The index of pending home resales increased 8.2 percent from April after a revised 11 percent drop the prior month that was smaller than initially reported, the National Association of Realtors said today in Washington. Economists forecast a 3 percent increase, according to the median estimate in a Bloomberg News survey.

Falling home prices that make properties more affordable may be luring potential buyers into the market even as 9.1 percent unemployment and stringent loan terms hold back a fuller recovery for the industry. Final sales in May, which were at a six-month low, will probably be “the low point of the year,” NAR Chief Economist Lawrence Yun said last week.

“At such depressed levels, any increase is welcome,” Anika Khan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. “But we’re not at a pace that would give us solid activity in the housing market.”

Estimates for pending home sales ranged from a drop of 4.8 percent to an increase of 15 percent, according to 36 forecasts in the Bloomberg survey. Pending sales rose 16 percent from May 2010.

A separate NAR report on June 21 showed sales of previously owned homes, which make up about 96 percent of the market, dropped in May to the lowest level in six months. Purchases decreased 3.8 percent to a 4.81 million annual rate. The median price fell 4.6 percent from a year earlier.

Leading Indicator

Pending home sales are considered a leading indicator because they track contract signings. Purchases of existing homes are tabulated when a sale closes, typically a month or two later.

Following the June 21 report, NAR’s Yun told reporters that home sales should begin to rebound in coming months and that pending sales, based on not-yet-complete data, looked to be up around 15 percent for May.

Today’s report showed an 88.8 index level for pending home sales on a seasonally adjusted basis. A reading of 100 is consistent with the average level of contract activity in 2001, when record-keeping began, and coincides with “historically healthy” home-buying traffic, according to the NAR. The index last rose above 100 in April 2010 before falling two months later to the lowest level since the real estate agents’ group created the index.

The NAR said the May increase was the biggest monthly gain since November.

Western Gain

All four regions showed an increase in contract signings from a month earlier, led by a 13 percent gain in the western U.S.

Lennar Corp. (LEN) Chief Executive Officer Stuart Miller said last week he sees the first signs of “repair” in the market. The third-largest U.S. homebuilder by revenue reported second- quarter profit that beat analysts’ estimates on higher house prices and earnings at its distressed-investing unit.

“While it’s now well-documented that the expected spring selling season of 2011 simply did not materialize, it is beginning to feel like the worst days of the housing market are getting behind us,” Miller said during a June 23 call with analysts.

Housing, nonetheless, is having trouble gaining strength. The S&P/Case-Shiller index of home values in 20 cities fell 4 percent in April from a year earlier, the most in 17 months, the group said yesterday. From March to April, prices dropped 0.1 percent on a seasonally adjusted basis.

Federal Reserve Chairman Ben S. Bernanke said June 22 that “uncertainty” surrounding employment and the broader economy is “affecting people’s willingness to make the commitment to buy a house.”

New-home purchases declined in May for the first time in three months and prices also dropped, a Commerce Department report showed last week. Sales decreased 2.1 percent to a 319,000 annual pace. The median price fell 3.4 percent from the same month in 2010, the biggest 12-month drop since October.

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

A backlog of foreclosures and falling sales indicate prices may decline further, discouraging builders from taking on new projects. Photographer: Joe Raedle/Getty Images

 

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June 27 (Bloomberg) — John Taylor, an economics professor at Stanford University, talks about Federal Reserve monetary policy, the Taylor Rule and prospects for U.S. economic recovery. Taylor speaks with Tom Keene on Bloomberg Television’s “Surveillance Midday.” (Source: Bloomberg)

Home prices probably decreased in April, showing the housing market remains an obstacle for the U.S. recovery, economists said before a report today.

The S&P/Case-Shiller index of property values in 20 cities fell 4 percent from April 2010, the biggest year-over-year drop since November 2009, according to the median forecast of 30 economists surveyed by Bloomberg News. Other data may show consumer confidence held near a six-month low.

