KeNo's Housing and Economic Portal: Tuesday June 16 Housing and Economic stories

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Bond-market rout lifts mortgage cost - (www.google.com/hostednews/ap) The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market. But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation. That's the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk. Kick-starting the economy requires higher spending, but rising rates mean fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won't be able to afford. To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much. Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported. "If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity," said economist Ed Yardeni, who runs his own investment firm. "Even worse, they could abort any necessary recovery in home sales and prices." Yardeni coined the term "bond vigilantes" in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn't doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time. So what has set off the vigilantes this spring, at a time when the consumer price index is down at an annual rate of 0.7 percent?

The Summer Home Bust - (www.slate.com) Good riddance to those cottages on the Cape, those cabins in the Adirondacks! The summer-home real estate market has crateredIn recent years, I've approached the summer with something resembling dread. Another three months of having to explain that, no, we won't be spending much time at our place on Cape Cod, seeing as how we don't have one. Sadly, my parents didn't have the foresight to purchase that adorable house in Tuscany for $600 when they happened upon it in 1958. Nor did my ancestors arrive on these shores soon enough to establish a compound on the Outer Banks. Bummer. In the late boom, the lack of a second home marked you as a downscale outlier. Historically, only rich Americans had second homes. But as easy credit flowed like a mighty stream, second-home ownership trickled down. In 2005, the combined sales of vacation and second homes (many of which are bought either as vacation homes or to rent as vacation homes) accounted for 39 percent of total home purchases. In 2006, a record 1.07 million vacation homes were sold, according to the National Association of Realtors. The typical vacation-home buyer that year had a household income of $102,200—well-off, but hardly rich. And so it became déclassé to stick around, especially when there were so many exciting places to go. Each Friday, the New York Times" Escapes" section presented a new locale where readers should think about setting up a homestead, each more implausible and inconvenient for New Yorkers than the next: A-frame houses near Lake of the Woods in Minnesota, lakeside developments in Kansas, mountaintop retreats in North Carolina. But with people underwater on their primary homes, unemployment rising, and lenders melting down, the air has come out of the second-home bubble. Some of the hardest-hit areas of the real estate bust—Florida, Phoenix, Las Vegas—are second-home havens. The real estate market in the Hamptons is as still as the Sargasso Sea. In 2008, sales of vacation homes and investment properties nose-dived 50 percent from their bubble-era peaks. This spring the Times folded "Escapes" as an independent section. Hallelujah! The virtues of second-home ownership were not something I ever grasped. I grew up in Michigan, where many of our neighbors had a cottage or cabin "up north"—the vast stretch of the state that was even colder than where we lived. These primitive structures could be used for summer pleasures, like swimming in freezing lakes and swatting away flies the size of hummingbirds, and for utterly mystifying winter pursuits, like ice fishing and cross-country skiing. My parents were displaced New Yorkers. Our primary winter sports were reading and brooding. As an adult, after moving to the suburbs and assuming the yoke of homeownership, I discovered that the concept of a second home made even less sense. Finding a plumber who will return your phone calls within 72 hours is a once-in-a-lifetime thing. Finding two? Impossible. The fair Connecticut town in which I reside is blessed with a lovely waterfront that offers golf, tennis, and sailing. The PPC (pools per capita) ratio is close to 1. And yet, come June, to my befuddlement, many of our neighbors shutter their homes and flee to other summer hot spots. It's like living in a seaside resort in Jamaica and buying a time share in Aruba because you need a place to go for Christmas break. Upon learning of these strange habits, I had the same reaction that I did when I read that the Ingalls family left their little house in the big woods for the prairie because Pa thought there were too many people around. When you live in a place that's away from it all, what are you getting away from?

Minnesota Governor To Begin "Unallotments" - (Mish at globaleconomicanalysis.blogspot.com) Three cheers for the few willing to make a step in the right direction. Minnesota's governor is one of the few. Please consider Pawlenty gets official go-ahead to begin making budget cuts. Let the cutting begin. Minnesota's top state finance official on Thursday formally notified Gov. Tim Pawlenty that the state will not take in enough money to pay its bills over the next two years, setting the stage for the governor to start using his executive power to unilaterally cut spending. In a letter to Pawlenty, Management and Budget Commissioner Tom Hanson wrote that, as expected, the spending he and the Legislature approved for 2010-11 would exceed the state's revenue collections by $2.7 billion. "Therefore, at the beginning of the next fiscal year (July 1), it will be necessary to reduce allotments of appropriations or transfers," Hanson wrote. Under state law, Pawlenty can't start to cut spending until the commissioner notifies him that the state faces a budget shortfall. Hanson's letter satisfies that requirement. Pawlenty has said he will start making spending reductions, officially known as "unallotments," as soon as possible after July 1 to protect the state's credit rating and give him the most possible options. Let The Cutting Begin: Cutting services rather than raising taxes is the right thing to do. Pawlenty is looking to cut health and welfare spending, college and university appropriations and state agency budgets. That's a good start, with start being the operative word. Eliminate would be a better word for many state agency departments.

