As the numbers show, these are rather extreme times–whether we’re talking about the dollar’s exchange rate (have pity on the American tourist trying to pay for his and her travels abroad!) or about the constant parade of anguish from Wall Street’s hedge funds and from the debt markets in general. The relationship between long- and short-term interest rates is being turned around by a flight to quality once again (with investors seeking short-term Treasuries as a safe harbor in uncertain times). Meantime, gold has joined the chorus of concern, rising to within spitting distance of $700 an ounce.
Don’t expect terrific predictions of the near- to mid-term future in these circumstances. This is a storm to sail through, glad to be able eventually to sail back out of it. It won’t do permanent damage. But it’s probably worse than the happy stock markets lead us to assume.
Thumbnail Sketch: “The housing market has yet to hit bottom,” says Moody’s Economy.com. Others such as Countrywide in yesterday’s comments regarding their recent earnings report have echoed this sentiment. As with any market that has ebbs and flows, we all need to remind ourselves that life does go on-as do real estate sales and purchases and refinancings.
And we’re not just being glib here. The Mortgage Applications Index (below left) continues to hold at strong levels, this week spotlighting the work being done to refinance troubled homeowners into workable mortgage loans. Refi applications were up a solid 4.9% after weeks of declines. News is out today, too, that several eastern states are offering money to help troubled borrowers do the refinancing they need to do.
At the same time, though, the 7.5% decline in the number of permits taken out for new construction does suggest that home-building hasn’t yet reached a bottom, and that is doubtless the result of builders thinking the market for homes hasn’t yet scratched the bottom of the barrel.
The weakness is underscored by the financial markets: We hear today that two of the Bear Stearns hedge funds made up largely of securitized subprime loans are considered nearly worthless at this point. Investor money just doesn’t want to go there-and we can conclude that there is further to fall before a recovery can begin for such investments…and such mortgages.
Later today, we’ll see the report on June’s existing home sales, followed in a couple of days by the report on new home sales in June. Sadly, these will likely reinforce the negative view of the real estate market, which will serve to slow sales even further.
Careful observers of the nation’s economy are easily finding reasons for concern, though the stock market indices seem intent on walking ever higher on the yellow brick road. The long-inverted yield curve, in which short-term interest rates remain slightly higher than longer-term rates, refuses to revert to what most of us consider “normal.” The financial markets are walking a high wire, carefully avoiding the fall that could result from a loss of confidence in hedge funds and debt instruments. And the dollar is lower against foreign currencies than it has been in thirty years. There is a silver lining such as the weaker dollar helping to erase long-term international trade imbalances, easing our current account deficit.
We will indeed get through all of this, but it is all rather unnerving, to say the least.
July 25, 2007
Gold $682.40/ounce [up!]
Crude Oil (Brent) $75.08/barrel [slightly down]
U.S. Dollar to…
Euro .7232 [down]
Japanese Yen 120.09 [down]
6-mo Treasury Bill Yield 5.05%
10-yr Treasury Note Yield 4.91% [6-mo down 1 bp, 10-yr down 14 bps]
30-yr Fixed-rate Mortgage 6.87%
15-yr Fixed-rate Mortgage 6.47%
1-yr ARM 6.16%
[HSH average rates: 30-yr down 2 bps, 15-yr down 10 bps; ARM down 4 bps]
Housing Starts June Up a surprising 2.3%, mainly in multifamilies – permits declined by 7.5%, though