Mortgage Rates Etc.

As the overhang of new homes sits at a 27-year high of 9.8 months, new home sales are expected to fall for a fifth consecutive month in the March index from the U.S. Census Bureau on Thursday.

In February’s report, sales fell 1.8% to a seasonally adjusted annual rate of 590K, contributing to an almost 30% decline since February 2007, when the pace was 840,000. Also, the median price of new houses sold in February was $244,100, a sizeable increase from the $225,600 figure from a month prior.

Of the 75 economists surveyed for the March release, the consensus is looking for a 1.7% decrease to 585K, with the lowest predictions expecting 560K sales and the most optimistic forecasting a rebound to just over the 600K mark. A number below 559K would mark the lowest pace of sales since February 1995.

Ellen Zentner, U.S. macro economist at the Bank of Tokyo-Mitsubishi, expects the index will fall 0.7% to 586K, but she said traders have already priced in a lot of negativity, so unless the results are really unexpected, it won’t cause much reaction.

Earlier this week, the NAHB/Wells Fargo survey of builder confidence remained subdued at 20, where it has been for three months after rising from the record low of 18 in December 2007. Zentner said that consistency could point towards some stabilization from the supply side, so a similar sign on the demand front would be welcomed by the markets.

However, four factors are preventing the housing sector from improving, she said. First, credit conditions remain tight. Second, until prices stop deflating, potential homebuyers will sit on the sidelines. Third, the economy continues losing jobs, and fourth, consumers are worried about inflation eating up their disposable income, which prevents them from buying big-ticket items.

Benjamin Reitzes, economist at BMO Capital Markets, said confidence is down for both builders and consumers, and he predicts several months of decline until the housing sector finally bottoms out near 500K in the second quarter of this year. As for the March report, he looks for a number below consensus at 575K, noting that even a worse figure would still not garner much attention.

The first housing index to display a bottoming out will be the housing starts report, he added, noting, “The quicker new home sales decline, the quicker house starts will decline.”

Zentner said the new home sales index “is a direct window to housing starts.” She said new homes only make up 14% of the housing sector, but their link to housing starts acts as a tool to forecast construction activity.

In the longer term, Zentner said the housing market will not make a turnaround until 2010, or at best, in late 2009.

Until that time, because housing is actually “tiny in terms of GDP,” the housing sector should neither drag nor boost economic growth, she said, adding that the initial impact on the broader economy came only from the big swing in the housing market.

In February’s new homes report, regional data was quite mixed, as the pace of sales in the Northeast fell from 62,000 to 37,000, while in the Midwest sales dropped from 78,000 to 73,000. However, the South saw the pace of sales go up from 315,000 to 333,000, and the pace in the West moved up 1,000 to 147,000.

By Patrick McGee and edited by Cristina Markham

Long term mortgage interest rates as reported by Freddie Mac in its Primary Mortgage Market Survey were virtually unchanged during the week which ended April 17. However, long term rates as reported by the Mortgage Bankers Association in their Weekly Mortgage Applications Survey for the week ended April 18 underwent significant upward movement.

First the Freddie Mac report. The 30-year fixed-rate mortgage (FRM) averaged 5.88 percent for the third straight week. Fees and points remained unchanged at 0.4 for the second week in a row.

The 15-year FRM averaged 5.40 percent, a decline of 2 basis points. Fees and points increased from 0.4 to 0.5.

Short-term adjustable rates showed a little more activity. The five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 5.48 percent with 0.6 point. The previous week it had averaged 5.56 percent with 0.7 point. The one-year Treasury-indexed ARM was down 8 basis points to 5.10 percent. Fees and points were also down from an average 0.7 to 0.6 point.

“Interest rates for fixed-rate mortgages held relatively steady for a second week, while ARM rates continued to decline amid market speculation that the Federal Reserve (Fed) may cut rates again at its upcoming Committee meeting,” said Frank Nothaft, Freddie Mac vice president and chief economist. “March’s housing starts were the lowest since March 1991 and consumer sentiment in April fell to a 26-year low while homebuilder confidence remains near record lows. Currently, the federal funds future contracts suggest nearly a 100-percent probability that the Fed will cut rates at the end of this month.

