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Yup, Refi Is Still The Way Of Life

"In the first quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review.This percentage is up from the fourth quarter of 2005, when the share of refinanced loans that took cash out was a revised 81 percent, and is the highest since the third quarter of 1990, the mortgage giant said.

"The share of all mortgages that were for refinance fell slightly in the first quarter of 2006 to 44 percent from 45 percent in the fourth quarter of 2005. Over

that same period interest rates on all mortgages increased between 0.02 and 0.25 percent," said Frank Nothaft, Freddie Mac vice president and chief economist.

"Almost no one is refinancing to reduce their interest rate in today's environment. In fact, the first quarter of 2006 is the first time in 20 quarters in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers," Nothaft said.< One reason why homeowners may be willing to increase the mortgage rate on their first-lien mortgage is because interest rates on most home equity lines of credit have been pushed up again as the Fed increased short-term interest rates in January and March, which in turn pushed up the prime rate, Nothaft said. Home-equity loans are typically linked to the prime rate, which currently is at 7.75 percent, and many home equity loans have rates that are 1 percent or more above the prime rate, Nothaft said. In contrast, the average rate on 30-year fixed-rate mortgages is presently near 6.5 percent, Nothaft said."

Inman News

Watching The Dollar

I've often thought, and previously mentioned, that it is not unlikely that we will have a dollar crisis to bring an end to this nonsense.

The last few days, have certainly weakened the Fed's credibility. Yesterday's episode of Maria Bartiromo relaying Bernanke's dinner party remarks set a new low, both for Fedspeak and for market idiocy in listening. Individually these things don't mean much, but over time they have a corrosive effect as market participants cast a wary eye over the Emperor's new clothes.

The dollar was down again today. CAD went through 0.90. DX is in the 85s. How low can it go? Well no real panic until it gows through 80, I think.

The Bubble Lives

Couple of interesting data points. Pending home sales today (NAR) was down over last year, but only 6%. Really in the noise. No bubble burst there. The BEA's report yesterday implied an estimate of $300 billion increase in mortgage debt outstanding in Q1 (an annual rate of increase of about 13%). So at any rate the home ATM has slowed a bit, but it is still pumping out a huge amount of money to support the overspent consumer.

Caution Is Setting In

CNNMoney did an informal online poll as to whether now was a good time to buy a house. Interestingly, 56% answered that it was better to wait.

CNNMoney Poll

Hedging

This term is often used but not understood. Hedging is a technique for removing specific risks from a position by entering an offsetting short position. Most often, it is used to remove market risk - beta - from a stock position, so that the return on the position becomes that of the outperformance of the position (plus the interest on the proceeds of the short), its excess return or alpha. In the trivial case of a perfect hedge, where the hedge is identical to the original asset, then the net position should earn the market risk-free return, typically the T-bill interest rate.

For example, to hedge a stock portfolio one might short the S&P futures, in effect going short the S&P 500 index basket of stocks. The return on this position would then be the risk-free return plus the performance of the portfolio relative to the S&P 500 index.

Mean Reversion

The philosopher Georges Santayana wrote: "Those who cannot remember the past are condemned to repeat it." There is a corollary in the financial markets - those who do remember the past are condemned to frustration and underperformance in manias, like the bubble in which we find ourselves today.

Nassim Taleb's book "Fooled By Randomness" describes this phenomenon, where the short-term success enjoyed by the novices fools them in to believing that they know what they are doing, when in fact they are so incompetent that they cannot recognize their own incompetence.

On The Other Hand...

WASHINGTON (MarketWatch) - Sales of existing homes rose unexpectedly in March by 0.3% to a seasonally adjusted annual rate of 6.92 million, the National Association of Realtors said Tuesday. After five months of declines, existing home sales have risen two months in row, prompting David Lereah, chief economist for the realtors, to say, "This is additional evidence that we're experiencing a soft landing." Economists expected sales to fall to a 6.70 million pace in March. The number of homes for sale rose 7% to a record 3.194 million, representing a 5.5-month supply at the March sales pace, the largest supply since July 1998. Median prices are up 7.4% in the past 12 months to $218,000, the smallest price gain since January 2004.

More Grist For The Housing Mill

UBS decides the landing is going to be hard: "Of late, however, the more rapid rate of decline in demand -- down 21% in eight months -- has led us to rethink our thesis for the near term," she said. "Given tough comparisons and a proliferation in for sale listings in some of the hotter markets, demand has fallen more quickly than we expected." Marketwatch

"ForeclosureS.com, a California based real estate investment advisory firm and nationwide publisher of foreclosure property listings, reported today that foreclosure activity in the first quarter of 2006 increased significantly from the fourth quarter of 2005 in several western and southwestern housing markets.

"The biggest increases were in major urban centers around the West," said ForeclosureS.com president Alexis McGee. "For example, Los Angeles County recorded 6,314 pre-foreclosure filings and foreclosures through March, up from 4,911 in Q4 of 2005, while in San Diego the numbers jumped from 1,565 in Q4 of 2005 to 2,241 in Q1 of 2006." Business Wire

"Investors who sought quick profits buying and selling real estate in the Washington region are in full retreat, dampening demand for homes, most notably for condos. What is becoming apparent, market watchers say, is how big a part speculators played in the region's real estate boom of the past few years. Not just condominiums, but also townhouses and single-family houses, were snapped up by investors using no-money-down financing and non-traditional loans. They helped send prices soaring at unprecedented rates. And now many are trying to sell, or rent at a loss. Some may eventually dump properties at low prices to get rid of them. That could weigh down values for everyone." Washington Post

Irvine, Calif. – April 25, 2006 – RealtyTrac™ (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its 2006 Q1 U.S. Foreclosure Market Report, which showed that 323,102 properties nationwide entered some stage of foreclosure in the first quarter of 2006, a 38 percent increase from the previous quarter and a 72 percent year-over-year increase from the first quarter of 2005. The nation’s quarterly foreclosure rate of one new foreclosure for every 358 U.S. households was higher than in any quarter of last year. RealtyTrac

State Of The Bubble

Where are we in the progress of the housing bubble?

Hard to say. It is clear that sales are down and inventories are rising, especially in the most extreme bubble areas, such as South Florida, Phoenix, Las Vegas, San Diego and so forth. However, there has been little downward movement on prices although the rapid rises seen last year seem to have stopped in most place, although not all. Some areas are still seeing bidding wars and price increases. The first cracks in the bubble occurred in late summer of 2004, with Pulte's drastic price reductions in Las Vegas showing that there were, in fact, limits to the ability to raise prices. What is clear is that new house builders are increasingly cutting prices and adding incentives to move the product. But the less skilled sellers of existing houses are still holding their ground and hoping for higher prices. If not now, in the fall. Or spring 2007. Or whenever.

What we saw in Australia and Britain was an initial drop, then a leveling out in housing. One certainly cannot rule out the same thing here. However, the real issue os not the bottom falling out of the housing market but the end of the "housing ATM" which has been funding consumption for the last few years. This should show up in M2, usually a good indicator for consumer spending. So far (as of the end of March). it has not done so. So I think it is too early to conclude that the housing bubble has burst, although the behavior of the new house builders and the rising inventoriea are a clear warning signal that the end is near.

We will be watching the weekly mortgage purchase index (from the Mortgage Bankers Association) for signs of movement, and also M2 as a leading indicator of consumer spending.