Bernanke, for a second-straight day, addressed the commercial real estate topic stating that the Fed is carefully monitoring the situation. This, along with rising credit-card defaults (which hit a new high of 10.76% in June) are topics we’ve addressed as significant challenges for the financials system. For now, a very positively sloping yield curve (nearly the steepest on record) is helping banks offsets these drags, but I question it will be enough.
Energy was the worst performing sector as the weekly energy report showed a smaller-than-forecast decline in crude inventories. Consumer discretionary and tech shares were the top performers on the session. The NASDAQ Composite, led by those tech shares, rose for an 11th straight day.
Market Activity for July 22, 2009
Federal Housing Finance Agency’s Home-Price IndexThe FHFA released its home-price data for May, showing prices rose 0.9% -- down 6.5% over the past year. This gauge shows the degree of decline as much milder than the other home-price figures are showing.
Case/Shiller, for instance, has prices down 18% (although this index is weighed down by areas that had the highest level of speculation during the boom and hence the most foreclosure activity in the bust; the index is also value-weighted so high-end homes have a larger effect – the FHFA index is equally weighted). Existing home sales out of the National Association of Realtors has prices down 16% over the past 12 months. The FHFA figure is a very broad look at the housing market, however it does miss the high-end home market as it does not capture jumbo mortgage properties. Basically, we like to average these three for a clearer picture – doing so results in a 13% decline in home prices, on a 12-month basis.
In terms of region, prices rebounded by the most on the West coast, up 2.7% in May, and New England showed the weakest results, down 2.0%. Home prices rose 1.4% in the Southeast and were up about 0.8% in the Midwest.
Mortgage Applications
The Mortgage Bankers Association reported that their mortgage apps index rose for a third-straight week in the period ended July 17, up 2.8% after a 4.3% advance in the previous week.
Purchases rose 1.3% after a 9.4% decline in the week prior, while refinancing activity rose 4.0% – the third-straight increase – even as the rate on the 30-year fixe mortgage rose to 5.31%. Back in April and May when the 30-year fixed rate moved below 5%, refinancing activity jumped; activity would suddenly cease when the rate moved back in the 5% handle. Now, borrowers are more willing to get refis done and the trigger point seems to be something closer to 5.30% now as many probably fear they won’t get a shot at sub-5.00% again.
The average loan size fell to $218,700 from $226,500 in the week prior and is down from $250,000 at the end of last year. Refinancing activity accounted for 55.5% of the index in this latest week.
In other mortgage-related news, the Washington Post reported that Freddie Mac will pick up the closing costs (up to 3.5% of the sale price) on the purchase of foreclosed properties. In addition, as part of their “Smart Buy” program Freddie is offering a two-year warranty on the home’s plumbing, a/c and heating systems, and appliances (water heaters, stoves, washers/dryers and dishwashers). This applies only to primary residencies, and to homes selling out of Freddie’s own foreclosure inventory. Oh, the plan also includes discounts on replacement appliances of up to 30%, and 15% on installation costs.
As we talked about when the agencies upped their refinancing LTV requirement to 125%, stating that this is a sign the government will take it to another level in using Fannie and Freddie to spark home buying and put the taxpayer on the hook for many more costs (as if they need more), it appears the great minds in government are just getting started in sticking it to people who have conducted their lives in a relatively responsible manner. And speaking of great ideas…
Government-Run Health Care
House Majority Leader Steny Hoyer left open the possibility that Congress may wait until after the August recess to vote on health-care legislation, as we briefly touched on yesterday. If they do, it would potentially be a serious positive for longer-term growth. There is opposition building as people learn more about the specifics and waiting certainly decreases the likelihood of passage.
Maybe some do not see the connection between this legislation and the economy.
First off, this additional financial burden (on top of the Social Security and Medicare time bombs) is hardly a necessity even if it were a smart thing to do – the actual number of uninsured Americans is much lower than the scaremongers incessantly state. Of the supposed 45 million uninsured, 10 million are eligible for either Medicaid or SCHIP but do not sign up – doesn’t matter anyway because these programs are available at the point of service so they are covered. Another 17 million live in $50,000-$75,000 households – these are people who can afford catastrophic insurance at a minimum (probably a lot of young people who simply prefer to go without) and half of those within this segment are transitory uninsured, meaning they lose their jobs and their health plan too, until they get a new job. Then you have another 5-8 million who are not even Americans, but the quacks that cause the uproar over the uninsured have to add in illegals to make the number sound scarier. This leaves us with about 12 million truly uninsured, and even these people cannot be refused care. While 12 million is a big number, one has a hard time finding a reason to venture down this government health-care road at the harm of everyone else. (These numbers are according to the 2007 Census Bureau report: “Income, Poverty, and Health Insurance Coverage in the United States.” the Heritage Foundation, and the Kaiser Family Foundation)
Now that that is out of the way, back to the economic harm of it all. To put it simply, our budget is already burdened in a structural way with enormous costs that will be harmful to both economic growth and the value of the dollar. The increase in tax rates alone in order to pay for this monstrosity would be the concrete boots that drown this economy over several years. Not to mention the damage this does to the American principle of self-reliance (however much of it is left anyway) – a principle that in the past has kept government spending at bay in terms of its percentage of GDP. If we add on another several hundred billion to a trillion dollars in government spending, especially via borrowing, you can forget about purchasing power of the dollar moving in the right direction. Let’s hope this thing that even the President admitted on Tuesday he had not read (there are a couple of competing bills), goes the way of the ash heap.
Have a great day!
Brent Vondera
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