A backlog of foreclosures and falling sales indicate prices may decline further, discouraging builders from taking on new projects. The drop in property values and a jobless rate hovering around 9 percent are holding back consumer sentiment and spending, which accounts for 70 percent of the economy.

“Home prices remain incredibly bogged down by foreclosures and weak demand,” said Sean Incremona, a senior economist at 4Cast Inc. in New York. “The picture is unlikely to change much this year. Declining home prices and high unemployment are bad for confidence.”

The S&P/Case-Shiller index, based on a three-month average, is due at 9 a.m. New York time. Survey estimates ranged from declines of 4.9 percent to 3.5 percent. Values fell 3.6 percent in the 12 months to March.

The New York-based Conference Board’s consumer confidence gauge, due at 10 a.m., rose to 61 from 60.8 in May, according to the Bloomberg survey median. Estimates ranged from 55 to 66.7.

Fuel Costs

Some of the improvement probably reflects a drop in fuel costs. The average price of a gallon of regular gasoline fell to $3.57 on June 26, down from a May 4 price of $3.99 that was the highest in almost three years, according to AAA, the nation’s largest auto club.

The projected rise in confidence contrasts with other surveys in which Americans’ moods dimmed. The Bloomberg Consumer Comfort index dropped in the week ended June 19, the first decline in five weeks, and the Thomson Reuters/University of Michigan sentiment gauge fell more than forecast this month.

The Case-Shiller report may show home prices fell 0.2 percent in April from the prior month after adjusting for seasonal variations, the 10th straight decrease, according to the Bloomberg survey.

The year-over-year gauges provide better indications of trends in prices, the group has said. The panel includes Karl Case and Robert Shiller, the economists who created the index.

Shiller told a conference in New York this month that a further decline in property values of 10 percent to 25 percent in the next five years “wouldn’t surprise me at all.”

Fewer Sales

Reports earlier this month showed the housing market is yet to gain momentum. Sales of previously owned homes, which comprise about 94 percent of the market, were down 3.8 percent last month from April, the National Association of Realtors said.

Purchases of new houses dropped 2.1 percent in May, the first decline in three months, according to Commerce Department data. Competition from foreclosed homes is hurting demand for newly built dwellings.

The 1.8 million-unit inventory of distressed homes nationwide that may reach the market would take about three years to sell at the current pace, Daren Blomquist, communications manager at RealtyTrac Inc., said this month.

As house prices decline, owners feel less wealthy and home equity shrinks, making borrowing more difficult.

The Standard & Poor’s Supercomposite Homebuilding index lost 4.4 percent as of June 27 from the end of April, less than a 6.1 percent drop in the broader S&P 500 gauge, which was weighed down largely by concern about the European debt crisis.

Builder Outlook

Some developers expect demand to stabilize following a poor selling season. Lennar Corp. (LEN), the third-largest U.S. homebuilder by revenue, last week said second-quarter sales fell from a year earlier and home orders were little changed, while the average price climbed. The 2010 orders were boosted by a federal tax credit for homebuyers that required contracts be signed by April 30.

“While it’s now well documented that the expected spring selling season of 2011 simply did not materialize, it is beginning to feel like the worst days of the housing market are getting behind us,” Chief Executive Officer Stuart Miller said during a conference call with analysts on June 23.

                    Bloomberg Survey

================================================================
                              Case Shiller   Cons. Conf
                              MOM%     YOY%    Index
================================================================

