How a Weak Dollar May Strengthen Our Real Estate Market

I prefer a strong dollar for eternity, but right now I feel about the dollar what St. Augustine felt about chastity. To paraphrase his notorious prayer, "Lord, make our dollar strong, but not just yet." - Bob McTeer, former President of Dallas Federal Reserve Bank

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Do you want a stronger dollar, or a weaker dollar? 

If you ask that question to the next three people you see, chances are they'll say (perhaps emphatically,) "Stronger." After all, it's the Greenback, and we instinctively equate a strong dollar with a strong nation.

And mostly, over the long haul, a strong dollar is a good thing.  It helps keep interest rates low, is a sign of a strong economy, and something worth rooting for.

But right now, a weaker dollar may be just the thing that helps lead us out of the real estate wilderness, and is probably what you should be rooting for.

That's because a weak dollar helps manufacturing and other industries that export goods and services by making the cost of their goods cheaper, relatively, than those of foreign competitors. 

In other words, a weak dollar drives up foreign demand for our products and services, so it's a boon to exports.

You might remember last weeks post on the Beige Book, which higlighted manufacturing as of the few bright spots in our local economy.  This was driven by, you guessed it:

"Business is booming due to exports," commented a Minnesota metal fabricator.

So when the dollar falls, Minnesota based exporters get a boost - hopefully large enough to make up for or exceed sputtering domestic demand, and cause them to add jobs and expand operations.  All sorts of good things flow from that.

Why this Matters to our local real estate market:
The recovery of our real estate market, and more importantly, it's long term health, is about not about ARM's adjusting, foreclosures, or the legacy of subprime and the real estate boom. 

It is about jobs and the local economy.  The stonger our local economy and job market, the quicker the recovery.

To elaborate, we point you to a piece from Yesterday's Wall Street Journal on the impact of exports on local economies. See also the cool interactive graphic (screenshot above):

Export-driven growth marks a dramatic shift in an economy that has relied heavily on consumer spending. That has slowed in recent months as Americans, nervous about job losses, teetering banks, falling home values, and rising gasoline and food prices, have tightened spending. Against that background, exports have emerged as a powerful motor...

It's a badly needed tonic for the beleaguered U.S. economy.

To be sure, Minnesota is far from the largest "net exporter," so we'll need more than just weak-dollar driven exports to pave the road to recovery, but for now, we'll take any help we can get.

09/12/08 at 10:48 AM Permalink | Comments (2) | TrackBack (0)
Filed Under: Economy, Twin Cities

Beige Book Twin Cities: Weak, Sluggish, Not Strong

One of the ways we earn our keep around here is by reading things like the "Beige Book," so you don't have to.  Here's a summary of the none too pretty picture painted in our very own 9th Federal Reserve District:

Summary: "Ninth District economic activity was stagnant since the last report. Decreased activity was noted in consumer spending and services, while residential construction and real estate remained slow."
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Consumer Spending: "Consumer spending decreased slightly in some areas."
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Residential Real Estate: Residential real estate remained slow. Second-quarter home sales in central Minnesota were down 14 percent from a year earlier.
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Manufacturing: "Overall manufacturing activity was up since the last report"..."Business is booming due to exports," commented a Minnesota metal fabricator.
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Employment and Prices: "Labor markets loosened somewhat since the last report...Wage increases were moderate...Prices for many commodities and energy have decreased since mid July, but remain at relatively high levels."

More than anything else, a healthy real estate market is about a strong local economy with ready access to employment.  Something we still have, by all indications.  But perhaps not for long - though this report is not without bright spots, it seems to paint a picture of an economy in a real estate and banking led slowdown. 

Sure, home prices are starting to look relatively attractive, pending sales are stringing together some YOY gains, and interest rates remain anchored in the low 6% range.  But the bigger economic picture put forth in the Beige Book is not exactly the stuff of a housing market turnaround.

09/03/08 at 04:29 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: Economy, Twin Cities

The Fed: Will They Or Won't They?

Greg Ip at the Wall Street Journal outlines the case for and against a "pause" in Fed Cuts after this week.

Argument for further Cuts:

"There's probably a recession going on, and the Fed may want additional insurance that the recession does not become an escpecially severe one."

Argument against further cuts:

"Additional interest rate cuts could be a little bit worrisome...it could for example lead to further weakness in the dollar, it could lead to futher upward pressure on commodity prices."

In other words, it all will boil down to what the Fed believes is a larger threat to the economy - inflation, or a recession?  So far, the Federal Open Market Committee has come down fimly in the recession-is-the-biggest-threat-so-inflation-be-damned camp.

