Sep. 27, 2007: Last week the rate cut, why haven’t mortgages improved?

Sep. 27, 2007: Last week the rate cut, why haven’t mortgages improved? Rob Chrisman

A wife invited some people to dinner. At the table, she turned to their six-year-old daughter and said, “Would you like to say the blessing?” “I wouldn’t know what to say,” the girl replied. “Just say what you hear Mommy say,” the wife answered. The daughter bowed her head and said, “Lord, why on earth did I invite all these people to dinner?”

“The greater thing in this world is not so much where we stand as in what direction we’re going,” said Oliver Wendell Holmes. What direction are rates going? That’s what makes a market, but many may be disappointed that the Federal Reserve’s interest rate cut won’t translate into lower monthly mortgage payments and a revival of the housing market. Mortgage rates won’t stimulate demand if underwriting criteria is too stringent, or property values have gone down. Some analysts feel that any action by the Fed may have little impact because this housing crash was caused by overpriced housing, not mortgages. (Home prices probably will fall on a year-over-year basis for the first time since the Great Depression of the 1930s, and originators in California and New York are hoping that conventional loan limits don’t actually decline in their states.) And investors are seeming to view the rate cut last week as inflationary instead of helpful, thus pushing rates up temporarily.

In that vein, mortgage demand decreased 2.8% last week. Purchase applications decreased 7.3% but refinance applications increased 3.3%. The market index is 6% higher than four weeks ago, and 16% above its year-ago level (purchases are 1% lower than four weeks ago, and 11% above a year ago, refinances are 17% higher than four weeks ago and 21% above a year ago). And this week locks appear to be lower than last, aside from FHA loans, possibly due to the continuation of a general slow down in the housing market seen over the past few weeks. Despite the steepening in the curve, ARM production has not increased dramatically versus fixed-rate loans.

Yesterday Durable Goods orders fell 4.9% in August after rising 6.1% in July, weaker than expected. Ex-transportation orders were down 1.8% over the month following a 3.4% rise in July. The Treasury’s 2-yr Note auction went fairly well, and the 10-yr yield has crept back down into the low 4.60’s. Today, however, it might move higher. The final revision to the 2nd Quarter Gross Domestic Product (GDP) came out as expected (+3.8%), but Jobless Claims were surprisingly strong. People filing for unemployment actually declined 15,000 to 298,000, and the 4-week moving average is actually -9,750! How can we have a slow economy when the job market appears to be so strong?

Reilly went to trial for armed robbery. The jury foreman came out and announced, “Not guilty.” “That’s grand!” shouted Reilly. “Does that mean I can keep the money?”