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Virginia Mortgage News - June 17 2005 |
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Mortgage rates have behaved very well, low-fee 30s staying about 5.625% as long Treasury rates completed a return to 4.10%, “V”-ing out of sub-4.00% ground for the umpteenth time since 2003. This latest excursion below 3.90% was the temporary artifact of end-stage short-covering by rate bears and equally last-ditch buying by economic bears. Both extremes paid the price for error.
The business media are so completely preoccupied with Housing Bubble coverage that it’s hard to find straight stories on the economy.
(The bubble stories all say that people in and near housing sound like tech stock players circa 1999; maybe, but the media are in a perfect replay of their Y2K coverage. This week’s bubble-booby prize to the New York Times: its huge, front-page biz-section blast on the surge in interest-only mortgages since 2001 failed to mention that there weren’t any available before 2001 -- quarter-century-old products like equity lines of credit and option ARMs excepted.)
The economy is behaving in ways different from the cyclical patterns 1945-1990, and some we do not yet understand (the trade deficit), but the differences should not be mistaken for weakness. The changing market for jobs tops that list.
A “weak job market” has been the mantra of this post-bubble (stocks, that is) era: soggy growth in “non-farm payrolls”, wage growth barely even with inflation, 65% of Americans saying jobs are hard to find, and domestic employment suffering from overseas competition and outsourcing.
Any pattern so profound should stand out in related data; if it does not, then we may misunderstand. In the most surprising story of 2005, a surge in tax revenue has badly discredited the weak-job-market assumption.
The January forecast for the 2005 federal defect was $427 billion; it is now falling faster than forecasters can revise, likely below $350 billion. In May 2004 alone the deficit was $62 billion; this year $35 billion. The improvement is entirely due to soaring revenue, more than offsetting the federal spending binge and war costs.
You can’t get federal revenue without income to tax. Something very powerful and healthy is going on under the radar. No, it’s not enough to change the out-years’ entitlement over-promise, but it’s very good news. Why, Art Laffer and his Tooth Fairy tax-cut Curve are celebrities again.
It’s not just federal tax receipts, either. After four awful years, state and local budgets will swing to $50 billion aggregate surplus this year on a take-off of sales and corporate income tax revenue. California’s deficit will fall from $8.6 billion to $3.3, and New York City of all places will enjoy a $3 billion surplus.
Those in the first ten rows shouting, “Housing Bubble, property taxes!”, please sit down and shut up. Rising home values have not yet caused a spike in property tax revenue, as assessed valuations are widely delayed and tax receipts limited by statute or referendum.
The economy is in better shape than we have thought. The trade deficit is worrisome, but ancient mathematics linking internal deficits to external ones are in question as the internal deficit is falling to half the range of the external. In a globalized world, our trade deficit may do odd things, but not be trouble.
The Fed thinks it is too easy for a healthy economy, will tighten to 3.25% on June 30, to 3.50% on August 9, and I think is a good bet to reach 4.00% by Christmas.
That would mean a 7% prime rate, a shock to those carrying big balances on their home equity lines, and LIBOR- and T-bill-indexed mortgages adjusting to 6.75% or more. Fans of option ARMs deceived by the lagging COFI index will be surprised as today’s 2.515% value moves above 3.00% by year-end, and the loans begin to adjust above 6.00% next year.
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