Austin Mortgage Market Update For the week of December 14, 2009

For the week of December 14, 2009 – Vol. 7, Issue 50

INFO THAT HITS US WHERE WE LIVE Last week gave us more proof the country’s housing market is heating up. According to Freddie Mac’s quarterly national Conventional Home Price Index (CMHPI), home prices were UP 0.9% in Q3 for their second quarterly increase in a row! And the Q2 number was revised upward to 2.0%! These rises have taken back about two-fifths of the price declines seen in Q4 of 2008 and Q1 of this year.

Freddie Mac’s chief economist said, “the home-price gains of the past two quarters reflect improving existing-home sales…. Sales volume was up 15% between the first and third quarters of this year.” He also added: “The lowest average fixed-rate mortgage rates in a half-century, lower house prices, incentives to encourage first-time buyers, and loan modification efforts to stem foreclosures have worked together to support sales and reduce the inventory of unsold homes.” The Standard & Poor’s/Case-Shiller Home Price Index also reported a second consecutive quarterly price increase, theirs at 3.1%!

A separate study came in with inventory declines for the 17th straight month, showing listings down 2.42% for November versus October and down 27.64% from last year! A monthly Foreclosure Market Report showed an almost 8% decrease for November, down 15% from the July peak. We’re still above last year’s numbers, but finally trending in the right direction!

>> Review of Last Week

KEEPING ON KEEPING ON… For the fourth week in a row the markets moved sideways, with one index slightly up, one a bit down and the third flat. Recently, there haven’t been any extreme weekly market moves in the indexes, up or down. Investors aren’t quite ready to believe things are as good as some indicators suggest, but they’re also not buying into any of the bleak scenarios some pundits still proffer.

Those pundits jumped all over Fed Chairman Ben Bernanke’s reference in a speech to “formidable headwinds” for the economy. He was actually cautioning us to not expect economic expansion to be too dramatic. His also said: “…our economy has made important progress during the past year….the financial system and the economy have moved back from the brink of collapse, economic growth has returned, and the signs of recovery have become more widespread.” Why didn’t those experts focus on this observation of “more widespread recovery”?

They were probably too busy ignoring the good news of a decreasing trade deficit, with exports UP six months in a row, at a 26.4% annual rate! We also saw the four-week moving average of unemployment claims fall to 474,000, its lowest level since September 2008. In fact, for the last six months, the decline in initial claims is faster than the declines during the “jobless” recoveries of 1991-92 and 2002, a signal this recovery may not be jobless. The week ended with November Retail Sales UP a way-better-than-expected 1.3%. So it came as no surprise that University of Michigan Consumer Sentiment also blew past consensus expectations!

For the week, the Dow went UP 0.8%, to 10471.50; the S&P 500 was up just 0.43 points, to 1106.41; while the Nasdaq went down 0.2%, to 2190.31.

Bonds ended the week under downward pressure. The recovery is looking better and the Fed seems to be holding to its low rates, with any tightening some way off in the future. The FNMA 30-year 4.5% bond we watch was down 31bp for the week, finishing at $101.22. Mortgage rates inched up a little, but still remained at historically low levels.

>> This Week’s Forecast

THE WORD FROM THE FED… This week, the big focus will be on the Fed’s policy statement coming out of their meeting on Wednesday. No one expects a rate hike now, but the experts will be scrutinizing the language of the statement to see if the Fed still expects their exceptionally low rate levels to remain for “an extended period.” We’ll have new data on inflation, with the Fed’s favorite CPI reading coming in and another good look at manufacturing with the Philadelphia Fed Index.

Folks who share our economic interests will be watching Housing Starts and Building Permits for November to see if home builder optimism continues to grow.

>> 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 December 14 – December 18

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months. Virtually no one expects a change in the Fed Funds Rate at this week’s meeting. But changes to the wording of the FOMC policy statement could give us some indication of how soon a rate hike could occur. 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:

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