Rate Watch #740 Downsizing Government

September 17, 2010
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

Product	Rate	Points	Est. APR*
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
	4.25%	1.00	4.28%
	4.375%	0.00	4.45%
15 Year Fixed Conforming
	3.75%	1.00	4.01%
	3.75%	0.00	3.88%
High-balance CONFORMING LOAN PRODUCTS (Loans greater than $417,000 and less than Hi-Balance amount for your county)
30 Yr Fixed Hi-Balance
	4.875%	0	4.73%
	4.5%	1.0	4.66%
15 Yr Fixed Hi-Balance	4.125%	0	4.26%
	3.875%	1	4.15%

* conforming loan limits for 2010 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now means "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county.) You can find the new High-Balance Conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by, but not limited to, the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining, and cash out (if refinancing).

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II) Fundamentals

Core CPI was flat in August. Overall was +0.3%. While overall is what affects a consumer's purchasing power, core is of greater macroeconomic importance. It filters out the jitter in food and energy prices and gives a much better idea of where prices are going in the longer term.

Initial Jobless Claims last week were 450,000. This was below consensus and previous. Core PPI was +0.1%. Overall PPI was +0.4%. Industrial Production is down and below consensus. Capacity Utilization is down and just above consensus. These data are relics of the economy of 70 years ago. Both Import Prices (ex-oil) and Export Prices (ex-ag) were up. Retail Sales ex-auto were +0.4% in August. Business Inventories were +1.0% in August. Basel III outline is done. This is an international set of standards regarding the capital of banks. In light of the currently distressed state of many banks, these regulations will be phased in from 2013 to 2019.

 

III) The Technicals

The daily is bearish and likely has at least another week to go in its cycle, the weekly is bearish, and the monthly is bullish.

For those who are not longtime readers, the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

I want to call attention to the Consumer Metrics Daily Growth Index (graph below). This appears to indicate that in the past week we started to see a bottom form for discretionary Consumer Spending. Rick Davis of Consumer Metrics offered this observation "I also think that we may be seeing the bottom form, but I expect any recovery this time to be much more drawn out than what we experienced during the 2008-2009 event. I base the slower up-slope on two factors: 1) the lack of available direct consumer stimuli this time around, and 2) people in general are going to be very cautious this time around about returning to their old spending patterns. The newer "frugal" paradigm won't be abandoned quite so soon."

V) Greenspan

There was an article this week in the Wall Street Journal with some interesting comments from Alan Greenspan. Greenspan seemed to be saying that Keynesian deficit spending (the stimulus) did not achieve the anticipated results. His exact words were,“I’m not saying the stimulus is not working, I’m saying it’s working far less than anyone anticipated.” He indicated that now the government needed to get out of the way and allow business to fuel the economy. He then said that what we need is higher taxes because of the deficits. Clearly this last point is the debatable.

What was most telling about what he said was his claim that the “most effective” stimulus would be an increase in stock prices. He also added that if housing prices drop, “all bets are off.” On the surface these statements are a bit strange. Equity prices will go up if more folks believe that we really are out of recession and in a period of growth albeit slow growth. If suddenly we were overcome by euphoria and started buying equities then indeed the fear and uncertainty would abate and people would start buying stuff and GDP would start rising.

The picture which I see is one of equity prices which have not yet factored in the likelihood of an extended period of very flat economic growth. Greenspan's points to higher taxes as the best of a bad set of choices indicated that growth will be slow. Higher taxes slow GDP. Period. Slower GDP means that the chance of equity values increasing is diminished. Outgoing head of the Council of Economic Advisors Christina Romer estimate that for every tax increase of 1% of GDP there is a 3% downturn in GDP.

The though that popped into my head is that it is strange that Greenspan is so confused. Maybe what is wrong is not the tax side of fiscal policy but the spending side.

There are a lot of folks who believe that we need a lot less government and a lot less government spending. One group with has been consistent on this is the Cato Institute. They present a work-in-progress about downsizing government at www.downsizinggovernment.org/. This is not a vague statement about downsizing but one which makes suggestions as to what parts of each agency should be eliminated. This is not entirely about eliminating the role of government but, to some extent, moving power from the Federal government to states. That, in itself, is daunting.

The people need to make sensible decisions about what they want from the government and how much they are prepared to pay for it. The expense of Medicare and Social Security alone is growing rapidly and almost all of the money in the trust funds has already been spent. I would offer that the Federal government has at least three avenues: 1) increase tax rate and risk harming GDP and possibly not increasing tax revenues 2) create money to deal with the deficits (the traditional deficit as well as Medicare and Social Security) 3) start downsizing to reduce expenses.

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643

Comments

[BobW.]

I believe that a return or clear signs of beginning to return to fiscal responsibility will inspire confidence and thus attract investment. Our government's current "strategy" of spending money like a teenager with a new credit card from some rich uncle is not lost on "investors". Our financial system has been running on inertia for some time now. That will end! When? How?

Omama speaks of fixing our education system or we will fall from first place. We fell from first place (per capita GDP) 40 years ago. We need to wake up. We can so it! But first we must admit we have a problem.
BobW.

[JimBjr]

The fact that you are still quoting Greenspan as if he should be listened too shows that you still don't get it and probably never will.

[Dick Lepre]

Unless I suddenly forgot what I wrote I was dismissing what Greenspan said as his "being confused." His statements made no sense.