California’s 2009 Home Buying Stats, Bond Market 101, Water (or Beer?) Consumption By Sports Fans

Water (or Beer?) Consumption By Sports Fans
Who says that numbers aren’t fun? A top muni bond analyst at Wells Fargo sent this chart to me.

California’s 2009 Home Buying Stats
In California (state motto: “By age 30, our women have more plastic than your Honda”) last year 47% of all homebuyers were first-time homebuyers, up from 35.9% in 2008. And REO and short sales made up half of the assets sold in the state, up from 36% in 2008, according to the California Association of Realtors. Of those surveyed by CAR, 40% of the homebuyers said they would not have purchased a home without the first time buyer tax credit. Lastly, the higher FHA loan amounts ($729,750 for single family) helped: in 2009 FHA loans accounted for 32% of the market compared to 18.9% in 2008, according to CAR.

Bond Market 101
Mortgage analysts and traders often talk about “negative convexity.” What is that? It is critical to remember that, for fixed income instruments, when rates go up, prices go down. (In a 5% environment, a $100 bond pays $5 per year. But if rates go up to 10%, investors want $10 per year, so the price of the original bond has to go down so that the $5 per year it pays will equal 10% of the purchase price for an investor.) Conversely, if rates go down, prices go up – simple!

But if the bond is “callable”, meaning that the issuer can pay it off, like a mortgage, as interest rates fall, the incentive for the issuer to call the bond at par increases; therefore, its price will not rise as quickly as the price of a non-callable bond. In fact, the price of a callable bond (like a mortgage) might actually drop as the likelihood that the bond will be called increases. This is why the shape of a callable bond’s curve of price with respect to yield is concave, or “negatively convex.” A very simple way to explain it is that mortgages pay off when rates drop, just when servicers and investors don’t want them to pay off, so mortgage prices don’t improve as much in a rally as, say, a Treasury bond!

Bonds and Rates For 2011
There is definitely an argument for higher rates over the next few years. Although some analysts believe that the economy is going to head back down, everything I have seen suggests that everyone believes things are better than they were. If the economy is indeed beginning to do better and expand, in the past five-year Treasury rates have tracked fairly closely to nominal growth (growth not adjusted for inflation), and in fact nominal growth and long-term rates tend to converge. So if history is a guide, the 10-year Treasury yield will likely double from the lows of the recession to the end of 2011, due at least in part to much improved economic growth. Of course the good news in this scenario is that more borrowers will actually have jobs, and homes will be appreciating.

Bonds and Rates For Right Now
But for now, mortgage rates and prices are darn good. In fact, 4.5% securities are above a price of 101 (1 point premium), and if you add the value of servicing onto these 4.75-5.125% 30-yr loans, agents should have a very nice rebate. Origination has indeed picked up to $1.5-2 billion a day, and there is still demand for the product. And there is certainly demand for the Treasury securities – yesterday’s $21 billion 10-yr sale went well. In fact, the bid-to-cover ratio set a record of 3.45:1. Today we have $13 billion of 30-yr bonds to sell, a “re-opening” of the last batch. We have already had the weekly jobless claims and the Trade Balance figures (actually somewhat smaller than expected). Jobless Claims came in at 462,000, down from a revised 468k, but continuing claims were up slightly. The impact on the market of these numbers was nil: the new 10-yr is yielding 3.74% and mortgage prices are worse by about .125.

Daily Humor
An Irish priest is driving down to New York and gets stopped for speeding in Connecticut. The state trooper smells alcohol on the priest’s breath and then sees an empty wine bottle on the floor of the car.

He asks, “Father, have you been drinking?”

“Just water,” replies the priest.

The trooper asks, “Then why do I smell wine?”

The priest looks at the bottle, smells it, and exclaims, “Good Lord! He’s done it again!”