May 31, 2011.Home Prices, by Metro Area
.Below, see data from the 20 metro areas Case-Shiller tracks, sortable by name, level, monthly change and year-over-year change. The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.
Metro Area March 2011 Level Monthly Change Annual Change
Atlanta 98.36 -1.9% -5.2%
Boston 147.36 -1.7% -2.7%
Charlotte 106.96 -2.4% -6.8%
Chicago 110.57 -2.4% -7.6%
Cleveland 96.80 -1.8% -6.3%
Dallas 112.89 -0.8% -2.5%
Denver 120.55 -0.6% -3.8%
Detroit 67.07 -2.0% -0.9%
Las Vegas 97.18 -1.1% -5.3%
Los Angeles 167.77 -0.3% -1.7%
Miami 137.28 -0.8% -6.1%
Minneapolis 105.57 -3.7% -10.0%
New York 163.50 -0.9% -3.4%
Phoenix 100.27 -0.5% -8.4%
Portland 132.67 -0.7% -7.6%
San Diego 153.88 -0.8% -4.0%
San Francisco 129.82 -0.1% -5.1%
Seattle 132.97 0.1% -7.5%
Tampa 127.08 -0.7% -6.9%
Washington 182.98 1.1% 4.3%
Sources: Standard & Poor's and Fiserv
From: http://blogs.wsj.com/economics/2011/05/31/a-look-at-case-shiller-by-metro-area-may-update-2/tab/interactive/
Tuesday, May 31, 2011
Wednesday, May 25, 2011
Draft bill would hike FHA loan down payments to 5%, slash loan limits
Draft bill would hike FHA loan down payments to 5%, slash loan limits
Legislation will likely draw fire from industry groups, Senate Democrats
By Ken Harney
Inman News™
Share ThisRepublicans on the House Financial Services Committee have drafted legislation that would raise the minimum down payment for FHA mortgages to 5 percent, cut FHA loan limits in most markets, and move the Agriculture Department's rural housing program to FHA's parent agency, HUD.
Though the draft bill has not been introduced, titled or assigned a number, it is expected to be the main subject of a hearing Wednesday before the Subcommittee on Insurance, Housing and Community Opportunity, chaired by Rep. Judy Biggert, R-Ill. After that, the bill is likely to be formally introduced and sped through subcommittee and committee votes and head for action by the full House.
The text of the draft bill appears to be a partial answer from House Republicans to the Obama administration's call earlier this year for a smaller federal government footprint in housing.
By lowering maximum FHA loan limits in large numbers of local areas -- well below even the limits that are already scheduled to kick in Oct. 1 -- the bill would squeeze down FHA loan volume across the country, cutting a resource for some home purchasers who can't obtain a conventional mortgage.
Here are some examples of current FHA loan ceilings, how they're scheduled to adjust in October, and where they'd end up under the Republican plan:
•In Los Angeles County, the present high-cost area maximum is $729,750, which was set by the federal economic stimulus legislation passed by Congress following the financial crisis of 2008. That ceiling is scheduled to drop to $625,500 Oct. 1. Under the new bill, however, the maximum FHA-insured loan amount allowed in Los Angeles would be $412,500 -- a $317,250 plunge from the current limit and $213,000 below the scheduled reduction this fall.
•Other counties in high-cost California would experience even sharper declines, such as Monterey, where the maximum would decline by $436,000 and Contra Costa, where the drop would be $379,750. Every county in California -- from big urban communities to rural areas -- would be on the losing end of the new FHA equation, and most reductions would be in the six figures.
•The lower limits would be significant in other states as well. Monroe County, Fla., would see maximum FHA loan limits go from $729,750 to $425,000. Under the scheduled Oct. 1 statutory decrease, the county -- which comprises the Florida Keys -- would have a $529,000 maximum. Sarasota, Fla., would see a $261,250 drop under the bill, Miami-Dade a decrease of $161,250, and Orange County (Orlando) limits would decline by $128,750.
•Large counties in the high-cost areas around Washington D.C. would see FHA limits drop by anywhere from $398,500 (Prince George's, Md.) to $366,250 in Baltimore. Most New England and mid-Atlantic states would end up with lower loan ceilings along with major markets in the Midwest and the Rocky Mountain states.
The FHA loan limit formula would be revised to 125 percent of the median home sale price in the local county under the bill, and the current $271,050 floor for loan limits nationwide would disappear.
Though major housing, real estate and lending groups had no comments pending the Wednesday hearing, they are likely to oppose the sharp cuts in loan limits.
Mortgage industry consultant Brian Chappelle, head of Potomac Partners in Washington, D.C., is scheduled to testify at the hearing and told Inman News that the higher loan ceilings are a bad idea.
Audits of FHA loan performance, Chappelle said, repeatedly have shown that higher-balance mortgages default and trigger claims against FHA's insurance funds at lower rates than smaller-balance loans.
"FHA is essentially an insurance company," he said, "and you need those (higher-balance) loans to spread the risk," just as private sector insurers do.
The Republican bill's call for a 5 percent minimum down payment on FHA loans also is likely to draw criticism from industry groups.
The National Association of REALTORS® and the National Association of Home Builders have opposed such a move in the past, arguing that there is no statistical evidence that adding 1.5 percent onto the current 3.5 percent minimum would significantly affect default probabilities of new FHA loans.
However, the higher down payments, along with the bill's prohibition of financing of closing costs, would make home purchases more difficult for substantial numbers of consumers.
Chappelle estimates that "40 percent of FHA borrowers would fall out" -- unable to afford the transaction -- "if they go to 5 percent down."
The bill also proposes shifting the Agriculture Department's rural housing program to the U.S. Department of Housing and Urban Development. A Republican staff member said "HUD has the housing responsibility and the expertise," so the change is logical.
However, proponents of the rural housing programs may not want to risk being swallowed up in an urban-oriented agency, nor is the Agriculture Department likely to want to lose a chunk of its traditional turf.
Where's the bill headed? Republicans say they are merely seeking to move the agenda they share with the Obama administration -- the smaller footprint concept -- which is, in turn, part of a larger agenda to phase out Fannie Mae and Freddie Mac.
Passage of the bill by the full House appears to be a real possibility, as Republicans are in control on that side of Capitol Hill.
But all bets are off in the Senate, where Democratic support for continuing FHA's role in the market is far stronger, and where dramatic cuts in loan limits in places like California, New York, Massachusetts and the East Coast's expensive markets likely won't fly.
Ken Harney writes an award-winning, nationally syndicated column, "The Nation's Housing," and is the author of two books on real estate and mortgage finance.
From: http://lowes.inman.com/newsletter/2011/05/25/news/143643
Legislation will likely draw fire from industry groups, Senate Democrats
By Ken Harney
Inman News™
Share ThisRepublicans on the House Financial Services Committee have drafted legislation that would raise the minimum down payment for FHA mortgages to 5 percent, cut FHA loan limits in most markets, and move the Agriculture Department's rural housing program to FHA's parent agency, HUD.
