MolloMarketReport

Consumer Confidence and Housing Race to the Bottom

It was a volatile day today in the market, but while the indexes were down they did bounce off their lows, were up for part of the day and closed only moderately lower. The Standard and Poor’s was closed at 1314.29, down 3.71 or -0.28%. The Dow Jones Industrial Average closed 11,807.43, down 34.93 or -0.29%. The Nasdaq was also lower closing at 2,368.28 which was a drop of 17.46 points or 0.73%. And our two head dragon of inflation / oil and housing / credit were at it again.

One victim in this mess has been the consumer. Consumer confidence fell to a 16 year low. The index was expected to come in at 56.4 instead registered 50.4 down from 58.1 in May. Digging deeper into those numbers we can see the reason why is one side of our two headed beast. Inflation expectations were running at 7.7%! This kind of inflation level would certainly be above the Fed’s comfort level and may reflect the fact that consumers (i.e. normal people) see the economy in much different terms than the official statistics see them. With food and gas making up larger parts of people’s budgets than they are reflected in CPI numbers it is easy to understand why.

Housing was also a big story today as the Case / Schiller index (widely viewed to be the most accurate housing price index) showed a year over year drop of 15.3% and a drop of 1.4% between April and May. Housing figures are notoriously seasonal, so really only the year over year numbers conveys any information of importance. What I would like to see is tracking of those year over year numbers on a monthly basis. For example, if next months year over year comes in at say a 12% drop, then that might be seen as an improvement since it would signal that the rate of decline is improving. It would also take out some of the noise from seasonality. From now on this blog will be tracking that statistic.

The US Senate has passed a $300B bill to rescue the housing market which it believes will be able to help over 400,000 distressed borrowers. The bill would refinance borrowers into a more affordable mortgage, but only if the mortgage holder is willing to accept a write down to a lower loan amount. However, what if the mortgage holders do not wish to write down, or can’t. Many loans have been sliced into CDO tranches with several owners owning different bits and pieces of different loans. The covenant that created the credit derivative could allow a certain number of recasts, but how many or under what circumstances could be a matter of legal interpretation. It could be awhile before things get untangled regardless of Congress’ wishes. The President is vowing to veto the bill; however with an 83 to 9 vote in the Senate his veto will be easily overturned. The House bill seems to have some minor differences, but I doubt they will cause much of a hold up.

In spookier housing news Wachovia has asked Goldman Sachs for mortgage advice. It should be remembered that in 2006 Wachovia purchased Golden West Financial and its mortgage arm World Savings. World was the undisputed king of the Pick-a-Pay Option ARM. They were doing these years before anyone else, and probably had some of the highest volumes of Option ARMs. Many believe that the Option ARMs are the next wave to hit the market. These loans are negative amortization loans, so rather than not paying down principal they actually accrue principal and thus a higher loan balance. However, the World Option ARM will not recast for 10 years unless the loan amount hits 125% of the loan balance. It is possible that a bulk of these loans could recast as the ARMs and Interest Only loans have, but when would be hard to tell. But, if they are asking Goldman for help, trouble could be on the way.

David Mollo

Trackback URI | Comments RSS