July 14, 2009

The Oil Factor

The price of oil provides many clues as to the health of the economy. In a deep recession, the demand for oil drops significantly. Yet, the price of oil may still rise during these periods because of political events that threaten supply or on the "hope" of the markets that the economy is going to recover. For now and for the past eight months, the fundamentals have been horrible–"The reasons are simple, said Philip K. Verleger Jr., an expert on energy markets at the University of Calgary in Canada: The still-sputtering economy has lessened demand at a time when there is already a big surplus of oil. For eight straight months, oil supplies have been running about 2 million barrels a day higher than the global demand of 83 million barrels a day, Verleger said. Eventually, he and others predicted, suppliers will tire of paying to store all of the surplus oil and flood the market. "That is the largest and longest continuous glut of supply that I have seen in 30 years of following energy prices," Verleger said. "It’s a huge surplus." (from CNN/Money).

So how does oil rally from under $35 per barrel to over $70 in a matter of a few months while this is happening? If you look closely, the performance of the stock market and rates have been closely tied with the movement of oil. When oil dropped from over $140 per barrel to under $35 per barrel, the stock market was falling approximately 30% and rates were headed down to historic lows. While the price of oil has rallied for a few months more recently it has started back down. And not so coincidentally, so has the stock market and rates. A few weeks ago we said that if the economy shows itself not to be on the verge of recovery, then the markets will adjust. Based upon the weak employment report, the markets seem to be doing just that. Again, we will be the voice of caution. One employment report does not mean that the recovery is not taking shape. In the next few weeks we will have a slew of profit reports, the reading for the economy in the second quarter and another employment report. There is the potential for a lot of volatility during this period–from rates to oil to the stock market. And there is always the possibility that trends will be broken–with one of these three markets not moving in tandem with the others.

The Markets. Rates continued down this past week. Freddie Mac announced that for the week ending July 9, 30-year fixed rates averaged 5.20%, down from 5.32% the week before. The average for 15-year fell to 4.69%. Adjustables were down as well with the average for one-year adjustables falling to 4.82% and five-year adjustables decreasing to 4.82%. A year ago 30-year fixed rates were at 6.37%. “Rates for 30-year fixed home loans fell for the second week in a row to the lowest level in six weeks amid market concerns over a weakening labor market,” said Frank Nothaft, Freddie Mac vice president and chief economist. “The economy lost 467,000 jobs in June, more than the market consensus, and the unemployment rate rose to 9.5 percent, the highest since August 1983. Moreover, hourly employee wages increased at an annual rate of 0.7 percent on average in the second quarter of 2009, the smallest gain since records began in 1964." Note: Rates do not include average fees and should not be used for comparison purposes.

Current Indices For Adjustable Rate Mortgages
Updated July 10, 2009

	Daily Value	Monthly Value
	July 9	June
6-month Treasury Security	0.27%	0.31%
1-year Treasury Security	0.47%	0.51%
3-year Treasury Security	1.46%	1.76%
5-year Treasury Security	2.33%	2.71%
10-year Treasury Security	3.44%	3.72%
12-month LIBOR–WSJ		1.677% (June)
12-month MTA		1.051% (June)
11th District Cost of Funds		1.832% (May)
Prime Rate		3.25% (Dec)

Home prices are at their most affordable in many years, which has opened up homeownership to many who had been locked out during the housing boom. And now, the federal government, and many states, are launching plans to hook up buyers of repossessed properties with very attractive terms. The feds made nearly $6 billion available for the Neighborhood Stabilization Program, which intends to combat blight by reducing the number of foreclosed homes on the market. The money, which has only started to flow during the past few weeks despite much of it being authorized last summer, will go to state and local housing authorities and non-profit organizations involved in providing housing for middle- and low-income families. "The NSP was designed to help deal with all the properties in foreclosure around the nation," said Antonio Reilly, executive director of the Wisconsin Housing and Economic Development Authority (WHEDA), which will administrate the program in several counties in the state. The bulk of the NSP funds will come from the $3.92 billion that was approved as part of the Housing and Economic Recovery Act of 2008 passed in August. By regulation, these funds must be spent in communities with the highest incidences of foreclosures and subprime loans. They’ll go to helping households earning no more than 120% of the median income of the local area, with 25% of the money going to families earning less than half the median. All the home sales using these funds must be for primary residences. Source: CNN/Money

These are tempting times for real estate bargain hunters. Whether it’s the house down the street with an asking price that keeps dropping or office space at a deep discount, if you have the means, there are deals to be had. Individual investors snapping up foreclosed houses have helped boost home-sale figures sharply in recent months. And now some real estate investment trusts are raising money to fund acquisitions of distressed commercial properties. Indeed, if you believe that now is a once-in-a-generation opportunity to buy low in real estate, REITs allow you a way to bet on a rebound in the market without getting approval for financing and taking possession of a piece of property yourself. And there seems to be no shortage of prospective purchases. There is an estimated $90 billion in commercial real estate in the U.S. alone that is "distressed," according to New York-based real estate research firm Real Capital Analytics. These are properties that have been foreclosed on, or whose owners are in default on their loans or in bankruptcy. "On top of those properties, there is hundreds of billions more in debt coming due in the next few years," says Peter Slatin, editorial director at Real Capital. "Some REITs are getting prepared for that." Source: Fortune

Median prices for single-family homes in California have risen for the third straight month, reaching $267,570, up 4 percent from April, according to a report from the California Association of Realtors®. The inventory of homes continues to drop, falling a 4.2-month supply in May, compared to 8.7 month supply in May 2008. California’s real estate market always has been seen as a leading indicator for the rest of the country. What is happening in California bodes well for the rest of the nation, observers say. Source: The Wall Street Journal