“In its current regional review released on April 16th the Fed noted ‘reports on real estate and construction were generally anemic for the residential sector’ and ‘economic conditions have weakened since its last report.’ In addition, San Francisco Fed Bank President suggested, ‘the economy has all but stalled and could even contract over the first half of the year’ in a speech the same day and that the downside risks to growth are significant.”

According to the MBA survey, the two long term rates it tracks were both up over 30 basis points. The average contract interest rate for 30-year FRMs went from 5.74 percent during the previous week to 6.04 percent with points, including the origination fee, decreasing from 1.05 to 1.04.

The average contract interest rate for 15-year FRMs jumped to 5.6 percent from 5.27 percent with points decreasing to 1.06 from 1.19.

The one-year ARM, however, decreased, moving from 7.02 percent to 6.93 percent with points increasing to 1.38 from 1.28.

Application volume decreased 14.2 percent on a seasonally adjusted basis from one week earlier and was down 13.4 percent when unadjusted. The application volume was 3.2 percent lower than during the same week in 2007.

Applications for refinancing as a share of all mortgage activity decreased to 49.2 percent from 53.5 percent the week before while applications for adjustable rate mortgages were virtually non-existent, representing 6.6 percent of all applications. Still this was a slight improvement over the 6.0 percent market share one week earlier.

The National Association of Realtors data on the sale of existing homes in March came in just where analysts had projected - down 2 percent from a seasonally adjusted annual rate of 5.03 million units in February to 4.93 million. This is 19.3 percent below the 6.11 units that were sold in March 2007.

Home sales had bumped up unexpectedly in February by 2.9 percent, leading the NAR to speculate that the housing market was “leveling off.” Tuesday’s figures, however, are a clear indication that the credit crunch, excess inventories of unsold houses, and the economy in general are continuing to sink sales.

Condo sales were up in March by 3.6 percent to a seasonally adjusted annual rate of 580,000 units, but that increase was offset by single family sales which dropped 2.7 percent to 4.35 million in March from 4.47 million in February. Sales in March one year ago were 18.4 percent higher at 5.33 million.

Lawrence Yun, NAR chief economist, said the market is performing unevenly. “Though mortgage rates are at historically low levels, some borrowers are facing restrictive lending practices in declining markets,” he said. “At the same time, many buyers continue to bide their time with a large number of homes to choose from, while other potential buyers remain on the sidelines.”

Housing prices were also down. The median price of all existing home types was $200,700 in March. This is 7.7 percent lower than one year ago when the median was $217,400. The median existing single-family home price was $198,200 in March, down 8.3 percent from a year ago and condos sold for a median price of $219,000 in March, 2.8 percent lower than one year earlier.

Inventories of homes for sale continue to be a major problem. The total inventory of available housing rose 1 percent in March to 4.06 million units. This represents a 9.9 month supply at the current absorption rate. In February there was a 9.6 month supply.

Regionally, existing-home sales in the Northeast rose 2.2 percent to an annual pace of 910,000 in March, but are 18.8 percent below March 2007. The median price in the Northeast was $284,300, up 4.6 percent from a year ago.

Existing-home sales in the West rose 2.2 percent in March to a level of 940,000 but are 22.3 percent below a year ago. The median price in the West was $285,100, which is 14.7 percent lower than March 2007.

In the South, existing-home sales fell 3.5 percent to an annual rate of 1.92 million in March and are 20.0 percent below March 2007. The median price in the South was $167,200, down 7.1 percent from a year ago.

Existing-home sales in the Midwest dropped 6.5 percent to an annual rate of 1.16 million in March, and are 15.9 percent below a year ago. The median price in the Midwest was $152,600, down 5.3 percent from March 2007.

NAR President Richard F. Gaylord blamed the mortgage industry for some of the decline, saying there are problems with the implementation of mortgage guidelines. “It appears there is some over-reaction on the part of some lenders now in requiring higher downpayment percentages than may be necessary. On the other hand, buyers in many parts of the country are able to take advantage of more lenient policies for FHA loans. However, because lenders don’t have enough underwriting experience with FHA loans in high-cost areas, there are localized bottlenecks in loan processing.”

Yun cautioned the Federal Reserve about further rate cuts. “Mortgage interest rates,” he said, “which do not move directly with Fed funds rates, may rise measurably and hurt the housing recovery if inflation gets out of hand. Monetary stimulus is plentiful - what is needed more at this point is a home buyer tax credit to get buyers off the sidelines and prevent the market from overshooting on the downside.”