Greg also goes on to make what we think is the central point to this discussion: If we are in a recession, inflation should take care of itself, as it is awfully hard for inflation to persist in the face of slumping demand and zero or negative job growth.  "Awfully hard" is not the same is impossible however, and much of the global rise in prices is a result of offshore demand, so the Fed is indeed in a precarious spot here.

This week's cut is a forgone conclusion, but the big news will be if the statement released at the conclusion of the Fed meeting signals an end to cuts.  This would almost certainly send mortgage bonds upward, and rates could improve.
Fed Weighs Pause After Next Cut [WSJ]

04/28/08 at 09:08 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Economy, Interest Rates, The Fed

The Feds Big Bet: What it Might mean for Mortgage Rates

The other day, we kicked around the idea of Fed Chairman Bernanke's condundrum: He is cutting rates, yet many long term rates - including fixed rate mortgages - are going up. 

So, since Mr. B spent the last two days testifying before congress, it might be a worthwhile excercise to tease out his thoughts on the same in an attempt to get an idea what this may portend for Mortgage Rates.

First from Forbes, while not in so many words, we have Bernanke confirming the 'conundrum':

'We have a problem, which is that the spreads between the Treasury rates and lending rates are widening...So in that particular area, it's been more difficult to lower long-term mortgage rates through Fed action,' he said.'

Yet, by all indications, and even in the face of what appears to be increasing inflation, the Fed will continue to cut.  From Chairman Bernanke:

'...downside risks to growth remain.  The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.'

So what then, about inflation - the primary reason many lending rates have risen in the face of the Fed cuts? Again from Mr. B:

'The projections recently submitted by FOMC participants indicate that overall PCE inflation was expected to moderate significantly in 2008, to between 2.1 percent and 2.4 percent (the central tendency of the projections).  A key assumption underlying those projections was that energy and food prices would begin to flatten out, as was implied by quotes on futures markets.  In addition, diminishing pressure on resources is also consistent with the projected slowing in inflation.'

And therein lies the key:  The Fed has placed a bet that we are in a (potentially nasty) recession, and if true, inflation will take care of itself.

The key takeaway: If the Fed is right, and continues to ratchet down short term rates, we can expect fixed rate mortgages to fall in 2008 (ARMS have already dropped.)  That is a big bet, and we hope a correct one.

02/29/08 at 09:04 AM Permalink | Comments (2) | TrackBack (0)
Filed Under: Economy, Interest Rates, Mortgage Economics, The Fed

Another Conundrum: Will Mortgage Rates Continue to Rise in Spite of Fed Cuts?

A great graphic from today's Wall Street Journal illustrating a fact that we've harped on around here for a while - that despite the recent flurry of Fed Cuts, mortgage rates have mostly moved in the opposite direction, and the housing market woes continue unabated:

There are two reasons mortgage rates haven't responded more to the Fed's rate cuts. One is that long-term Treasury yields, which are the benchmark for most mortgage rates, have risen recently, perhaps because of increased concern about inflation as the prices of oil and other commodities soar. The other is that the spread between mortgage rates and Treasury rates has widened as investors and banks become increasingly reluctant to make home loans."

If you'll remember, back in 2005, the Greenspan Fed was similarly vexed by their inability to influence mortgage and other long term rates (the infamous 'conundrum' speech.)

Back then, despite hiking rates (17 times by the time they were done) in an attempt to cool an overheated housing market, rates stayed low, and lenders did nothing but create ever looser credit standards in an attempt to continue the party.  The ensuing hangover is what the Bernanke Fed is trying to cure (hair of the dog, anyone?) with rate cuts.

So now Fed faces precisely the opposite problem:  They are cutting rates, hoping to prevent a housing and general economic meltdown, yet rates are beginning to rise, and credit standards for all types of loans - from credit cards, to mortgages, to auto loans - are getting tighter.

Somwhere in this there is a lesson for economists and future Fed Chairman, who should have at the very least a keen sense of the irony in all this.
Decline in Home Prices Accelerates [WSJ]

02/27/08 at 09:51 AM Permalink | Comments (3) | TrackBack (0)
Filed Under: Economy, Interest Rates, Mortgage Economics, National & Abroad, The Fed

PMI Risk Index: 19% Chance That Twin Cities Home Prices Will be Lower in Two Years

The above mentioned graphic and stats come from the folks at PMI, who publish the US Market Risk index (link - PDF!), which purports to tell us which markets are at greatest risk for price declines.