Date of Release              06/28    06/28    06/28
Observation Period           April    April      June
----------------------------------------------------------------
Median                       -0.2%    -4.0%     61.0
Average                      -0.2%    -4.0%     61.0
High Forecast                 0.4%    -3.5%     66.7
Low Forecast                 -0.5%    -4.9%     55.0
Number of Participants          17       30       70
Previous                     -0.2%    -3.6%     60.8
----------------------------------------------------------------
4CAST Ltd.                    ---     -4.1%     61.5
ABN Amro Inc.                -0.1%     ---      61.0
Action Economics              ---      ---      63.0
Aletti Gestielle SGR          ---      ---      60.0
Ameriprise Financial Inc      ---      ---      61.5
Banesto                       ---     -4.1%     61.7
Bank of Tokyo- Mitsubishi     ---      ---      59.0
Bantleon Bank AG              ---      ---      60.0
Bayerische Landesbank         ---     -4.0%     62.0
BBVA                          ---     -3.9%     60.8
BMO Capital Markets           ---     -4.4%     62.0
BNP Paribas                   ---      ---      58.0
BofA Merrill Lynch Resear     ---     -3.9%     61.0
Briefing.com                  ---     -3.8%     59.0
Capital Economics            -0.4%    -4.1%     65.0
CIBC World Markets            ---     -4.2%     62.5
Citi                          ---      ---      61.0
Commerzbank AG                ---     -4.0%     60.0
Credit Agricole CIB           ---      ---      62.0
Credit Suisse                 ---     -3.8%     55.0
Daiwa Securities America      ---      ---      62.0
DekaBank                      ---      ---      61.5
Desjardins Group              ---     -3.9%     61.0
Deutsche Bank Securities      ---      ---      62.0
Exane                         ---      ---      61.5
Fact & Opinion Economics      ---     -3.5%     59.0
First Trust Advisors          ---      ---      59.9
FTN Financial                 ---      ---      60.0
Helaba                        ---      ---      60.0
HSBC Markets                 -0.2%    -3.9%     60.0
Hugh Johnson Advisors         ---      ---      60.5
IDEAglobal                    ---     -4.0%     60.0
IHS Global Insight            ---     -3.9%     61.0
Informa Global Markets        ---      ---      61.0
ING Financial Markets        -0.2%    -3.9%     63.0
Insight Economics             ---     -3.9%     59.0
Intesa-SanPaulo               ---      ---      63.0
J.P. Morgan Chase            -0.1%    -3.8%     60.5
Janney Montgomery Scott L    -0.3%    -4.8%     62.0
Jefferies & Co.               ---      ---      62.0
Landesbank Berlin             ---      ---      58.0
Manulife Asset Management     ---      ---      61.0
Maria Fiorini Ramirez Inc     ---      ---      62.5
MF Global                    -0.5%    -4.2%     60.5
Moody’s Analytics             ---      ---      59.0
Morgan Stanley & Co.          ---      ---      64.0
Natixis                       ---     -4.0%     61.0
Nomura Securities Intl.       ---     -3.9%     59.8
Nord/LB                       ---      ---      60.0
Parthenon Group              -0.4%     ---      59.7
Pierpont Securities LLC       ---      ---      64.0
PineBridge Investments        0.4%     ---      61.5
Raiffeisenbank Internatio     ---      ---      62.0
RBC Capital Markets           ---      ---      62.0
RBS Securities Inc.           ---      ---      59.5
Scotia Capital                ---      ---      59.0
SMBC Nikko Securities        -0.1%    -3.8%     63.0
Societe Generale             -0.2%     ---      66.7
Standard Chartered           -0.3%    -4.8%     61.0
State Street Global Marke     0.1%    -3.6%     60.1
Stone & McCarthy Research     ---      ---      62.5
TD Securities                -0.5%     ---      60.0
UBS                          -0.2%    -3.9%     62.0
UniCredit Research            ---     -4.0%     61.0
Union Investment              ---      ---      61.8
University of Maryland       -0.4%    -4.1%     60.0
Wells Fargo & Co.             ---      ---      59.3
WestLB AG                     ---     -4.9%     60.5
Westpac Banking Co.           ---      ---      60.5
Wrightson ICAP                0.0%     ---      63.0
================================================================

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

www.fha-rates-today.com

The draft legislation, ‘‘FHA-Rural Regulatory Improvement Act of 2011’’, was discussed today in a House Subcommitte hearing entitled “Legislative Proposals to Determine the Future Role of FHA, RHS and GNMA in the Single-and Multi-Family Mortgage Markets”.