U.S. house prices rose 0.6% in February following January’s 1.1% decline, the Office of Federal Housing Enterprise Oversight (OFHEO) reported Tuesday. Economists had expected a monthly decline of 1.5%.

In the previous month, U.S. home prices fell 1.1% between December 2007 and January 2008, contributing to a 12-month decline of 3.0%.

For the 12 months ending in February, U.S. prices fell 2.4%. Since itspeak in April 2007, the index is down 3.1%, the OFHEO reported.

For the nine divisions covered by the survey, the seasonally adjusted monthly price changes ranged from -0.6% to 2.2% from January to February. Seven of the 9 regions reported increases in February, led by New England, which saw prices rise 2.2%, and West North Central region, which reported a 1.3% gain.

The East South Central region also reported a 1.2% increase. The Mountain region reported the largest price decline of 0.6%.

The other region to report a continued drop in prices was the South Atlantic at -0.2%.

In the quarterly report for the fourth quarter of 2007, the purchase-only house price index fell by 1.3% from the third quarter, a substantially greater decrease than the 0.3% price decline between Q2 and Q3. Over the past year, prices fell 0.3%, as the fourth-quarter decline erased earlier price gains.

The purchase-only index is based on more than five million repeat sales transactions, while the all-transactions index, released quarterly, includes more than 34 million repeat transactions. Both indexes are based on data obtained from Fannie Mae and Freddie Mac for mortgages originated over the past 32 years.

By Stephen Huebl and edited by Nancy Girgis

©CEP News Ltd. 2008

The new monthly OFHEO purchase-only home price index is expected to fall 1.5% in February, following a 1.1% decline in the January report.

The purchase-only index, based on data from home sales, was introduced in OFHEO’s fourth quarter 2007 House Price Index (HPI) report, and provides home price conditions for the nation and each of the nine Census Divisions.

In the previous month, U.S. home prices fell 1.1% between December 2007 and January 2008, contributing to a 12 month decline of 3.0%. Since its peak in April 2007, the monthly index has fallen by 4.1%.

Michael Gregory, an economist at BMO Capital Markets, said house prices “likely displayed deepening deflation,” falling to -3.5% year-over-year in February, from -3.0% in January.

In the quarterly report for Q4 of 2007, the purchase-only house price index fell by 1.3% from the third quarter, a substantially greater decrease than the 0.3% price decline between Q2 and Q3. Over the past year, prices fell 0.3%, as the fourth quarter decline erased earlier price gains. This was the first four-quarter decline since 1991.

The purchase-only index has exhibited greater weakness over the past year from the all-transactions index, which rose by 0.8% in 2007.

The purchase-only index is based on more than five million repeat sales transactions, while the all-transactions index, released quarterly, includes more than 34 million repeat transactions. Both indexes are based on data obtained from Fannie Mae and Freddie Mac for mortgages originated over the past 32 years.

By Patrick McGee and edited by Stephen Huebl

©CEP News Ltd. 2008

The existing home sales index for March is expected to fall 1.6% to a pace of 4.93 million units, following a surprising 2.9% gain to a pace of 5.03 million in the previous month.

February’s advance halted a six-month trend of declining sales and was well-above expectations, but sales were still down 23.8% from one year ago, when the annual pace of sales was 6.60 million units.

David Sloan, senior economist at 4Cast, said he was “a bit suspicious” of the previous month’s gain, and based on a similar rise in the data at the same time last year, he suggested some seasonal issues may have been responsible for the uptick.

After last month’s release, NAR chief economist Lawrence Yun called the report “another sign that the market is stabilizing,” but he said it was too early to speak of its implications for the longer term.

Sloan is looking for the index to fall to 4.80 million in March, largely based on a decline in the pending home sales index, in addition to the fact that the new home sales index continued falling in February.

The pending home sales index, which measures existing home sales that have been agreed upon but not yet finalized, saw a decline of 1.9% to its lowest number ever in the February report on April 8, suggesting that Tuesday’s existing home sales index may follow suit.

Yet there is a wide range of expectations among the 70 economists surveyed. On the low end, some economists are looking for a pace as sluggish at 4.80 million, while the most optimistic forecasts are looking for a pace of 5.08 million.

