Mortgage Rates Etc.

Home builders, who have been feeling the squeeze on the selling side of their business for months, are now reporting that they are caught in a crunch on the development side as money for land acquisition, development, and home construction is drying up.

While the spill-over from the subprime crises has made credit difficult to obtain on many levels and for many businesses, the National Association of Home Builders claimed this week that pressure on home builders is growing worse.

Bob Mitchell, a home builder from Rockville, Maryland and former president of the NAHB testified this week before the Senate Small Business Committee’s hearing on “Impacts of the Credit Crunch on Small Firms,” telling members that, “This credit crunch actually appears to be worsening despite the concerted efforts of central banks here and abroad. Tighter mortgage lending terms have made it difficult for home buyers to obtain financing to purchase new homes. Likewise, there have been dramatic adverse swings in the cost and availability of AD&C loans for home builders.”

Builders use AD&C loans (Acquisition, Development, and Construction) to purchase land, develop lots, put in infrastructure such as streets and sidewalks, lighting, utility connections; and to build the actual houses.

Mitchell told the senators that funding for residential development and construction projects has been severely limited or blocked completely at federally insured depository institutions. These are, he said, the sole source of credit for these types of projects for the small businesses that comprise most of the home building industry. There is also no secondary market for residential construction money to which local lenders could turn for additional liquidity.

He noted that such a secondary market would directly benefit builders and lenders by transferring risk away from the lenders, increasing the availability of funds and mitigating the impact of equity calls on builders or the transfers of partially completed projects to banks under capital or regulatory pressure.

Mitchell called for participation on the part of many components of the private and public sectors to build such a market for AD&C loans. Among his suggestions:

• Government Sponsored Entities: Fannie Mae should increase activity in its existing AD&C loan purchase program while Freddie Mac creates a similar program;
• Federal Home Loan Banks: housing production loans should be accepted as collateral for secured advances to member institutions;
• The Federal Housing Administration: Competition in the secondary market would be increased by federal insurance of the construction portion of these loans in order to attract new originators such as mortgage banking companies.
• Wall Street: Changes to tax provisions relating to Real Estate Mortgage Investment Conduits and Taxable Mortgage Pools would be helpful in securitizing construction loans and Wall Street could develop prototype private security instruments for AD&C loans.
• Banking Regulators: A balanced approach when evaluating bank lending is crucial in regard to these loans. “Small businesses, including small builders, are vital to the economy and arbitrary or unreasonable regulatory restrictions would only serve to harm many builders, and potentially, many banks,” said Mitchell. “It would be ironic and tragic to have the positive work of the Fed undone by bank regulators taking a totally different vision and approach when it comes to lending matters.”

Mitchell, in his testimony, also called for passage of the housing stimulus measures recommended earlier by NAHB. Several of these measures are contained in bills being considered by the House, the Senate, or committees trying to reconcile different House and Senate versions, but in some cases Congress did not go as far as NAHB would like. The organization’s wish list, as enumerated by Mitchell, would include a temporary home buyer tax credit that NAHB sees stimulating a “wave of buying that could quickly reduce excess supply in housing markets and halt the dangerous erosion of house prices and mortgage credit quality.”

Other provisions include expanding the carryback of net operating losses beyond the current two years. NAHB has suggested a carryback of five years which it claims would help all types of businesses that have been hit hard in the current economic climate, including financial institutions and manufacturers, and would provide flexibility for home builders with large land holdings to reduce their inventories in an orderly fashion to stabilize home and land prices.

Finally, approving a temporary $10 billion expansion of the mortgage revenue bond program would help strapped borrowers seeking to refinance their own homes. Expanding the reach of the program would allow it to have the largest effect particularly in communities experiencing the possibility of a wave of foreclosures or an extreme excess of inventory.

Hundreds of thousands of American homeowners may be in desperate straits, facing crippling rate resets or worse, foreclosure, but others continued to purchase vacation homes and investment properties at a healthy rate.

According to a study released late last month by the National Association of Realtors® (NAR) such second-home sales declined with the overall market in 2007, but second home sales still accounted for 33 percent of all new and existing home sales. The combination of these two sales accounted for 36 percent of the total in 2006.