In a formal release, the House Financial Services Committee’s Republican Chairman Spencer Bachus touted the bill as a coming at an important time in history, “This hearing and legislative proposal come at a pivotal moment, as the Committee debates the future of the mortgage finance system, and in particular, government guarantee programs that could expose taxpayers to significant losses.”

Industry advocates were quick to respond to the proposal as a move in the wrong direction.  Michael Berman, Chairman of the Mortgage Bankers Asssociation, explained that down-payments are not the best indicator of payment default. Berman said,  “Recently, policymakers have focused on required minimum down-payments as a measure of what factors are necessary to create sound lending practices. While down-payment certainly impacts default risk, other compensating factors, particularly full documentation of conservative loan products, are more influential mitigating factors.”

Berman went on to share the MBA’s opinion on the matter, saying, “The current minimum down-payment of 3.5 percent for borrowers with credit scores of 580 or above and 10 percent for borrowers with credit scores of 579 and below permits borrowers to have appropriate “skin in the game” while providing credit-worthy homebuyers with an option for entering the purchase market. Maintaining the existing minimum down-payment requirements, while requiring strong underwriting standards, such as full documentation and income verification, allows borrowers to responsibly become, and stay, homeowners.”

The MBA isn’t the only industry group to oppose the down-payment hike. Ron Phillips, President of the National Association of Realtors, shared similar sentiments in his prepared remarks. “NAR strongly opposes increasing the down-payment for FHA. The correlation between down-payment and loan performance is significantly less important than the linkage to strong underwriting, which FHA continues to have. FHA’s foreclosure rate remains less than conventional mortgages, so we don’t believe changes to the down-payment would do anything but disenfranchise many creditworthy homebuyers”.

Not all feelings were mutual though. The Cato Institute, a D.C. think tank devoted to limiting government participation in free markets, believes a combination of poor credit history and low down-payment requirements  have resulted in “tremendous losses” for private mortgage investors and the FHA. In its prepared testimony Cato said, “Given the relatively “safe” features of an FHA loan, we do not have to guess about loan characteristics driving the borrower into default. We know it is equity and credit history that drives losses.”

Cato outlined a variety of FHA program reforms it believes must be implemented immediately to ensure taxpayers are exposed to minimal risk.  These reforms include:

Immediately require a 5 percent cash down-payment on the part of the borrower.
• Require FHA to allow only reasonable debt-to-income ratios.
• Restrict borrower eligibility to a credit history that is equivalent to no worse than a 600 FICO score.
• Require pre-purchase counseling for borrowers with a credit history that is equivalent to a FICO score between 600 and 680.
• Require a 10 percent down-payment, immediately, for borrowers with a credit history equivalent to below a 680 FICO score.

Borrower eligibility should also be limited to borrowers whose incomes do not exceed 115 percent of median area income, so as to mirror the requirements of section 502(h)(2), as amended, of the Housing Act of 1949.

Besides raising the down-payment requirement, the proposed legislation would also cement  the reduction of current “high-cost” loan limits. The maximum loan limits for Fannie Mae, Freddie Mac, and FHA are currently $417,000 with a temporary limit of up to $729,750 for one-unit properties in high-cost areas. The temporary high-cost area limit was first set in the Economic Stimulus Act of 2008, and was extended in subsequent legislation. It expires on September 30, 2011. Without the extension, the high-cost loan limit ceiling would revert back to the limits established under the Housing and Economic Reform Act (HERA), a maximum of $625,500 in high-cost areas.

The Obama administration already stated in its white paper that it will not support another extension of the higher loan limits, but the MBA believes the higher limits should be maintained until the housing market stabilizes and the private market shows more signs that demand has returned. MBA  urged such legislation to be enacted well before October 1, 2011, in order to avoid certain market disruptions that will, because of rate locks, occur within 90 days of the current limits expiring. The National Association of Home Builders echoed that perspective. 

