and, literally, brighten up the room. Be sure to find candles with two or more wicks so the candle will burn evenly and last longer.

• In addition to all these nice gifts, the gift of knowledge is an invaluable gift your host may treasure move than any other. “Did you know that it is still not too late to refinance if you haven’t already?” “Did you know you can still get a 30 year mortgage in the 4’s, a 15 year in the 3’s, and a 5/1 ARM at 2.99%?” “Sure, rates have gone up lately, but it is not too late”.

• Another great gift is a referral. If you meet that host or party goer at the parties who hasn’t refinanced yet, let us know….we can help!

by: Tim McLaughlin

In last week’s Market Monitor, we talked about a couple
of the forces that negatively impacted the Fixed Income
markets (the backlash from the G-20 summit, investors
pulling back on their purchases of US Government Debt,
etc). This week, we saw the slide continue as more factors
contributed to the downturn:

* GOP leaning economists and lawmakers planned on
launching a campaign to “potentially rescind QE2”. In
reality, the odds of this happening seem slim, but it
nonetheless delivers a negative message to the global
communities that there is a divide within the upper
reaches of the US Government, and that we are not
even on the same page (does QEII make sense or not?)

* Richmond Fed President Lacker suggested that the Fed
may need to raise rates instead of keeping them low, in
order to curtail inflation (which is non-existent at this
point). Also, this calls into question the validity of QEII by
a member of the FOMC who is sitting at the decision
table and opining on what policy we should implement.
Again, not good for continuity or global confidence.

* There was a news report citing a warning from Moody’s
that permanent tax cuts could potentially have adverse
effects on the US sovereign debt credit rating. If the
sovereign rating goes down, it would stand to reason
that either: a) foreign investors may purchase less debt
and/or b) US debt issuance will be more expensive
(looking for a higher yield on “riskier”, lower rated debt).
Both a and b would contribute to higher interest yields.

* Additionally, we haven’t even touched on the issue of
China’s inflation concerns (and what they will do to
control inflation), Ireland’s banking issues, and the fact
that it appears that some institutions who were big block
buyers of MBS debt earlier in the year are now selling
their positions and taking the profits by fiscal year end.

Takeaway: QEII is still in place: a slow, methodical
purchase plan. That will help the market, but Fixed Income
will really be driven by supply and demand, and supply
significantly laps demand at this point in time. Expecting
volatility through the rest of the month (short week next
week); December’s direction is TBD at this point.

by: Tim McLaughlin

We expected a lot of news, and a great deal of market
uncertainty this week, and that’s what we got. Here is a
recap from the most action packed market week of the year:
Election Tuesday: Pretty much went as projected.
Republicans took back the House, Democrats held on the
Senate by the narrowest of margins, and President Obama
publically took responsibility for the “shellacking” Democrats
endured on Election Day.

With the election behind us, what does this mean for the
future? Republican’s will take a look at redoing/undoing
Dodd/Frank, Health Care, Consumer Protection oversight,
however, it is long shot that they will be able to make a
significant dent in any of these. Wall Street is happier, but
we will see if that translates into anything positive in the
mortgage space. I am sure the volume around the future of
Fannie Mae/Freddie Mac becomes louder in congressional
chambers over the next six months. Election, as a whole,
was good for moral and the markets, which is good for rates
and housing, but Wednesday was really the key…
Bernanke Wednesday: Did and said all the right things.
The FOMC came out with a package that, for the most part,
met the expectations of the marketplace. $600B in new
Treasury purchases targeted ($100B more than projected),
but over a longer timeframe (by the end of Q2 as opposed to
the end of Q1), thus an artificial cap of $75B a month as
opposed to the projected cap of $100B per month.
From a market perspective, all sectors liked/loved the
news. No real knee jerk reaction on Wednesday afternoon
post announcement, so, initially, there were thoughts that
the market had potentially fully priced the whole
announcement into various asset classes in advance, but
Thursday saw rallies in all sectors (Equities, Fixed Income,
Commodities), so, obviously, there is still some room for the
market to capitalize on this.

The game plan related to the FOMC’s moves are simple:
by driving down the dollar, reducing interest rates, and
hopefully create just enough (but not too much) inflation, that
should positively impact investments, exports, consumer
goods, and the economy as a whole, which, in turn, also
helps job creation and employment. The goal of the stimulus
plan (QEII) is straightforward: to not let existing roadblocks
continue to encumber the economic recovery. While the
initial response (from the market) regarding the
announcement is good, we will have to trend the results over
the next few months to come.

by: Tim McLaughlin 

The focus for next week is undoubtedly the FOMC meeting on Tuesday/Wednesday, and what the Fed chooses (or chooses not) to unveil. Many traders/economists are of the opinion that what the Fed may do is already priced into the current stock and bond market levels, to some degree.

When the US government, who prints money, wants inflation, it is not a wise strategy to bet against them. The QE II that the press is consumed with is a form of government monetary policy used to increase the money supply, when necessary, by buying government securities or other securities from the market. This, in turn, increases the money supply by giving financial institutions with capital an opportunity to promote increased lending and liquidity. Quantitative easing appears when the banks interest rates (overnight Fed Funds, discount rates, etc.) have already been lowered to near 0% levels and have failed to produce the desired effect.

The major risk of quantitative easing is that although more money is floating around, there is still a fixed amount of goods for sale. With more cash and the same amount of goods, inflation usually increases, which in turn pushes rates (like mortgage rates) higher. And the end game for the Fed at this point is to increase inflation (and therefore jolt the economy, as detailed last week).

On the downside, if the FOMC does nothing, or not as much as the market would like or expects, that could adversely impact the markets, with equities probably being more negatively impacted then bonds. Weds afternoon will undoubtedly be an important time in the marketplace.