Though the draft bill has not been introduced, titled or assigned a number, it is expected to be the main subject of a hearing Wednesday before the Subcommittee on Insurance, Housing and Community Opportunity, chaired by Rep. Judy Biggert, R-Ill. After that, the bill is likely to be formally introduced and sped through subcommittee and committee votes and head for action by the full House.
The text of the draft bill appears to be a partial answer from House Republicans to the Obama administration's call earlier this year for a smaller federal government footprint in housing.
By lowering maximum FHA loan limits in large numbers of local areas -- well below even the limits that are already scheduled to kick in Oct. 1 -- the bill would squeeze down FHA loan volume across the country, cutting a resource for some home purchasers who can't obtain a conventional mortgage.
Here are some examples of current FHA loan ceilings, how they're scheduled to adjust in October, and where they'd end up under the Republican plan:
•In Los Angeles County, the present high-cost area maximum is $729,750, which was set by the federal economic stimulus legislation passed by Congress following the financial crisis of 2008. That ceiling is scheduled to drop to $625,500 Oct. 1. Under the new bill, however, the maximum FHA-insured loan amount allowed in Los Angeles would be $412,500 -- a $317,250 plunge from the current limit and $213,000 below the scheduled reduction this fall.
•Other counties in high-cost California would experience even sharper declines, such as Monterey, where the maximum would decline by $436,000 and Contra Costa, where the drop would be $379,750. Every county in California -- from big urban communities to rural areas -- would be on the losing end of the new FHA equation, and most reductions would be in the six figures.
•The lower limits would be significant in other states as well. Monroe County, Fla., would see maximum FHA loan limits go from $729,750 to $425,000. Under the scheduled Oct. 1 statutory decrease, the county -- which comprises the Florida Keys -- would have a $529,000 maximum. Sarasota, Fla., would see a $261,250 drop under the bill, Miami-Dade a decrease of $161,250, and Orange County (Orlando) limits would decline by $128,750.
•Large counties in the high-cost areas around Washington D.C. would see FHA limits drop by anywhere from $398,500 (Prince George's, Md.) to $366,250 in Baltimore. Most New England and mid-Atlantic states would end up with lower loan ceilings along with major markets in the Midwest and the Rocky Mountain states.
The FHA loan limit formula would be revised to 125 percent of the median home sale price in the local county under the bill, and the current $271,050 floor for loan limits nationwide would disappear.
Though major housing, real estate and lending groups had no comments pending the Wednesday hearing, they are likely to oppose the sharp cuts in loan limits.
Mortgage industry consultant Brian Chappelle, head of Potomac Partners in Washington, D.C., is scheduled to testify at the hearing and told Inman News that the higher loan ceilings are a bad idea.
Audits of FHA loan performance, Chappelle said, repeatedly have shown that higher-balance mortgages default and trigger claims against FHA's insurance funds at lower rates than smaller-balance loans.
"FHA is essentially an insurance company," he said, "and you need those (higher-balance) loans to spread the risk," just as private sector insurers do.
The Republican bill's call for a 5 percent minimum down payment on FHA loans also is likely to draw criticism from industry groups.
The National Association of REALTORS® and the National Association of Home Builders have opposed such a move in the past, arguing that there is no statistical evidence that adding 1.5 percent onto the current 3.5 percent minimum would significantly affect default probabilities of new FHA loans.
However, the higher down payments, along with the bill's prohibition of financing of closing costs, would make home purchases more difficult for substantial numbers of consumers.
Chappelle estimates that "40 percent of FHA borrowers would fall out" -- unable to afford the transaction -- "if they go to 5 percent down."
The bill also proposes shifting the Agriculture Department's rural housing program to the U.S. Department of Housing and Urban Development. A Republican staff member said "HUD has the housing responsibility and the expertise," so the change is logical.
However, proponents of the rural housing programs may not want to risk being swallowed up in an urban-oriented agency, nor is the Agriculture Department likely to want to lose a chunk of its traditional turf.
Where's the bill headed? Republicans say they are merely seeking to move the agenda they share with the Obama administration -- the smaller footprint concept -- which is, in turn, part of a larger agenda to phase out Fannie Mae and Freddie Mac.
Passage of the bill by the full House appears to be a real possibility, as Republicans are in control on that side of Capitol Hill.
But all bets are off in the Senate, where Democratic support for continuing FHA's role in the market is far stronger, and where dramatic cuts in loan limits in places like California, New York, Massachusetts and the East Coast's expensive markets likely won't fly.
Ken Harney writes an award-winning, nationally syndicated column, "The Nation's Housing," and is the author of two books on real estate and mortgage finance.
From: http://lowes.inman.com/newsletter/2011/05/25/news/143643
Thursday, May 19, 2011
Don?t Expect A Housing Market Recovery Until 2014 - Morgan Brennan - Closing Table - Forbes
Don’t Expect A Housing Market Recovery Until 2014
By MORGAN BRENNAN
Own a home? Brace yourself for an even longer recovery than anticipated. A new homeowners survey released jointly by Trulia.com and RealtyTrac suggests we won’t see a housing recovery until 2014 at the earliest now.
“I’d love to say we have taken a few steps forward, but the reality is we are backtracking,” says a somber Pete Flint, Chief executive of Trulia.com, a San Francisco, Calif.-based real estate listing site.
Every six months Trulia and RealtyTrac.com, an Irvine, Calif.-based foreclosure listing site, pair up for a homeowners survey conducted by Harris Interactive. The results of the last one, released in December, anticipated a 2012 housing market recovery. Between the sites’ own research and the sentiments of the 2,018 homeowners and renters polled from April 14-19, that expectation can be scratched. The survey indicates that 54% of Americans believe a recovery is at least another two and a half years away, up from 34% of Americans six months ago. Given the troves of recent reports pushing disappointing data, the bearish shift in sentiment is not a surprise.
Home prices plunged further in the first quarter of 2011, further fueling “double-dip” discussions. Last week Zillow.com, a Seattle, Wash.-based real estate site, reported a national price plunge of 3% quarter-over-quarter — the largest quarterly drop since Q4 2008. Just today, the National Association of Realtors (NAR) reports that existing home-sales ticked down 0.8% month-over-month to a seasonally adjusted rate of 5.09 million in April. Earlier this week the U.S. Department of Commerce reported that new home starts fell 10.6% from March to April.
Why is housing continuing to fare so poorly? There’s a gaggle of reasons, but Flint and Rick Sharga, senior vice president of RealtyTrac start with the ongoing foreclosure crisis. RealtyTrac estimates bank-owned properties (REOs) on the market sell for an average discount of 35% off non-distressed for sale home prices. In places like California, that discount is even steeper at 46%. Those discounts force list prices down on everything else in the market.
