Garrick Werdmuller

I read an interesting article yesterday that said nearly half American adults who participated in a recent survey said they no longer believe that home ownership is a realistic way to build wealth, reported by the National Foundation for Credit Counseling.

The findings, from a recent survey of about 1,000 people, run counter to the long-held perception that a home should be part of a person's financial strategy, the NFCC said. So what was once the cornerstone of retirement and wealth building is now looked at as an unstable threat to the American Families' livelihood?

Being in the Mortgage business since 2001 I have definitely seen the good, the bad, and the ugly, and lived through it all. The whole time I have been educating my clients that real estate is a long term investment. Why? Because IT IS!.

The "Mortgage Meltdown" consists of three years of bad loans. From 2005 to 2007, if you purchased then, and especially in areas that were overbuilt then you are in serious trouble if you still own your home. Many of theses areas in central California have values not seen since 1995 and that is really unfortunate.

I find it hard to believe that after these three years of a tough market (OK, going on 5) nearly half of America thinks that real estate is no longer a good investment? People are funny. I am willing to bet these are the same people who couldn't wait to get into the housing market in 2003 "before it's too late!" and couldn't wait to buy Yahoo stock in 1997. AH, I remember when my plumber and the guy at the video store counter new more about the stock market than Warren Buffet.

And speaking of which...What is it Warren Buffet said? Something to the effect of "Be fearful what people are buying and buy what people are fearful of?" Hmmmmm - time to get pre approved! ;^D

Yesterday will be one of those I will remember in the mortgage industry. We basically went from4.875% to 5.5% in a matter of hours (see my Waterloo Rate alert below).

Today mortgage backed securities (MBS) prices are higher (rates lower), recovering a portion of yesterday's losses, in volatile trading on speculation the U.S. economy will not rebound soon enough to keep yields at their highest levels since November; FNMA 4.5% coupon 99.59bps, +21bps. We switched the current coupon from the 4.0% to 4.5% to better reflect market conditions. MBS prices are lower than their levels before the Fed announced March 18 it would expand purchases to stem the housing slump and bolster consumer spending. The Fed has made low mortgage rates a priority in its strategy to end the recession. Signs of a recovery in the U.S. have prompted investors to move out of the relative safety of fixed income assets, like MBS, and into higher yielding and more riskier assets. Rising yields make the governments rescue efforts more expensive. The yield curve, difference between 2yr & 10yr note yields, widened to 275bps, its highest ever on concern the flood of supply will overwhelm buying. A steepening yield curve suggests investors are demanding more to lend because of the risk an economic recovery will lead to faster inflation. Auctions so far this week have eased concern that international (China) investors will shy away from buying as U.S. borrowing surges. Durable goods orders jumped more than forecast, up 1.9% in April as a rebound in autos and a surge in defense spending overshadowed declines in business equipment. However, a downward revision to March, -2.1% vs -0.8%, left new orders below expected levels for April. Year over year, overall new orders for durable goods are down 24.4%. Intial jobless claims fell 13K to 623K, lower than forecast, from a revised higher 636K the prior week. The alarming news is a sizable 110K jump in continuing claims to a record 6.77 million, the 19th in a row, reflecting restrained hiring. Claims in coming weeks may climb amid restructuring in the auto industry. New home sales held steady in April at 352K, a bit lower than expected, but supply and price readings were positive. Supply is now at 10.1 months and the median price rose 3.7% to $209,700.

Mortgage backed securities (MBS) prices are higher (rates lower) in quiet range-bound trading as investors await todays Fed purchases of U.S. debt and the 11am pt release of the FOMC minutes from the monetary policy meeting in late April; FNMA 4.0% coupon 100.02bps, +7bps and the high of the session. Treasury Secretary Geithner is testifying this morning to the Senate Banking Committee on the progress of the Troubled Asset Relief Program (TARP) and the many other government rescue plans. The Treasury Department is scheduled to announce tomorrow the amount it will auction of 2, 5 & 7yr notes next week as the administration borrows record amounts to try to snap the deep recession and service record budget deficits. The FOMC minutes may address if policy makers will adjust the size of the central banks purchase program and help fill in details on quantitative easing. The minutes have become a market mover as analysts parse each word looking for clues to policy. The minutes include the complete economic analysis compiled by the Fed and whether any members voiced opposition; any surprises can cause a reaction in MBS prices. According to the Mortgage Bankers Association (MBA) weekly survey purchase applications are showing no strength at all, declining 4.4%. Falling home prices and low rates (4.69% avg 30yr fixed) are failing to stimulate significant buying. Refinancing activity continues to rise, up 4.5%, which will help limit future foreclosures. On the inflation front, oil rose above $61 a barrel for the first time in 6 months as U.S. crude supplies dropped. Oil is up 36% this year and could extend its rally if prices cross their 200 day moving average of $63.29 a barrel. The 200 day moving average is a key technical level for many momentum models and a break above would provide support.

Mortgage backed securities (MBS) prices fell (rates rose) for the first time in four days as reports show manufacturing contracted less than expected, easing speculation the economic recovery was weakening; FNMA 4.0% coupon 100.14bps, -17bps. The Fed bought debt three times this week, part of an effort to lower borrowing costs, amid a two-week hiatus in the Treasury's auction schedule which resumes May 26th. International demand for long-term U.S. financial assets rose in March as China added to its portfolio, indicating foreign confidence in the U.S. markets is on the increase. Investors worldwide have sought a haven from global market turmoil by buying U.S. Treasury securities. On the downside, foreigners were heavy sellers of agency debt (FNMA, FHLMC, GNMA). Industrial Production contracted again in April but at a slower pace, down 0.5% after falling a revised 1.7% in March. Motor vehicle and parts production climbed 1.4% in April, but those increases are unlikely to be sustained in coming months as sales fall and companies shut plants to reduce inventories. Overall capacity utilization in April continued its downward trend, slipping to 69.1%, an historical low. Consumer price index was unchanged in April and on an annual basis is down 0.7%, biggest decline since 1955. Core rate, excluding food & fuel, climbed 0.3% in April, but half the jump reflected an increase in tobacoo excise taxes. Core prices rose 1.9% over the past year. Wages increased 0.1% and were up 2.6% over the last 12 months. Empire State index improved to minus 4.6 in May vs -14.7 in April, but with mixed results. General business conditions did improve, with shipments and inventories positive, however new orders show a deepening rate of contraction. Consumer Sentiment rose in May to 67.9 from 65.1, due to the expectations component jumping 6 points, but the assessment of current conditions remains very weak.