by Calculated Risk on 10/21/2005 12:51:00 PM

CNN reports: Stricter OCC rules on exotic mortgages may help stabilize housing prices as less buyers qualify

... the increasing use of interest-only and option adjustable rate mortgages has put federal regulators on high alert. This fall, the Office of the Comptroller of the Currency, along with other financial regulators, will issue guidelines for mortgage lenders that could make lenders think twice before readily offering exotic mortgages to potential buyers.

Will the inability to gain easy access to these creative mortgage products finally help let some of the air out of the inflated housing bubble?

It's certainly a distinct possibility, said Andy Laperriere, managing director at ISI Group.

"I think it will affect a meaningful amount of loans," he said. "It'll be enough to take the marginal buyer out of the hottest markets and therefore slowdown or even stop some price appreciation."

Experts certainly see some correlation between the availability of these products and the surge in housing prices. Laperriere added that in high-priced markets such as California and Washington, interest-only and option ARMs make up about 50 percent of the mortgages used to finance homes.
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...there's no denying that exotic mortgages have climbed in popularity in tandem with the rise in housing prices. According to the Federal Reserve Board's latest quarterly survey of senior loan officers from July, nearly a third of respondents said that non-traditional mortgage products make up 5 to 16 percent of their dollar volume of residential mortgages while one bank said these products make up 50 percent of its dollar volume.

And more than half of respondents noted that the share of mortgage originations accounted for by non-traditional mortgage products had been higher over the past 12 months than over the previous 12 month period.

Dean Debuck, a spokesman for the OCC, which regulates financial institutions, said the organization will issue guidance for mortgage products, adding that growth in the industry has uncovered "some things that need to be fixed." While he declined to comment on the specific guidelines, he said the OCC is focused on "safety, soundness and good risk management."

Financial analysts expect the OCC to set specific credit-worthiness standards to prevent people from over-stretching themselves into debt and make sure that these products are aimed at individuals that are capable of repaying the mortgage when interest rates climb and their monthly payments increase significantly.

by Calculated Risk on 10/20/2005 08:31:00 PM

Reuter reports: Washington home market softens as investors sell

After hitting a high in May, the number of contracts in Washington D.C. and its surrounding Virginia areas of Prince William, Loudoun, Fairfax and Arlington counties have fallen by about half, according to the Greater Capital Area Association of Realtors. Meanwhile, inventory of houses for sale has doubled and in some cases tripled, and homes are staying on the market 30 percent longer.

In Falls Church City, contracts peaked in April and inventory is double that seen in December.

Too many houses are for sale, experts said. Speculators -- who last year bought homes, not to live in, but to sell or "flip" within a year -- are trying to cash in on the price increases now. "For Sale" signs are sprouting on lawns and depressing prices throughout the market, analysts and Realtors said.

Next week, housing numbers for September will be reported, with Existing Home Sales on Tuesday, and New Homes Sales on Thursday. For New Homes I'm mostly interested in Sales (also inventory), but for Existing Homes, inventory continues to be the story.

by Calculated Risk on 10/20/2005 04:19:00 PM

Two weeks ago I looked at the short run oil and gasoline market dynamics and concluded:

"it is not unexpected to see oil prices fall - and they may fall some more. However there is a danger of much higher gasoline prices (and heating oil prices) if demand stays strong."

Since then oil and gasoline prices have fallen significantly. November crude closed at $61.03 and November unleaded futures at $1.61. Both are below the pre-Katrina levels.

The fall in the price of oil was expected. But its worth looking at the gasoline market to understand why gasoline prices have fallen.

There are four key numbers for gasoline from the Department of Energy: Stocks(S), Domestic Production(P), Imports(I) and Demand(D). We can write a simple relationship:

Change in S = P + I - D

If S is falling below the normal range, the price will rise leading to a drop in demand and probably more imports. If S is stable or rising then the price will fall.


Click on graphs for larger images.

NOTE: These graphs are intended to provide a comparison between 2005 and 2004. The Y-axis may not start at zero.

