Let’s hope that March Madness this year is limited to basketball, or at least, if it relates to the economy it is the good kind of madness. January and February only brought serious economic madness with the worst two-month start to the Dow ever. In a normal world, the slide in the Dow would normally bring dollars to bonds in a way that would improve bond prices and rates. Some of this happened with TBills, but the activity in MBS moved towards slightly worse rates. Even the T Bill benefit was offset by the large tranches of new issuances from the treasury as they begin to fund the stimulus and deficit spending. A theory on the MBS sideways move is that bondholders don’t want to get too long ahead of the inevitable stock reversal. And it looked like the upturn might have been underway after the S&P 500 met its Nov. ’08 low and jumped in a positive direction. This late week motion seems to have lost steam as global stocks overnight were all in recession retreat and the US markets have opened to the downside again.
Look to the bottom of this email for some examples on the new $8,000 Homebuyers’ Tax Credit. Also, make sure you look at the recap below on the economic news of the past week. A couple of side-notes: While the GDP was revised downward for 4Q08 to -6.2%, the indications are that 1Q09 will shatter all records with a real possibility of being a double-digit negative. New home sales set record lows but builders have slowed to a point that inventory actually improved in spite of sales.
Stress testing began under the CAP program and CITI moved further down the hopefully-only-temporary, nationalization path. Stress testing is based on the “highly unlikely” scenario of “10-12% unemployment and a further drop in housing prices of 20%”. I hate to be a pessimist, but I don’t agree with Treasury’s thought that this is “highly unlikely”. Unemployment in OR and CA is already at 10%. One of my trusted sources has recently projected a 15% nationwide unemployment figure and while I don’t think it will go all the way there, I do anticipate exceeding 12% in less than 6 months. This should keep us in a place where the Fed Funds Rate Target and the Prime Rate won’t be moving up in this period and not likely in the rest of the calendar year.
While this economic upheaval originated in the US, it is clear that the whole world is experiencing it in spades. In fact, while we may feel like the programs we are implementing are shotgun-quick and somewhat haphazard; the rest of the world is trying to catch up. And the strength of the dollar is an indication that investors globally like the US efforts. That’s not to say there aren’t surprises that will still be standing when the dust settles. The new budget proposals have unprecedented deficits attached to them. That on its own doesn’t scare me. What scares me is that some of the permanent programs being funded will require continued spending into the future. From a real estate stand point, the single most significant threat of the budget proposal is the combination of eliminating home-mortgage deductibility for “upper income” taxpayers (that will include huge numbers of two income families) and increasing capital gains rates. These should be hotly contested in congress and we will keep our eye on it.
Rates are still exceptional from a long-term perspective. Funding is available. Let Signet Mortgage advise you and your friends and family. Make it a great week! - Dave