Despite the fact that 56% of renters and 47% of homeowners polled are interested in buying a foreclosure or bank-owned property (a reflection of a larger trend in which 26% of homes sold last year were foreclosures), there are just too many distressed properties for buyers to absorb. This is where shadow inventory raises its ugly, looming head. There are over 900,000 residential properties sitting on banks’ balance sheets right now, of which 600,000 have yet to reach the market. Another 1.2 million properties are currently in some stage of foreclosure, of which a mere 20% have been listed for sale. Behind that, an additional four million properties are in some stage of delinquency — not yet in foreclosure but on their way there.
“Just based on the rate of activity we’ve seen on distressed property purchases, we have almost a two year supply simply of bank properties already on the books,” says Sharga. “It will depress property prices and keep home building numbers down, which also depresses prices because new home sales are one of the factors that start to stimulate home prices.”
Sharga expects foreclosure activity to continue at high levels into next year and flat line in 2012. He surmises the market will have a huge distressed inventory to sell off into 2013, maybe even into 2014. Banks have been taking longer to foreclose on properties — as long as 800 days in New York and New Jersey, 600 days in California and 400 days in Florida, for example — which pushes the listing and sale of those homes out further than earlier anticipated.
Another looming circumstance delaying chances of a recovery is housing policy changes on Capitol Hill. An estimated 96% of all mortgage activity currently hails from Fannie Mae, Freddie Mac, FHA and the other government-backed banking entities. Most home buyers in the market are investors with cash or homebuyers qualifying for FHA loans.
“Don’t discount some of the conversations going on in Capitol Hill right now about the Government Sponsored Enterprises (like Fannie and Freddie) as well as the Dodd-Frank bill,” asserts Flint. Both he and Sharga note that the private mortgage market has yet to come back, thanks to tightened lending practices and the fact that banks remain weary to issue mortgages on properties that may continue to hemorrhage value. “Absent those [government-backed] entities there is no mortgage market and there is no housing market,” warns Sharga.
Potential buyers also seem hesitant to take the home ownership plunge right now. More than two-thirds of the 704 renters polled for the survey expressed plans to wait two years or more before buying a place. If this reflects the larger American sentiment, coupled with the fact that borrowing money has a become painstakingly more difficult process, expect the lack of prospective buyers to drive prices down in the market as well.
Even so, Trulia and RealtyTrac remain steadfast that home values for the U.S. housing market as a whole is close to hitting bottom, likely doing so this year or at some point within the next 18 months. Just expect the market to stay on that bottom for a long time to come.
“We are not expecting a bounce off that bottom,” surmises Flint. “But expecting for prices to flat-line along there for the next couple of years and finally beging to appreciate sometime in 2014.”
From: http://blogs.forbes.com/morganbrennan/2011/05/19/dont-expect-a-housing-market-recovery-until-2014/?partner=alerts
By MORGAN BRENNAN
Own a home? Brace yourself for an even longer recovery than anticipated. A new homeowners survey released jointly by Trulia.com and RealtyTrac suggests we won’t see a housing recovery until 2014 at the earliest now.
“I’d love to say we have taken a few steps forward, but the reality is we are backtracking,” says a somber Pete Flint, Chief executive of Trulia.com, a San Francisco, Calif.-based real estate listing site.
Every six months Trulia and RealtyTrac.com, an Irvine, Calif.-based foreclosure listing site, pair up for a homeowners survey conducted by Harris Interactive. The results of the last one, released in December, anticipated a 2012 housing market recovery. Between the sites’ own research and the sentiments of the 2,018 homeowners and renters polled from April 14-19, that expectation can be scratched. The survey indicates that 54% of Americans believe a recovery is at least another two and a half years away, up from 34% of Americans six months ago. Given the troves of recent reports pushing disappointing data, the bearish shift in sentiment is not a surprise.
Home prices plunged further in the first quarter of 2011, further fueling “double-dip” discussions. Last week Zillow.com, a Seattle, Wash.-based real estate site, reported a national price plunge of 3% quarter-over-quarter — the largest quarterly drop since Q4 2008. Just today, the National Association of Realtors (NAR) reports that existing home-sales ticked down 0.8% month-over-month to a seasonally adjusted rate of 5.09 million in April. Earlier this week the U.S. Department of Commerce reported that new home starts fell 10.6% from March to April.
Why is housing continuing to fare so poorly? There’s a gaggle of reasons, but Flint and Rick Sharga, senior vice president of RealtyTrac start with the ongoing foreclosure crisis. RealtyTrac estimates bank-owned properties (REOs) on the market sell for an average discount of 35% off non-distressed for sale home prices. In places like California, that discount is even steeper at 46%. Those discounts force list prices down on everything else in the market.
Despite the fact that 56% of renters and 47% of homeowners polled are interested in buying a foreclosure or bank-owned property (a reflection of a larger trend in which 26% of homes sold last year were foreclosures), there are just too many distressed properties for buyers to absorb. This is where shadow inventory raises its ugly, looming head. There are over 900,000 residential properties sitting on banks’ balance sheets right now, of which 600,000 have yet to reach the market. Another 1.2 million properties are currently in some stage of foreclosure, of which a mere 20% have been listed for sale. Behind that, an additional four million properties are in some stage of delinquency — not yet in foreclosure but on their way there.
“Just based on the rate of activity we’ve seen on distressed property purchases, we have almost a two year supply simply of bank properties already on the books,” says Sharga. “It will depress property prices and keep home building numbers down, which also depresses prices because new home sales are one of the factors that start to stimulate home prices.”
Sharga expects foreclosure activity to continue at high levels into next year and flat line in 2012. He surmises the market will have a huge distressed inventory to sell off into 2013, maybe even into 2014. Banks have been taking longer to foreclose on properties — as long as 800 days in New York and New Jersey, 600 days in California and 400 days in Florida, for example — which pushes the listing and sale of those homes out further than earlier anticipated.
Another looming circumstance delaying chances of a recovery is housing policy changes on Capitol Hill. An estimated 96% of all mortgage activity currently hails from Fannie Mae, Freddie Mac, FHA and the other government-backed banking entities. Most home buyers in the market are investors with cash or homebuyers qualifying for FHA loans.
“Don’t discount some of the conversations going on in Capitol Hill right now about the Government Sponsored Enterprises (like Fannie and Freddie) as well as the Dodd-Frank bill,” asserts Flint. Both he and Sharga note that the private mortgage market has yet to come back, thanks to tightened lending practices and the fact that banks remain weary to issue mortgages on properties that may continue to hemorrhage value. “Absent those [government-backed] entities there is no mortgage market and there is no housing market,” warns Sharga.
Potential buyers also seem hesitant to take the home ownership plunge right now. More than two-thirds of the 704 renters polled for the survey expressed plans to wait two years or more before buying a place. If this reflects the larger American sentiment, coupled with the fact that borrowing money has a become painstakingly more difficult process, expect the lack of prospective buyers to drive prices down in the market as well.
