Housing Perfect Storm
Research for Online Investors

by John Dalt

9/08/11

Fixed mortgage rates have fallen to the lowest levels since 1951, according to Freddie Mac.  The average rate for a 30-year mortgage is quoted at 4.12% and 15-year rates are at 3.33%. Ten-year Treasury bond interest rates are at an all time low of 1.99%.  Mortgage rates track the ten-year note interest rate, as most mortgages close out within that time frame.

According to USA Today, only 40% of households have a credit score of 700 or above.   Many do not have the required 20% down payment.  In prior years the sale of a previous home supplied the down payment for a new larger home.  Existing home sales are slower this year than any in the last 14 years.  With soft prices, sellers do not realize a capital gain on their existing home.

Nearly a third of homeowners have zero equity in their homes or are even “underwater” according to CoreLogic.  Underwater means they owe more on their mortgage than the house could be sold for.

Perfect Storm in Housing

Interest rates this low should ignite the housing market, if the economy were growing.  High unemployment encourages those with jobs to pay off debt and “pull in their horns” on new purchases.  Business is reluctant to transfer of employees.  A glut of foreclosed properties on the market causes potential buyers to delay purchases in hopes of buying cheaper in the future.  All of these subtle individual actions have created a perfect storm in the housing market.

The Bank of England held short term interest rates the same this morning at 0.5%.  There was speculation the European Central Bank (ECB) would lower rates as Jean-Claude Trichet was seen with Ben Bernanke at Jackson Hole two weeks ago.  The ECB kept their short term rates steady at 1.5%.

In the U.S., last month’s trade balance (imbalance?) was lower than expected at only a minus $44.8 billion dollars.  This was down from $51.6 billion in July.  Initial jobless claims last week were up 2,000 over last week at 414,000.  Continuing claims were down but still higher than expected at 3.717 million.

The U.S. “Super-Committee” began meetings today.  They opened the meeting with a stirring rendition of KUM-BA-YA and a hallway protest by unions chanting they wanted jobs (just kidding about the song).  The committee of six senators and six representatives has until Nov. 23rd to write a bill that will cut $1.2 trillion from the Federal Budget over the next ten years.  The House and Senate will then vote to approve the bill by Christmas and the President sign it by mid-January.  If any of these steps are missed, or the whole experiment fails, automatic spending cuts kick in for Medicare and Defense spending.

Ben Bernanke, Chairman of the Federal Reserve, spoke in Minneapolis over the noon hour.  The market dropped on release of his comments prior to him taking the stage.  There was no promise of another round of quantitative easing!  Traders never give up hope they will hear the magic words.

We think if it does come, the introduction will be so cloaked in “Fed Speak” only the most discerning parsing of their words will pick up the true meaning.  The Chairman did say the Open Market Committee would discuss available financial tools at the September meeting.  Bernanke took questions that had been pre-approved and allowed him to comment on political budget negotiations.  The market regained some of the earlier losses as questions were asked.  Perhaps it was overreaction to no news, or just weariness of listening.

The market is treading water today ahead of the President’s address tonight.  We are in the upper regions of a “trading range” of 1119 and 1225.  I have drawn two horizontal lines on the chart below at support and resistance.

We can also see the “Death Cross” that occurred on 8/11/11.  We advise caution while the market is trading in this range.  Light volume indicates hesitancy from buyers willing to open new or add to positions at these prices.  Until we see commitment by large institutional investors, the market gyrations are just wall paper.

Quote:  We believe that we are just about to enter a critical period for the eurozone and that the threat of some sort of break-up between now and year-end is greater than it has been at any time since the start of the crisis—Alastair Newton, strategist for Nomura Securities, London

The mailbag:
Life (and economics) is pretty complicated. Except for the fact that the top 400 net-worth individuals in the US are worth the same as the bottom 150 MILLION individuals.... go ahead and explain that away... and don't be flippant.---subscriber R.T.

John’s reply:  Not a flippant answer, I do not care.  I do not covet my neighbor's wife or assets.  I believe, like Abraham Lincoln, that I should look at successful people as an example to emulate that I might be as successful.  Rewards come to those that work hard.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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