We have a couple of tenants on why the American economy (read: US consumer) is ready to rebound... it won't have anything to do with jobs since those are in the dumper for a while, but most of it will be on the 3 legged stool of (a) government flooding the system with money, fiscal and monetary stimulus creating jobs and 'prosperity' (b) the Fed holding the neck down on mortgage rates will allow indebted consumers to act like it's 2006 again, refinancing like mad and using their dwindling equity as a piggy bank and (c) we have a "commodity" tax cut, namely of the energy kind.
I'm excluding of course the fairy tale that China will cause the entire world to rebound with its magic wand.
Point (c) is unwinding day after day as (pick your reason) (1) China buys everything under the sun or (2) people are fleeing the dollar into something that has actual value or (3) speculators love the fact that margin requirements in commodity markets are still tiny and leverage is enormous so commodity markets are once again their plaything for "fast money".
Point (a) has been working like a charm - I see prosperity everywhere. Those 3.5 million jobs Obama said would be "created or saved" is obviously working, and the value of the stock market is being propped up very well through flooding of dollars into the system, which now are being used to speculate instead of lending.
But point (b) got us here, so it's important to focus on it. While the Federal Reserve is happy to take losses day after day to suppress rates [Jun 3, 2009: Weekly Mortgage Apps of Interest Today; Fed Already Loses $5 Billion] the bond market might be trying to tell the Fed, eventually the free market will win. Now, I do expect at the next Fed meeting (or if the stock market starts to fall, a "surprise" intervention) the Fed announces an even bigger plan to buy mortgage backed securities. (will it be a waste of money? yes) While they say outwardly the rising yields are a "great thing", the data we received yesterday says otherwise.
We are easy credit addicts and each iteration of our dependency requires stronger and stronger drugs to get the same high. In yesterday's piece [Jun 3: A Country that Cannot Function without Easy Money] I wrote
Mortgage Applications Down 16% ... and that's with only half a week of mortgage rates jumping over 5%. ... but purchases still increased a bit.
Well folks, that was lazy on my part... much like the mainstream media who gets excited when April numbers in housing show improvement over March, or May over April - we forget that housing is seasonal. Much of the activity is concentrated in spring and first half of summer. So activity in March is always better than February, and April better than March, etc. So what we are passing as green shoots as we see month over month increases is just the nature of the country going into the stronger part of the CYCLICAL housing season. We sell more homes in April than we do in December. Every year. Mortgage applications for purchases will be better in May than November. Every year.
So while it is fair to compare REFINANCING activity week over week, since that can happen any month and has no seasonal ebb and flow... it was wrong for me to let out my inner bull emerge and say purchase applications went up a bit. Because they should go up. They do every year and should until at least mid summer.
To be rigorous we need to look at YEAR over YEAR activity on the purchase side.
So let me give you that data... again I want you to keep in mind - affordability is at all time highs, prices have dropped 30-40% in many markets year over year, we are handing out $8000 to first time buyers to use as down payments, foreclosures are going for 50%+ off, and interest rates have plummeted YEAR over YEAR.
What are the results?
- This week in 2008 interest rates for 30 year fixed were at 6.17%
- This week in 2009 interest rates for 30 year fixed were at 5.25%
How did year over year purchases do, which is how we SHOULD compare housing? Despite a 92 basis point drop in interest rates and all the items I listed above in terms of affordability, government handouts, half off price sales, blah blah - purchases applications were down 19.7% year over year.
So yes they were up from "last week" but I imagine that will happen just about every week until we reach the apex of the housings season. So that's the full story and as your intrepid reporter I fell under the sway of "grab the easy number" like the media and did not dig deeper.
Does any of this matter? Not to the market... we are in green shoot mode. I am just showing you how bad it really is out there. Despite all the efforts, all the money wasted, all the manipulation of interest rates... we dropped 20% in purchase applications versus this week last year. Now consider the horror if the Federal Reserve loses the battle and mortgage rates go back to some scary level like... 5.65%.
Off to drink some Kool Aid.