21 percent of all homes purchased in 2007 were for investment purposes compared to 22 percent the year before. An additional 12 percent of the home purchases were vacation homes, down from 14 percent in 2006.

In terms of numbers, the Investment and Vacation Home Buyers Survey showed that the total number of primary sales declined 10 percent to 4.34 million in 2007 from 4.82 million the year before. Vacation home sales dropped 30.6 to 740,000 from what had been a record-setting 1.07 million homes in 2006. Investment property sales accounted for 1.35 million transactions compared to 1.65 million in 2006, a drop of 18.1 percent.

The median price spent on a vacation home in 2007 was $195,000, 2.5 percent lower than the median of $200,000 in 2006. Investment property was purchased at a median price of $150,000, unchanged from 2006.

Vacation homes were most popular in the South where 41 percent of them were purchased; 25 percent were bought in the West, 19 percent in the Northeast, and 16 percent in the Midwest. 30 percent of the homes purchased were in rural areas, 20 percent each in resort areas or suburbs, and 14 percent in a city neighborhood.

Investment properties were also disproportionally located in the South (38 percent) with 23 percent in the Northeast, 21 percent in the West, and 19 percent in the Midwest; 39 percent were purchased in a suburb, 21 percent in a small town, and 20 percent in an urban area.

The typical vacation-home buyer in 2007 was 46 years old, had a median household income of $99,100, and purchased a property that was a median of 287 miles from his or her primary residence; while the typical investor was 42, earned an income of $92,900, and bought a home that was relatively close to his or her primary residence - a median distance of 27 miles.Sixty-five percent of vacation home buyers and 71 percent of investment home buyers purchased existing homes, while the remainder purchased new homes.

Lawrence Yun, NAR chief economist, said the findings suggest different cycles for each of the sectors over the past two years. “Investment-home sales declined sharply in 2006 as speculators disappeared, leaving the market to serious buyers, with the pattern continuing in 2007,” he said. “Vacation-home sales rose to a new record in 2006 because there was a pent-up demand from buyers who couldn’t find a property as a result of tight supplies in preceding years.”

The overall sales decline in 2007 resulted from a combination of factors. “Certainly, second homes are discretionary purchases and there is a natural tendency to pull back from big-ticket items in periods of uncertainty,” Yun said. “The other factor is the disruption in the mortgage market, with a significant tightening of credit during the second half of 2007. Some buyers simply adopted a wait-and-see attitude.”

Yun said lifestyle factors and strong demographics remain positive for the vacation home market. “Investment considerations are secondary for vacation-home buyers, so there is some dormant underlying demand,” he said. “A peak of population is moving through the prime years for buying recreational property. It is welcoming to see investment sales returning to pre-boom sales activity.”

NAR’s 2007 Investment and Vacation Home Buyers Survey, conducted in March 2008, includes answers from 1,965 usable responses. The survey controlled for age and income, based on information from the larger 2007 National Association of Realtors® Profile of Home Buyers and Sellers, to limit any biases in the characteristics of respondents.

Dallas Fed President Richard Fisher, one of two Fed dissenters in the last FOMC rate cut decision, said he has a “strong reluctance” about further rate cuts.

Speaking at the Chicago Council on Global Affairs, Fisher warned against “inflating our way” out of the credit crisis and that further cuts may “compound the bad.”

“The answer, to be curt, is not to compound the bad by repeating the oft-prescribed remedy of inflating our way out of our predicament with a wing-and-a-prayer promise that it can always be reined in later,” Fisher said. “It is for this reason that I have maintained a strong reluctance to further general monetary accommodation.”

He noted he has been an advocate of using the Fed’s various discount window facilities “within reason, to bridge the financial system’s structural problems as the credit markets correct themselves and run the long course of contrition.”

By Stephen Huebl and edited by Nancy Girgis

©CEP News Ltd. 2008

Inflation worries sparked a front-end led selloff in Treasuries on Thursday as market participants increasingly believe the Federal Reserve will only cut rates by a quarter-point at the end of the month.

