April 12. Greece vs US residential real estate

Eurodollars came back from an early deficit to close nearly unchanged Friday.  Last week appeared to have potential to break out to higher rates as tens touched 4% and auctions loomed, but european problems (highlighted by Greece) shifted demand to the safety of the US. (tens closed 3.89). One year euro$ calandar spreads which have pretty much been capped at a level of 150-152 this year threatened to surge as EDZ0/Z1 traded 156.5 Monday, but that sprd slipped back to 150 by Fri.

–A move to higher yields could still occur this week, if concrete steps are announced for Greece.  Catalyst could come in the form of Wednesday’s Retail Sales data, expected +1.2%.  Anecdotal and official reports all point to strengthening retail, due to pent up demand.  However, the large chain stores that reported better sales have all benefitted from competitors going out of business. Walmart has just announced new price cuts, so the lower end is still struggling.

–Though likely an anomoly, China ran a trade deficit last month. However, not open to dispute is the Baltic Dry Freight Index, which is approaching the lower end of the range as defined by March 2009. (trade still weak). http://www.dryships.com/pages/report.asp

–NYTimes warns over the weekend that rates are rising: “Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.”  The article cites mortgage, credit card and auto loan rates.   

Problems in Greece vs US Residential Real Estate  

In thinking about the problems of Greece, the problems are over-indebtedness, a lack of co-operation on the part of taxpayers, a bloated public sector, and now, exacerbating all, much higher rates.  Borrowing rates over 7% are crushing Greece.  Many observers think that guarantees from the EU which will provide lower financing rates are still destined to fail.  How does that situation compare with the US residential real estate market?  It’s over-indebted, borrowers aren’t paying or are walking away, and there is a prospect of rising rates now that the Fed has stopped QE.

Obviously the difference is that the US has figuratively swept the problem under the rug.  We no longer mark loans to market, and the gov’t has guaranteed a huge portion of the real estate market through Fannie, Freddie, FHA.  Europe doesn’t have the same flexibility in shifting risk from financial institutions to the taxpayer.  A rise in rates would be just as detrimental to US real estate as it is for Greece, and PRIVATE lenders won’t lend at current terms.

Even with huge subsidies, the housing market has only stabilized.  From 4/6 Bloomberg: “U.S. apartment rents dropped in the first quarter and the vacancy rate remained at a record as unemployment near a 26-year high limited tenant demand.  Actual rents paid by tenants… declined 1.5% from a year earlier, Reis Inc. said…Vacancies were unchanged at 8%, the highest level since 1980…”  (Also note that in terms of CPI weight, the shelter component including rents and Owner Equiv Rent is 32%).  

–From a study at DePaul, thanks JK …



The point is that a rise in  US mortgage rates, whether driven by concerns about the US’ fiscal position, or better short term economic growth will derail US housing. 

(tangentially related…Nicolas Cage’s Bel Air mansion, once thought to be worth $35 million, failed to sell at foreclosure for $10.4 million)

Posted on April 11, 2010 at 8:08 am by alexmanzara · Permalink
In: Eurodollar Options

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