Mortgage Matters

GROUNDBREAKING: Housing starts fell in May, just as analysts had expected. More building permits were issued than most had expected. I have a convoluted explanation that's probably wrong.

Starts fell 2.1 percent in May from the previous month, and they fell 24.2 percent from the previous May. To give you raw numbers, starts were at a seasonally adjusted annual rate of 1.474 million last month, and at a rate of 1.944 million in May 2006. The big decline shows the extent of the housing slump.

Permits are a different story. They were issued last month at a seasonally adjusted annual rate of 1.5 million units. That's up 3 percent from April and down 21.7 percent from May 2006.

You have to view these numbers in this context: There are a lot more houses for sale, new and used, than there are buyers. Supply is far higher than demand, and house prices have been dropping. No wonder housing starts are down.

Here's a stab at an explanation for the rise in permits: Builders are having trouble selling the houses that they're building or already have completed. Yet the same builders own vacant land that they were planning to build on. Now they know that it's going to be a long time before there's enough demand to warrant building houses on the vacant land that they own.

So they want to sell the land. And if the vacant lots have building permits, the land is more valuable. That's my guess at why permits are up while completions are down.

Blogger Calculated Risk says: "This report shows builders are still starting too many projects, and that residential construction employment is still too high." In the comments section of that posting, someone points out that permits for single-family houses are way down, and permits for multifamily buildings haven't fallen as much. Another commenter observes that "it may be signalling a shift towards renting from buying/owning." Sounds about right.

Bob Walters, chief economist for Quicken Loans, says: "Long-term interest rates are conducive to housing, making home ownership a reality for many people, but until the inventory of unsold homes dissipates somewhat, home builder sentiment and therefore the number of housing starts will remain in their current range throughout 2007."

WACKY YIELDS: When bond yields skyrocket, as they've done in the last two weeks, there inevitably is an overreaction. They always climb too high, then fall back. Not always all the way back, but at least part-way back. That's what happened late Friday.

The yield on the 10-year Treasury finished at 5.16 percent Friday afternoon, down from 5.23 percent the previous day, and a tenth of a percentage point off Tuesday's 5.26 percent. Freddie Mac's required net yields -- another indicator of mortgage rates -- have taken an up-and-down ride, too. One Freddie Mac yield that I track rose to 6.63 percent Tuesday and fell to 6.48 percent Friday afternoon. It's up 4 basis points so far this morning.

Bankrate's weekly rate survey is conducted on Wednesdays. Last week, the average 30-year rate was 6.84 percent, the highest in 11 months. If that survey were to be taken today, the average 30-year fixed would be about 6.75 percent, or 9 basis points lower. My hunch -- and my hunch isn't necessarily any better than yours -- is that bond yields and mortgage rates won't drop much more. I think they'll stabilize around 6.75 percent, and they're more likely to rise than to fall.

FLOATERS: I got a question this weekend from someone in Las Vegas who is interested in buying a floating home. Do I know any lenders?, the reader asked. No, I don't know of any in Las Vegas. But if you dream of owning a floating home, check out my article on financing floating homes, written five years ago. It sounds like a cool lifestyle, huh?

SUBPRIME WOES: "A few weeks ago," The Wall Street Journal reports, "the market for bonds backed by risky home loans looked like it was calming down. Now, problems are quickly mounting." Moody's has cut the ratings on $3 billion worth of securities backed by subprime mortgages.

The downgrades "represent less than 1 percent of the over $400 billion in subprime mortgage-backed bonds that were issued in 2006," the Journal helpfully notes.

In other news, just 3 million people filed bankruptcy this week, only 1 percent of the U.S. population. Move along, nothing to see here ...

JUNK MAIL: Fortune writer Jon Birger writes about a direct-mail solicitation he received from GMAC Mortgage. What's remarkable is the scare tactics that GMAC uses -- implying that Birger's mortgage lender, Washington Mutual, is among the mortgage companies that are "heading for financial trouble because they have made too many questionable loans."

First of all, WaMu is not in financial peril. Second, GMAC credit rating is "several notches below that of WaMu," Birger notes.

CALENDAR: The only compelling economic reports this week come out Tuesday morning, when the Commerce Department counts housing starts and building permits issued. I tend to agree with Calculated Risk, who says: "There is no way the news will be 'good' for housing. If starts decline - as expected - that means more weakness in the housing sector. And if starts unexpectedly increase that just means more supply and more weakness to come."