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Sour Housing Notes

The following is an excerpt from the Professional Edition Fed Report of December 23. It was also made available to Wall Street Examiner Economic Bulletins, a free email service, on December 24. You can subscribe via the form in the left sidebar.

The Mortgage Bankers Association’s Mortgage Applications index announced Wednesday did a
belly flop. Purchase applications dropped 11.6% last week taking the purchase index back near the November 13 low. After that came a sharp bounce until December 4, followed by an immediate collapse back to the low.

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Here’s what I think happened. When the first time home suckers’ tax credit expired, the market took
the Acapulco cliff dive. Then Congress, in its infinite wisdom, or maybe just because they were crapping their pants when the saw the numbers, extended and expanded the credit. At that point those buyers who previously had tried to get in under the wire but missed the deadline jumped back in to the market. My position has been that at this point, virtually everyone who wanted to use that credit had already done so. The extension sucked in all the procrastinators.

Now who’s left?

Apparently, no one. Applications are again doing the cliff dive. The 2 year downtrend is intact. The index is again well below the 52 week moving average, and it would appear that there’s room for conditions to worsen before reaching the lower limit of the long term trend rate of decline.

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The Commerce Department was also out this week with more bad news on the housing front. New home sales plunged 11% in November. That’s on top of a 5.7% downward revision in the
October figure. The downtrend in sales is still intact. Inventories are being whittled down, but the inventory to sales ratio is turning back up. While the ratio is not at the crisis levels of 2008 and 2007, at 9.4 units of inventory per unit sold, it remains well above the December seasonal norm of
approximately 5 units.

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Prices have stabilized over the past 10-12 months, with the buyer’s credit and artificially suppressed mortgage rates playing a big role. There’s little question that they are distorting price levels along with sales volume, although to what extent is unclear. As mortgage rates rise, these props will have less of an impact, and eventually no impact, and the market will return to a more “natural” price level. I would expect the median sale price to remain within the 33 month downtrend channel for the foreseeable future. That trend equates to an annualize rate of decline of approximately 5%.
Topics covered in the Fed Report include:
  • Treasury Auctions
  • Federal Revenues
  • Treasury Yields
  • Open Market Operations (OMO)
  • Primary dealers
  • Alphabet Soup
  • TAF
  • TALF- Toxic Assets Live Forever
  • Other Fed Balance Sheet Items
  • Foreign Central Banks
  • The Dollar
  • GSE-Treasury Spread
  • Housing
  • Commercial Paper and Related Facilities
  • Money Supply

Updates are posted 3 times each week.

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