Mortgage Credit News – July 31, 2009

Interest rates are a hair lower at week’s end, more in relief that another massive Treasury borrowing — $109 billion in term debt alone — came off without injuries.

However, long-term Treasury rates have been elevated since May, pushing mortgages to 5.50%, past the edge of refinance demand, and near the limit of buyer demand. The economy is living on government spending, in today’s report up 5.6% in the 2nd quarter, but consumer spending falling faster than GDP, minus 1.2% versus negative 1.0%. So long as the Treasury can raise cash without further damage to rates, the economy will stumble forward, but upward pressure has already cancelled much of the credit-easing benefit of the Fed’s zero percent cost of money.

The stock market rose after every new economic report, good or bad. Markets are very thin this time of year, and data distorted by hazy seasonal adjustments.

Everybody’s favorite summer-school subject: math. Insert your pocket protectors, and deconstruct housing, banking, leverage, and health.

Euphoria followed a reported 11% leap in June sales of new homes. Up to 384,000 annual, about 30% of 2005. Lessee… divide by 12, that’s thirty-odd thousand monthly. An 11% gain is only 3,000 houses, and only under contract, not closed, many conditioned on finding a buyer for an existing home. Median new-home price $206,000, down 5.8% for the month and 12% in a year. The worst June since 1982. Hooray.

Then Case-Shiller found marginal increases in home prices in several metro areas. Better than down! Maybe bottoming… maybe. Consider that all indices measure homes that have sold, a tiny fraction of the total, hugely overweighted with distressed sales. My friend Gary Crabtree (appraisal-lifer in Bakersfield, CA) and others around the country explain: distressed resale asking prices have free-fallen to overshoot.

Opinions of value offered to foreclosure resellers have assumed a 2% compound monthly decline for most of three years. In heavily distressed markets, prices down from $350,000 to $150,000, many new listings find auction conditions, bids tens of thousands over ask. Then the lucky winners try to get purchase-loan appraisals, and many fail. “Value” is a theoretical concept in a market with random comparables 25% apart. ”Prices rising” is a meaningless observation until sustained and widespread.

Banking. For two years bankers have sworn that there is plenty of credit, just no qualified applicants. Yes, we want 25% down now, but that’s your problem. Now the truth: the Treasury says that total loans held by the top 15 banks fell by 2.8% in the 2nd quarter, only two with sub-1% gains. How are we going to get solid growth while bankers are determined to reduce lending? We’re not.

The “deleveraging” problem is similar. We borrowed too much as percents of income, assets, and GDP. To improve, if assets, income, and GDP are falling, we must pay off debt faster than they fall. Consider the ultimate consequences of that equation. That’s why the Fed is at zero, wishes it could go negative, and has no inflation worry.

All health care fixes have collided with the mathematic hell of comparative compounding: since 1980 real GDP has grown 120%, and health care spending by 300%, both trends intact today. Mr. Obama’s compassionate error has been to assign top priority to covering everyone, instead of first establishing what we can afford.

I am old enough to remember a doctor coming to our home to treat me. Cadillac coverage, insurance gouging, inefficiency, lawsuits, and heroics all have contributed to the uncontained increase in health spending, but altogether not so much as this: fifty years ago, that physician’s capacity to care for me was largely contained in his black bag and his head. The capacity of medicine today has outpaced our ability to pay.

We have only solved this problem in wartime: the French WWI invention of “triage” to prioritize care during an overload of casualties. Current political posturing condemns that thinking applied to civilians as rationing, or Finish-Off-Granny. However, any solution attempting to satisfy infinite demand will fail versus finite resources. Just math.