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Wednesday, October 24, 2007

Existing Home Sales And Rate Cut

Because of the generally benign effects of the previous rate cut on mortgage rates, the odds are now very high that this existing home sales report will cause the Fed to cut 25 bps and probably another 25 bps quite shortly. The one thing the Fed cannot do is cut rates if rates force higher mortgage rates, but the previous cut combined with the demand drop is forcing price competition for qualified borrowers and offsetting inflation worries. The Fed has room to cut again and it almost certainly will. Given the choice between baseline consumer inflation combined with a severe recession and baseline consumer inflation combined with a mild recession, the Fed will pick the second option. The major factor affecting mortgage rates is risk, and failing to cut increases risk enough to offset any marginal inflation-fighting effect.

The significance of the report is as follows. The 2007 total actual sales will probably be between 5.6-5.7 million, down from 7.1 in 2005 and 6.5 in 2006. I am waiting for CR's post on the next NAR prediction, which should be absolutely delightfully funny. The actual YoY national sales drop was 22.7%, from 529,000 to 409,000. The pace of sales in 2008 depends on what the real economy does and should be in the 5.2-5.5 million range - provided that conditions do not change sharply for the worse.

As for loss predictions, the bottom just dropped out. In every region, the average price dropped below the 2005 regional average. Median prices dropped below the 2005 median in every region but the Midwest. These comparisons are overweighted to the current prices because of the ubiquity of sellers concessions now versus buyers concessions in 2005, so the true number is worse. For example, in the West September's average was 347,300 versus the 2005 West average of 363,800. But the real current number is probably more on the order of $340,000. Current average 93.5% of the 2005 average. Play the funeral dirge of your choice.

Industry apologists will explain that this was due to the suppression of higher-end sales due to higher jumbo mortgage rates. But this is untrue. Actually, 2007 prices have been distorted up till now because of a shift in sales toward the higher end. This is never sustainable because you need the lower end purchaser to support the higher end, and the higher end homes will end up taking higher than average losses as they always do.

In all too many areas, first time homebuyers who purchased from 2004 on are now underwater. Most who purchased in 2005 are underwater unless they put down at least 10%. It's a true blowout. Jingle mail is in the future, because although the hardest hit areas have fallen in price enough to bring more buyers into the market, buyers at a 30-35% discount are not going to help lienholders. Prices will continue to drop through next year and in some regions into 2009. We are going to roll back regionally to at least 2003 pricing.

There was great debate and discussion about why Countrywide would refi its paying customers into FNMA/FHA loans. This is why. They get money back for operating capital while offloading their losses. I think FNMA is going to have to be very careful about its underwriting, though. Fannie's procedures for underwriting in declining price areas won't be much of a curb if Countrywide is doing the evaluations, will it? What is the incentive for Countrywide, or any other lender, to follow the guidelines if by ignoring them they are achieving their own survival?

Hoo hah. I was going to post about casual dining, but frankly this report is inducing enough nausea to prevent discussions of it and restaurants on the same day. The downward plunge on the RE rollercoaster has begun.

PS: The outlook for most European countries is slightly worse than ours. Catholicism may come back into vogue in Europe. "Hail Mary, full of grace ... pray for us now and in the hour of our layoff."

Comments:
The outlook for most European countries is slightly worse than ours.

I believe that.

As a side topic, I just put up some charts of gasoline station sales and how it affects overall retail spending if you are interested.
 
a lot of ppl dont konw that the FED rate cuts spikes the mortgage rates to go up !
 
In this case, it didn't, FHA Loans. And that is because weakening effective demand for mortgages (that are of good credit quality, anyway) is forcing rates down.

The ten year Treasury yield has dropped instead of having risen. Treasury yields.
 
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