Thursday, July 11, 2013

Today's links

1---Mortgage Application Volume Continues to Sink , DS News

Purchase activity was also down. The seasonally adjusted Purchase Index fell an adjusted 3 percent week-over-week and was down 23 percent unadjusted. Compared to the same week last year, the index was up 5 percent—a considerably smaller increase than those reported in the past several months.
Meanwhile, mortgage rates continued to jump. The average contract interest rate for a 30-year fixed-rate mortgage was 4.68 percent, the highest since July 2011. Points increased to 0.46 (including the origination fee) for 80 percent loan-to-value ratio loans.

2---Americans Report More Financial Troubles , DS News

According to Consumer Reports, the Trouble Tracker Index climbed more than five points to 39.2 in July, “an increase that was entirely fueled by an epic 23.3-point jump among those households earning $100,000 or more,” the organization said. The tracker measures the proportion of consumers that have faced difficulties and the number of negative events they have encountered.

3---REITs Deepening Bond Losses as Leverage Forces Sales, Bloomberg

Since the May 2 comments, shares of the companies, which use borrowed money to make $400 billion in credit market bets, dropped about 20 percent and the value of their assets has plunged after the Federal Reserve triggered a flight from bond funds by signaling plans to slow its debt-buying program

4---Nowhere to Hide in Worst Bond Losses Since 2008: Credit Markets, Bloomberg

5---QE: Not worth the risk?, Mark Gongloff

Fed critics often accuse the central bank of letting dangerous speculative bubbles inflate all over the world with its money-printing. The Fed has acknowledged that it's aware of the dangers, and Bernanke himself has spoken recently of the need for central bankers to keep an eye on developing bubbles. The Fed seems to think its QE program might not be worth the risks any more, which may be one reason it's eager to dial it back.

6---The plight of labor, Reuters

It’s May Day, and Henry Blodget is celebrating — if that’s the right word — with three charts, of which the most germane is the one above. It shows total US wages as a proportion of total US GDP — a number which continues to hit all-time lows. Blodget also puts up the converse chart — corporate profits as a percentage of GDP. That line, you won’t be surprised to hear, is hitting new all-time highs. He’s clear about how destructive these trends are:
Low employee wages are one reason the economy is so weak: Those “wages” are represent spending power for consumers. And consumer spending is “revenue” for other companies. So the short-term corporate profit obsession is actually starving the rest of the economy of revenue growth.
In other words, we’re in a vicious cycle, where low incomes create low demand which in turn means that there’s no appetite to hire workers, who in turn become discouraged and drop out of the labor force

7---Health care and SS for china, but not for US, Bloomberg

The government is taking steps to reform the hukou system. It’s expanding health-care and pension plans so Chinese need not save so much to protect themselves from catastrophe. Regulators are giving banks more flexibility to set market-based interest rates and encouraging lending to the service sector, which is creating jobs. It will take all this and more to unleash Chinese spending power

8---Abenomics Leaves Japan’s Hinterland Behind as Budget Cuts Bite, Bloomberg
(Another reason why Abe will fail)

9--Atheists are most feared group in the country, Info clearinghouse

10--Red flags for China's exports, sober look

the converged numbers show that export growth in China has stalled. And unless one can argue for rising domestic demand to offset exports, one should be prepared for disappointing GDP growth.

11--Dire Predictions for Housing Recovery, CNBC

The housing recovery is in for a major pause due to higher mortgage rates. It is not in the numbers now, and it won't be for a few months, but it is coming, according to one noted analyst. The market has seen rising rates before, but never so far so fast; there is no precedent for a 45 percent spike in just six weeks. The spike is causing a sense of urgency now, a rush to buy before rates go higher, but that will be short term. Home sales and home prices will both come down if rates don't return to their lows, and the expectation is that they will not.

Where is the proof of this? We only need look to the $8,000 home buyer tax credit that expired in 2010. The falloff was dramatic.

"That stimulus was so small compared to a 3.5 percent interest rate, it's almost not even a comparable, but it's the only thing I can find," said Mark Hanson, a well-known mortgage analyst in California who predicted many aspects of the mortgage market crash. "When that stimulus went away, new home sales fell 38 percent in a single month, down 25 percent year-over-year, and existing home sales fell 30 percent over a single month, 24 percent year-over year."

Hanson is predicting a 19 percent jump in contract cancelations for the home builders for sales made between December 2012 and June of this year. That is because 70 percent of homes sold in that time were not built yet, and buyers had not locked in rates. As for the home builder stocks, he said they are, "priced for perfection" according to sales from the past years, but those sales won't hold up.

The predictions may sound dire, but the forward-looking indicators are falling in line. Mortgage applications have been falling for the past month. Applications to purchase a home are down 28 percent in the past month and up only 4.5 percent from a year ago. They should be up far higher, given that prices and demand are rising so fast. Signed contracts to buy existing homes jumped unexpectedly to a six-year high in May as rates started to rise; there's your rush.

At a brokers open house in Northern Virginia this week, real estate agents said they are already seeing the effects of higher rates on the ground and in the homes they're trying to sell.

