April 7, 2009

Paper Pushers Rule The Earth

It is now confirmed. The world has been taken over by an alien species. They use names such as "CPA" and "auditor." How did we come to this conclusion? First of all, no one really understands who caused the mess we are in except auditors. Secondly, the stock market’s reaction this week tells us who our leaders really are. We had a good rally in March. Nice to have some relief. We don’t know if the bear market is over or this is just a bounce. The good news is that the stock market continued the rally early in April. One of the factors fueling the rally was not good economic news. It was the fact that we changed an accounting rule.

Most of you don’t know what "marked to market" really means so we won’t go there. We are not sure anyone but accountants know this. The bottom line is that no more goods or services were produced but somehow banks and other financial institutions will now be able to "say" that they either made money or lost less money. Our alien leaders said so. Forget the fact that we have now lost five million jobs since the start of 2008 and the unemployment rate is the highest it has been in 25 years. In a world run by aliens, the stock market rallies on the news of a new accounting rule. Good news is good news. If we can build on this rally we will have more confidence. We keep using that word but don’t look now, pending home sales are up. That comes from confidence. This could be the beginning of the end of the bad news. If the accountants don’t change the rules again.

The Markets. Rates continued their assault on record lows this past week. Freddie Mac announced that for the week ending April, 30-year fixed rates averaged 4.78%, down from 4.85% the week before. The average for 15-year fixed fell to 4.52%. Adjustables also fell with the average for one-year adjustables decreasing to 4.75% and five-year adjustables falling to 4.92%. A year ago 30-year fixed rates were at 5.88%. “Mortgages followed other interest rates lower this week amid reports of slower economic growth” said Frank Nothaft, Freddie Mac vice president and chief economist. “The final estimate of economic growth in the fourth quarter was revised lower and personal incomes fell 0.2 percent in February, below the market consensus. On a positive note, pending existing home sales rose 2.1 percent in February, marking the second increase in three months as potential homebuyers are taking advantage of historically low rates and falling home prices. Serving as a spur to sales, housing affordability reached an all-time high in February 2009 since the series’ inception in 1971, according to the National Association of Realtors®.”

Current Indices For Adjustable Rate Mortgages
Updated April 3, 2009

Pending sales climbed at a seasonally adjusted rate of 2.1 percent in February from the previous month, according to the National Association of Realtors. Double-digit gains in pending sales were posted in the Midwest and Northeast, and the report also shows home prices pushing the group’s affordability index to record heights. “Pending home sales have a way to go for there to be a meaningful increase, but recent increases in shopping activity are hopeful indicators that we’ll see additional sales gains,” he says. “More buyers are getting into the market to take advantage of stimulus incentives and much improved housing affordability conditions, but it will take a few months before we could see this turn up in measurable sales contract activity.” Sources: The New York Times and National Association of Realtors

The Federal Reserve has so far spent about $250 billion on mortgages acquired from lenders by Fannie Mae and Freddie Mac. The purchases, which could eventually top $1 trillion, are one part of the financial buyout many people understand and support. This spending has driven mortgages to record lows, encouraged people to buy houses, and helped many people refinance out of risky mortgages. It all looks good on paper, but some economists are warning others about some risks. Here are a few of their concerns: The Fed is creating new money to pay for this, which will eventually encourage inflation. When the Fed stops buying, rates will increase quickly and substantially. Finally, not too many investors are interested in purchasing the low-yielding mortgages, so it is likely taxpayers will have to foot the bill. Source: The Wall Street Journal Editor’s Note: The author does not point out that if the real estate market recovers due to these actions, there will be plenty of buyers in the future and therefore, the increase in rates and loss to the government is not necessarily a given.

U.S. office rents declined at the steepest rate in seven years during the first quarter of 2009, according to research firm Reis Inc. "It’s really sobering to see that even though we’re technically at the beginning of this downturn, the magnitudes of the declines and the fact that they’re registering historic levels," says Victor Calanog, Reis director of research. So far, commercial property values have decreased 22 percent from their peak in 2007, according to J.P. Morgan. Nationwide, rents, minus discounts to tenants, have fallen 3.2 percent, compared to the first quarter of 2008. The vacancy rate rose 15.2 percent in the first quarter. Reis predicts that surplus space will reach 47.7 million square feet by the end of 2009, but some commercial property experts are saying that number is too low. Many economists expect a recovery in this sector by early 2010. Source: Reuters News