Rate Watch #746 Competitive Devaluation
October 29, 2010
by Dick Lepre
[email protected]
www.loanmine.com
| Product | Rate | Points | Est. APR* | |
|---|---|---|---|---|
| CONFORMING LOAN PRODUCTS (Loans less than $417,000) | ||||
| 30 Year Fixed conforming | ||||
| 4.000% | 1.00 | 4.14% | ||
| 4.25% | 0.00 | 4.21% | ||
| 15 Year Fixed Conforming | ||||
| 3.5% | 1.00 | 3.76% | ||
| 3.625% | 0.00 | 3.74% | ||
| High-balance CONFORMING LOAN PRODUCTS (Loans greater than $417,000 and less than Hi-Balance amount for your county) | ||||
| 30 Yr Fixed Hi-Balance | ||||
| 5.125% | 0 | 5.19% | ||
| 4.75% | 1.0 | 4.91% | ||
| 15 Yr Fixed Hi-Balance | 4.000% | 0 |
4.15%
| |
| 3.75% | 1 | 4.02% | ||
* 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
1st look at 3rdQ 2010 GDP is +2.0%. This is the projected annual growth based on the 2nd Q-3rd Q growth. This important datum is comprised of some knowns (Consumer Spending) and some unknowns (investments, exports, imports). I would not be surprised if this subsequently gets revised down. (The August revision to 2ndQ 2010 knocked it down from +2.4% to +1.6%.) If you examine the insides of the data it is not a pretty picture. Comparing 3rd Q 2010 to 2ndQ2010 Personal income was up 2.1% 3rdQ compared to +4.4% 2nd Q. Disposable income (after taxes) was up 1.5% in 3rd Q compared to +4.4% in 2nd Q. Real Disposable Income (inflation adjusted) was +0.5% in 3rd Q compared with +4.4 in 2nd Q%.
Even if GDP really was +2.0% that is not going to solve our fiscal crisis or the present unemployment situation.
The Fed's preferred Inflation Gauge showed tame inflation and will be part of next week's justification for QE2 and monetary policy which may well set us into an inflationary period.
Initial Jobless Claims last week were 434,000. This is the lowest number since July. Core Durable Goods Orders was -0.8% last month. Overall was +3.3%. Expectation for core was +0.2%. It may be the case that businesses got ahead of themselves in thinking that the recession was over and the economy recovering. New Home Sales were 307,000 (annualized) above consensus and previous. In the bigger picture, when this peaked in July 2005, New Home Sales were 1,380,000 (annualized). Existing Home Sales in September rose to 4.53 million annualized. This is still below the level of a year ago when tax credits were subsidizing the market.
III) The Technicals
The daily is bearish. The weekly is bearish. The monthly is bullish. The daily is 15 days into its bear cycle. The pattern at close yesterday showed that if we do not rally soon and the weekly goes lower there is little technical support. Anything about the techs must be offset with the knowledge that the Fed is pursuing QE buying and can slap Treasury yields down.
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
The fact is that we are in a bad spot. Even if BEA's +2.0% GDP growth is accurate, economic growth is dreadfully small. We will have more enormous deficits and we are having them despite Keynesian efforts to spur the economy with increased government spending and despite an already finished round of QE which resulted in, more or less, having banks park their excess reserves with the Fed. The election cycle only serves to highlight the fact that there is no economic leadership. Snarky commentary about the administration, Congress, business, and the banking industry really serves to make the average guy out there simply want to stay home and drink.
To Ranger outfielder Josh Hamilton who, earlier this week said that he smelled weed in the outfield here in SF during WS game one I have these word of advice, "Dude, if you can smell weed then you are playing too deep." Actually there is a pungent smell in that ballpark and it is garlic fries. If you are more familiar with BBQ than garlic fries you might mistake their smell for weed.
V) Competitive Devaluation
You may have recently heard the term "competitive devaluation." "Competitive devaluation" refers to nations simultaneously trying to devalue their currency to increase their exports and thus their GDP. The G20 met and discussed this and promised that they would not allow this to happen. Treasury Secretary Geithner made a few speeches in which he suggested that China needed to move its pegs so that their currency was more valuable. On the surface this would make US exports cheaper.
This is really a brain-dead way of looking at a large problem. China is smart enough to recall what happened to Japan in 1985. In 1985 there was a multinational agreement called the Plaza Accord. The Plaza accord devalued the dollar v. the Yen. It was an agreement between the U.S. , the U.K, France, Germany and Japan to have their central banks work together. This was the global economy in action. The attempt was to narrow the U.S.-Japan trade gap. Money flowed into Japan and generated asset bubbles, a burst and two decades of economic stagnation.
Now we have clueless legislators in D.C. clamoring for economic sanctions against China if they do not increase the value of the Yuan v. the dollar. That is not going to work. Some of this is politics. The administration perceives that it owes debts to labor unions and protectionism is generally geared to preserve union jobs. A Republican administration might be following up on phone calls from businesspeople and similarly call for sanctions or protectionism to protect their bottom lines. Protectionism is unlikely to work so devaluation of the dollar seems to be the way to close the trade gap.
Economist Steve Hanke suggests that the dollar be fixed to the Euro and that East Asian counties also fix their exchange rates relative to the dollar. Watch this video in which Steve explains why. Fixing exchange rates provides less prerogative regarding fiscal policy. You can't have fixed exchange rates and suddenly create another $1.5 trillion of money supply.
The trade deficit is offset by a capital account surplus. The formula is Savings - Investment = Exports - Imports. If our savings is not equal to our investments then a trade deficit is a mathematical necessity. This works as long as people are willing to invest here. If we lower the trade gap and savings stay the same, there will not be enough money for investments. There is always a capital account surplus which equals the current account deficit.
The biggest difference between the situation in China and that which existed in Japan is that China has a substantial opportunity to grow its domestic production. When the Japanese real estate bubble burst there was no way that Japan could expand exports fast enough to avoid stagnation. Also the Japanese tend to be savers rather than spenders so there was little opportunity to expand domestic demand.
This is a complex issue and what I have written here barely scratches the surface.
If you have something to add to this discussion please post a comment on the blog.
Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
[email protected]
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
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