U.S. two-year yields were up 12.4 bps to 2.09%, five-year yields up 8.3 bps to 2.90%, 10-year yields up 4.8 bps to 3.74% and 30-year yields up 3.4 bps to 4.53%. The Eurodollar June 08 contract was down 15.0 ticks to 97.14. The 10/2 year curve is 7.73 bps flatter at 164.72 bps.

Jeff Given, portfolio manager at John Hancock Advisors, said the selloff at the front end is the result of heightened inflation worries and better value elsewhere.

“There’s a possibility the Fed doesn’t cut much more, - if at all - because of some of the inflation numbers we’ve seen,” Given said.

Fed fund futures show that a 25 bps cut is fully priced in at the April 30, but the odds of a 50 bps have fallen to 18% from 42% a week ago.

Given expects the Fed to cut a cumulative 75 bps over the next three meetings to lower the Fed funds rate to 1.50%, but he still sees little value in Treasuries.

“At these yield levels I wouldn’t be a buyer. Treasuries are one of the most overvalued securities out there,” Given said.

By Adam Button and edited by Cristina Markham

©CEP News Ltd. 2008

Speaking Thursday before the House Subcommittee on Financial Institutions and Consumer Credit, Federal Reserve Division of Consumer and Community Affairs Director Sandra Braunstein emphasized a need for further consumer protection as it would pertain to credit cards.

Braunstein announced a proposal would come later in the spring under the Federal Trade Commission Act that would introduce new regulations into the industry in an effort to help further eliminate deceptive practices (following a June 2007 proposal) on the part of credit card issuers.

“Disclosure requirements can help ensure that consumers receive information about credit card terms in ways they can understand, in formats they can use, and at times when it is most helpful,” she said. “Consumer testing has proven to be very useful in improving disclosure, but we have also concluded that stricter approaches in some areas may be needed.”

By Ryan Szporer and edited by Cristina Markham

©CEP News Ltd. 2008

Merrill Lynch & Company will eliminate 2,900 jobs as it struggles to recover from its third consecutive quarterly loss which it announced on Thursday.

The company said it was taking $6.6 billion in write-downs related to mortgages, collateralized debt obligations and generally badly underwritten commercial loans, resulting in a first quarter loss of $1.96 billion or $2.19 per share. Another $3.1 billion was written down because of mortgage-related securities but was accounted for elsewhere.

With the current figures, Merrill has now reported net losses over the last three quarters to $14 billion. This equals what the bank earned in 2005 and 2006.

The 2,900 jobs that will be eliminated will came mainly from the capital markets and trading side of the company and Merrill Lynch expects that it will realize about $800 million from the cuts. Some sources said that 4,000 jobs were scheduled for cuts, others said this included 1,100 that had been announced earlier, to come from the mortgage banking side.In a conference call with analysts, company CEO Merrill CEO John Thain, said that the first quarter was “as difficult a quarter as I’ve seen in my 30 years on Wall Street” but said that, while things would not be dramatically improving right away that business has improved in April and that it is probable that Merrill will be profitable for the rest of the year.

If the several million people over the next few years actually lose their homes, where are they going to go?

The conventional wisdom is that they will go back into the rental market and perhaps that is one reason for the jump in permits and housing starts for residential buildings over five units reported by the Census Bureau the last few months. However, a study recently released by the National Low Income Housing Coalition is , not just in high priced locations, but virtually everywhere in the country.

Out of Reach 2007-2008 asks and tries to answer two questions:

1. Could someone who gets a full-time job in your community today reasonably expect to find a modest rental unit he or she could afford?
2. What would a family in your community have to earn to be reasonably assured of quickly finding an affordable rental unit?

In answering, Out of Reach constructed a “” for every county, metropolitan area, and state in the country and then compared it to local wage and income levels in those communities. The Housing Wage is the full-time hourly wage one would need to earn in order to pay what the Department of Housing and Urban Development estimates to be the fair market rent (FMR) for an apartment in each area, spending no more than 30 percent of income (the HUD standard for rental assistance programs) on housing costs.

According to the report, the 2008 national Housing Wage for a two-bedroom rental unit is $17.32. A full-time worker and work year round - 2080 hours per year - to be able to afford the average FMR of $900 per month.

