Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – Nov 18th, 2008

Year In Review

Pardon last week’s brief hiatus, as the day was enjoyed by me and my family, as we celebrated Veteran’s Day together.

The Economic Stimulus Package

Let’s take a brief look at what has transpired over this past year.  First, with the Credit Crisis in full blown force, Congress enacted the Economic Stimulus Package.  Basically it raised conforming loan limits to 125% of the Median Priced Home for the area or kept them at $417,000, whichever was LESS.  So, our median priced home was $320,000.  125% of $320,000 is $400,000, so our conforming loan limits remained at $417,000 for Butte County.  However, HUD also increased the FHA loan limits to 125% of the area’s Median Priced Home.  So, FHA loan limits for this year were $400,000 after the Stimulus Package was approved.  As mentioned in a previous article, it also changed some of the mortgage insurance calculations depending upon a borrower’s credit risk score, down payment amount, where the down payment funds were coming from.  Conforming loans with also were categorized by a new type of risk based pricing.  This was also based upon credit risk score.  So, if a borrower had a score less than 740, unless you put 20% down or more, there were new add-ons to the cost of a loan, never seen before this stimulus package.

Then came HR 3221

The Housing and Economic Recovery Act of 2008.  Essentially, this got rid of most 100% down programs (however there is a new one that can still obtain 100% financing and the seller can pay 6% of the sales price toward your closing costs and paying the interest rate down).  It changed FHA down payment requirements to 3.5% as opposed to just 3%.  It changed the Economic Stimulus Package by lowering the HUD and Conforming loan limits to 115% of the area’s median priced home.  However, HUD determined the median priced home to be only $255,000.  That’s a 20.31% drop on values in one year.  So, that puts FHA loan amounts for the year 2009 at $293,250 for Butte County.

Gov’t Takeover of GSE’s

On September 6, the Government took over the Government Sponsored Enterprises FannieMae and FreddieMac.  With the turmoil of the Fed’s Bear Stearn’s Bail out, banks failing left and right, the formation of Term Auction Facilities, the announcement of PIMCO to stop buying bonds, the world following suit, nowhere to sell mortgages any more, congress set up a $200 Billion line of credit for banks to guarantee that banks could sell mortgages so that they had more money to lend for home buyers to keep an industry alive.

Today, Ben Bernanke and Henry Paulson are speaking to Congress about the effects of the $750 Billion bailout.  Apparently, their words are expected to be promising.  I’ll touch base on this in next week article.  Interesting note:  again, we see interest rates doing somewhat the opposite of what they’d normally do.  Core producer prices rose by 0.4% versus expectations of 0.1% which moved us to the highest 12 month gain since 1989.  It seems as though the markets are ignoring this, as they feel that the very high energy prices we were seeing mid-year are being felt today.  Since oil has come down and therefore energy prices, the scary reading is being somewhat shrugged off.

Also next week, the Producer Price Index and the release of the previous FOMC minutes.  Get out there and buy…values are down, as well as rates…it is time…Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – March 4th, 2008

Jobless Claims Continue To Show Signs of Recession

Last Wednesday the Wall Street Journal reported this headline:  Inflation could be a bigger problem than many think!  As Homer Simpson might say, “Doh!”

Last week I mentioned the nice layer of support that the 200-day moving average was giving us.  It has continued to be our best friend in this extremely volatile market. 

I keep commenting on the Initial Jobless Claims numbers for the week.  Remember that the last two recessions that the United States went through, the four-week average of these claims reached 362,000.  This last week we hit 373,000 and brought the average to 360,500.  We’re getting closer folks!

A recession is two Gross Domestic Product quarters in a negative number.  The Fourth Quarter 2007 GDP was 0.6%.  It shows the economy is significantly slowing.  Good ‘ole Ben Bernanke spoke to congress this past week.  His comments caused interest rates to lower a bit.  But the big news of this past week was OFHEO’s (The Office of Federal Housing Oversight Committee) announcement that they rescinded the Capital Requirment Penalties to GSE’s.  What does this mean?  Remember when FreddieMac and FannieMae’s accounting was off approximately $3 Billion each?  OFHEO (the government entity that governs conforming loan limits) penalized these Government Sponsored Entities (FannieMae and FreddieMac) by requiring that they have penalty reserves of 30% more than the usual reserve requirement for each loan funded.  Well, Wednesday, OFHEO removed this penalty reserve requirement, freeing up more money for Fannie/Freddie to purchase loans in the secondary market.  So, this announcement was completely separate from HR 5140 and the economic stimulus package that the president signed into effect on February 13th.  This may also have an effect on removing the limits on Jumbo loans.  We’ll learn more about this in the future, however, this could be huge for high priced areas like California, in general.  I’ll report more on this latter as I learn more. 

FHA Loan Limits Increasing?

So, the announcement of HUD’s new median priced home limits will be announced on March 7th.  Here’s what’s expected.  Conforming loan limits will remain at $417,000.  However, if our median prices stay the same as they are now, $304,000.  Than FHA loan limits should increase by 125% or $380,000.00.  FHA is very flexible, with 3% down, no termite report clearances are required, the seller doesn’t have to pay any of the buyer’s fees anymore (excluding a tax service fee which is about $77.00), the appraisals are just as flexible as FannieMae and FreddieMac appraisals, and with the Nehemiah Funding Program, a participating seller can fund 6% (3% for the down and 3% towards buyer’s closing costs) of the sales price through their non-profit and basically put nothing down in this market.  Believe me, there are a lot of sellers out there that wouldn’t mind crediting 6% just to sell their home right now. 

