U.S. stocks stumbled, but just slightly, as the latest mortgage applications index and October housing starts showed that a new round of home-buying weakness is likely upon us. Concerns are also increasing over FHA-backed mortgage loans. The latest to express concern about the FHA is Robert Toll, CEO of home builder Toll Brothers, who referred to the situation as “a definite train wreck.”
The FHA’s required down payment is only 3.5% and these loans now make up 24% of the market, up from 3% in 2006, if memory serves -- we’re looking at a lot more mortgages going underwater. With 14.4% of FHA-backed loans at least 30 days late and 7.8% at least 90 days late (according to the Mortgage Bankers Assoc.), this will work as another incremental force keeping foreclosure rates heightened and another taxpayer bailout is coming. Book it, it’s a done deal.
However, this market is living in a keep-up-the-bad-work mindset. The broad market rallied late in the session to darn-near erase earlier-session losses. What’s bad is good in this bizarro environment because it signals an increase in ZIRP’s lifecycle – easy money continues to boost the appetite for risk.
Financials led the rally as billionaire John Paulson, president of the eponymous hedge fund, put a price target of $29.81 on Bank of America by 2011 – the stock currently trades at $16.35. Sounds like he either wants to juice his trade or believes the Fed will remain at or near zero for another two years.
Among the 10 major industry groups, health-care and telecoms were the only other sectors to close in positive territory. I found it interesting that basic material and energy stocks failed to close higher even as metals and energy prices gained ground. Also, the dollar nearly gave back all of its prior session gains, still these dollar-down trades couldn’t make it to the plus side.
Volume was weak again as barely more than one billion shares traded on the NYSE Composite – that’s roughly 18% below the six-month daily average.
Market Activity for November 18, 2009
Mortgage Applications
The Mortgage Bankers Association reported that its applications index fell 2.5% in the week ended November 13, even as the 30-year fixed-rate mortgage averaged 4.83% -- the lowest level since May.
The purchases index fell for a sixth-straight week as buyers were frozen, uncertain as to whether the tax credit would be extended or not. Now that that extension has been promulgated, it should unfreeze home sales in the coming weeks. Nevertheless, I wouldn’t expect quite the effect it had in the summer as we’re now past the traditional buying season and most of those who were able to take advantage of the credit probably have.
The purchases index is down to the lowest level since late 1997.
Refinancing activity slipped 1.4% after large bounces over the previous two weeks of 11.3% and 14.5%, respectively.
Consumer Price Index
The Labor Department reported the headline consumer price index (CPI) rose 0.3% in October (+0.2% was expected). The core rate, excludes food and energy, rose 0.2% (+0.1% was expected).
Year-over-year, headline CPI was down 0.2%, the slightest decline since y/o/y comparisons began posting negative readings in March. This will change to an increase when the November data is released. Even if CPI comes in unchanged for the month, the y/o/y figure will be up 1.5%. If the current monthly trend continues to December, the y/o/y figure will close in on 3%. The degree of increase in the headline y/o/y readings from there will depend upon the direction of the dollar and the rise in commodity prices.
The y/o/y reading on the core rate remained benign, 1.7% for October.
The main contributor to the October rise in headline CPI was the transportation segment (which consists of private and public vehicles and gasoline) – it accounted for 71% of the increase. The core rate was driven by new and used vehicle prices, accounting for 58% of CPI’s October increase when excluding food and energy.
Used vehicle prices, at least according to CPI, rose 3.4% last month and this component is up 31% at an annual rate over the last three months -- clearly a function of clunker cash. Thanks Congress!
Housing Starts
The Commerce Department reported that housing starts plunged 10.6% in October – which is pretty amazing considering starts remain on the mat, but this is necessary due to weak fundamentals. Builders broke ground on 529,000 units at an annual rate, the market was expecting a rise to 600,000 units. Overall housing starts are down 30.7% from the year ago period and 76% from the cycle peak hit in January 2006. (On the chart below, SAAR stands for seasonally adjusted at an annual rate.)
Construction starts on single family units fell 6.8% in October. The 476,000 in single family starts (at an annual rate) is 33% above the all-time low hit in February but even with this bounce the number remains 9% below the erstwhile record low, which was hit in 1981.
Multi-family starts slid 34.6% in October, which follows a 19% decline in September. The 53,000 in multi-family construction starts marks a new all-time low.
Housing construction permits, obviously an indication of future work, fell 4.0% last month -- down 24.3% from the year-ago period. It appears that boost third-quarter GDP receive from residential construction (the first in 15 months – sorry I think I stated 13 months in a letter earlier this week) was a one-and done event.
Bumpy Road – Not Just a Metaphor
We are in the process of $787 billion in deficit spending that is specifically slated as stimulus – traditional infrastructure projects, entitlements, health services, energy efficiency, etc. Something in the range of $45-$65 billion is earmarked to highway and transportation projects. So why exactly do I find myself dodging I-270 potholes on the way to and from work?
Recall our skepticism early this year regarding the claim that there are “shovel ready” projects. That is, the claim that money will be delivered directly to state and local governments which have projects ready and waiting, and thus immediately result in new work – a wonderfully conspicuous event for politicians as Americans would be able to see this activity as they go about their daily lives. Well, only the naïve believed this claim as there is an arduous, and well-known, appropriations process that stands in the way of immediate results. Still, one would think we’d get something to show for this, one of many budget busting, programs. Apparently, they can’t even resurface roads in a reasonable timeframe.