NAHB First Vice Chairman Barry Rutenberg, a home builder from Gainesville, Fla.,  told the House Financial Services Subcommittee, “Counties across the country would see their loan limit reduced by tens of thousands of dollars, placing further downward pressure on home prices and impairing the ability of borrowers to use FHA-insured mortgages to purchase new homes,”

To keep FHA, Fannie Mae and Freddie Mac loan limits at their current levels, NAHB called on Congress to support H.R. 1754, the Preserving Equal Access to Mortgage Finance Programs Act, a bipartisan measure sponsored by Reps. Gary Miller (R-Calif.) and Brad Sherman (D-Calif.).

The draft legislative proposal will require a full Committee vote before it is formally introduced to be voted on by the entire house.  Such measures would not be expected to pass the Senate.

The Merrill Option Volatility Estimate, or MOVE, index fell to 74.80 basis points on April 25, within 0.7 of its lowest level since July 2007, just before credit markets seized up and led to the worst financial crisis since the Great Depression. The index is down from a 12-month high of 125.2 on Dec. 15.

For all the concern over the $1.3 trillion budget deficit and a warning from Standard & Poor’s that the U.S.’s AAA credit rating is in jeopardy, Treasuries posted the best returns in eight months during April, gaining 1.15 percent, according to Bank of America Merrill Lynch indexes. Investors were reassured by Fed Chairman Ben S. Bernanke, who said he’s in no hurry to raise interest rates and that he will keep reinvesting proceeds of maturing debt held by the central bank in bonds.

“Volatility is showing the market is not worried about a massive yield spike” said Laird Landmann, a managing director at TCW Group Inc., which oversees $65 billion in fixed-income assets. “The market has given the Fed latitude to be deflation fighters rather than inflation fighters right now.”

The Fed began a second round of asset purchases that’s been dubbed quantitative easing, or QE2, in November after buying $1.7 trillion in securities through last year to help prevent deflation by increasing the amount of money in circulation. The Fed has been buying about $75 billion of Treasuries a month in a program that will end next month.

Falling Yields

The U.S. is counting on the confidence of domestic and foreign investors to remain high as it sells record amounts of debt to finance the deficit.

Yields on Treasuries have fallen to an average of 1.81 percent from 5 percent in mid-2007 even though the amount of marketable Treasury securities has risen to $9.14 trillion from $4.34 trillion, Bank of America Merrill Lynch indexes show.

The Treasury Department — which is scheduled to auction $72 billion of 3-, 10- and 30-year bonds at its so-called quarterly refunding in coming days — got a boost last week as commodities tumbled and investors sought the safest assets.

The yield on the benchmark 10-year note fell 14 basis points, or 0.14 percentage point, to 3.15 percent, the lowest level on a closing basis since Dec. 7, based on Bloomberg Bond Trader Prices. The price of the 3.625 percent note due February 2012 rose 1 6/32, or $11.88 per $1,000 face amount, to 103 31/32.

The yield was 3.16 percent today at 9 p.m. in New York.

‘Left Behind’

Yields have plunged from the highs this year of 3.77 percent on Feb. 9 on concern rising energy and food costs will restrain the economy after U.S. gross domestic product expanded at a 1.8 percent annual rate last quarter. That’s the slowest pace since the three months ended June 30.

“Our economy is far from where we would like it to be, and many people and neighborhoods are in danger of being left behind,” Bernanke said in a speech in Arlington, Virginia, on April 29. “The broader economy is in a moderate recovery.”

The central bank will keep its target rate for overnight loans between banks in a range of zero to 0.25 percent through year-end, according to the median estimate of 80 economists surveyed by Bloomberg News. A separate poll shows they expect 10-year yields to remain below 4 percent in 2011.

Fed Driving Volatility

“The primary driver of volatility right now is Fed policy,” said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, one of the 20 primary dealers that trade with the Fed. “The hurdle to a hike seems high because of the growth picture and the hurdle to ease is high because of inflation concerns.”

