Jack Hirsch's Blog

Americans are feeling better about their budgets right now, raising the possibility of a full economic recovery.

According to a University of Michigan and Reuters, Consumer Sentiment rose for the fifth straight month in June.

Consumer Sentiment is now at its highest levels since September 2008, the month in which Lehman Brothers failed, Fannie Mae and Freddie Mac were nationalized, and the global financial crisis is believed to have peaked.

Rising confidence levels are important to the economy — and to housing –because a confident consumer is more likely to make the big-ticket purchases that propel the economy forward. 

This includes buying new homes.

That said, the Consumer Sentiment Survey has its flaws. 

For one, the survey’s sample set includes just 500 families.  This is hardly a cross-section of America.  Secondly, when people feel better about their finances, it doesn’t always lead to additional consumer spending — it could lead to more saving.

What people say they’ll do and what they actually do can be two very different things, but if consumer spending does increase in the months ahead, expect home sales to benefit on the willingness of families to “take more chances” and expect mortgage rates to suffer on concerns for inflation.

Mortgage backed securities (MBS) prices continue to rally higher (rates lower) as weakness in the stock market (DOW down 150pts) is lifting MBS markets as money flows out of equities and into fixed income assets. Market participants note the price rally may continue this week as MBS are likely to benefit from a brief respite in government supply and the Fed’s two scheduled purchases of Treasuries. There is a lull in the Treasury auction schedule until they resume with 2yr, 5yr & 7yr notes on June 23-25. MBS may also garner support from traders who base their strategies on technical analysis of charts and historical data. The 14 day stochastic oscillator, which measures the closing price of a security relative to its highs and lows during a particular period, indicates prices are poised to halt their recent declines. The Empire State general business conditions index fell to minus 9.4 from a minus 4.6 last month as sales and inventories declined, showing the economy is still months away from a sustained recovery. The outlook for the next six months climbed to the highest level in almost two years as the drawdown in goods on hand clears the way for factories to ramp up output. Regional and national purchasing manager surveys have shown a declining rate of contraction in recent months, but actual improvement will not be evident until current new orders pick up and destocking comes to an end. International holdings of long term U.S. financial assets, a safe haven for foreign investors during the global financial crisis, rose a net $11.2 billion compared to $55.4 billion in March. Foreigners were net buyers of equities, but turned sellers of U.S. coporate bonds and agency debt. The key topic among Foreign invetors remains the U.S. commitment to a strong dollar.

This week provides investors information on the housing market and manufacturing, but the most significant economic data released will be the monthly inflation reports. The week begins with the Empire State manufacturing index, a survey of factory executives from New York, New Jersey and one county in Connecticut and the earliest measure of regional manufacturing. Also Monday, the Treasury International Capital report details long term investment inflows from foreign investors. Tuesday the Producer Price Index (PPI) comes out, which focuses on the increase in prices for goods used to produce finished products. Housing starts and building permits provide a view of the housing market and construction industry, both expected to be awful. Rounding out a busy Tuesday is Industrial Production and Capacity Utilization figures. Consumer Price Index (CPI) is the most closely watched inflation report and will come out on Wednesday. The CPI looks at the price change for finished goods sold to consumers, while the core rate excludes volatile food and energy prices. Information on mortgage applications from the Mortgage Bankers Association is due out also on Wednesday. Thursday we get Jobless Claims, Leading Economic Indicators and the Philadelphia Fed Index, all important barometers of the economy, but ultimately the Treasury’s announcement of the size of their next round of debt offerings will be the primary focus of the day. Friday there are no economic reports due out but it is “Quadruple Witching” day, when all cash and futures contracts expire along with the indexes themselves. Tendency is for an extremely volatile day in the equity markets.

Information provided from http://www.tbwsratealert.com/MarketCommentary.aspx

When finances are tight, homeowners are often forced to choose between making home repairs right away, and putting them off until finances improve.

Some repairs, though, become more expensive if not tackled on the double.  The hard part is knowing which fixes those are.

In this 5-minute piece from The Today Show on NBC, a Consumer Reports editor talks about important, must-make-them-now home repairs, including:

• Re-sloping soil for runaway rainwater
• Replacing curled and cracked roofing shingles
• Sealing damaged vinyl siding
• Replacing soft wood
• Treating mold issues — both major and minor

Maintaining a home preserves its long-term integrity and can help support resale value, too.  Not every minor fix must made today, but left unchecked, some minor fixes can turn into major ones — and that’s when costs can pile up.

