THE BASIS POINT

Home Sales And The Tax Credit

 

Mortgage Bond Market Update
Yesterday we saw yet another improvement, with lower coupon (current production) prices doing the best. At the close of business yesterday, the spread between a Fannie 4.5% security and a Fannie 5.0% security was 2.5 points. (So .5 in rate equates to 2.5 points, or about .625 points for every .125% move.) As it turns out, apparently some dealers are quoting Fannie 30-yr 3.5% security prices. Although when a new security starts trading, it is very illiquid, but the price drop is about 3 points from a Fannie 4.0% security, or .75 in price for every .125%.

FOMC and Economic Preview
Today the FOMC wraps up its two-day meeting. Looking at the big picture, the economy is projected to expand 3.2% this year and slightly less in 2011, with the jobless rate staying above 9% for the foreseeable future. With no inflation, housing and employment scraping by, and European problems, there is no need for overnight rate hikes by the Fed. Many feel that although many areas are stable or improving housing-wise, but in many there are signs of some renewed weakening in home prices. Foreclosures continue (although 70% of them are concentrated in 11 states), bank repossessions hit a record monthly high for the second month in a row in May, and existing home inventories are increasing – none of which help home prices. On the flip side, housing starts are down. Of course, why build more when there are plenty of “used” houses around?

New and Existing Home Sales Dropping
Last month New Home Sales jumped almost 15%, but with tax credits expiring most analysts believe that the number for May, which will be announced at 10AM EST, will drop significantly. Yesterday Existing Home Sales from NAR unexpectedly dropped 2.2% in May, although the median price is up 2.7% versus a year ago. Sales increased in the West and South, were flat in the Midwest, and lower in the Northeast. The number of previously owned homes on the market is a little over 8 months of inventory at current sales levels, but there is some feeling out there that hundreds of thousands of buyers may not be able to finalize the sale by the end of June due to delays in the mortgage process, particularly for short sales, or in the interruption in the National Flood Insurance Program.

10yr Note Yields, Mortgage Applications
Yesterday prices rallied and rates dropped, with the 10-yr hitting 3.15% (it was down to 3.06% in late May) and mortgages better by about .5 in price. Weak housing data and a nervous stock market will do that. Today we’ll have the second leg of the latest Treasury auctions with $38 billion of 5-year notes, and New Home Sales for May which are predicted to plunge nearly 19%. We have already heard that the Mortgage Bankers Association’s mortgage application index dropped almost 6%. (Purchase apps were down about 1% and refi’s were down over 7%, although refi’s still make up about 74% of total apps.) The current 10-yr is at 3.16% and mortgage prices are a shade better than Tuesday’s closing levels.

Daily Humor
A guy calls a company and orders their 5-day, 10 pound weight loss program.

The next day, there’s a knock on the door and there stands before him a voluptuous, athletic, 19 year old babe dressed in nothing but a pair of Nike running shoes and a sign around her neck.

She introduces herself as a representative of the weight loss company. The sign reads, “If you can catch me, you can have me.”

Without a second thought, he takes off after her. A few miles later huffing and puffing, he finally gives up.
The same girl shows up for the next four days and the same thing happens.

On the fifth day, he weighs himself and is delighted to find he has lost 10 pounds as promised.
He calls the company and orders their 5-day/20 pound program.

The next day there’s a knock at the door and there stands the most stunning, beautiful, sexy woman he has ever seen in his life. She is wearing nothing but Reebok running shoes and a sign around her neck that reads, “If you catch me you can have me”.

Well, he’s out the door after her like a shot. This girl is in excellent shape and he does his best, but no such luck. So for the next four days, the same routine happens with him gradually getting in better and better shape.
Much to his delight on the fifth day when he weighs himself, he discovers that he has lost another 20 lbs. as promised. He decides to go for broke and calls the company to order the 7-day/50 pound program. ‘Are you sure?’ asks the representative on the phone. “This is our most rigorous program.”

“Absolutely,” he replies, “I haven’t felt this good in years.”

The next day there’s a knock at the door; and when he opens it he finds a huge muscular guy standing there wearing nothing but pink running shoes and a sign around his neck that reads, “If I catch you, you’re mine.”

He lost 63 pounds that week.

 

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