"It has gotten a lot quieter, which is a shame because historically the rates are still very low," said Ruth Griel with Prosperity Mortgage.

"It's having a kind of chilling effect on the market," said Mark Beardsley, a Realtor with Long and Foster. "What's happening is we are pricing down. If they were qualified for 600, now we're looking at 550 and below."

Mortgage rates going from 3.5 to 5 percent is roughly a 15 to 20 percent decrease in what the average buyer can afford. They can move to different loan products, like an adjustable rate loan, but ARMs are harder to qualify for and require far more documentation.

Rising rates are the number one worry for the majority of buyers right now, according to a new survey by Trulia, an online real estate company. 56 percent of consumers they surveyed said they would be discouraged from buying if rates reach 6 percent. Trulia's chief economist, however, is not concerned.

"By design, the strengthening economy should boost housing demand at the same time that rising rates dampen housing demand," he wrote in a post on He also said that the drop in refinances will cause banks to go looking for business and potentially loosen up a bit on lending.
The trouble is that as rates jump, so too do home prices. A continuing lack of for-sale listings has buyers bidding up prices.

Why is there so little inventory? Too many homeowners have too little equity to consider a move up and others are afraid they won't be able to find anything to move up to. While supplies increased slightly in the Spring, the Realtors do not expect a significant number of new listings to come onto the market as we head into the traditionally slower fall season.

Prices are moving up faster than income growth and faster than employment growth. Even the Realtors have said they are overheating. Buyer demand is clearly there, a lot of pent-up demand from the housing crash, but demand that will have a price cap. Yes, mortgage rates were at 6 percent for much of the 2000's and higher than that in the 1980s and 1990s, but 3.5 percent became the new normal, and a lot of demand was pulled forward at that rate. This housing recovery was easy at 3.5 percent. It will be far harder at 5.

12--Dismal IMF report shows "no area of the world economy that can provide the basis for a general expansion ", wsws

The notion that somehow China and other so-called “emerging markets” were going to provide a new foundation for the expansion of the world economy was always a fiction, given their dependence on the US and Europe as their major export markets. But it was able to be maintained for a period due to extraordinary financial and fiscal measures undertaken in the aftermath of the financial crisis, especially by the Chinese government.

Authorities launched a stimulus package of some $500 billion and unleashed an expansion of credit in order to fuel the financing of investment projects, especially by local government authorities. As a result, the ratio of total credit to gross domestic product in the Chinese economy rose from around 115 percent in 2008 to an estimated 173 percent. At the same time, the share of investment rose from 42 percent of GDP in 2007 to 47 percent in 2013.

The stimulus measures were predicated on the assumption that eventually Europe and the US would recover, bringing a renewed expansion of exports. But the stagnation in the US economy and the contraction in Europe have meant that the expansionary credit policies in China can no longer be sustained. They have now been replaced by the imposition of a clampdown.

The overall significance of the IMF update is that it makes clear there is no area of the world economy that can provide the basis for a general expansion and no prospect of such a development in the future.

13--Mortgage Rate “Surge”…A Comparable Event to Analyze, Mark Hanson-

Comparable “Credit Event” in 2010 left New Home Sales Down 37% MoM and Existing Sales Down 30% MoM
The most recent “credit event” to hit housing was the sunset of the $8k Homebuyer Tax Credit ($18k in CA due to $10k state overlay) in April 2010 for New Home “Sales” and June 2010 for Existing Sales.  I call this a “semi” comparable because I argue that the Twist/QE3 benefit of rates in 2012/13 a full 150bps lower than in 2011 was a hell of a lot larger and meaningful to home buyers than $8k....

Long periods of extreme stimulus do a great job in filling pent-up and pulling forward demand.   They create malinvestment like we have seen in residential real estate with PE firms tripping all over themselves to pay 10% to 20% more than appraised value/list price for the “privilege” of a 3% yield, which now by comparison looks terrible as a bond replacement trade.
Our thesis in 2009/10 proved outthe First-Time buyer was the primary beneficiary of the $8k Tax Credit, which released a ton of pent-up demand, but more importantly pulled forward demand from years into the future.  This led to a severe “hangover”, as First-Time buyer volume plunged post-credit and has never been as strong since.
This time around the primary beneficiary to the Twist/QE3 stimulus was the “investor” paying cash as a bond replacement trade.  And just like the loss of the $8k ended the frenzied demand from first-timers, rental yields similar to UST-10s will end the “exuberance” by PE firms in housing as a “trade”.
The Twist/QE3 stimulus aimed right at mortgage and housing was the greatest stimulus of all time by an order of magnitude.   And we lost it ALL in a period as quickly as we lost the “Homebuyer Tax Credit”.   As such, I don’t see why we should expect something different as an outcome.  This, I see similar pressure on house sales volume and prices as we saw in 2010, which kicked off the “double-dip”…of course, that only ended in mid-2011 with the introduction of greatest stimulus of all time…Twist and subsequently QE3.

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