No loans in 'Wonderland'

Flickr image by Robert Whitehead.

In a considerable achievement, Treasury and mortgage rates held last week's improvement: the 10-year T-note near 3.5 percent, mortgages 5.375 percent.

To have held during one of the thinnest trading weeks of the year, in which a butterfly wing-beat can blow up any market; in the week before the Treasury's next borrowing wave ($109 billion new cash next week); stock market antigravity; and interpretation of all incoming data as "recovery" -- quite an achievement.

That last upward force on rates -- anticipation of recovery -- is the most powerful of all at the end of any recession cycle. The decline in long-term rates from two tries at 4 percent 10-year T-notes since May, and trading now as though headed for lower -- that pattern says that real players in actual markets disbelieve the daily cheerleading, with the Fed, White House and Treasury being indistinguishable from CNBC.

This week, housing got the optimistic pom-pom treatment. Yes, new construction starts improved again in July, but stabilizing, not really growing -- builders shifting to low-end homes, the half-million annual aggregate less than half of health, one-quarter of 2005. Today the stock market took off again on the National Association of Realtors' corner-turning report of a 7.2 percent gain in sales of existing homes, to 5.2 million annualized in July.

Everybody wants to see the turn and nobody wants to read the contrary data. Today's aggregate sales numbers are indistinguishable from last July's, and one-third off the 2005 peak. Median prices were distinguishable, 15 percent lower. Purchase loan applications did not increase enough in July to support the sales numbers.

NAR said that 31 percent of the sales were distressed (as opposed to zero in 2005); however, a mortgage-industry survey of real estate brokers found that 64 percent of sales were distressed in one way or another. The July 1 underwriting guidance by mortgage insurer MGIC, measuring conditions in 76 metro areas, found 29 "softening or weakening," one improving: in Rochester, N.Y., soft conditions were "stabilizing."

The heart of the data-interpretation struggle: Are we in recovery, or are we stabilizing temporarily in unsustainable conditions?

I think the supply of credit is central, and the best overall evaluation is the Fed's quarterly Senior Loan Officer Survey. ...CONTINUED

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