The current national minimum wage is $5.85 and when fully implemented in July of next year will be $7.25 per hour. Three fully-employed family members, earning minimum wage and spending 30 percent on housing would just be unable to afford an average apartment at fair market value. In fact, the report states that there is no county in the country where a single individual can work 40 hours per week at minimum wage and afford a one-bedroom apartment at the local FMR.

Of course the median hourly wage in the U.S. is much higher than the minimum wage although there were 1.7 million workers earning the minimum before the rate was increased last year. Still, at the median hourly wage of $16.00 and the average income of renters at $13.94, only a household that averages a 50 hour work-week with no unpaid time off can afford the average FMR for a two-bedroom unit at the national mean renter wage.

In 2006 more than 9 million renter households paid more than 50 percent of their income for housing, leaving little for food, transportation, medical insurance, etc., and 98 percent of these households were considered low income.

But neither rents nor Housing Wage alone tell the whole story. For example, the report points out that the area with the highest two bedroom Housing Wage in the survey was Stamford-Norwalk, Connecticut while Henry County, Alabama had the lowest of all the states ($9.25 - Puerto Rico was lower). Therefore the higher minimum wage in Connecticut - $7.65 won’t go as far as the $5.85 minimum in Alabama in providing housing.

The study also looked at rural housing and found a similarly depressing situation. The data show that in no state can a full-time minimum wage job assure access to affordable rental housing even in non-metro areas which have generally been assumed to be affordable.

and well as subsidized rental units and tenant-based rental subsidized do provide a supply of market-rate rental units that are affordable but often these units are deteriorating, unsafe, or occupied by higher income households. The numbers of these units shrinks yearly because of neglect, gentrification, and conversion to condominiums.

So what are the answers to the questions the National Low Income Housing Coalition asked?

1. No one in the U.S. today who gets a full-time job at the minimum wage can reasonably expect to find a modest rental unit he or she can afford
2. A sample of some of the statewide Housing Wages would include:
   • Colorado - $16.09
   • Iowa - $11.88
   • California - $24.01
   • Texas - $15.02
   • New York - $23.03
   • South Carolina - $12.92

A complete list of state Housing Wages can be found at http://www.nlihc.org/orr/orr2008/housingwagemap.pdf.

U.S. initial jobless claims came in lower than expected in the week ending April 12 with a total of 372K seasonally adjusted claims filed, representing a 4.8% rise from the week before, the Department of Labor reported Thursday. Forecasts were looking for a total of 375k claims. The previous week’s figure was revised downward to 355k from 357k.

The latest figure is slightly lower than the four-week moving average of 376k. Economists say the average is a less volatile employment indicator than the weekly claims snapshot.

Jobless claims have retraced after reaching a two-and-a-half year high of 407,000 in the final week of March. The index’s all-time high was reached on Sept. 30, 1982 when initial jobless claims surged to 671k. The all-time low was in 1968 when claims stood at 162k.

Continuing claims rose to 2984k in the week ending April 12, up from an upwardly revised reading of 2958k in the previous week, representing a 0.9% gain.

Continuing claims reached their highest level at 4637k in May 1975 and dipped to their lowest level of 988k in May 1969.

“Initial jobless claims continue to hover around the 375,000 recession DMZ, while continuing claims are drifting higher at the start of the second quarter,” economists from Bear Stearns wrote in a client note. “We judge these data to be consistent with continued weakness in the labor market in April and with recessionary conditions in the overall U.S. economy.”

Ian Shepherdson, chief U.S. economist from HFE, said the dip in the four-week average is “compromised” by the seasonal adjustment issues related to the early Easter holiday. He noted the less volatile eight-week moving average rose to a new cyclical high of 366.1k, having climbed for the past eight weeks.

“We can think of no good reason why claims should now level off, and plenty of reasons why they should be expected to rise further,” Shepherdson wrote in a client note. “Expect 400K-plus by mid-year.”

By Stephen Huebl, shuebl@economicnews.ca, edited by Nancy Girgis

©CEP News Ltd. 2008

Economic conditions across the United States have slowed since February, the Federal Reserve’s Beige Book noted, as nine of the 12 districts report slowing economic activity.