Robert Stein, senior economist at FT Advisors, said the report will help determine whether February’s rebound was the beginning of a new trend to mark stabilization, or merely a pause before even more declines.

Stein expects existing home sales to improve for a second month to a pace of 5.08 million. He said the combination of lower interest rates for mortgages, in addition to a lessening in the decline for new home sales, suggests enough buffer for existing sales to improve yet again.

New home sales fell by 1.8% in February, but the decrease to 590,000 was not as bad as expected, and the report included some upward revision to the January data as well.

In the medium-term, Stein expects further declines, saying it is still a few months early to call for normalization. After the advance he expects in Tuesday’s report, Stein said the index will decline for a few months and bottom out just below a pace of 5 million.

Economists from Global Insight said there are three forces working against the U.S. housing market right now “First, credit remains tight. Second, the economy is losing jobs (300,000 private-sector jobs lost in the past four months). And third, house prices are falling in more places and at an accelerated rate.”

The decline in house prices is related to the high overhang of inventories, added BMO senior economist Michael Gregory, who looks for a 2.2% decline to 4.92 million units. In February’s report, the level of housing supply improved from a 10.2 month supply to 9.6 months, but that figure is still far above the longer-term median average of about 6 months.

Gregory said there is a “price deflation mentality among prospective purchasers,” meaning that potential home-buyers are reluctant to buy a home as they perceive the price to decline even further.

Also to be released on Tuesday is the new OFHEO purchase-only home price index for February, which economists expect to fall by 1.4%, after a 1.1% drop in the previous month.

By Patrick McGee and edited by Cristina Markham

©CEP News Ltd. 2008

The Office of Federal Housing Enterprise Oversight (OFHEO), the division of the Department of Housing and Urban Development that oversees and regulates Freddie Mac and Fannie Mae, has reached a notable settlement with three of Fannie Mae’s former executives.

The settlement, announced late Friday, will end enforcement actions against the three officers arising out of accounting and internal control problems at the two government sponsored enterprises (GSEs) in 2004. It took Freddie Mac and Fannie Mae three years to revise their financial reporting to clear the problems and cost them a substantial part of their autonomy.

The Consent Orders were announced by OFHEO Director James B. Lockhart and dealt with former Fannie Mae Board Chairman and Chief Executive Officer Franklin D. Raines, former Chief Financial Officer J. Timothy Howard and former Controller Leanne Spencer.

OFHEO had filed an administrative Notice of Charges against the three on December 18, 2006, alleging that they had, among other charges, inappropriately managed earnings, failed to ensure that adequate internal controls were put in place, permitted the accounting function to operate without adequate resources, and released misleading financial reports. OFHEO charged that the above represented misconduct and unsafe and unsound practices that led to losses suffered by Fannie Mae.

The Consent Order requires that Mr. Raines pay Fannie Mae a total of $24.7 million. $3.8 million will be obtained from the sale of Fannie Mae stock of which $1.8 million will be allocated as a donation to programs and initiatives to assist homeowners facing the loss of their homes or other homeownership related initiatives approved by OFHEO. The remaining $2 million will be paid to the U.S. Government.

Mr. Raines will also surrender stock options that were valued at $15.6 million at the time they were issued and will relinquish other unnamed benefits estimated at $5.3 million.

Mr. Howard will pay $950,000 from the sale of his Fannie Mae stock, $200,000 of which will be donated to OFHEO approved homeownership programs and the remaining $750,000 paid to the U.S. Government. He will relinquish $5.2 million in stock options and an additional $240,000 in other benefits.

Ms. Spencer will pay $275,000 to the U.S. Government and waive any claims against Fannie Mae for compensation.

The three have also agreed that they will not work at Fannie Mae or any firm doing business with the GSE unless their compensation at such a firm is not tied to work or relationships with Fannie Mae.

In a press release issued by OFHEO, Mr. Lockhart stated “OFHEO’s mission is to ensure that the Enterprises operate in a safe and sound manner. That cannot occur without corporate management providing prudent and responsible leadership and setting the appropriate ethical and overall ‘tone at the top.’ The Consent Orders announced today represent a satisfactory conclusion to the enforcement actions against these individuals. OFHEO continues to work with the current leadership of the Enterprises to ensure they meet the highest standards for corporate governance and corporate integrity.”