The Core PCE, by the way, was reduced to 2.2%.  Better than expected, but still outside of the Fed’s desire to have inflation readings between 1% and 2%!  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – October 22, 2007

Inflation Between 1.0% & 2.0%

Last week I had mentioned that we were missing the Consumer Price Index and Core Consumer Price Index (CPI) Report by one day.  Well, this last Wednesday, inflation concerns were somewhat swept away as the core rate of consumer inflation continued to show stableness and came in at expectations.  The Core CPI was reported at 0.2% for September.  On a year-over-year read, we’re remaining steady at 2.1%.  So, with the Personal Consumption Expenditure Index (PCE) at 1.8%, we remain quite close to the Fed’s desire to keep inflation between 1.0 and 2.0 percent. 

Unfortunately, the Commerce Department revealed greater than expected weakness in the housing sector.  Housing Starts for September reported 1.19 million, weaker than the 1.28 million expected.  Also, Building Permits dropped 7.3%. This is the lowest numbers in both categories in fourteen years! 

Another Fed Lowering of Rates?

Initial Jobless Claims came in at 337,000.  Well above the 316,500 expected number, and with the thought of wage-based inflation coming under control, it points to a greater possibility of the Fed lowering the overnight rate again, at its October 31, 2007 meeting. 

Conforming Loan Limits = $417,000

A quick note to let you know that the Office of Federal Housing Enterprise Oversight (OFHEO), announced last week that they will be keeping the conforming loan limit at $417,000 for a single family residence. 

Stocks got hammered last week.  After losing over 500 points in the Dow; mortgage bonds benefited greatly, by gaining close to 100 basis points.  So, whereby a loan might cost you one point, now you’re looking at zero points for the same interest rate.  A very welcome sign for rates!  Interesting that this happened on the twenty year anniversary of Black Monday…when the Dow lost 22%.

Stocks Will Move Rates…

Interest rates will definitely take their direction from wherever the stock market decides to go.  With not a lot of economic information coming out, stocks benefits will hinder bonds, and vice-versa.  On Tuesday, Apple, Inc. announced that their profits are skyrocketing due to sales of iPhones, iPods, and Macintosh computers.  They’re quarterly profits were reported up 67%.  It’s had an effect on the stock market, however, mid-day Tuesday saw things slowing down a bit. 

So, until next week!

Chico, CA Interest Rates Market Report – Economic Influences – August 28th, 2007

Conforming Loan Limit Increase?

No word yet on the increase in conforming loan amounts.  In last weeks article we mentioned that Fed Chairman Ben Bernanke was meeting with officials to see about the opportunity to help our current liquidity crisis by increasing the number of loans that FannieMae and FreddieMac would purchase.  By increasing the loan amount, from the existing $417,000 limit on single family residences, it would free up banks to fund more loans and help with this crisis. 

FHA Loan Limit Increase?

An emergency increase in Housing and Urban Development’s FHA loans, is also in the works.  Currently, in our area, the maximum loan amount, for a single family residence, is $304,000.  Rumor has it that they would like to increase this amount to the existing Conforming Loan Limits of $417,000. 

Interest rates have remained relatively steady over the past week.  Even with a lot of the economic data that was reported, we are in somewhat of a tight crunch between the 100-day and 200-day moving averages.  The 100-day moving average has really been a significant level of support, but the 200-day moving average has really been strong level of resistance.  Remember that there are “trends” or “averages” that bonds (mortgage backed securities) follow.  For example bonds will make a 50 day, 100 day, or 200 day moving average that they like to stay close to.  By watching and measuring these “averages” or “trends” you can generally tell where bonds (and therefore interest rates) will move. 

Last week four major lending institutions borrowed money from the Federal Reserve’s Discount Rate discussed in last week’s article.  Citigroup, JP Morgan Chase, Bank of America, and Wachovia Bank all borrowed $500 Million each.  Next week we’ll learn just how much money was borrowed from this “Discount Window.” 

Jobless Claims Are Concerning

The Bank of Japan decided to keep their overnight rate unchanged.  It’s largely believed that if they did raise their overnight rate, even to deal with concerns of inflation that they’re having, it would have sent more concern into to global markets.  Initial Jobless claims were up to 322,000.  That’s near expectations, but this number keeps moving from the 300,000 normal range…to 325,000 as being where “expectations” are…more softening in the labor department?  Durable Goods Orders were way up!  But this report has been very volatile, recently, and therefore the markets did not react. 

Interestingly, the Bank of China revealed they held a significantly greater number of subprime mortgage investments than expected.  This story will continue to develop and we’ll see how it will affect our market. 

Recession Around the Corner?

There are a number of economists that are indicating that we’re heading toward a recession.  Hopefully, the moves that the Federal Reserve is acting on; lowering the discount rate, watching core inflation and wage based inflation, a probable move to lower the overnight rate on September 18^th,  should prevent such an outcome. Also, consumer confidence is really low.  Actually at it’s worst level of the year. 

Next week we’ll be reporting on the Gross Domestic Product and the Fed’s Favorite Gauge on inflation, the Core Personal Consumption Expenditure Index (PCE).  So, for the week ahead, generally it would look very favorable for interest rates, however, as mentioned above, the 200-day moving average has been as stubborn as a mule to get past.  We actually bounced right off of it on Monday.  So, if we can’t get by that tough level of resistance, we may see the opposite and slightly higher rates for next week.  Until then…