Have a great day!
Brent Vondera, Senior Analyst
The FHA’s required down payment is only 3.5% and these loans now make up 24% of the market, up from 3% in 2006, if memory serves -- we’re looking at a lot more mortgages going underwater. With 14.4% of FHA-backed loans at least 30 days late and 7.8% at least 90 days late (according to the Mortgage Bankers Assoc.), this will work as another incremental force keeping foreclosure rates heightened and another taxpayer bailout is coming. Book it, it’s a done deal.
However, this market is living in a keep-up-the-bad-work mindset. The broad market rallied late in the session to darn-near erase earlier-session losses. What’s bad is good in this bizarro environment because it signals an increase in ZIRP’s lifecycle – easy money continues to boost the appetite for risk.
Financials led the rally as billionaire John Paulson, president of the eponymous hedge fund, put a price target of $29.81 on Bank of America by 2011 – the stock currently trades at $16.35. Sounds like he either wants to juice his trade or believes the Fed will remain at or near zero for another two years.
Among the 10 major industry groups, health-care and telecoms were the only other sectors to close in positive territory. I found it interesting that basic material and energy stocks failed to close higher even as metals and energy prices gained ground. Also, the dollar nearly gave back all of its prior session gains, still these dollar-down trades couldn’t make it to the plus side.
Volume was weak again as barely more than one billion shares traded on the NYSE Composite – that’s roughly 18% below the six-month daily average.
Market Activity for November 18, 2009
Mortgage ApplicationsThe Mortgage Bankers Association reported that its applications index fell 2.5% in the week ended November 13, even as the 30-year fixed-rate mortgage averaged 4.83% -- the lowest level since May.
The purchases index fell for a sixth-straight week as buyers were frozen, uncertain as to whether the tax credit would be extended or not. Now that that extension has been promulgated, it should unfreeze home sales in the coming weeks. Nevertheless, I wouldn’t expect quite the effect it had in the summer as we’re now past the traditional buying season and most of those who were able to take advantage of the credit probably have.
The purchases index is down to the lowest level since late 1997.
Refinancing activity slipped 1.4% after large bounces over the previous two weeks of 11.3% and 14.5%, respectively.Consumer Price Index
The Labor Department reported the headline consumer price index (CPI) rose 0.3% in October (+0.2% was expected). The core rate, excludes food and energy, rose 0.2% (+0.1% was expected).
Year-over-year, headline CPI was down 0.2%, the slightest decline since y/o/y comparisons began posting negative readings in March. This will change to an increase when the November data is released. Even if CPI comes in unchanged for the month, the y/o/y figure will be up 1.5%. If the current monthly trend continues to December, the y/o/y figure will close in on 3%. The degree of increase in the headline y/o/y readings from there will depend upon the direction of the dollar and the rise in commodity prices.
The y/o/y reading on the core rate remained benign, 1.7% for October.
The main contributor to the October rise in headline CPI was the transportation segment (which consists of private and public vehicles and gasoline) – it accounted for 71% of the increase. The core rate was driven by new and used vehicle prices, accounting for 58% of CPI’s October increase when excluding food and energy.
Used vehicle prices, at least according to CPI, rose 3.4% last month and this component is up 31% at an annual rate over the last three months -- clearly a function of clunker cash. Thanks Congress!
Housing Starts
The Commerce Department reported that housing starts plunged 10.6% in October – which is pretty amazing considering starts remain on the mat, but this is necessary due to weak fundamentals. Builders broke ground on 529,000 units at an annual rate, the market was expecting a rise to 600,000 units. Overall housing starts are down 30.7% from the year ago period and 76% from the cycle peak hit in January 2006. (On the chart below, SAAR stands for seasonally adjusted at an annual rate.)
Construction starts on single family units fell 6.8% in October. The 476,000 in single family starts (at an annual rate) is 33% above the all-time low hit in February but even with this bounce the number remains 9% below the erstwhile record low, which was hit in 1981.Multi-family starts slid 34.6% in October, which follows a 19% decline in September. The 53,000 in multi-family construction starts marks a new all-time low.
Housing construction permits, obviously an indication of future work, fell 4.0% last month -- down 24.3% from the year-ago period. It appears that boost third-quarter GDP receive from residential construction (the first in 15 months – sorry I think I stated 13 months in a letter earlier this week) was a one-and done event.
Bumpy Road – Not Just a Metaphor
We are in the process of $787 billion in deficit spending that is specifically slated as stimulus – traditional infrastructure projects, entitlements, health services, energy efficiency, etc. Something in the range of $45-$65 billion is earmarked to highway and transportation projects. So why exactly do I find myself dodging I-270 potholes on the way to and from work?
Recall our skepticism early this year regarding the claim that there are “shovel ready” projects. That is, the claim that money will be delivered directly to state and local governments which have projects ready and waiting, and thus immediately result in new work – a wonderfully conspicuous event for politicians as Americans would be able to see this activity as they go about their daily lives. Well, only the naïve believed this claim as there is an arduous, and well-known, appropriations process that stands in the way of immediate results. Still, one would think we’d get something to show for this, one of many budget busting, programs. Apparently, they can’t even resurface roads in a reasonable timeframe.
Have a great day!
Brent Vondera, Senior Analyst
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