Housing Math: Bottom Seekers + Neglect = Repetitive Foreclosures - (Mish at globaleconomicanalysis.blogspot.com)The bottom will come. I guarantee it. When it does, no one will want to buy. In the meantime knife catching is fraught with danger as flippers get washed out one by one. Wash, Rinse, Repeat: Please consider the following from "MG" who writes: Mish, I am familiar with the house at 755 Eames Way in zipcode 02050 because it is just up the road from me. It's currently in its 3rd foreclosure since January of 2007. The family that purchased it in June of 2005 ($635k 95%LTV) bailed in December of 2006. A group of realtors came in and bought the home from $544,500 with the intent for a quick flip. That failed and they went into foreclosure. HSBC sold the home to a local investor for $440K. The investor was able to secure a $417K loan (conforming limit) from First Horizon. Shortly thereafter in early Spring of 2008 the same investor obtained a 2nd loan from Bank of America for $125K and apparently took the money and ran. The home has been empty since December of 2006. Offers now are sub $200k.

Kennedy bill would make employers provide care – One minor problem, bill doesn’t say where money comes from - (news.yahoo.com/s/ap) Employers would be required to offer health care to employees or pay a penalty — and all Americans would be guaranteed health insurance — under a draft bill circulated Friday by Sen. Edward M. Kennedy's health committee. The bill would provide subsidies to help poor people pay for care, guarantee patients the right to select any doctor they want and require everyone to purchase insurance, with exceptions for those who can't afford to. Insurers would be supposed to offer a basic level of care and would be required to cover all comers, without turning people away because ofpre-existing conditions or other reasons. Insurance companies' profits would be limited, and private companies would have to compete with a new public "affordable access" plan that would for the first time offer government-sponsored health care to Americans not eligible for Medicare, Medicaid or other programs. It all adds up to sweeping changes in how America's health caresystem operates and aims to achieve President Barack Obama's goal of holding down costs and extending health coverage to 50 millionuninsured Americans. It's already been known that Kennedy's health committee was planning to pursue most of the concepts outlined in the draft of the bill, called the "American Health Choices Act." But it's the first actual bill language to circulate since Congress began working on Obama's health care overhaul. Congressional and interest groups officials cautioned that the language in the document was not final. "It's a draft of a draft. HELP Democrats are still actively talking amongst themselves and their Republican colleagues," said Anthony Coley, spokesman for the Health, Education, Labor and Pensions Committee that's chaired by Kennedy, D-Mass. Kennedy's committee is scheduled to begin voting on legislation later this month, as is the Senate Finance Committee, which has jurisdiction over tax issues. The House also will get to work soon to meet Obama's goal of passing legislation through both chambers by August, so the president can sign a bill in fall. The draft bill sets up a system of state-level "exchanges," where people would go to shop for insurance plans and which would also oversee the marketplace. The federal-state Medicaid program for the poor would be greatly expanded. Insurers would be required to pay for preventive care, and a new Medical Advisory Council would make recommendations on required health care benefits that would take effect unless Congress rejected them all at once — similar to how military base closures are handled. The draft doesn't address how this would all be paid for. That remains a major sticking point.

Obama plan had muted impact on US mortgage prepays - (www.reuters.com) Neither President Obama's housing program to boost mortgage modifications and refinancing nor rock-bottom loan rates triggered the expected early mortgage bond repayment wave in May, analysts said. Wall Street firms have predicted for months that prepayments would leap as the programs kicked in and mortgage rates sank to record lows. Bond holders, who invest based on prepayment forecasts, have endured extreme volatility in recent weeks as Treasury yields spiked and swiftly wiped out refinancing opportunities. Those holding bonds backed by mortgages with low loan rates could be stuck holding these lower-yielding securities longer than planned. Hedging that risk, they often sell Treasuries or swaps, furthering the spiral higher in yields and loan rates. "These prepayment rates were below our expectations," wrote JPMorgan analysts Thursday night. "We had looked for a greater degree of reactivity, given low rates in March/April and the implementation of the Obama plan. Clearly, the plan is having little impact so far." Average 30-year fixed home loan rates were 4.86 percent in May and 4.81 percent in April, a steep drop from the rates of about 6 percent a year earlier, according to Freddie Mac. "Credit-impaired borrowers continue to be subject to the tight underwriting standards that the Obama plan is supposed to have eased," JPMorgan said.

Alabama County Set to Halt Services, Shut Buildings Over Budget – (www.bloomberg.com) Alabama’s most populous county is preparing to stop road maintenance, close courthouses and shutter services for the elderly after a court struck down taxes that pay for about 35 percent of its budget. Jefferson County, which includes Birmingham, released a plan to cut $52 million from its budget as it appeals the ruling against its business and occupational taxes to the Alabama Supreme Court. Without that revenue, the county has said it is at risk of running out of money as soon as this month. The loss of the tax money was another blow to a county that has been struggling to avoid bankruptcy since last year, when Wall Street’s financial crisis caused its interest bills to soar on more than $3 billion of bonds. The proposed cuts, released today by county Commission President Bettye Fine Collins, would slash deeply into the government’s services and also include closing a nursing home for the indigent, declaring a moratorium on enforcing zoning and littering laws, and scrapping local development contracts. To contact the reporter on this story: