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Rate Watch #750 Faith Based Economics

November 29, 2010
by Dick Lepre

Product Rate Points Est. APR*  
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
4.375% 1.00 4.53%  
4.5% 0.00 4.56%  
15 Year Fixed Conforming
3.75% 1.00 4.01%  
3.875% 0.00 3.98%  
High-balance CONFORMING LOAN PRODUCTS (Loans greater than $417,000 and less than Hi-Balance amount for your county)
30 Yr Fixed Hi-Balance
5.375% 0 5.45%  
5.00% 1.0 5.16%
15 Yr Fixed Hi-Balance 4.5% 0
4.125% 1 4.40%  

* 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).

To apply on-line go to: http://www.loanmine.com/LoanApplication.  Make sure that your pop-up stopper is disabled.

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II) Fundamentals

Initial Jobless Claims: Actual 407K, consensus 442K, previous 439K
New Home Sales: Actual 283K, consensus 314K, previous 307K
Durable Orders: Actual -3.3%, consensus -0.3%, previous 3.5%
Durable Orders ex - Transportation: Actual -2.7%, consensus 0.4%, previous -0.4%
Personal Income: Actual 0.5%, consensus 0.4%, previous -0.1%
Personal Spending: Actual 0.4%, consensus 0.6%, previous 0.2%
PCE Prices - Core: Actual 0.0%, consensus 0.1%, previous 0.0%

3rd Q GDP 1st revision moved GDP to +2.5%. Just over half of that is due to inventory increases at factories and in wholesale distribution. Greater than 80% of the 2.5% gain is from inventory buildup and government spending. The Consumer Metrics Daily Growth Index, while still negative, has been moving up for about one month. Consumer Spending is the only thing likely to get GDP going strong and consumers are showing signs of modestly increased confidence and predisposition to spend. The unemployment rate is what gives many people pause.





III) The Technicals

The daily is narrowly bullish. While the stochastic shows bullish there is a limit to the upside objective. The weekly is bearish and, while the monthly is still bullish, it is showing sign that the secular bull market is probably in the later half of its cycle. In the long run (months) we are headed for higher Treasury yields and mortgage rates.

I must point out that Jim Grauer (StoMaster) has started updating his comments about the bond tech almost every day. Check it out at StoMaster. This is complex stuff. You need to keep in mind that this is a technical analysis which deliberately blinds itself to economic fundamentals and looks only at the data (30 year Treasury bond futures). This technical analysis is presented here because I believe that it supplements analysis of fundamentals. At a time such as the present when there is gigantic uncertainty and statistical volatility the value of technical analysis is diminished.


IV) Analysis

FNMA will keep the current conforming and high-balance conforming loan limits in place for loans funded before September 30, 2011. After that, the high-balance conforming will be cut back (as word fail me here) to the permanent temporary limit of $625,500.

A list of the high-balance limits by county may be found here by selecting the state from the pull-down and typing the county.


V) Faith Based Economics

"Faith" is a confident belief in a truth which is not based on intellectual proof. We usually use the word "faith" in reference to religion. This faith is the private belief of the individual members of a religion. The religions are organized and have things such as prayer, churches, ceremonies and structure.

My intent here is not at all to discuss religion but to note only that, from my perspective, the believers in economic theories are engaging in faith when they frame their ideas. Worse yet faith in economic beliefs becomes tangled with faith in one of the two political parties or, more loosely, with liberal or conservative disposition.

Liberals tend to place their economic faith in Keynesian thinking. Keynes simply made the point that it is occasionally necessary for the government to engage in deficit spending to get the economy going. In this sense, it may well be the case that whatever notions Keynes had were applied with the 2009 stimulus and are no longer needed. Instead, the true believers state that the problem with the 2009 stimulus was only that it was not large enough.

Keynesian thinking runs afoul of reality because is that it assumes that there is a predictable multiplier effect for government spending. A multiplier effect occurs when money which the government spends gets once again or money that individuals earned was not taken in the form of taxes and those wage earners spent that money and the folks who they gave it to spent it again. Keynes assumed that the money which the government spent would lead to cascading spending which would lead to increased GDP and increased tax revenues which would pay for the spending. If you want more details, read this Wikipedia article on the marginal propensity to consume. The stimulus bill (The American Recovery and Reinvestment Act of 2009) failed to achieve it goal because the marginal propensity to consume was lower than expected. Presumably, this was because banks, business and consumers lacked the confidence that this would be effective. Banks did not lend because of their weakened state and consumers did not spend because they were worried about their jobs. Businesses were stuck in the middle.

At the other end of the spectrum are conservatives and "supply side economics." They believe that everything good that happened since 1980 was a consequence of Reagan's tax cuts.

Whether someone is a Keynesian or a supply-sider that person is guided by ideology not by something scientific or anything approaching absolute. Ideologues provide theories which take what I have called "faith based economics" and make them sound convincing enough to motivate politicians and regulators and to sell to the public. The result is much less than ideal. Instead of recognizing and admitting that our ability to forecast the change in output given a set of changes in the inputs we persist in acting as if we understand what is happening.

Even if we are 100% objective in our economic decisions it is still extremely difficult to know what, at present, is the best way to get employment and GDP growing more than they are at present. If we base our decisions on political predisposition then the chance of ending the period of high unemployment is minimized.

The fact is that fiscal policy is left to Congress and the President. If they make decisions for short-term political purposes rather than long-term economic health then that is what we will have. A perfect example at present is what to do about the Bush tax cuts. Since we really do not know what the best choice is it makes sense to me to extend them, as is, for one year and stop thinking that somehow in the next few weeks Congress is going to come up with a long-term solution.

I believe that what we need is fiscal sanity. We are getting by for the time with mega-deficits only because interest rates are so low. Higher interest rates will cause a dramatic rise in the cost of debt service. We need to start stabilizing the federal government's spending and its tax rates.

The economy is extremely complex. Managing it requires flexibility and not intransigent beliefs.


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





Dick Lepre
1400 Van Ness Avenue
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