Hello again to all my Real Estate Partners
I wanted to wait until the market reacted to the government job reports before I wrote this update. Wednesday marked a very different strategy for Ben Bernanke and the Federal Open Market Committee. After lowering the Federal Funds Rate (the rate banks lend to each other and the index that the Prime Rate adjusts to) by 3% since August of last year, the committee decided to ease by just ¼ % and furthermore, inferred that they saw no urgency in easing again. They feel that the previous rate cuts will start showing their effect soon as there is always a lag between the cut and its effect on the economy. Clearly, investors agreed as both stocks and bonds moved up in price since Wednesday. That is good for all investors as the world looked at the action as a sign of strength. The Euro, which had been as high as 1.59 against the US dollar, fell to 1.5424 today.
Then came the wild card...the government job report. Mortgage rates (30 year Fixed) had ticked down below 6% again for the first time in weeks. If the employment numbers were close to the consensus of 5.2% unemployment (from 5.1% last month) and 75000 jobs (from 80,000 last month) lost, rates would have fallen quickly as negative financial news means inflation will probably stay under control. Well...unemployment "plunged" to just 5% and only 20,000 jobs were lost. The news was devastating to mortgage bonds as the price quickly fell a whopping 134bp in a matter of minutes. (That's equivalent to ¼ % increase in rate!) Remember, the higher the bond price, the lower mortgage rates go.
But once the details of the report were unpacked, including downward revisions to the last two Jobs Reports, as well as some realization that the economy still lost 20,000 jobs, Mortgage Bonds staged an enormous recovery. The truth is that investors were confused...they reacted emotionally when the numbers came in "much less horrible" than was expected. Stocks got a jolt as these days it seems that it takes only news that isn't devastating to make a positive equity market. But as the employment figures were analyzed, things looked...well, more realistic. While it was true that we lost "only" 20,000 jobs, the sectors that were hit the hardest were construction, manufacturing, and retail. Jobs added at the government level and education softened the blow. Guess who pays for that? Are you looking in the mirror?
The bottom line is that today could have been a killer day for mortgage rates and yet by market close, bonds had gained back most of their losses. Theses Fed meetings have been nothing more than distraction to investors. After every single meeting the Feds have eased, mortgage rates have headed up soon after. The next Fed meeting is scheduled for June 24th-25th, 7 weeks away. Now we can let the market play itself out without concern of what the Feds will do. The next few days will be key...if bonds can maintain their price level, we may see rates drop to the January levels.
We have gotten close to the "perfect storm" that it takes for mortgage rates to drop before. What is the perfect storm? Rates are low after the Fed eases and then bad news on Wall Street flows investors to the safety of bonds. Let's hope we are close to that. (Somehow that doesn't sound right!)
In other news released before the employment numbers came out, the Fed boosted its biweekly Term Auction Facility sales of cash to banks by 50 percent to $75 billion and expanded the collateral it takes from bond dealers through loans of Treasury securities. It also raised the amount of dollars it makes available to the European Central Bank and Swiss National Bank through swap lines to a combined $62 billion from $36 billion.
Today's actions follow a jump in banks' borrowing costs of as much as 0.38 percentage point since the Fed's March meeting that had blunted the impact of the cash injections that began in December. Fed officials expanded the collateral they accept under the Term Securities Lending Facility to include AAA rated asset- backed investments. This collateral includes student loan debt as well as credit card debt. Why do this? The Feds are encouraging lenders to lend. Clearly the collateral they are now accepting has higher risk but it is we, the tax payers, are paying the bill if there are defaults.
We have come to the point that further rates cuts make no sense. The Fed Funds Rate is now just 2% (in 2004, Greenspan's Fed lowered to 1%) and yet the long end of the curve has not benefited. (One might wonder where mortgage rates might be had the Feds not eased at all). Further cuts may hasten the decline of the dollar which is very inflationary. The show of backbone by the Fed by intimating that the rate cuts have ended has rallied the dollar this week. As long as the Feds hold tight, the dollar should continue to gain strength. This is very key to keep inflation in check. Look for more news from the Fed to improve liquidity to bring down lending costs. It's not hard to see that there has been an overreaction by lenders that have resulted in underwriting standards tightening and lending costs increasing. (A borrower MUST have at least a 720 credit score now to get the lowest rate available if they have less than 40% equity.) By lowering costs to lenders and by allowing a variety of debt assets as collateral, the Feds are helping this to happen.
Rest assured that the Fed is actively moving to help the Real Estate sector. There are some that say we will not see the market recover until 2010. I certainly have no crystal ball, but I look for a recovery that begins later this year. All of the Fed moves will result in a recovering economy that will be led back by Real Estate. But the key to it all is to promote liquidity so that both consumers and businesses will begin to do the spending this economy thrives on.
As always, I encourage your comments and questions. Remember, those that survive the down cycles live to thrive in the up cycles. Until next time, I wish you good business and good times. Rick
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