The Real Estate Trading Game

Zero-point rates on 30yr fixed Conforming loans (up to $729k) begin this week up about .125% after touching record low levels the week of May 17, and rates on Jumbo loans (above $729k) are steady. Rates are holding just above record lows because global investors continue to be net buyers of Treasury and mortgage bonds as a safe haven from European debt problems and stock weakness. When mortgage bond prices rise on these buying rallies, rates drop.

EUROZONE PROBLEMS LOWER U.S. RATES

Debt concerns in Eurozone countries continue as we enter June, with ratings agency Fitch downgrading Spain from AAA to AA+ on Friday, and France acknowledging that their ratings are justifiably at risk. As for stocks, the Dow and S&P lost 7.9% and 8.2% respectively in May, the worst losses in five quarters.

To calm markets last week, China stated they weren’t shifting away from European bonds, and it worked for a couple days. Stocks rallied and U.S. mortgage and Treasury bonds sold off, pushing rates higher.

But to begin this week, the data is proving that most institutional investors and central banks are net sellers of Eurozone debt (http://bit.ly/c5MKpf).

This will help keep rates low short-term, but it’s unreasonable to expect that rates can go lower.

Before the week of May 17, we only touched on record low rates (which are .125% lower than today’s average rates shown below) two other times since Freddie Mac started keeping the official records in 1971: April 2009 and November 2009. And in both cases, rates rose just as quickly.

The reason is that there are too many factors preventing mortgage bonds (that rates are tied to) from rallying past current price levels—not the least of which is the Fed’s $1.25t mortgage bond portfolio they will look to start selling in the next 12-24 months.

RATE LOCK ADVISORY FOR WEEK OF JUNE 1

Besides these global economic topics influencing markets this week, the high points of the economic calendar are as follows. The WeeklyBasis rate lock bias continues for the second week—this is the right time for borrowers to lock rates at the lowest possible levels.

NAR’s April Pending Home Sales Tuesday, which will show us how many homes went into contract and these numbers will still be skewed by the April 30 expiration of the Federal homebuyer tax credit.

There are five public speeches this week on the economic outlook by voting members of the Fed’s rate setting committee, including Kansas City Fed president Thomas Hoenig who has voted against keeping the overnight Fed Funds Rate at .25% at all three 2010 Fed meetings—he thinks inflation is a threat and his public comments usually cause rates to rise.

The Bureau of Labor Statistics jobs report Friday is expected to show 508k jobs gained in May, which would be a monumental single-month gain since 573k jobs were added from January through April. If this the actual number is close to this, rates will rise on improving economic sentiment—even if the unemployment rate doesn’t move much from it’s 9.9% mark.

DAILY CONSUMER-FRIENDLY COMMENTARY

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Rates were net down .125% for the week ended April 9 mostly on positive overall Treasury auctions. This regains half of the .25% rise we had as the Fed ended it’s 15-month mortgage rate stimulus program on March 31. Conventional conforming rates are now back within .25% of all-record lows.

INFLATION & FED OUTLOOK DOMINATE WEEK
The WeeklyBasis rate lock bias going into the past three weeks is now shifting to a floating bias going into Monday, with more rate lock caution as the week goes on. Here’s why…

There’s no economic data Monday, and Trade Balance data Tuesday that’s usually not a big rate mover. Wednesday we have Consumer Inflation and Retail Sales data. Inflation should still remain subdued but if it moves up at all, rates would follow. Retail Sales also may not move a lot, but even a bit of up movement will cause rates to rise on perception that the worst is over—and retail sales are the most obvious indicator that consumers are ready to spend again.

Also Wednesday, Fed chairman Ben Bernanke testifies before congressional Joint Economic Committee on the economic outlook. His speech will contain much of the recent ‘subdued inflation for some time’ message, but the Q&A helps pinpoint timing on the Fed’s eventual exit from ultra low rates.

ECONOMICS 101: WHAT IS A MINSKY MOMENT?
From Wednesday to Friday, market mood will be influenced by several speeches from prominent Fed officials, financial leaders, lawmakers, and journalists at the 19th Annual Hyman P. Minsky Conference On The State of the U.S. and World Economies. Speakers will explore where markets and financial reform goes from here.

Minsky (1919-1996) was an American economist who’s best known for his study of financial crises. The New Yorker’s John Cassidy, a speaker at this year’s conference, summed up Minksy’s work like this: “There are basically five stages in Minsky’s model of the credit cycle: displacement, boom, euphoria, profit taking, and panic.”

Minsky’s work has grown in influence as world economies more quickly go from booms (based on incurring massive debt to invest in higher yielding assets) to busts (based on the mass selling of those assets when the debt comes due). A ‘Minsky Moment’ is when the panic selling sets in…buyers are scarce because asset values plummet, and the debt used to finance asset purchases can’t be serviced.

In other words: credit and liquidity both freeze. Just like they did when the crisis began in Fall 2007.

So the topics covered at this week’s conference will be closely watched by market participants.

Since sending the WeeklyBasis 2010 Rate Outlook this Monday (as opposed to normal Friday delivery), rates are still holding. See below for current levels as of the end of mortgage bond trading today.

Now onto the critical alert for the week: Homebuyers intending to use FHA loans to finance condo purchases should be advised that FHA condo “Spot Approvals” are going away February 1. A Spot Approval is when a lender can approve and fund a loan on a specific unit in any condo building provided the building meets certain conditions (building is 4 units or greater, 90% of units sold, 51% owner-occupied, no more than 20% commercial space, healthy condo budget, etc.).

An FHA Spot Approval is key for buyers because it means the buyer has lots of inventory to choose from. As of February 1, HUD is eliminating Spot Approvals, meaning an entire building must be approved by HUD directly or by a lender directly. Because of fraud liability and risk issues, most lenders are not approving whole buildings and deferring to the HUD-direct approval method.

This means significantly less condo inventory to choose from, at least for the next 3-6 months as more condo projects get FHA approval from HUD—a 4-8 week approval process that’s likely to get longer after February 1. For example, in all of San Francisco, there are only 27 FHA-approved condo projects currently approved.

If a homebuyer looking to buy a condo with FHA financing in the first quarter and wants to have the largest possible inventory to choose from, they should consider this HUD deadline. If they want to do a Spot Approval on a non-FHA approved building, they need to be in contract by Friday, January 29.

For post February 1 inventory evaluation purposes, use the following instructions to see which entire condo buildings are currently FHA approved by HUD:

- Go to https://entp.hud.gov/idapp/html/condlook.cfm

- For ‘Approval Method’ select ‘Pre HRAP/DELRAP’

- For City, enter city name, e.g.: ‘San Francisco’

- Leave all other fields blank

- Select ‘Send’

If there are any questions about how a condo building can obtain a HUD-direct approval, or homebuyer scenarios to discuss, please let me know.

CONFORMING RATES ($200,000 – $417,000) – 1 POINT

30 Year: 5.0%   (5.12% APR)

FHA 30 Year: 5% (5.13% APR)

5/1 ARM: 3.875% (3.99% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 1 POINT

30 Year: 5.25% (5.36% APR)

FHA 30 Year: 5.25% (5.38% APR)

5/1 ARM: 5.25% (5.37% APR)

JUMBO RATES ($625,500 – $3,500,000) – 1 POINT

30 Year: 5.875% to 6.25%   (6.02% to 6.37% APR)

5/1 ARM: 5.25%   (5.43% APR)