How do they do this?  By comparing past historical data and trends in house price appreciation, affordability, housing supply, and foreclosure rates to our current situation, of course. 

Still lost?  Basically, it works like this.  Anywhere the aforementioned factors deviate from historic norms, a market is assigned a risk factor according to the severity of the deviation (the larger the deviaiton from past history, the more likely things will come back to earth, and the greater risk of decline.) Add 'em all up, weight them for impact, wash, rinse, repeat, and you get the US Market Risk Index, which assigns each major statistical area a percentage between 0 and 100 that describes their risk of housing declines over the next two years.

Which brings us to the Twin Cities.  As suggested by the graphic above, and in the report (link- PDF!) - the Twin Cities have a 19% chance of seeing price declines over the next 2 years.  That also means there is an 81% chance that we won't see price declines (glass half full! glass half full!)

With the exception of those sitting on the sidelines rooting for further price declines, I think most people would take those odds right now without missing a beat.  In fact, it's almost tempting to call this data a sign of stability.

How-ev-er, since we have a degree in nothing whatsoever to do with economics or statistical analysis, it's worth pointing out two factors that the risk index does not adjust for, that may add to the downside risks.

First, and most obvious, is the credit crunch.  The recent housing runup was based on the largest expansion of housing credit in the history of mankind.  The unwinding of the mortgage credit bubble will put pressure on demand for housing that this study does not seem to account for in any way.  We expect lending guidelines to tighten further throughout 2008, adding to these pressures. Sure, increases in affordability as prices fall may help, but we have a long way to go before simple price drops give back what what has already been taken away by tighter credit standards.  And did we mention things will get tighter?

The second factor is foreclosures, about which the study has this to say:

In today’s housing market changes in foreclosure rates are a leading indicator of changes in housing supply and provide additional insight into the direction ofhouse price movements. We would expect that house prices would be negatively affected by a rise in foreclosed properties in an area.

So what about our foreclosure rate?  A quick search of the Hennepin county website shows that in the first 15 days of this year, there have been 338 (!) sherriff's sales, on pace for 7 HUNDRED (!!)foreclosures in Hennepin County.  In January.  In ALL of January last year there were 218.   

It seems that foreclosures in MN are nowhere near peaking, are excacerbated by price declines, and we are just now getting into the reset periods for many of the worst sub-prime ARM's, with most of the ALT-A, Prime, and Option ARM resets forthcoming.

[Quick Aside: After all the wrangling about delinquent payments, potential short sales, etc. etc., the Sheriff sale is the first big step in a foreclosure, after which there is a redemption period of (usually) 6 months during which the owner can make good, after which the property can be re-sold by the "buyer" - usually the lender that held the mortgage.]

It will take at least 6 months before the properties being sold at foreclosure auction today are on the market, and at least another 3-6 months to actually sell and close.  This will put additional downward pressure on prices, especially in those areas hit hardest by foreclosure.

By not factoring in the credit crunch, and perhaps underestimating the impact of foreclosures on price pressure, we think this study underestimates the risk of further price declines in our market, though this is one case where we'd be very happy to be wrong. 
Winter 2008 Economic and Real Estate Trends Report [The PMI Group]

01/15/08 at 03:15 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Economy, Foreclosures, Market Stats, Reports & Research, Twin Cities

Consumers, Well Acquainted with Mr. Frying Pan, Rush to Meet Mr. Fire

If you have any notion that our collective national jones for borrowed money at any cost and nearly any terms will be behind us once the market, the government, et al. deals with the mortgage mess, you might want to re-think things.

For instance: You might assume, super-smart blog readers that you are (you are!), that the consumer, faced with stagnant incomes, flat-to-declining home values, rising interest rates, and tougher credit standards, would curtail spending.  Right?  Well...not so fast.  Instead, it appears that consumers less able to tap home equity to feed spending habits are turning to credit card debt:

As Mortgage Equity Withdrawals decrease....(click for big)

The graphic above represents MEW, or Mortgage Equity Withdrawals (cash out refinances, Home Equity Loans, etc.) [Source: Calculated Risk, Dr. James Kennedy)

Credit Card Balances are Rising...

Source: Wall Street Journal, Credit Crunch Moves Beyond Mortgages, August 22nd, 2007
http://online.wsj.com/article/SB118773982869404682.html

Talk about frying pan to fire.  And, of course, with average credit card interest rates at already levels (13-18%) that make the ugliest sub-prime loan on the planet a bargain, Credit Card Issuers are raising rates:

Some lenders, such as USAA, are nudging up credit-score requirements across their auto loans, credit cards and personal loans. Bank of America Corp. and Capital One Financial Corp. recently raised fees and interest rates for some of their credit-card customers.

