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David Lereah's Last Wish

Written by Brian Hicks
Posted February 1, 2007

David Lereah could use a rabbit's foot or two. Or perhaps he ought to consider combing through the grass in search of a four-leafed clover. Either way, he could use all the help he can get.

That's because after calling the bottom in the housing market no less than five times this year, the head of the National Association of Realtors (NAR) has clearly reached the point of desperation.

In a recent interview in which he proclaimed to have seen his latest bottom, Mr. Lereah said, "With fingers and toes crossed, it appears that we have hit bottom in the existing home market."

Fingers and toes crossed? You have got to be kidding me.

The truth is that the desperate Mr. Lereah now knows what any realtor worth his salt already knew: The spring selling season, set to begin after the Super Bowl, is either going to make or break the current market.

As any honest realtor will tell you, it is the spring selling season that sets the tone for rest of the year. And given the current free fall in housing, this season promises to be one of the most crucial periods for the real-estate market in recent history.

As the NAR's chief economist now knows, the open houses this spring will either be very quiet or jammed with those buyers he claims are just waiting on the sidelines. For David Lereah and his industry it represents a moment of truth that is certainly worthy of crossed fingers and toes.

But despite all these wishes and charms, Mr. Lereah is likely to end his spring on a down note, because not even rubbing the Buddha's belly will be enough to change the current downturn.

Recent data in fact point to a further dip. According to the numbers released last week, new home sales fell in 2006 by the largest amount in 16 years and existing homes sales suffered their biggest decline since 1989.

And by every measure available, supply continues to grow while demand continues to slacken-which even an economist could tell you are the seeds for more bad news.

In truth, you don't exactly have to be an economist to read the tea leaves of the market. According to a recent poll released by Experian-Gallup, nearly half of the consumers they polled now say that a housing price collapse is possible in their local residential real-estate market-a stunning reversal from just last spring, when most people doubted that the bubble even existed.

Each spring, however, dishes out another new reality. And given the the state of the current market, Mr. Lereah won't be the only one wishing on a star.

 

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Mortgage Matters

 

Hi Steve,

I heard your mortgage segment yesterday here in Phoenix, AZ, on 1510 AM, really great. I have a question concerning the Fed meeting today and how that will effect the MTA index that is tied to my pay-option ARM mortgage. Does the Fed typically control the Fed rate, discount rate, and prime? What about the other indexes?

Thanks very much,

B.C.

Dear B.C.,

Thanks for reading and for listening. As you know, the Federal Reserve is meeting this week and the decision on the Fed funds rate is expected to be neutral-meaning that the Fed will neither raise its overnight rates nor lower them.

And while the Fed does not actually directly control the interest rates that consumers face, its actions-either up or down-often serve as a benchmark for other rates, such as prime.

Additionally, by tightening or loosening the money supply, the Fed shows whether it is trying to speed up or slow down the economy. This ends up affecting rates in two ways.

If the Fed is loosening (cutting rates), it signals the bond market that the economy is weakening. This makes bonds more attractive, pushing up their price and driving down their yields. It is these falling bond yields that push lower interest rates.

On the flip side, if the Fed is tightening (raising rates), it signals that the economy is strong, which has the effect of raising rates.

When the Fed is neutral, however, it is only the workings of the bond markets themselves that determine interest rates, since the Fed's bias is unknown.

For you, that means you need to be watching the yields on one-year Treasuries, since your rate is the average of these yields plus the margin.

But because your rate is based on a twelve-month average of these bond yields at constant maturity, your movements either up or down should be small in the short term. Over time, of course, these moves can end up being quite large, as you may well know, given the upward movement in bond yields of short-term Treasuries.

So while your rate does ultimately depend on the action in the bond market, the rate policies of the Fed indirectly shape these markets.

I hope that helps,

Steve

By the way . . . Countrywide Financial Corp., the largest U.S. mortgage lender, said on Tuesday that fourth-quarter profit fell three percent as housing market conditions worsened and loan servicing income nearly disappeared.

The company also said it faces a "challenging" year in 2007, and projected a range of earnings per share that falls mostly below the average analyst forecast.

CEO Anthony Mozilo said, "Looking ahead to 2007, the industry will likely see continued pressure on margins as mortgage origination volumes decline and industry capacity is rationalized. We are also preparing for increased borrower delinquencies and continued credit deterioration."

In related news, sub-prime mortgage lender Fremont Investment and Loan said on Monday that it had severed ties last quarter with some 8,000 brokers whose loans were responsible for some of the highest delinquency rates in the industry.

Soaring loan repurchases by Fremont led to a $16.4 million loss on the sale of its mortgages in the first nine months of 2006, compared with a $316.4 million gain on sales for the same period of 2005.

To date, some sixteen sub-prime lenders have closed up shops since December 2006.

The banking debacle continues.

Wishing you happiness, health and wealth,

Steve Christ, Editor

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