For the week of February 8, 2010 – Vol. 8, Issue 6

INFO THAT HITS US WHERE WE LIVE The Pending Home Sales Index recovered from its November slump, increasing 1.0% in December, putting it 10.9% over its level of a year ago. National Association of Realtors chief economist Lawrence Yun sees “…a broad improvement over year-ago levels. December activity was the fifth-highest monthly tally in two years.” The slump was attributed to the rush before November to grab the tax credit set to expire at the end of that month.

We now know the tax credit was extended to buyers who can sign a contract by April 30 and close on the home by June 30. It’s also been expanded, adding a $6500 credit for repeat buyers to the $8,000 credit for first timers. The NAR’s Yun estimates 2.4 million households should take advantage of the credit this year.

The NAR also released their adjusted overall outlook for this year and next. They estimate existing home sales will grow from 5.19 million in 2009 to 5.66 million in 2010 and 5.7 million in 2011. They see new home sales growing from 375,000 in 2009 to 446,000 in 2010 and 637,000 in 2011. They believe prices have bottomed, projecting a 3.4% hike in the median price for existing homes to $179,800 this year and then a 4.3% rise to $187,500 in 2011. New homes should go up 3.7% this year to a $221,300 median price and then 4.7% in 2011 to $231,700.

>> Review of Last Week

STILL NORTH OF 10,000… Last week, stocks took investors on a wild ride, but when all was said and done, the venerable Dow remained defiantly above 10,000. Investor concerns focused mostly on a “sovereign debt crisis” in Europe. Basically, Portugal had trouble selling its treasuries. Then, Spain, whose 19% unemployment is way worse than any European country except Latvia, raised its deficit forecasts. Finally, people questioned if the Greek government has the fiscal discipline necessary to pay back its loans. European markets tanked and Wall Street roller-coastered.

Investors also aren’t completely sold on our own recovery. The problem of course is jobs, the most lagging of all economic indicators. Weekly initial jobless claims rose by 8,000, a bit worse than expected. Then Friday’s January employment report showed a loss of 20,000 jobs, when a 13,000 gain was expected. But hey, the unemployment rate fell to 9.7%! Average hourly earnings were UP 0.2% for the month and UP 2.0% over last year. Also, total hours are up at a 1.8% annual rate in the last three months. This works out to about 200,000 jobs a month, showing there’s a growing demand for labor, which companies are meeting by increasing hours. Needless to say, they can’t keep that up indefinitely.

Now for some really good news. Personal income was UP 0.4% in December and personal consumption rose 0.2%. Over the past three months, real inflation-adjusted consumer spending is UP at a strong 3.6% annual rate. Not surprising, given that in the last nine months, compensation per worker is UP at a 4.7% annual rate. In line with that, several retailers announced same store sales, with most beating estimates — some by substantial amounts! The ISM Manufacturing index hit 58.4, a five-year high, and ISM Services went to 50.5 in January, signaling expansion in the non-manufacturing sector too.

But for the week, the Dow was off 0.5%, to 10012.23; the S&P 500 slipped 0.7%, to 1066.19; while the Nasdaq was down just 0.3%, to 2141.12.

A volatile stock market, combined with sovereign debt worries, did wonders for bond prices. The FNMA 30-year 4.5% bond we watch ended UP a solid 38 basis points for the week, closing at $101.41. Mortgage rates stayed at the historically low levels we’ve been seeing. But homebuyers and owners looking to refinance should note that the Fed said it will stop buying mortgage bonds March 31. Experts feel this will send rates up a bit.

>> This Week’s Forecast

CHECK IN WITH CONSUMERS…This week the big economic indicators will be the January Retail Sales reports. Are consumers coming back into the game, or are they acting like the stock investors on Wall Street? We’ll learn all on Thursday. That day’s weekly unemployment numbers will also continue to get attention. Friday brings Michigan Consumer Sentiment, for another take on the mindset of the folks whose spending remains key to the recovery.

>> The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Economic Calendar for the Week of February 8 – February 12

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Most economists feel the Fed will stick to its commitment to keep the Funds Rate at current low levels for “an extended period.” That period will at least take us through the June meeting. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

Current Fed Funds Rate: 0%–0.25%

Probability of change from current policy: