Commentary: The mortgage market is eerily quite this morning - trading activity is thin and sporadic.
The Commerce Department reported earlier today that homebuilding took a giant leap forward in June, with housing starts posting a 14.6% gain from May levels. The June gain is the strongest since the beginning of the year. Construction of single-family homes increased 9.4% while work on multifamily homes, such as townhouses and apartments, climbed 30% -- up a whooping 100% from this same time last year. Building permits, an indicator of future construction activity, posted a 2.5% gain for the period.
While the numbers of the housing sector look impressive on their face - in reality they represent only a fractional improvement off of their all-time historical lows. Mortgage investors shrugged this data off completely - since nothing in the numbers yet indicates the housing sector is doing anything more than bouncing along the bottom.
(The following is a repeat from yesterday's commentary.)
The stalemate in Washington continues to draw mortgage investors' undivided attention. The majority of credit market participants expect a dramatic "last-second-save" by Washington - with both political parties crowing about their success in diverting financial catastrophe for the nation. The probability is growing that meaningful and sustainable deficit reduction plans will be largely sacrificed in order to avoid a major national credit default.
The "so what" factor here is worth noting.
Without major deficit spending reform we will find ourselves as a nation asking our creditors to lend us more money - so we make next month's payment to them on the debt we already owe. Just because we have maxed out our national credit cards - spending more money than we make - is certainly no reason for us not to get an approval to increase our credit limit. And it is certainly no reason for our creditors to quit lending money to us at preferential rates. Right?
Perhaps such rationale is justifiable in the mind of those desperately trying to avoid the political heat implementing meaningful deficit spending reduction plans could/will generate during the upcoming 2012 campaign season. But for global investors in our sovereign debt -- the risk of an ultimate credit default by the United States will grow at an uncomfortable pace - and as that risk grows - the trend trajectory of interest rates on everything from Treasury debt obligations to mortgages will surely rise as well.
Just because the credit ceiling is raised does not mean that the bomb has been successful defused - the fuse will just not be burning quite as fast as it is right now. Here is why. Should the United States loose its coveted AAA credit rating by way of an unthinkable credit default - capital from around the globe will almost surely still flow into dollar denominated assets like Treasury debt obligations and mortgage-backed securities for a period weeks or months following our debt default. Realistically, where else is this capital going to go? We are at least one of the top four prettiest girls - and the argument could easily be made that we are still the prettiest girl - at the global credit markets dance.
Be patient - be disciplined - and play it by the numbers.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
