BCA Research on the high yield overshoot:
bcaresearch.com
This quote from the article you posted is stunning and says it all, confirmation of my Portland "Pearl District theory" too:
About 30 percent of condominium buyers in Washington and San Francisco and 40 percent in south Florida are obtaining mortgages for investment purposes, says Gregory Leisch, chief executive of Delta Associates, a real-estate research firm.
We will get another look at the purchase index on Wed., but the big story on the buying spree rollover in housing will come in after Super Bowl Sunday on Feb. 6th, when "homebuyers" tend to get active. We shall see if the FOMC rate hike and possible language change meets them with another good uptick in mortgage rates, or if that even matters. Will be crucial in determining if air is coming out of the Bubble, ya think? Looks like the consumer is being subsidized still, so how are lenders making money, margins are disappearing fast?
Do you realize that fed fund rates have been increased from 1.5% in early August to going on 2.5% on Feb. 2nd, and ARM rates (using the MBAA figure) have only gone up from 3.85-3.90 to 4.10-4.17. It's been a combination of foreign central banks heavily buying agencies and shrinking spreads (especially of late), and lending resell and portfolio margins shrinking. Hidden away in a 10-Q of Homestead Mortgage is this boilerplate remark:
On June 30, 2004, in response to current growth prospects for the United States economy, the Federal Reserve Open Market Committee (the "Federal Reserve") raised the Federal Funds Rate 25 basis points in the first of a series of expected moves to increase short-term interest rates. Higher short-term interest rates will increase the Company's borrowing costs, thereby reducing financing spreads (the difference between the yields earned on these investments and the rates charged on related borrowings). Although the effects of rising borrowing costs on financing spreads can eventually be mitigated by ARM security yield increases, interest rates on the Company's borrowings rise (and fall) almost immediately while ARM security yields change slowly by comparison because the coupon interest rates on the underlying loans reset only once or twice a year and the amount of each reset can be limited or capped. Consequently, as increasing short-term interest rates reduce current financing spreads, earnings and dividends will decline in the immediately ensuing quarters before the benefits of ARM security yield increases are fully realized.
It's just amazing how such extraordinary efforts are employed to avoid Judgement Day, whether it's hiring tankers at $10 a barrel for emergency oil shipments, to convincing the BOJ to buy agencies at only 30-35 bps spreads over Treasuries during a FNM crisis. The pendulum on this Emperor wears no clothes nonsense, whether it be non-existent junk and agency spreads to running refineries at max capacity and dangerously injecting water into oil fields to squeeze out a few 100,000 extra bb a day, has just gone way too far, something is going to break. |