Mortgage backed securities (MBS) prices are sharply higher in active trading as demand at yesterday’s 30yr bond auction helped ease concern that international investors will slow purchases amid record U.S. debt sales and after release of this morning’s economic reports. Indirect bidders, an investor class that includes foreign central banks, bought 49% of the bonds on offer yesterday, the biggest percentage since 2006. Japanese Finance Minister said his contry’s confidence in U.S. debt is unshakable. Japan is the second largest U.S. creditor with $687 billion behind China, with $768 billion. The next auctions of Treasuries are set for June 23-25, when 2yr, 5yr & 7yr notes will be sold. U.S. import prices rose 1.3% in May, for the third straight month and the largest increase since July last year, reflecting the increasing cost of oil that threatens to undermine the economic recovery. Prices of imported goods, compared with a year earlier, dropped 17.6%, the biggest decrease since 1982. Prices excluding fuels climbed 0.2% to end a long string of declines, while being down by 5.85% on an annual basis. There are early hints of inflation pressure as commodity prices have been on the rise. The Consumer Sentiment index edged higher 0.3 to 69.0, showing little improvement and some concerns over inflation. The expectations component, which has been driving measurements sharply higher for the last two months, actually fell 4pts, the first decline since February. Inflation expectations rose, which typically appears when coming out of recessions, certainly reflecting higher prices at the gas pump. Crude oil fell from $72.68 a barrel, a 7 month high, to $71.27 a barrel after a record plunge in European industrial production prompted speculation that bets on an economic recovery are premature.

Information provided from http://www.tbwsratealert.com/MarketCommentary.aspx

Mortgage backed securities (MBS) prices opened lower, but have since turned positive after release of economic data that was at best luke warm.

The DOW is up 100pts in early activity. Traders continue to believe that long term interest rates are headed higher on concern surging budget deficits and a falling dollar will prompt investors to reduce holdings of U.S. fixed income assets, like MBS. Crude oil prices climbed over $72 a barrel today with increased global consumption outlook amid signs the recession is bottoming out. Retail sales rebounded moderately in May, up 0.5%, first time in three months with the gain related to higher gasoline prices and shoppers seeking bargains from ailing automakers. Retail sales on a year ago basis in May were down 9.6% and show little sign of an underlying rebound in spending. Jobless claims fell 24K to 601K, fewer than forecast and the lowest level since January, from a revised higher 625K the prior week as businesses are slowing staff reductions. The improvement is clearly evident in the 4 week moving average, a less volatile measure, which fell to 621,750 from 632,250; its lowest level since February confirming global expectations that U.S. payroll contraction has peaked. Business inventories fell 1.1% in April following a 1.3% decline in March indicating that businesses were not anticipating better conditions, however May appears to have a much less weak month so watch for a pivot in inventory data as retail sales increase. According to the RBC CASH (Consumer Attitudes and Spending by Household) Index consumers economic enthusiasm faded this month as the jobless rate reached a 26 year high, gas prices climbed daily and the intial fervor for the government’s economic remedies waned, even though consumer expectations continue to show improvement. Despite current financial woes increasing numbers are starting to believe the worst is behind them. 1 million option ARMs will reset higher in the next four years, with 750,000 adjusting in 2010 and 2011 and the peak coming August 2011 when 54,000 loans recast. The deliquency rate for payment option ARMs originated in 2006 is soaring to 42.44% from 23.26% in the last year. For 2007 loans, the rate went from 10.1% to 35.25% on loans 60 days or more past due. U.S. foreclosure filings reached 321, 480 properties last month, up 18% from a year earlier. One in 400 U.S. households received a filing last month.

Information provided from http://www.tbwsratealert.com/MarketCommentary.aspx

Tighter mortgage guidelines since late-2008 are forcing home buyers to make bigger downpayments.  Anecdotally, the change has led to a surge in buyers taking gifts of cash from family members.

If you’re among those accepting a cash gift from family, it’s important to know that you can’t just deposit the money in your bank account. 

There is a proper way to accept a cash gift and it requires 3 distinct steps:

1. Complete and sign an acceptable gift letter
2. Document the gifter’s withdrawal of funds with teller receipts
3. Document the giftee’s deposit of funds with teller receipts

See, mortgage lenders pay close attention to gifts-for-downpayments.  For one, lenders have to make sure that downpayment cash is “clean” (i.e. not laundered).  And, secondly, they want the gift to really be a gift and not a loan-in-disguise.

This is why lenders will often require that a signed, dated letter accompany the home loan application. 

As an example:

I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property].

This is a gift — not a loan — and there is no expectation of repayment.

Signed,
[Signature of gifter]

To further appease lenders, gift recipients should make sure that gift funds are not commingled at the time of deposit.  If the gift is for $12,000, for example, the bank’s deposit slip should indicate that a $12,000 deposit was made — nothing more, nothing less. 

Don’t add a random $50 check to the deposit, in other words.  If you have a separate deposit to make, make it as a subsequent transaction with its own receipt.

