Matrix Blog

The Mortgage Bankers Association’s chief economist, Douglas Duncan said that the trigger for price declines is always the loss of jobs and doesn’t see a slowdown in employment, “not until 2006.” He predicts that 2005 will set records “and only an unexpected roadblock of monumental size will slow its pace”

Well, we may have a potential roadblock, sort of. Oil Prices have often been a trigger for inflation and higher long term rates such as mortgages.

Then why isn’t it happening now?

Well, here’s a thought…after adjusting for inflation, we are still well below [inflation-adjusted oil prices](http://inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp) that peaked at $94 per share in 1980. Core inflation is still within the Fed’s confort zone but [energy prices are rising](http://www.marketwatch.com/news/story.asp?siteid=mktw&dist=nwtam&guid=%7B2AF7F405%2DBD16%2D48D9%2DB0D1%2D6C323AFAE571%7D).

Tags: David Duncan

Comments Off on Will Oil Grease The Inflation Wheel?

A study by PMI Mortgage Insurance Co. found that piggyback loans may pose risk to the mortgage system; especially vunerable are high priced housing markets. The borrower can use a second mortgage to “finance” a portion of the down payment. This creative financing technique has allowed more purchasers to be more highly leveraged. The study suggests that higher priced housing markets, where the gap between affordability and price is wider, are seeing more of this type of financing and are therefore subject to greater risk in a housing downturn.

[USA Today](http://www.usatoday.com/money/perfi/housing/2005-07-27-risk-real-estate-usat_x.htm) put together the results of the PMI study in the following table.

The [PMI Risk Index](http://money.cnn.com/2005/08/03/real_estate/buying_selling/pmi_riskiest-markets/) predicts the risk of home-price declines over the next two years using local economic forecasts.

Piggyback loans — so called because a second mortgage is piggybacked on to a first to compensate for a smaller down payment — have become common in recent years as housing prices have appreciated. Approximately 42 percent of home purchase mortgage loan dollars involved piggyback loans during the first half of 2004, up from 20 percent in 2001.

Here is the [PMI Report [Note: PDF]](http://www.pmigroup.com/lenders/media_lenders/pmi_eret05v3s.pdf)

Local media coverage based on risk:

• High Risk
  [San Diego, CA Note: Subscription](http://www.mercurynews.com/mld/mercurynews/news/12243396.htm)

• Low Risk
  [Phoenix, AZ](http://phoenix.bizjournals.com/phoenix/stories/2005/08/08/daily17.html)
  [Pittsburgh, PA](http://www.pittsburghlive.com/x/tribune-review/trib/newssummary/s_362867.html)

Tags: USA Today, PMI Mortgage Insurance, Risk

Comments Off on Piggyback Loans Pose Higher Risks to Certain Markets

Apparently, the Chinese government (The National Development and Reform Commission)was concerned about housing prices back in 2004 which rose 7.7% nationwide last year. In addition, values increased 25% over the period 1998 to 2003 with a 16% market share of investment properties.

The article also said that “The commission Tuesday also said the government’s housing supply is not as balanced because common commercial apartments are not available in large enough numbers, while there is an oversupply of luxury apartments and high-end villas.”

Is it just me, or does this sound familiar? But wait a minute…this is China…”oversupply of luxury apartments and high-end villas?”

Fast forward to the current real estate market in China…

Housing prices in 20 cities fall in July but the average nationwide increase in 70 cities increased 6.4% annually. China, like us has localized markets with different housing trends. 20 out of 70 cities saw falling prices, yet the overall average saw an increase.

Shanghai has observed soaring housing prices in recent years. Its commercial housing prices topped 5,118 yuan (US$617) per square metre last year, about 24.2 per cent or 1,000 yuan, up from the previous year.

Does that sound familiar?

Note: By my conversion calculations, Shanghai averages $6,641 per square foot! Please help me out on this…did I do the conversion correctly? Thats 30% higher than the highest sales in Manhattan on a per square foot (Rupert Murdoch’s $44M penthouse purchase was just north of $5,000 per square foot).

Tags: China

Comments Off on A Bear in a China Shop?

According to Investopedia.com a yield curve is a “graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates. For bonds, it typically compares the two- or five-year Treasury with the 30-year Treasury.”

Yield curves have loudly entered the economic discussions. If you grab the red line [Note: Java] in the yield chart, you can see how short term and long term rates have changed in relationship to one another over time.

The traditional economic model for banks is being turned on its head. Banks typically borrow at lower short term rates and lend at higher long term rates, capturing the spread. Since the yield curve is flattening, there is little difference between both rates creating bottom line pressures for lenders.

However, in a recent article in American Banker [Note: Paid Subscription] suggests that the yield curve, when inverted, could actually spell lower mortgage rates next year.