OFHEO previously entered into a Consent Order with Fannie Mae that included a $400 million civil money penalty and revision of major internal controls, restructuring the company’s organization, and changes in accounting practices and corporate governance.

Economists will be paying attention to this month’s U.S. housing data in hopes of finding a bottom in the market. Before that, however, the focus will be in Canada on the Bank of Canada’s interest rate decision.

On Tuesday, the BOC will hold its regular monetary policy meeting. Economists are in agreement that following the April 17 release of March’s CPI data, low inflation will enable the BOC to cut 50 basis points. Such a cut would bring interest rates down to 3.00%.

“The market is about fully priced for a 50bp rate cut..,” said Stewart Hall, market strategist at HSBC Securities in a note to clients.

He added that the BOC is cutting rates in an attempt to limit the impact of the U.S. slowdown north of the border.

“A tame inflation profile for Canada suggests that the policy adjustment amounts to taking out cheap insurance against the U.S. economy, which is exporting further softness into the Canadian economy,” he wrote.

Turning to the U.S, economists aren’t expecting much improvement in the U.S. housing industry as the sector continues to churn out weak data.

Also on Tuesday, March existing home sales data will be released, which are expected to fall 1.6% following a 2.9% rise in February.

On Thursday there will be more housing data with the release of new home sales, which are expected to decline 1.0% following February’s decline of 1.8%. Economists expect that 585,000 homes were sold in the month, which is down from February’s sales of 590,000 units.

Economists at Wachovia said it is too early to start looking for a bottom yet, writing in a research note that one of the problems continues to be the high number of homes still on the market.

“It is a little early to celebrate the return of a good housing market,” economists at Wachovia said. “Inventory levels remain extremely high in the existing market, as many homeowners are unwilling to sell at current market prices. While some progress has been made over the last six months, we expect new home inventories to improve before existing home inventories, as builders have a greater incentive and ability to cut prices.”

All times in EST.

Monday:

Markets will receive Canadian International securities Transactions for February, which reached $0.916 billion in January.

8:30 CA International Securities Transactions FEB Prior: C$0.916

9:30 US Chicago Fed’s Evans Gives Remarks for Money Smart Week

13:00 US TSY to Sell $20 B 3-Month Bills

13:00 US TSY to Sell $20 B 6-Month Bills

13:30 US Fed’s Kroszner speaks on Community Development in Minnesota

14:30 US Chicago Fed’s Evans speaks to High School Students in Illinois

Tuesday:

The highlight of the day will be the Bank of Canada monetary policy announcement. Economists expect the BOC will cut 50 basis points bringing interest rates to 3.00%.

In the U.S., existing home sales for March are expected to fall 1.6% following February’s rise of 2.9%. It is expected that 4.95 million homes were sold, down from 5.03 million units sold in February.

Other housing data also point to more declines. The housing price index for February is also expected to decline, falling 1.4% following January’s 1.1% decline.

7:45 US ICSC Chain Store Sales

8:55 US Redbook Retail Sales

9:00 CA Bank of Canada Rate 22-April Exp: 3.00% Prior: 3.50%

10:00 US Existing Home Sales March Exp: 4.93M Prior: 5.03M

10:00 US Existing Home Sales (M/M) March Exp: -1.6% Prior: +2.9%

10:00 US House Price Index (M/M) FEB Exp: -1.4% Prior: -1.1%

10:00 US Richmond Fed Manufacturing Index April Exp: 2 Prior: 6

13:00 US TSY to Sell $8 B 5-Year TIPS

13:00 US TSY to Sell 4-Week Bills

17:00 US ABC Consumer Confidence 20-Apr Prior: -39

Wednesday:

Markets will once again focus on Canada with the release of February retail sales, which are expected to rise 0.3% following January’s rise of 1.3%

7:00 US MBA Mortgage Applications 18-Apr Prior: +2.5%

8:30 CA Retail Sales (M/M) FEB Exp: 0.3% Prior: +1.5%

8:30 CA Retail Sales Less Autos (M/M) FEB Exp: 0.5% Prior: +1.3%

10:30 US DOE U.S. Crude Oil Inventories 18-Apr Prior: -2356K

10:30 US DOE U.S. Gasoline Inventories 18-Apr Prior: -5517K

10:30 US DOE U.S. Distillate Inventory 18-Apr Prior: +52K

10:30 US DOE U.S. Refinery Utilization 18-Apr Prior: -1.63%

13:00 US TSY to Sell 2-Year Notes

Thursday:

The U.S. will get more housing data with the release of the new homes sales report. Economists forecast new home sales to decline 8% following February’s decline of 1.8%. They expected 585,000 homes were sold in the month, which is down compared to February sales of 590,000.