Gasoline stocks rose in the most recent week and are close to the levels of 2004.


Part of the reason for the increase in stocks is that domestic production has recovered somewhat from Hurricanes Katrina and Rita. The dip in 2004 is from Hurricane Ivan.

According to the Energy Information Administration's Daily report, a significant quantity of refining capacity is still off-line in the gulf.

"Refinery shutdowns in the Gulf of Mexico region total approximately 1.27 million bbl/d as of October 19, 2005."

This means other domestic refineries have made up a portion of the difference, probably by postponing maintenance.


Another factor in lower prices has been the quantity of imports. Imports of gasoline jumped significantly in the last month to about 1.5 million bbl/day. It is not clear how long this level of imports can be maintained.

And the last graph shows demand. Demand dropped sharply after hurricane Katrina, and is still below 2004 levels. It also appears demand is recovering as prices fall.


The Department of Energy wonders: How Much Has Oil Demand Dropped? After reviewing the data, the DOE asks:

"... what is really happening with petroleum product consumption? And, with retail prices headed toward pre-hurricane levels, at least for gasoline, are consumption and/or product supplied likely to rebound in tandem? Certainly, the latter shows signs of a rebound as this week's estimates rose well above the most recent four-week average. Although we hesitate to make too much out of one week's worth of data, product supplied is likely to continue to rebound, as Gulf Coast refinery production continues to recover. The question is, how much? Coming weeks' data may shed more light on this important issue."

If the economy weakens, I expect demand to stay below pre-Katrina levels even with lower prices. However, if the economy stays healthy, demand will most likely recover and once again put upwards pressure on oil prices. Stay tuned.

by Calculated Risk on 10/19/2005 06:58:00 PM

"The basic problem is you have huge bubbles, great big bubbles, on the coasts," David Wyss, chief economist for Standard & Poor's.

From Reuters: Economists see US housing near peak, eye slowdown

by Calculated Risk on 10/19/2005 01:15:00 PM

The Census Bureau reports(PDF):

BUILDING PERMITS:

Privately-owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 2,189,000. This is 2.4 percent (±0.8%) above the revised August rate of 2,138,000 and is 7.4 percent (±1.1%) above the September 2004 estimate of 2,039,000.

HOUSING STARTS:

Privately-owned housing starts in September were at a seasonally adjusted annual rate of 2,108,000. This is 3.4 percent (±6.3%)* above the revised August estimate of 2,038,000 and is 10.3 percent (±7.2%) above the September 2004 rate of 1,912,000.

HOUSING COMPLETIONS:

Privately-owned housing completions in September were at a seasonally adjusted annual rate of 1,979,000. This is 3.2 percent (±7.9%)* above the revised August estimate of 1,917,000 and is 10.9 percent (±8.8%) above the September 2004 rate of 1,784,000.

The Mortgage Bankers Associations (MBA) reports:

The Market Composite Index — a measure of mortgage loan application volume – was 737.5, an increase of 6.1 percent on a seasonally adjusted basis from 694.8, one week earlier. This measure includes an adjustment to offset the effects of Columbus Day on application activity. On an unadjusted basis, the Index decreased 4.4 percent compared with the previous week but was up 3.7 percent compared with the same week one year earlier.

The seasonally-adjusted Purchase Index increased by 7.3 percent to 503.9 from 469.5 the previous week whereas the Refinance Index increased by 4.5 percent to 2095.7 from 2004.9 one week earlier.

Thirty year mortgage rates rose to 6.09% from 5.98% the previous week.

A couple of comments: Permits are inexpensive and therefore a poor indicator. New and Existing Home Sales has historically been much better indicators for the housing market. In the previous housing busts, 'Starts' stayed strong right into the slow down and the excess inventory led to many builders going bankrupt. Usually 'Starts' is a trailing indicator for the housing market.

The mortgage application data from the MBA shows activity is still strong and indicates that housing hasn't fallen off a cliff - yet.