Rates are even better this week than last! We are locking conforming loans at 4.625% for 30-year fixed for the price of an origination and normal closing costs. Why the improvement? Mortgage Backed Securities (MBS) continue to ride sky high with values very close to their 2-year high-water mark set 6 weeks ago. There are more investors wishing to buy MBS as an excellent investment, now safely returning twice what CDs and other fixed income instruments are returning. The volumes available (supply) of mortgage bonds dipped lower in the last 2 weeks as home purchases and refinances slowed, causing demand to exceed supply.
All of this is possible because the inflation monster is secured tightly in its closet for apparently many more months to come, leaving supply and demand to rule the day. Two very critical factors to watch for in supply and demand are Fed purchases of MBS and foreign investors’ appetite for US debt instruments. The Fed purchase program will taper off through an end, slated for March 30, 2010. See the chart below for Fed purchase history. The other most significant influence on gov’t issued debt (MBS compete directly with T Bills for investor demand) is the level of interest from overseas buyers.
Much has been said about “When will China stop buying our debt?” The answer was clarified to me Friday by the Oracle of Omaha, Warren Buffett in a Charlie Rose interview. If you didn't see it, watch for it on Bloomberg replays or see excerpts of it by clicking here. He explained many things very clearly including why China buys US debt, even after they threaten to walk away. It is all about the US-China Trade deficit which is running in excess of $400 Billion annually. Those are real, US dollars being exported that have to work their way back into the US to have any value. The most logical place for that until the trade balance shifts is into Treasury securities, hence the continued demand. Now the biggest problem will come if we deficit-spend our way into a need for even more bond investors than this cycle can support. Current projections of deficit spending over then next 7 years would cause irreparable damage to this delicate balance. Mr. Geithner will have to apply a hand of restraint in the current spending plans. Watch for this to become a much more important topic in the coming year.
Last week I pointed out that the trend of Central Oregon home unit values and median prices were moving in different directions. (Unit volumes have recovered in Oct ‘09 to be ~90% of Oct ’07 transactions, whereas median prices have continued to fall, now at ~50% of Oct ’07 prices.) I asked the question there about price per square foot because median prices are a combination of two very different influences, changes in the price per square foot (true value indicator) and a shift in the “mix” of higher and lower priced homes. Well one of my readers got back to me with some good-news facts. Even though the median price has fallen by 50%, the price per square foot in the same time has dropped less than 30%. This shows what we have known from the activity: the median price drop is significantly a reflection of the shift in mix to starter homes selling more than higher-end homes. Time will tell, but this should give some hope for a recovery in the median prices as mix shifts again to more normal. Central Oregon is still the best place in the US to live. If you haven’t seen it already – make sure you check out the new Visit Bend promotional video, click here.
The coming week has economic reports of interest. The retail sales reports will be out today and PPI/CPI inflation data on T/W. The following week’s auctions of T-Bills will be interesting when announced on Thursday. If you are tired of the impact HVCC has had on your deals, click here for a blog of recent experience. Check out the job interview skills video toward the bottom of this email and make it a great week!
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