Volatility averaged 90.75 basis points in the five years before June 2007, as measured by the MOVE index, which tracks price swings based on over-the-counter options maturing in 2 to 30 years. The index then soared to a record 264.6 following the collapse of Lehman Brothers Holding Inc. in September 2008. It rose to 84.1 percent on May 6.

While the debt market may be sanguine, the world’s biggest bond investor said last week that relatively low yields on Treasuries fail to compensate for the risks of the securities.

‘Abdication of Responsibility’

“There should be little doubt that simply holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility,” Bill Gross, who runs the $240.7 billion Pimco Total Return Fund, wrote in his monthly investment outlook letter. Bond investors “are being shortchanged by 1 percent to 2 percent annually compared to historical norms,” he wrote.

Gross, who is also the co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co., began to bet against U.S. government-related debt in March and made cash the largest holding of the Total Return Fund.

S&P put a “negative” outlook on the U.S. AAA credit rating April 18, saying there’s a one-in-three chance of a downgrade unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt. Congress is debating raising the government’s $14.29 trillion limit, which the Treasury predicts will be reached this month.

Demand Sustained

So far, there’s been no sign of waning demand. Treasury has received $2.97 in bids for every dollar auctioned this year, little changed from last year’s record $2.99, Treasury data show. The U.S. has sold $713 billion of notes and bonds this year, compared with $812 billion at this time in 2010.

Purchases are being helped by commercial banks buying U.S. government securities at the fastest pace since July, or $68 billion over the past two months, boosting their total stake to $1.683 trillion, Fed data show.

The Fed has also been the dominant buyer of Treasuries sold at recent auctions, making the central bank the world’s biggest holder of U.S. government debt. More than 36 percent of the Treasuries the Fed bought in March were issued within the previous 90 days, up from 15 percent in November, according to Bank of America Merrill Lynch.

International demand is also picking up. The Fed’s holdings of U.S. government debt on behalf of foreign central banks and institutional investors jumped to $2.691 trillion as of May 4, up 3.58 percent from this year’s low of $2.598 trillion on Jan. 19. That compares with no change in the previous 11 weeks.

Bearish to Neutral

The most bearish primary dealer, Morgan Stanley, as well as Goldman Sachs Group Inc., has dropped recommendations to bet against Treasuries as economic growth slows.

“We have recently turned neutral from bearish on bonds,” James Caron, head of U.S. interest rate strategy at Morgan Stanley in New York, wrote in a report last week.

Goldman Sachs, also based in New York, abandoned its call for investors to set up trades that would profit from a drop in five-year notes, Francesco Garzarelli, the firm’s London-based chief interest-rate strategist, wrote in a report.

“Right now we’re keeping monetary policy accommodative,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview on Bloomberg Television May 5. Asked whether a third round of quantitative easing was under consideration, Rosengren said that “nothing’s off the table, it depends on economic conditions, so we have to do whatever makes sense given our outlook for the economy.”

A bond market measure of inflation expectations the Fed uses to help determine monetary policy was at 2.93 percentage points, compared with 2.82 percentage points on March 23. It reached a 10-month high of 3.28 percentage points in December. The five-year, five-year forward break-even rate projects what the pace of consumer price increases may be, beginning in 2016. It averaged 2.78 percentage points over the past five years.

“Until there are significant worries about inflation and a bigger pickup in growth the Fed is under no pressure to move,” said William Cunningham, co-head of global active fixed-income in Boston at State Street Global Advisors, which oversees $2.1 trillion.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

current FHA 5/1 arm rates at 3.5%

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FHA streamline refinance with no appraisals require a 2% drop in interest rate per FHA guidelines.

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Mortgage Rates for both FHA and Conforming have been low due in large part to the unrest in the Middle East and the Japan disaster.  The Federal Reserve Board announce yesterday they would be selling mortgage backed securities they bought as part of the initial stimulus program to keep mortgage rates low.  They are going to sell up to $10 billion/month of mortgage backed securities held in reserve.  This had little effect on market mbs pricing and mortgage rates held steady.  The 30 year fixed FHA mortgage rates are ranging from 4.25% – 4.75%.