Even so, Trulia and RealtyTrac remain steadfast that home values for the U.S. housing market as a whole is close to hitting bottom, likely doing so this year or at some point within the next 18 months. Just expect the market to stay on that bottom for a long time to come.
“We are not expecting a bounce off that bottom,” surmises Flint. “But expecting for prices to flat-line along there for the next couple of years and finally beging to appreciate sometime in 2014.”
From: http://blogs.forbes.com/morganbrennan/2011/05/19/dont-expect-a-housing-market-recovery-until-2014/?partner=alerts
Tuesday, May 10, 2011
5 Reasons You Should Consider Selling Now
5 Reasons You Should Consider Selling Now
by The KCM Crew on May 10, 2011
If you plan on moving anytime in 2011, you should strongly consider selling your house now rather than waiting. Here are five reasons why:
1.) This is when your house will get the most exposure
The spring, and particularly the month of May, is when most buyers enter the real estate market. This surge of buyers dramatically increases the exposure for your house . The best chance of getting quality offers (perhaps even multiple offers) is RIGHT NOW!
2.) Foreclosures and short sales will increase in about 90 days
The good news is that the number of people paying their mortgage on time is increasing. This will lead to less distressed property sales later this year and throughout 2012. The not-so-good news is that there is still a large inventory of existing foreclosures and short sales that will still be coming to market.
As an example, LPS reported in their latest Mortgage Monitor that:
There are still twice as many loans going 90+ days delinquent as are starting foreclosure
There are almost three times the number of foreclosure starts as there are foreclosure sales
Distressed property inventory levels are almost 45 times the rate of monthly foreclosure sales
This means that there is a backlog of properties which will start coming to the market in about 90 days as banks clear up their paperwork challenges. These properties sell at dramatic discounts. They will be your competition. Both Fannie Mae and Freddie Mac have recently discussed the magnitude of this challenge.
3.) Interest rates have risen over the last six months
Interest rates have stabilized recently. However, in the last six months, interest rates have climbed over 1/2%. Every time the rates increase 1/4%, approximately 250,000 buyers are eliminated from qualifying for a mortgage. In an environment of volatile rates, waiting could mean that there will be fewer buyers eligible to purchase your house. It also could mean that you will pay a higher rate on the next home you buy.
4.) Qualifying for a mortgage is about to get even more difficult
Besides increasing rates, there are other factors that will hinder a buyer’s ability to qualify for a mortgage as we move forward. Lending standards have been getting tighter over the last year. And as the government debates the new proposed guidelines (QRM), banks are gearing up for even more stringent standards.
Morgan Stanley recently stated:
“Recent developments in issues such as GSE reform, Dodd-Frank securitization rules, and foreclosure settlement issues suggest a tighter and more expensive environment for mortgage credit.”
This may impact any potential purchaser for your property and may also impact your next purchase.
5.) It’s time to get on with your life
Probably the most important reason to sell is so you can get on with your life. You placed your home on the market for a reason. Do not allow a less-than-stellar housing market prevent you from reaching your goals as an individual or as a family. Think about the reasons you decided to move in the first place. Are these reasons still important to you? If you have to take less than you were originally hoping to get for your house, your family has a question to ask each other: Is the dollar difference in sales price worth putting off our plans? Only you and your family know the answer to that question.
Bottom Line
If you plan to sell this year, the reasons above prove that selling now makes more sense than waiting to later in the year. Sit with a real estate professional in your area today to fully understand your best option.
From: http://kcmblog.com/2011/05/10/5-reasons-you-should-consider-selling-now/
by The KCM Crew on May 10, 2011
If you plan on moving anytime in 2011, you should strongly consider selling your house now rather than waiting. Here are five reasons why:
1.) This is when your house will get the most exposure
The spring, and particularly the month of May, is when most buyers enter the real estate market. This surge of buyers dramatically increases the exposure for your house . The best chance of getting quality offers (perhaps even multiple offers) is RIGHT NOW!
2.) Foreclosures and short sales will increase in about 90 days
The good news is that the number of people paying their mortgage on time is increasing. This will lead to less distressed property sales later this year and throughout 2012. The not-so-good news is that there is still a large inventory of existing foreclosures and short sales that will still be coming to market.
As an example, LPS reported in their latest Mortgage Monitor that:
There are still twice as many loans going 90+ days delinquent as are starting foreclosure
There are almost three times the number of foreclosure starts as there are foreclosure sales
Distressed property inventory levels are almost 45 times the rate of monthly foreclosure sales
This means that there is a backlog of properties which will start coming to the market in about 90 days as banks clear up their paperwork challenges. These properties sell at dramatic discounts. They will be your competition. Both Fannie Mae and Freddie Mac have recently discussed the magnitude of this challenge.
3.) Interest rates have risen over the last six months
Interest rates have stabilized recently. However, in the last six months, interest rates have climbed over 1/2%. Every time the rates increase 1/4%, approximately 250,000 buyers are eliminated from qualifying for a mortgage. In an environment of volatile rates, waiting could mean that there will be fewer buyers eligible to purchase your house. It also could mean that you will pay a higher rate on the next home you buy.
4.) Qualifying for a mortgage is about to get even more difficult
Besides increasing rates, there are other factors that will hinder a buyer’s ability to qualify for a mortgage as we move forward. Lending standards have been getting tighter over the last year. And as the government debates the new proposed guidelines (QRM), banks are gearing up for even more stringent standards.
Morgan Stanley recently stated:
“Recent developments in issues such as GSE reform, Dodd-Frank securitization rules, and foreclosure settlement issues suggest a tighter and more expensive environment for mortgage credit.”
This may impact any potential purchaser for your property and may also impact your next purchase.
5.) It’s time to get on with your life
Probably the most important reason to sell is so you can get on with your life. You placed your home on the market for a reason. Do not allow a less-than-stellar housing market prevent you from reaching your goals as an individual or as a family. Think about the reasons you decided to move in the first place. Are these reasons still important to you? If you have to take less than you were originally hoping to get for your house, your family has a question to ask each other: Is the dollar difference in sales price worth putting off our plans? Only you and your family know the answer to that question.
Bottom Line
If you plan to sell this year, the reasons above prove that selling now makes more sense than waiting to later in the year. Sit with a real estate professional in your area today to fully understand your best option.
From: http://kcmblog.com/2011/05/10/5-reasons-you-should-consider-selling-now/
Wednesday, May 4, 2011
LPS Study Puts Foreclosure Inventory at All-Time High
LPS Study Puts Foreclosure Inventory at All-Time High
05/03/2011
By: Carrie Bay
A new report released by Lender Processing Services this week (LPS) shows that foreclosure activity picked up significantly during the month of March.
As of the end of March, LPS’ analysis shows the foreclosure inventory stood at 2.2 million loans – a new all-time high.
The company calculates foreclosure inventory as the number of loans that have been referred to a foreclosure attorney but have not yet reached the final stage of foreclosure sale. LPS says the March figure represents 4.21 percent of the nation’s outstanding mortgages.
The number of new foreclosure actions in March – 270,681 – increased 33 percent from the previous month.
At the same time, LPS says foreclosure sales also increased significantly, suggesting that the halt in activity due to various moratoria may be passing.
RealtyTrac reported a similar pickup in foreclosure activity during March when releasing its first-quarter tallies last month.
LPS’ analysis shows that the nation’s foreclosure inventory is eight times historical “norms,” while delinquencies have dropped to about 1.8 times the 1995-2005 average.
The company says delinquencies continued to head south in March, dropping by more than 11 percent month-over-month to their lowest level since 2008, as more delinquent loans either cured or were moved into foreclosure. Based on LPS’ historical data, delinquencies are down nearly 20 percent since this time last year.
Early-stage delinquencies have led the decline, as fewer problem loans enter the pipeline. In fact, 30-day and 60-day delinquent inventories are now approaching pre-crisis levels, according to LPS, with new problem loans now less than half 2009’s peak levels.
The company says it’s important to note the impact of seasonality, as the first quarter of virtually every year shows a drop in new delinquencies, and historically March is consistently the month with the largest declines.
LPS’ study also found that loans in foreclosure, on average, have been delinquent for 549 days. Thirty-one percent of the loans in foreclosure have not made a payment in over two years.
Altogether, the company reports that there were 6,333,040 single-family mortgages past due or in foreclosure as of the end of March.
That figure is the lowest it’s been since late 2008, and LPS says the impact of modification activity is “apparent.” The company found that 23 percent of loans that were 90-plus days delinquent a year ago are current today.
From: http://ping.fm/GksmY
05/03/2011
By: Carrie Bay
A new report released by Lender Processing Services this week (LPS) shows that foreclosure activity picked up significantly during the month of March.
As of the end of March, LPS’ analysis shows the foreclosure inventory stood at 2.2 million loans – a new all-time high.
The company calculates foreclosure inventory as the number of loans that have been referred to a foreclosure attorney but have not yet reached the final stage of foreclosure sale. LPS says the March figure represents 4.21 percent of the nation’s outstanding mortgages.
The number of new foreclosure actions in March – 270,681 – increased 33 percent from the previous month.
At the same time, LPS says foreclosure sales also increased significantly, suggesting that the halt in activity due to various moratoria may be passing.
RealtyTrac reported a similar pickup in foreclosure activity during March when releasing its first-quarter tallies last month.
LPS’ analysis shows that the nation’s foreclosure inventory is eight times historical “norms,” while delinquencies have dropped to about 1.8 times the 1995-2005 average.
The company says delinquencies continued to head south in March, dropping by more than 11 percent month-over-month to their lowest level since 2008, as more delinquent loans either cured or were moved into foreclosure. Based on LPS’ historical data, delinquencies are down nearly 20 percent since this time last year.
Early-stage delinquencies have led the decline, as fewer problem loans enter the pipeline. In fact, 30-day and 60-day delinquent inventories are now approaching pre-crisis levels, according to LPS, with new problem loans now less than half 2009’s peak levels.
The company says it’s important to note the impact of seasonality, as the first quarter of virtually every year shows a drop in new delinquencies, and historically March is consistently the month with the largest declines.
LPS’ study also found that loans in foreclosure, on average, have been delinquent for 549 days. Thirty-one percent of the loans in foreclosure have not made a payment in over two years.
Altogether, the company reports that there were 6,333,040 single-family mortgages past due or in foreclosure as of the end of March.
That figure is the lowest it’s been since late 2008, and LPS says the impact of modification activity is “apparent.” The company found that 23 percent of loans that were 90-plus days delinquent a year ago are current today.
From: http://ping.fm/GksmY
PMI Expands LTVs and Credit Scores in Distressed Markets
PMI Expands LTVs and Credit Scores in Distressed Markets
05/03/2011 By: Carrie Bay
PMI Mortgage Insurance Co. is seeing signs of strengthening in markets the firm classifies as “distressed,” enough so that the private mortgage insurer is relaxing its requirements for loan-to-value (LTV) ratios and minimum credit scores.
The California-based insurer issued a bulletin last week announcing that it is raising the LTV to 95 percent for both purchase transactions and rate-term refinances in distressed markets, as long as the borrower has at least a 720 credit score.
In addition, PMI has lowered the minimum credit score requirement to 680 for LTVs at or below 90 percent on one-unit properties and condominiums. The LTV max for co‐ops is 85 percent, and the lower credit score minimum of 680 also applies.
“We are encouraged that market conditions have improved sufficiently to enable PMI to expand LTV and minimum credit score requirements,” the company stated in the bulletin.
PMI also announced that it has removed four markets from its Distressed Markets List, including Bakersfield‐Delano, California (Zip code 12540); Sacramento‐Arden‐Arcade‐
Roseville, California (40900); Dalton, Georgia (19140); and Hagerstown Martinsburg, Maryland‐West Virginia (25100).
Currently, the entire state of Nevada and select markets in Arizona and Florida are the only names on PMI’s “distressed” list (there are no longer any California markets listed).
The company says it plans to add the entire states of Arizona and Florida to the list, effective July 1. Attached housing remains ineligible for mortgage insurance in the state of Florida.
Looking at the broader picture, PMI’s latest market forecast notes that leading indicators point to at least a modest pickup in home sales activity ahead.
“Home sales should increase in coming months, and we expect them to rise throughout the year (unless energy prices skyrocket),” PMI said in its report. “Gains in home sales should remain modest in 2011, however, given the large share of households with underwater mortgages, as well as extremely tight underwriting criteria.”
Still, as long as the job market continues to improve, PMI is predicting an increase in sales of existing homes of 7.7 percent to 5.29 million units this year.
With rising home sales, PMI says house prices should begin a seasonal pickup soon, with “modest gains” in the second half of 2011.
The company notes, though, that the large price declines already seen in the early part of the year are likely to yield small declines for all of 2011 for median existing home prices, still weighed down by distressed sales.
PMI expects the median price of previously owned homes to close the year 1.8 percent lower than it was at the end of 2010, but the company’s analysts are forecasting a 2.5 percent rise in the median price next year.
From: http://ping.fm/qvF8H
05/03/2011 By: Carrie Bay
PMI Mortgage Insurance Co. is seeing signs of strengthening in markets the firm classifies as “distressed,” enough so that the private mortgage insurer is relaxing its requirements for loan-to-value (LTV) ratios and minimum credit scores.
The California-based insurer issued a bulletin last week announcing that it is raising the LTV to 95 percent for both purchase transactions and rate-term refinances in distressed markets, as long as the borrower has at least a 720 credit score.
In addition, PMI has lowered the minimum credit score requirement to 680 for LTVs at or below 90 percent on one-unit properties and condominiums. The LTV max for co‐ops is 85 percent, and the lower credit score minimum of 680 also applies.