John Herrmann, chief economist at Cantor Viewpoint, a unit of Cantor Fitzgerald …Mr. Herrmann’s outlook is somewhat contrarian. Most economists expect rates to rise as the economy strengthens. But Mr. Herrmann told MSN that mortgage rates could be headed lower – perhaps to 5.25% by the end of the year and eventually “grinding down to 5%” next year.

A deceleration of economic growth, competitive pressure in the mortgage industry, and a trend toward tying 30-year mortgage rates and hybrid loan rates closer to the five-year Treasury rate than the 10-year are all contributing factors, he said.

His reasoning? Without housing, economic growth is way below potential.

[More on yield curves to come…](http://matrix.millersamuel.com/?p=82)

Comments Off on Yield Curve Enters Kitchen Table Talk

Canadian housing prices are on the rise, but the underlying conditions do not suggest the threat of a bubble similar to that of the late 1980s, according to the Bank of Montreal.

I would hope Bank of Montreal (BOM) learned their lesson from the late 1980’s when they were active construction lenders in the New York market with what appeared to be loose underwriting standards.

BOM says the same things that economists are generally saying in the US: a modest rise in mortgage rates will temper demand but there are concerns about affordability.

Tags: Canada, Canadian Housing Market

Comments Off on Phew! No Housing Bubble In Canada.

Here is an article written by an independent thinktank on public policy initiatives called oddly enough, The Independent Institute

“Making Sense of High Housing Prices” discusses the fact that once governments started adopting land use and urban growth controls, prices began to climb.

Economists Edward Glaser of Harvard and Joseph Gyourko of the University of Pennsylvania studied the effect government restrictions have on housing prices in a number of markets around the country. They found that 90 percent of the difference between physical construction cost and the price of new homes could be attributed to government restrictions on building. Only 10 percent of the difference was due to intrinsically scarce land.

In fact, Glaser & Co. did a study on Manhattan housing that asked the question “Why is Manhattan so expensive? (it also refers to a Miller Samuel / NYU research paper).

Comments Off on Making Sense of High Housing Prices

FRB: Press Release–FOMC statement and Board discount rate action–August 9, 2005

The Fed does it again. It was surprising to me that they still used the phrase “with robust underlying growth in productivity” since productivity cooled off in the second quarter [Note: Subscription]. However, jobs data improving, it seems more likely that the Fed will continue to raise rates.

However, this doesn’t seem to mean much higher mortgage rates are imminent. The demand for bonds has kept bond prices high and yields low [Note: Subscription] (which most mortgage rates are tied to).

All this ties to real estate through mortgage rates. More on the yield curve to come…

Comments Off on 10’s the Charm?: The Fed raises the rate by 25 basis points to 3.5%

According to a study released Tuesday by the Center for Housing Policy

Surging housing prices are putting the dream of a home beyond the reach of middle and low-income workers in many cities around the country

The center is an advocate for affordable housing.

Home ownership has seen significant expansion over the past 10 years with Fannie Mae now claiming that 69% of Americans own their homes.

Wages have held flat for community workers and aren’t likely to rise in the near future. The median home price is consistent with that of the National Association of Realtors [Note: PDF].

Tags: NAR, National Association of Realtors

Comments Off on Housing Boom Squeezes Low-Income Workers: Study

What is the Beige Book and why is it Beige? Prior to 1970 it was red and not intended for public reporting. Perhaps the color was not considered neutral enough for economic reporting – beige seems to be about as neutral as you can get. In 1983, the Beige Book became a public report.

More digging to do on the latter, but here’s the latest…well, not exactly hot off the presses¦Federal Reserve: Beige Book–New York–July 27, 2005

Basically, economic expansion is now more moderate than earlier this year, including retail sales and labor costs and productivity. It is interesting that one of the items that has kept mortgage rates (long term rates) in check for so long has been the fact that productivity has outpaced economic growth. As a result, large corporations have been more likely to refrain from hiring new employees. The limited growth in employment has kept long term rates in check as investors are less concerned about the threat of inflation.

Construction and real estate were robust across the region, but the rate of price increases has slowed. This doesn’t mean prices are falling, it means that the rate of appreciation is slowing.

Tags: Beige Book

Comments Off on Economically Speaking, Its Beige

Inflation seen as key to Fed policy.

Tomorrow marks the likely 10th 1/4 point increase in the Federal Funds rate since June 2004 and with the jobs report showing growth, an increase seems almost certain.

The Chinese currency [Yuan] was recently strengthened by 2%, which could reek havoc with the housing market if allowed to float as much as 40% to which would be needed to benefit the manufacturing sector. The US would see a competitive advantage in manufacturing, allowing prices to increase, placing upward pressure on rates, tempering activity in the housing sector.

Tags: China

Comments Off on Yuan Inflation?