The rising trend in weekly jobless claims will also garner attention as it creeps higher to the 400,000 mark. The consensus is for weekly claims to rise to 375,000 following last week’s rise of 372,000. Continue claims are expected to come in at 2960 following last week’s number of 2984

North of the border, the Bank of Canada will release its quarterly Monetary Policy Report.

8:30 US Durable Goods Orders March Exp: 0.1% Prior: -1.7% Revised: -1.1%

8:30 US Durables Ex Transportation March Exp: 0.6% Prior: -2.6% Revised: -2.4%

8:30 US Initial Jobless Claims 19-Apr Exp: +375K Prior: +372K

8:30 US Continuing Claims 12-Apr Exp: 2960 Prior: 2984K

10:00 US Help Wanted Index March Exp: 20 Prior: 21

10:00 US New Home Sales March Exp: 585K Prior: 590K

10:00 US New Home Sales (M/M) March Exp: -1.0% Prior: -1.8%

10:30 US EIA Natural Gas Storage Change 18-Apr Prior: +27

10:30 CA Bank of Canada Monetary Policy Report

13:00 US TSY to Sell 5-Year Notes

Friday:

The week ends on a softer note with the release of final print of the University of Michigan/Reuters consumer sentiment.

9:00 US Citigroup’s Robert Rubin speaks on taxes at Princeton

10:00 US U. of Michigan/Reuters Consumer Sentiment April Final Exp: 63.5 Prior: 63.2

By Neils Christensen and edited by Cristina Markham

©CEP News Ltd. 2008

In the strange thinking that passes for logic on Wall Street, shares of Citigroup stock were expected to surge today after the company announced yet another huge quarterly loss. In fact, shortly after the announcement, the stock was up 7 percent in pre-open trading.

The big bank lost $5.1 billion ($1.02 per share) during the first quarter, largely because of continuing problems with mortgages and leveraged loans. Writedowns related to mortgages and other credit market problems totaled around $12 billion and another $3 billion related to consumer credit problems was also written down.

However, investors were expected to gobble up the stock and generally shore up the stock market on Friday because the losses were not as bad as had been expected and were only about half of the $10 billion the bank lost in the previous quarter.

At that frantic time in the bank’s history Citigroup removed its CEO Chuck Prince and raised over $30 billion in capital through sale of stock and assets. Much of the money came from investor funds run by Asian and Middle Eastern governments. The bank has also reduced its payroll by 4,200.

Citigroup still has big exposure to bad mortgages and leveraged loans and with the release of first quarter results, Moody’s Investors Services changed its ratings for Citigroup to negative citing the high level of writedowns, however actual losses had come in very close to the average expected by most analysts.

Speaking at a credit conference in Charlotte, North Carolina on Friday, Boston Fed President Eric Rosengren addressed the current housing price slump in the U.S., saying that it may continue affecting even more banks.

In a panel discussion with Richmond Fed President Jeffrey Lacker, Rosengren pointed to a lack of an additional buffer to banks’ capital and at cutting dividends as a mean to deal with the crisis. Turning his attention to liquidity and the role of central banks, he said that times have called for a period of reevaluation.

“For a central bank to play an effective role during financial turmoil, it needs to understand the sources of liquidity problems, the interrelationships between market participants, likely losses, and market participants’ potential reactions to these losses,” he said.

Rosengren went on to say that the Federal Reserve needs to take on a more hands-on approach to supervising financial institutions.

“In sum… we can take appropriate actions to reduce the likelihood that extended periods of illiquidity will occur in the future,” he said.

Rosengren offered no comment on current monetary policy and economic outlook in the U.S.

By Ryan Szporer and edited by Nancy Girgis

©CEP News Ltd. 2008