“We are encouraged that market conditions have improved sufficiently to enable PMI to expand LTV and minimum credit score requirements,” the company stated in the bulletin.
PMI also announced that it has removed four markets from its Distressed Markets List, including Bakersfield‐Delano, California (Zip code 12540); Sacramento‐Arden‐Arcade‐
Roseville, California (40900); Dalton, Georgia (19140); and Hagerstown Martinsburg, Maryland‐West Virginia (25100).
Currently, the entire state of Nevada and select markets in Arizona and Florida are the only names on PMI’s “distressed” list (there are no longer any California markets listed).
The company says it plans to add the entire states of Arizona and Florida to the list, effective July 1. Attached housing remains ineligible for mortgage insurance in the state of Florida.
Looking at the broader picture, PMI’s latest market forecast notes that leading indicators point to at least a modest pickup in home sales activity ahead.
“Home sales should increase in coming months, and we expect them to rise throughout the year (unless energy prices skyrocket),” PMI said in its report. “Gains in home sales should remain modest in 2011, however, given the large share of households with underwater mortgages, as well as extremely tight underwriting criteria.”
Still, as long as the job market continues to improve, PMI is predicting an increase in sales of existing homes of 7.7 percent to 5.29 million units this year.
With rising home sales, PMI says house prices should begin a seasonal pickup soon, with “modest gains” in the second half of 2011.
The company notes, though, that the large price declines already seen in the early part of the year are likely to yield small declines for all of 2011 for median existing home prices, still weighed down by distressed sales.
PMI expects the median price of previously owned homes to close the year 1.8 percent lower than it was at the end of 2010, but the company’s analysts are forecasting a 2.5 percent rise in the median price next year.
From: http://ping.fm/qvF8H
Tuesday, May 3, 2011
PIMCO | Investment Outlook - The Caine Mutiny (Part 2)
The Caine Mutiny (Part 2)
•Low policy rates and the increasing negative real yields that they engender as inflation accelerates represent an immediate threat to investment portfolios.
•Bond prices don’t necessarily have to go down for savers to get skunked during a process of “debt liquidation.”
•PIMCO advocates a renewed vigilance, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies.
The Gross household is a robe-wearing household – at least on the distaff side. Sue has a closet full of them, all white, and is thrilled each and every Christmas with a new white one under the tree. Go figure. I on the other hand am a little more casual about nighttime attire, a habit I picked up or at least observed during my Navy years in the South China Sea. But I am getting ahead of myself. Back in 1969, yours truly was a lowly ensign whose responsibility among other things was to substitute for the captain when he was sleeping. Vietnam era captains couldn’t be at the helm 24/7 so during relatively calm hours, the benchwarmers got a chance to quarterback the ship. Such was the case on a warm September evening, making 20 knots on our way home to San Diego in the middle of the vast and totally empty Pacific Ocean, 2,000 miles west of Honolulu. I was standing the dreaded “mid-watch” – midnight to 4:00 am – and under instructions to wake the captain if anything “unusual” took place; FAT chance, aside from the occasional mermaid or sea monster sightings, and no one ever woke the captain up for that.
Well, around 2:00 am there was a sighting – quite remarkable, actually, because the Pacific is BIG and the occasional freighter was rare indeed. Ten miles at 15° off the bow, I spotted an oil tanker on the horizon, apparently headed our way. There is a Navy axiom that even an idiot ensign can remember, which tells a navigator whether or not a mid-ocean collision is possible – “constant bearing, decreasing range,” or CBDR for short. If, for instance, that tanker was closing to five miles and was still positioned 15° off the bow, well, there would be a growing chance that we would meet head-on five miles later. Ah, wouldn’t you know it – this tanker had a CBDR and yours truly was the only one who was aware of it. Tankers set their controls on automatic pilot during the midnight hours, so the approaching ship wasn’t about to change course. I was the only officer awake. Not for long, though – I called up the captain like the good little ensign I was, and here, dear reader, is where I finally circle back to the underwear. A captain in full dress uniform is an impressive sight – four stripes on the epaulets, heavily starched white shirt. “Yes Sir!” is the almost automatic response. But an unshaven, 60-year-old, pot-bellied captain in his underwear? Now there’s a disconcerting sight. “I got the deck,” he said, which meant he was assuming control as he plopped into the captain’s chair with a toot and an expulsion of natural gas worthy of the prior evening’s pork and beans.
Well, to this point, the incident was a paragon of human comedy not tragedy, but it quickly turned serious. Two miles 15°, one mile 15°, 1000 yards 15° – “Captain – constant bearing, decreasing range!” Ah, but El Capitan wasn’t hearing me – he was asleep at the helm, and half-naked no less: in command, in his underwear, and off somewhere in la-la land. Twenty seconds after my warning, the tanker came within 20 yards of cutting us and 150 young sailors in half. I in my fascination with a captain in his jockey shorts had assumed he was awake and knew what he was doing. He in his Fruit of the Looms and 2:00 am exhaustion was incapacitated, temporarily incompetent, and anything but a Naval captain. “What the hell was that?!” he screamed as it passed astern after nearly disemboweling our 300-foot destroyer. I was speechless and subject to a potential court martial, so I meekly replied, “A tanker, sir”. “The Grim Reaper” would have been a better description. It is with that as a reminder that there are no white robes under the Christmas tree for yours truly. I wear a t-shirt and jockey shorts if only to remind me of a sleeping pot-bellied captain and that old Navy adage – constant bearing, decreasing range – constant bearing, decreasing range.
Forty years later, I find myself in a similar position, this time, however, displaying the four-striped epaulets myself as a co-captain of the SS PIMCO, a $1.2 trillion carrier designed to travel the world and the seven seas in a quest for principal protection and alpha generation. And I thought the mid-watch was a hassle! Whatever it is, Mohamed and I either alternately or in unison maintain 24-hour surveillance for tankers on a collision course with your investment portfolios and savings. There should be no “what the hell was that!” moments at PIMCO, even on Lehman Day 2008. Indeed, there was not. While the global financial tanker was on automatic pilot, we had changed course well in advance and it has been relatively smooth sailing since.
The metaphor begs the question however as to what tanker is now on a constant bearing decreasing range, and indeed there would seem to be many such blips on the radar screen: global imbalances in trade, finance and currencies; excessive private and sovereign debt levels; growing disparities in wealth between the rich and the poor; aging demographics threatening aging and younger generational priorities. Lots of ships out there. Our upcoming Secular Forum will analyze these topics and many more next week, after which Mohamed and I will alert you to the prospects.
