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Bellevue Real Estate, Mortgage, and Economy 12/4/11

Posted on 04 December 2011

Here is the Bellevue Real Estate Report for Dec. 4, 2011:

Interest Rates Continue In A Holding Pattern: The pattern we have seen for the last number of weeks where Europe is the focus while there continues to be encouraging signs in the US economy. Fears regarding Europe were stoked earlier this week when an auction by Germany’s government went badly and resulted in interest rates approaching those of countries in danger of default. Later this week the US Federal Reserve announced initiatives to help provide dollars to European financial institutions in an effort to stave off gridlock. There is more talk of the European Central Bank providing funds to the IMF in order to buy up sovereign debt in order to keep rates down. The US and five other central banks injected liquidity into markets in move to lower currency swap rates. The move is aimed at easing strains in markets and boosting the central banks’ capacity to support the global financial system. With the program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process. The stock market roared back at this announcement as well as encouraging news about employment and retail sales that were very strong over Thanksgiving. AT the same time we have not seen the usual sell off in mortgage bonds so rates have remained steady. This indicates investors may not believe the ‘good news’ or are looking to rumors of further government support to keep rates low.

Our analysts have mentioned numerous times over the last couple of months that US long term rates would find it a huge hill to climb to trade for any extended time under their current levels. The 10 yr Mortgage Security, driver for mortgages, has tried a number of times since Sept to hold under 2.00% but has not been able to hold. We believe US long term rates are about as low as they may fall based on the present fundamentals. That said, Europe is a time bomb, if defaults actually occur it would change our outlook; until then current rates are about the best we expect.

Industry News
State of the Economy:
Last Week in Review

It’s been said that “slow and steady wins the race.” And when it comes to the Jobs Report for November, it seems that the labor market continues to improve at a gradual pace. Read on for the details…and what they mean for home loan rates.
There was good news, as the headline number for job creations in November came in at 120,000, with 140,000 private jobs offsetting government losses. What’s more, some upward revisions to the two previous readings added 72,000 more jobs than had been reported.
Perhaps even more important, Hourly Earnings grew by just 0.1% – a number that suggests no threat of wage-based inflation. Remember, inflation is the arch enemy of Bonds and home loan rates because when inflation rises, investors in Bonds demand a higher yield to offset the lost buying power inflation imposes on a fixed payment. And as home loan rates are tied to Mortgage Bonds, this would mean home loan rates move higher. So the Hourly Earnings number was good news for Bonds and home loan rates.
Catching the markets by surprise was a rather sharp decline in the unemployment rate to 8.6%, the lowest unemployment rate we’ve since March of 2009. While this is good news on the one hand, part of the decline stems from the fact that 315,000 people were removed from the workforce because they totally gave up looking for work. And with 13.3 million Americans still out of work, more improvement is certainly needed here.
Similarly, the labor participation rate (which is currently hovering at a 30-year low at 64) needs to move above 66 or it will be difficult for the economy to grow fast enough to lower our budget deficit. In fact, last week Bond ratings firm Fitch issued a stern warning to the US, saying that our AAA rating will be in jeopardy if we don’t soon do something to rein in our own ever-growing budget deficit.
It is good news that we’re seeing some slow and steady improvement in the labor market…and coupling this with other recent positive economic signals, means we are not near a recession at the moment. But our economic health remains fragile, and any external shock from Europe could easily disrupt the economic improvement we are seeing.
The bottom line is that the uncertainty out of Europe – and the prospect of additional Mortgage Bond buying (QE3) from the Fed – should continue to support Bonds and home loan rates as they will benefit from investors looking for a safe haven for their money. However, it is also unlikely that Bonds and home loan rates will improve much further. Inflation, while not yet a problem, is still elevated…and if it continues to creep higher, this will limit any improvement home loan rates may see. With home loan rates still near historic lows, now remains a great time to purchase or refinance a home. Let me know if I can answer any questions at all for you or your clients.
A lot of talk these days that the US economy is improving, most of it comes from those that have a vested interest in touting any bullish view. The economy is stagnant at best; not too hot but not too cool either. Every data point recently is taken as the final word, and every negative data point these days is largely discounted. With Europe teetering on a serious crisis there is actually no real strong consensus that the economy is improving. The market is telling us that this is the view point; huge swings in stock indexes but in the wider perspective no directional change. Everyone is in a state of mass uncertainty and until Europe can find any solution to their debt crisis nothing will change. Wrap a big red Christmas ribbon around it; with the housing market in depression and unemployment not likely to decline much, the outlook for the US is not good, not bad either. Over the last couple of weeks the safety moves into US treasuries has ebbed substantially. We can argue that the US economy won’t improve much based on the housing market and the high level of unemployment, however trading in the equity markets implies investors are increasingly more optimistic about the future. Either way one sees it the reality is that no one is sure, that has lead to huge wings in the indexes and has contributed to keeping interest rates from falling further.

Real Estate Miscellaneous Stats:
FHA Reserves In Trouble: The FHA reported on 11/15/2011 that it’s reserve account has dwindled to ¼ of 1% of the $1.1 trillion worth of mortgage loans that it insures. The account is supposed to be maintained at 2% of all insured loans.
Sept Case/Shiller home price index was a little better than expected, down 0.6% for the 20 city and -0.4% for the 10 city price, forecasts were for a decline of 3.0% on the 20 city. Year over Year the 20 city prices were down 3.6% while the 10 city down 3.3%. For some areas this was disappointing as spring and summer surveys showed some strength in values. For many areas this indicates a recovery is not coming soon. We are not losing value like we did in 2007 and 2008 but weaker values is not what we hoped for at this point in time. The Standard & Poor’s/Case-Shiller index released Tuesday showed prices dropped in September from August in 17 of the 20 cities tracked. That was the first decline after five straight months where at least half of the cities in the survey showed monthly gains. In the Seattle metropolitan area, which includes King, Snohomish and Pierce counties, September prices were down 1.1 percent from August, the second monthly decline after five straight months of increases. Just five other cities saw bigger monthly drops: Atlanta, San Francisco, Tampa, Chicago and Las Vegas. Seattle-area home prices were down 6.5 percent from September 2010, according to Case-Shiller.

Sept pending home sales, contracts signed but not yet closed, was thought to be +0.1%. NAR reported pending sales jumped 10.4%; yr.yr pending sales +9.6%. More positive news.
Loan Program Of The Week. New Portfolio Jumbo Loan: Guild Mortgage has just entered in to an agreement with a Jumbo Loan provider that offers some of the most flexible underwriting and creative provisions for loan approval. Here are a few bullet points:
• Loan Amounts Up to $5,000,000.00 and $10,000,000.00 on a case by case basis.
• True portfolio product with flexible underwriting policy. We just approved a loan that was declined with other portfolio lenders because of income problems.
• Asset Depletion can be used to supplement income. This can be done even if a client does not have a history of depleting assets on their tax returns. Income calculations from this source are based on age of the borrower. 4001K funds can only be used if the borrower is of retirement age.
• Pledged Assets can be used to reduce down payment. This allows the borrower to keep their assets invested. This can allow down payments as low as 10%. Pledge cannot come from a 401K, IRA or annuities.
This loan can be very helpful for high net worth borrowers that may not show a lot of income on their tax returns.

Bellevue Real Estate Report