In part because of, you guessed it, rising mortgage defaults:

Nationally, credit-card delinquencies are relatively low at 4% and haven't risen significantly in the past three years. However, in certain markets, especially those that have been hit hard by a decline in home values, delinquencies have spiked higher.

Might it just be that the "problem" is not mortgages, or credit cards, or [insert any other way to borrow], but the fact that for far too long undisciplined lenders have been catering to undisciplined borrowers, across the entirety of the lending universe (from hedge funds down to your neighbor.)

It's like a trillion dollar game of chicken, and we have a hard time imagining how it ends well for many of the participants.  While we'd like to be able to say the undisciplined lenders and borrowers will get their respective comeuppance, many of the disciplined will be caught in the undertow.
Credit Crunch Moves Beyond Mortgages [WSJ]
Advance Q2 Mortgage Equity Withdrawal Estimate [CR]

08/23/07 at 11:27 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Credit, Economy, Interest Rates, Personal Finance, Sub-Prime

Fedswirl: Nothing to See Here

Google news lists 895 news articles on yesterday's (non-news-event-because-everybody-knew-what-was-going-to-happen) decision by the FOMC to leave rates unchanged, so it's unlikely that you are hearing it from us first; but if you haven't the stamina to wade through all of the coverage, here's our grossly oversimplified executive summary:

Rates Unchanged Because:
1.  Economy is maybe/probably slowing.
2.  Inflation is maybe/probably a problem.
3.  We care more about number 2 than number 1.

See how easy that was?
· Parsing the Fed [WSJ Online]

05/10/07 at 11:15 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Economy, Interest Rates, The Fed

March Home Sales Report: You can dress it up, but...

The March existing home sales report hit the wires today, and Mike Larsen over at Interest Rate Roundup (another blog you should be reading) provides the best commentary we've seen today on it's ugly data. 

In brief:

No amount of lipstick can make this pig of a home sales report look pretty. Sales dropped sharply. Prices fell again. And inventories are closing in on the 14-year high set in late 2006. No doubt, crummy weather had an impact on the figures. But sales were poor in all regions...That tells me a lot more is at work here – namely, that affordability is still poor, that speculators have left the building, and that tighter mortgage standards are starting to knock marginal buyers out of the market.

We'll add the obligatory "This is just a snaphsot, one report does not define the market, local areas don't always correspond to national/regional figures, etc. etc." but no matter how you spin it, this lets more air out of the balloon the "real estate bottomed last August" crowd is clinging too.  We'll unpack the local figs when we get our hands on them.
March Existing Home Sales - Ugh [interestrateroundup.blogspot]

04/24/07 at 01:50 PM Permalink | Comments (3) | TrackBack (0)
Filed Under: Economy, Industry News, Market Stats

WSJ: Twin Cities Real Estate Market Looks Weak

The most excellent WSJ RealEstateJournal runs a piece analyzing the prospects for 18 major real estate markets, and the Twin Cities, as you can see in the graphic at right, is one of them.  Let's just say they are not calling us the next "hot market."

<<click on graphic for a larger image>>

The graphic, which is fairly self explanatory, uses recent inventory changes, price trends, and job growth outlook to gauge the the health of our real estate market, and the results are not all that promising for the Twin Cities.  Particularly troubling are the job growth prospects - we've long maintained that a healthy housing market is about jobs more than anything else - and if the figures in the chart are accurate, we might be in for a bit of a choppy ride for the next couple of years.

On the upside, the Minneapolis Federal Reserve's data disagrees with that used in the chart (from Moody's), predicting both a job growth rate and unemployment rate better than the national average.  From the Fed's 2006 Forecast:

The forecasting models predict continued employment growth in 2006, but at slightly slower rates than in 2005. In addition, unemployment rates should remain at low levels relative to historical averages. According to the  business outlook poll, 33 percent of respondents plan to increase employment at their place of business in 2006; 14 percent expect decreases. Respondents also noted increased difficulty finding available workers compared with the preceding year’s poll.

Does this mean that a crash is coming, and property values are set to fall?  We hardly think so - these are just educated guesses after all -  but if you are watching the housing market, watch the job growth, which is the real "fuel" for a healthy market.
· As the Boom Cools, New Markets Heat Up [REJ]
· Minneapolis Fed Forecast, 2006 [minneapolisfed.org]

05/03/06 at 07:40 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Economy, Minneapolis, Reports & Research, The Fed, Twin Cities