For now I would like to continue down the route of previous months’ Investment Outlooks and discuss the immediate threat to investment portfolios represented by low policy rates (fed funds in the U.S.) and the increasing negative real yields that they engender as inflation accelerates. I spoke last month to the reality of investors being “skunked” and having their pockets picked simply by receiving yields less than inflation, and suggested that as a major reason why the PIMCO ship was carrying a limited supply of Treasuries on board. Although we have warned for several years of the deteriorating creditworthiness of America’s AAA rating, our de minimis Treasury positions had less to do with much more immediate issues than America’s balance sheet prospects. We are highly sensitive to the pocket-picking policies that governments in general deploy to right the ship.
Well, ahoy matey, as quick as you can shout “thar she blows,” an academic working paper by Carmen Reinhart and M. Belen Sbrancia affirmed the same thing but in much more grounded, well-ballasted research. The paper, titled “The Liquidation of Government Debt,” contains a historical analysis of how governments attempt to get out from under the crushing burden of a debt crisis. For developed countries such as the United Kingdom and the United States, the period beginning in the mid-1940s (when depression and WWII sovereign debt loads were oppressive) was used as a starting point for pocket picking, “skunking,” or what they term “financial repression.” While the ancient Romans used to shave metal coins in an attempt to monetize existing debts, our evolving financial system has used more sophisticated techniques. With inflation accelerating, due to WWII and post-war demands on commodities, the Treasury capped long-term bond yields at 2½% and in so doing ensured that its debt/GDP ratio would be reduced. If savers received an average 2% on their Treasuries while the nominally based economy was advancing at 5% or more annualized growth rates, then debt to GDP could be lowered from its peak level of 116% to 112%, to 109%…etc. every 12 months. In fact, the authors found that “for the United States and the United Kingdom, the annual liquidation of debt via negative real interest rates amounted on average to 3 or 4% percent of GDP a year…which quickly accumulated (without compounding) to a 30 to 40% of GDP debt reduction in the course of a decade.” Even after interest rate “caps” were removed in 1951 via the Fed-Treasury Accord, extremely low/negative real interest rate policies continued until the Volcker revolution in 1979. By that time, U.S. (and U.K.) debt levels had been normalized, primarily at the expense of savers who had been “repressed” (and depressed!) for over three decades. At that historical turning point, government bonds were labeled “certificates of confiscation.” Not only had savers received Treasury bill rates that were negative for over 25% of the nearly four decades, but they were holding long-term AAA rated bonds trading at 30 to 40 cents on the dollar.
The point of the Reinhart paper was not to state the obvious – that inflation is bad for bonds. Their financial repressionary thesis points out that bond prices don’t necessarily have to go down for savers to get skunked during a process of “debt liquidation.” The argument over whether the end of QEII on June 30 will result in higher yields and lower Treasury bond prices is, in a sense, a secondary one. Even if 10-year Treasuries stay where they are at 3.30%, and fed funds close to 0%, savers and financial intermediaries are being shortchanged by both of these yields and everything in between. Today’s rates resemble the interest rate caps prior to the 1951 Accord. Either through QEI, QEII or the Fed’s “extended period of time” language reinforced at Chairman Bernanke’s recent press conference, U.S. Treasuries and the bond market in general are being “repressed,” “capped” or simply overvalued compared to the prior 30 years. Bond investors forced to invest in dollar government bonds either through indexation, convention, regulatory guidelines or simply falling asleep at the helm are being shortchanged by 1 to 2% annually compared to historical norms and in many cases receive negative real yields, as shown in Chart 1. If Reinhart’s history is any guide, an investor should expect these overvaluations to be with us for years if not decades. While that still leaves open the question of price behavior following QEII, there should be little doubt that simply holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility.
Bond – and stock – investors have been sailing on the “Good Ship Lollipop” for over 30 years following the Volcker Revolution and the return of high real interest rates to investment markets. Now, however, with governments attempting to impose financial repression, bond investors should revolt. Their ship should more likely be christened the “USS Caine” in memory of a silver screen mutiny that, while traumatic, eventually returned all sailors safely to port. PIMCO advocates not so much a mutiny but a renewed vigilance on this new ship, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies. Many of these countries have more pristine balance sheets and higher real interest rates than those currently being imposed in some developed markets subject to current and future “repression.” If AAA quality is your requirement, then Canadian or Australian bonds may also fit your horizon. Join us, along with Carmen Reinhart, in shouting “constant bearing/decreasing range!” The Treasury market is on a collision course with financial repression and it is time to adjust your rudder to starboard to get home safely.
William H. Gross
Managing Director
PIMCO
From: http://www.pimco.com/EN/Insights/Pages/The-Caine-Mutiny-Part-2.aspx
•Low policy rates and the increasing negative real yields that they engender as inflation accelerates represent an immediate threat to investment portfolios.
•Bond prices don’t necessarily have to go down for savers to get skunked during a process of “debt liquidation.”
•PIMCO advocates a renewed vigilance, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies.
The Gross household is a robe-wearing household – at least on the distaff side. Sue has a closet full of them, all white, and is thrilled each and every Christmas with a new white one under the tree. Go figure. I on the other hand am a little more casual about nighttime attire, a habit I picked up or at least observed during my Navy years in the South China Sea. But I am getting ahead of myself. Back in 1969, yours truly was a lowly ensign whose responsibility among other things was to substitute for the captain when he was sleeping. Vietnam era captains couldn’t be at the helm 24/7 so during relatively calm hours, the benchwarmers got a chance to quarterback the ship. Such was the case on a warm September evening, making 20 knots on our way home to San Diego in the middle of the vast and totally empty Pacific Ocean, 2,000 miles west of Honolulu. I was standing the dreaded “mid-watch” – midnight to 4:00 am – and under instructions to wake the captain if anything “unusual” took place; FAT chance, aside from the occasional mermaid or sea monster sightings, and no one ever woke the captain up for that.
Well, around 2:00 am there was a sighting – quite remarkable, actually, because the Pacific is BIG and the occasional freighter was rare indeed. Ten miles at 15° off the bow, I spotted an oil tanker on the horizon, apparently headed our way. There is a Navy axiom that even an idiot ensign can remember, which tells a navigator whether or not a mid-ocean collision is possible – “constant bearing, decreasing range,” or CBDR for short. If, for instance, that tanker was closing to five miles and was still positioned 15° off the bow, well, there would be a growing chance that we would meet head-on five miles later. Ah, wouldn’t you know it – this tanker had a CBDR and yours truly was the only one who was aware of it. Tankers set their controls on automatic pilot during the midnight hours, so the approaching ship wasn’t about to change course. I was the only officer awake. Not for long, though – I called up the captain like the good little ensign I was, and here, dear reader, is where I finally circle back to the underwear. A captain in full dress uniform is an impressive sight – four stripes on the epaulets, heavily starched white shirt. “Yes Sir!” is the almost automatic response. But an unshaven, 60-year-old, pot-bellied captain in his underwear? Now there’s a disconcerting sight. “I got the deck,” he said, which meant he was assuming control as he plopped into the captain’s chair with a toot and an expulsion of natural gas worthy of the prior evening’s pork and beans.