It’s also worth noting that gifting funds between family members can create both legal and tax liabilities.  If you’re unsure about how donating or receiving a gift may impact you, call or email me directly.  If I can’t help you with your questions, I can refer you to somebody that can.

Mortgage backed securities (MBS) prices opened sharply lower (rates higher) as demand for better yielding assets increases amid rising confidence in the global economy. The monthly rollover took place overnight for FNMA securities switching the current coupon from June to July.

The government will sell $19 billion of 10yr notes today after demand was stronger than average, 2.82 bid to cover ratio, at yesterday’s 3yr note auction. Foreign investors purchased 44% of the total as the government relies on them more to sustain record borrowing. The budget deficit is projected to increase to $1.85 trillion for the year, equivalent to 13% of the nation’s economy. Crude oil prices rose above $71 a barrel for the first time in seven months on stockpiles dropping and speculation the dollar will extend its decline as investors turn from fixed income assets, like MBS, to other assets classes including commodities seeking an inflation hedge. The dollar fell on speculation central banks around the world may try to diversify their reserves away from the U.S. currency. The average 30yr fixed mortgage surged highest since November, offsetting low home prices and buyer incentives to push mortgage applications to the lowest level since February, threatening to deepen the housing slump and sideline prospective home buyers. According to the Mortgage Bankers Association’s weekly survey the purchase index gained 1.1% while the refinancing gauge fell 12% as the jump in borrowing costs discourage refinancing. The U.S. trade deficit widened in April as exports dropped 2.3%, the lowest level in three years as worldwide demand contracted further. The drop in exports reflected reduced demand for engines, machinery and metals. Exports to Japan plunged to the lowest level since 1994. Imports decreased 1.4%, led by declines in fuel, drilling equipment, computer accessories and toys. On a positive note, a higher level for imported consumer goods suggests that businesses believe that the consumer sector will be rebounding in the coming months. At 11am pt the Fed releases the Beige Book, the report on economic conditions used at the upcoming FOMC meeting, and its impact on MBS markets can be dramatic. Also at 11am pt, the Treasury releases the monthly budget report for May, an account of the surplus or deficit of the government. May typically shows a moderate deficit, however April posted a record $20.9 billion deficit when surpluses existed for 25 years.

Information provided from http://www.tbwsratealert.com/MarketCommentary.aspx

Mortgage backed securities (MBS) prices opened strong and have continued to trade higher (rates lower) as investors believe yields may have peaked, citing technical analysis showing the increase losing momentum, which may spur demand at this week’s Treasury auctions.

Chain store sales according to ICSC-Goldman were down 0.8% , the lowest reading since early May, while Redbook reports a plunge of 4.3% citing cooler weather and the prior months stimulus check burst of spending fading. Wholesale inventories fell a steep 1.4% in April, as distibutors tried to cut excess supply to better reflect decreasing sales. Today’s figure was larger than expected and follows a revised lower 1.8% decrease in March and indicates that firms are still in deep drawdown mode, but given the prospect of economic recovery, should help to boost future production and employment as firms restock to meet demand. Risk premiums have fallen as investors continue to search for higher yields; risk premiums on “junk” bonds have fallen to their lowest level since September 26.

Information provided from http://www.tbwsratealert.com/MarketCommentary.aspx

Mortgage backed securities (MBS) prices are lower – rates are higher. Higher rates may deepen the housing slump and sideline consumers planning to refinance or but their first home. The combination of an improved economic outlook, rising budget deficits and an 11% drop in the dollar over the last 3 months are potentially inflationary and the catalyst for higher rates. A burst of inflation could sap demand just as the economy is starting to right itself after the biggest contraction in 5 decades. Gasoline prices are up $.54 since May 1, which removes over $70 billion from consumers annual spending borrower. The DOW is down over 100pts, but fixed income assets are not benefiting.

Information provided from http://www.tbwsratealert.com/MarketCommentary.aspx

When it comes to controlling pests, bugs and insects in the home, chemical deterrents are a common and effective remedy. 

Recently, however, because of environmental and safety concerns, electronic methods are growing in favor. Pest control chemicals can be very dangerous to humans.

Often, an electronic pest repellent is less effective than a similar, home-wide chemical treatment.  This is because of how electronic pest repellents work.

Rather than dosing pests with poison to kill them, the electronic devices work by emitting high-frequency soundwaves to disrupt insect communication patterns.

The soundwaves may also disrupt mating and reproduction.

There are a number of “name-brand” products for electronic pest control.  Among the more popular is Pest Offense, a plug-in device that retails for $30 and which has sold over 4 million units.  Black & Decker and Sunbeam have products in the space, too.

Electronic pest control isn’t perfect, but it’s safe for humans, pets and the environment.  It can also be less expensive than traditional pest control treatment.