The report noted consumer spending is “softening” across much of the U.S. while residential construction is “generally anemic.”

“Reports from the twelve Federal Reserve districts indicate that economic conditions have weakened since the last report,” the Beige Book reads, noting that nine districts reported a slowing in the pace of economic activity, while the remaining three - Boston, Cleveland, and Richmond - described activity as mixed or steady.

Districts reported year-over-year declines in retail and/or auto sales, while tourism, in contrast, was generally described as strong, with a number of districts noting particular strength in foreign visitors. Reports on non-financial services varied by district: demand for transportation services was generally characterized as weak, while business and health services continued to expand. Other service industries were said to be mixed.

Most districts reported little change in retail price inflation, though Richmond and San Francisco noted some moderation. Most business contacts reported that wages were unchanged or were increasing moderately in all districts.

Many districts reported slowing consumer loan demand and economic activity. The report noted the input cost gains were widespread while selling prices were less so.

Many districts did report generally strong exports.

“Despite some variation across districts, employment levels appeared to be little changed, on balance, from recent months,” the report noted.

Some weakening in the job market was reported in the New York, Atlanta, Chicago, St. Louis, and Minneapolis districts. Cleveland reported flat employment levels while Richmond indicated mixed trends. Boston and Kansas City indicated modest increases in employment, with some deceleration indicated in the latter. Firms in the Philadelphia, Atlanta and Minneapolis districts reported layoffs, reductions in work hours or hiring freezes in response to current or expected slowing in economic activity.

The Beige Book covers the period through April 7.

By Stephen Huebl and edited by Nancy Girgis

©CEP News Ltd. 2008

Housing starts and the issuing of construction permits continued to fall in March. Permits for building privately-owned housing units were issued at a seasonally adjusted annual rate of 927,000, 5.8 percent lower than the revised February pace of 984,000 and 40.9 percent below the March 2007 estimate of 1,569,000.

According to a monthly report issued on Wednesday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, permits for single family houses were down 6.2 percent from February and 46.4 percent from March 2007 while permits for buildings with 5 or more units of residential housing were off 4.0 percent and 21.9 percent respectively.

The Northeast and the South were in positive territory with the former showing a 3.8 percent increase in total permits over the month before and the later eking out 0.4 percent growth. The Midwest was down 10.6 percent and the West fell 20 percent.

Privately-owned housing starts in March declined 11.9 percent from revised February figures. The actual numbers were a seasonally adjusted rate of 947,000 starts in March; 1,075,000 in February. The March figure is 36.5 percent lower than the pace of 1,491,000 starts recorded one year earlier.

Single family housing starts were at a rate of 680,000, 5.7 percent below the February figure of 721,000 and 43.6 percent lower than the 1,205,000 starts one year earlier.

A National Association of Home Builders (NAHB)/Wells Fargo survey reported that builder confidence in the housing market remained unchanged at near record low levels this month. According to the groups’ monthly Housing Market Index ((HMI), was at 20 out of a possible score of 100. In December the HMI hit a record low of 18. The survey started in 1985.

The Index is based on responses from builders as to how they perceive current single family house sales now and how they expect those sales to look in six months. Builders rank those perceptions as good, fair, or poor. They are then asked to rate current buyer traffic from very low to very high. Scores for each component are ranked and then used to compute an overall score which is the HMI. A score over 50 for any of the components or for the HMI as a whole indicates that more builders view sales conditions as good than poor.

The component measuring current sales conditions was down two points in April to 18, its lowest level since November of last year. The component measuring buyer traffic held even at 19 for the third month in a row after hitting a low of 13 in December. There was some good news, however, as builders’ expectation for future sales (six months hence) rose four points to 30.

“While builders continue to report improvements in traffic through their model homes compared with late last year, this activity has not translated to actual sales. That’s where Congress can make a big difference,” noted NAHB Chief Economist David Seiders. “Measures that stimulate consumer confidence in the housing market, push the fence-sitters into the ring and put a floor under house prices can successfully halt the drag that housing is exerting on the national economy, and help stabilize financial markets at the same time. But such measures need to be implemented as soon as possible in order to limit the severity of the economic recession that now is underway.”