Weekly Economic Update August 8, 2007

Economic conditions are looking slightly worse each week, though I do not share the feeling of panic that continues to show its face occasionally in the markets–especially the credit markets.

Indeed, FDR comes to mind:   We have little to fear but fear itself.

As Walls Street shows concern about mortgage backed securities, rates are growing up and there is a consolidation in the mortgage origination industry with larger banks growing their market share.       This is essentially a “Flight to Quality” in the mortgage business.

I hope you enjoy this week’s economic report.

August 8, 2007 KEY INDICATORS Gold $681.60/ounce [up]Crude Oil (Brent) $71.13/barrel[down]U.S. Dollar to…    Euro .7245 [down]    Japanese Yen 118.78 [nearly unchanged]6-mo Treasury Bill Yield 4.93%10-yr Treasury Note Yield 4.74%[6-mo down 5 bps, 10-yrDown 17 bps]30-yr Fixed-rate Mortgage 6.94%15-yr Fixed-rate Mortgage 6.55%1-yr ARM 6.30%[HSH average rates: 30-yr up 11 bps, 15-yr up 6 bps; ARM up 10 bps] Mortgage Bankers Association Mortgage Applications Index week ending 7/27  Overall    607.1 (down 0/3%; down 3.6%            the week prior)  Purchase Money Loans     416.6 (down 1.8%; down 5%            the week prior)  Refinancing Loans     1724.1 (up 1.8%; down 1.4%the week prior) Weekly Jobless Claims 7/28    307,000 first computation – 303,000 prior week (with 2,000 upward revision) Employment Situation July    Payroll employment up 92,000 – unemployment rate up to 4.6% ISM Indices July    Down 2.2 points to 53.8 – ISM Non-Mfg Index fell 4.9 to 55.8

Weekly Commentary Thumbnail Sketch: If anything, worries are multiplying among economic analysts that the number of defaults and, eventually, foreclosures from unraveling existing mortgages will continue to rise. What is perhaps most startling at this point, though, is that worries extend way beyond the somewhat limited world of mortgages to the entire world of credit, debt, borrowing, lending. Further, the overall economy isn’t being viewed with as much optimism as was recently the case. Patrick Schmid of Moody’s Economy.com puts it this way: “There is no doubt that an international credit tightening is under way. It began with the U.S. housing downturn, which resulted in declining real estate prices. As adjustable-rate mortgages set higher, payments became more difficult for many homeowners—especially those whose credit rating was subprime to begin with. Many subprime lenders, whose business models were based on continually rising house prices, faced losses as defaults and foreclosures increased. Politicians became melodramatic over the housing dilemma, putting pressure on regulators, who in turn called for tighter lending standards. The next step was a spike in financial volatility, and some likely market overreaction,” “All told,” Schmid concludes, “today’s market shows some elements of a credit crunch—but not enough to warrant pinning the label on with certainty.” Whether or not we want to call it a “crunch,” however, has little bearing on the fact that the markets are clearly full of concern and, in some cases, incipient panic. Things get very confusing when fears start to roil the market: We see the 10-year T-bill rate fall heavily at the same time that mortgage rates edge north, for example. There is no explaining it. It will take time for the markets to sort out their emotions (or, more specifically, their reading of our economy’s future). 

Until then, we would be wisest, one suspects, to take most of the conclusions put forward by economic analysts with a massive grain of salt. We’re in not-make-sense territory, watching with justifiable concern to see if defaults and foreclosures rise to worrisome heights…if lenders show even more reticence about making the kinds of loans they were making all day long just a few months ago (especially the huge loans made for corporate buy-outs and restructurings)…and if the real estate market can weather the storms and do what it does best, which is simply to focus on the buying and selling of personal residences. There is still reason to put a great deal of faith in real estate, as we’ll likely see in months to come.

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