Well, to this point, the incident was a paragon of human comedy not tragedy, but it quickly turned serious. Two miles 15°, one mile 15°, 1000 yards 15° – “Captain – constant bearing, decreasing range!” Ah, but El Capitan wasn’t hearing me – he was asleep at the helm, and half-naked no less: in command, in his underwear, and off somewhere in la-la land. Twenty seconds after my warning, the tanker came within 20 yards of cutting us and 150 young sailors in half. I in my fascination with a captain in his jockey shorts had assumed he was awake and knew what he was doing. He in his Fruit of the Looms and 2:00 am exhaustion was incapacitated, temporarily incompetent, and anything but a Naval captain. “What the hell was that?!” he screamed as it passed astern after nearly disemboweling our 300-foot destroyer. I was speechless and subject to a potential court martial, so I meekly replied, “A tanker, sir”. “The Grim Reaper” would have been a better description. It is with that as a reminder that there are no white robes under the Christmas tree for yours truly. I wear a t-shirt and jockey shorts if only to remind me of a sleeping pot-bellied captain and that old Navy adage – constant bearing, decreasing range – constant bearing, decreasing range.
Forty years later, I find myself in a similar position, this time, however, displaying the four-striped epaulets myself as a co-captain of the SS PIMCO, a $1.2 trillion carrier designed to travel the world and the seven seas in a quest for principal protection and alpha generation. And I thought the mid-watch was a hassle! Whatever it is, Mohamed and I either alternately or in unison maintain 24-hour surveillance for tankers on a collision course with your investment portfolios and savings. There should be no “what the hell was that!” moments at PIMCO, even on Lehman Day 2008. Indeed, there was not. While the global financial tanker was on automatic pilot, we had changed course well in advance and it has been relatively smooth sailing since.
The metaphor begs the question however as to what tanker is now on a constant bearing decreasing range, and indeed there would seem to be many such blips on the radar screen: global imbalances in trade, finance and currencies; excessive private and sovereign debt levels; growing disparities in wealth between the rich and the poor; aging demographics threatening aging and younger generational priorities. Lots of ships out there. Our upcoming Secular Forum will analyze these topics and many more next week, after which Mohamed and I will alert you to the prospects.
For now I would like to continue down the route of previous months’ Investment Outlooks and discuss the immediate threat to investment portfolios represented by low policy rates (fed funds in the U.S.) and the increasing negative real yields that they engender as inflation accelerates. I spoke last month to the reality of investors being “skunked” and having their pockets picked simply by receiving yields less than inflation, and suggested that as a major reason why the PIMCO ship was carrying a limited supply of Treasuries on board. Although we have warned for several years of the deteriorating creditworthiness of America’s AAA rating, our de minimis Treasury positions had less to do with much more immediate issues than America’s balance sheet prospects. We are highly sensitive to the pocket-picking policies that governments in general deploy to right the ship.
Well, ahoy matey, as quick as you can shout “thar she blows,” an academic working paper by Carmen Reinhart and M. Belen Sbrancia affirmed the same thing but in much more grounded, well-ballasted research. The paper, titled “The Liquidation of Government Debt,” contains a historical analysis of how governments attempt to get out from under the crushing burden of a debt crisis. For developed countries such as the United Kingdom and the United States, the period beginning in the mid-1940s (when depression and WWII sovereign debt loads were oppressive) was used as a starting point for pocket picking, “skunking,” or what they term “financial repression.” While the ancient Romans used to shave metal coins in an attempt to monetize existing debts, our evolving financial system has used more sophisticated techniques. With inflation accelerating, due to WWII and post-war demands on commodities, the Treasury capped long-term bond yields at 2½% and in so doing ensured that its debt/GDP ratio would be reduced. If savers received an average 2% on their Treasuries while the nominally based economy was advancing at 5% or more annualized growth rates, then debt to GDP could be lowered from its peak level of 116% to 112%, to 109%…etc. every 12 months. In fact, the authors found that “for the United States and the United Kingdom, the annual liquidation of debt via negative real interest rates amounted on average to 3 or 4% percent of GDP a year…which quickly accumulated (without compounding) to a 30 to 40% of GDP debt reduction in the course of a decade.” Even after interest rate “caps” were removed in 1951 via the Fed-Treasury Accord, extremely low/negative real interest rate policies continued until the Volcker revolution in 1979. By that time, U.S. (and U.K.) debt levels had been normalized, primarily at the expense of savers who had been “repressed” (and depressed!) for over three decades. At that historical turning point, government bonds were labeled “certificates of confiscation.” Not only had savers received Treasury bill rates that were negative for over 25% of the nearly four decades, but they were holding long-term AAA rated bonds trading at 30 to 40 cents on the dollar.
The point of the Reinhart paper was not to state the obvious – that inflation is bad for bonds. Their financial repressionary thesis points out that bond prices don’t necessarily have to go down for savers to get skunked during a process of “debt liquidation.” The argument over whether the end of QEII on June 30 will result in higher yields and lower Treasury bond prices is, in a sense, a secondary one. Even if 10-year Treasuries stay where they are at 3.30%, and fed funds close to 0%, savers and financial intermediaries are being shortchanged by both of these yields and everything in between. Today’s rates resemble the interest rate caps prior to the 1951 Accord. Either through QEI, QEII or the Fed’s “extended period of time” language reinforced at Chairman Bernanke’s recent press conference, U.S. Treasuries and the bond market in general are being “repressed,” “capped” or simply overvalued compared to the prior 30 years. Bond investors forced to invest in dollar government bonds either through indexation, convention, regulatory guidelines or simply falling asleep at the helm are being shortchanged by 1 to 2% annually compared to historical norms and in many cases receive negative real yields, as shown in Chart 1. If Reinhart’s history is any guide, an investor should expect these overvaluations to be with us for years if not decades. While that still leaves open the question of price behavior following QEII, there should be little doubt that simply holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility.
Bond – and stock – investors have been sailing on the “Good Ship Lollipop” for over 30 years following the Volcker Revolution and the return of high real interest rates to investment markets. Now, however, with governments attempting to impose financial repression, bond investors should revolt. Their ship should more likely be christened the “USS Caine” in memory of a silver screen mutiny that, while traumatic, eventually returned all sailors safely to port. PIMCO advocates not so much a mutiny but a renewed vigilance on this new ship, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies. Many of these countries have more pristine balance sheets and higher real interest rates than those currently being imposed in some developed markets subject to current and future “repression.” If AAA quality is your requirement, then Canadian or Australian bonds may also fit your horizon. Join us, along with Carmen Reinhart, in shouting “constant bearing/decreasing range!” The Treasury market is on a collision course with financial repression and it is time to adjust your rudder to starboard to get home safely.
William H. Gross
Managing Director
PIMCO
From: http://www.pimco.com/EN/Insights/Pages/The-Caine-Mutiny-Part-2.aspx
Subscribe to:
Posts (Atom)
.JPG)