Austin Mortgage Market Update – For the week of February 1, 2010

For the week of February 1, 2010 – Vol. 8, Issue 5

INFO THAT HITS US WHERE WE LIVE The week began with December Existing Home Sales dropping 16.7%. Some observers felt this was the result of uncertainty over the homebuyer tax credit, scheduled to expire at the end of November. The tax credit was, as we now know, extended into this year, but it wasn’t announced soon enough to help December sales. Nonetheless, Existing Home Sales are UP 15.0% over a year ago. And the median price of an existing home is now $178,300, UP 1.5% over a year ago and the best year-over-year comp since 2006. Finally, inventories are now down to 3.29 million, their lowest reading since March 2006.

Wednesday, New Home Sales were reported at a 342,000 annual rate, down 7.6% for December. But inventories are now at 231,000, 59.6% below their mid-2006 peak and at their lowest level since 1971, when the population was two thirds its size today. The Case-Shiller index of home prices in the 20 biggest markets went up a seasonally-adjusted 0.2% in November. This was the sixth month in a row the index gained and prices increased in 14 of the 20 markets. The FHFA price index for homes bought with conforming mortgages went up 0.7% in November, its fifth advance in the last seven readings.

According to Freddie Mac’s weekly Primary Mortgage Market Survey, mortgage rates inched down for the fourth week in a row. But prospective homebuyers and owners looking to refinance should note that the Fed reiterated its intention to end mortgage bond purchases on March 31. Experts feel this will make rates head up a bit.

>> Review of Last Week

STILL SLIPPING… There were plenty of good things to consider last week, but investors chose to dwell on the negative tidbits instead. This sent stocks down for the third week in a row, making January the worst month for the markets since February 2009. The week began with Apple reporting its most profitable quarter ever. Microsoft and SanDisk also made the tech sector look good by beating earnings estimates, but Wall Street worried about the companies’ cautious outlooks. Oh well. We even saw Consumer Confidence UP in January for the third month in a row!

At its meeting last week, the Fed left the funds rate at 0% to 0.25% and altered the language of its policy statement to be more bullish on the economy. But there was one dissenting vote against keeping the rate low, which investors fretted over. That evening, President Obama’s State of the Union message didn’t include too many specifics on how he would help boost the economy. Stocks slid Thursday. December durable goods orders were up only 0.3%, but taking out transportation, they were UP 0.9% for the month and UP 11.9% annually for the last six months. History shows that once businesses begin investing more in equipment (“durable goods”), payroll gains soon follow.

Friday we got the terrific news that the U.S. economy grew in Q4 of last year at a 5.7% pace, the fastest GDP growth rate in six years. Pessimistic observers seem scared to admit the economy is in fact improving, commenting that inventories accounted for a large part of Q4 growth. In fact, final sales, which is GDP excluding inventories, are UP at an accelerating pace for three straight quarters! The Chicago PMI, expected to decline, instead increased, showing growing strength in Midwest manufacturing. And the employment index came in at the highest level since 2005, reporting its first positive number since 2007.

But for the week, the Dow dipped 1.0%, to 10067.33; the S&P 500 slipped 1.6%, to 1073.87; while the Nasdaq was down 2.6%, to 2147.35.

In addition to sliding stocks bringing new money into the bond market, we had month-end buying helping to push prices up. The FNMA 30-year 4.5% bond we watch ended UP 9 basis points for the week, closing at $101.03. Mortgage rates are still historically low, according to the most recent Freddie Mac report.

>> This Week’s Forecast

ANOTHER LOOK AT HOUSING AND JOBS… December Pending Home Sales will grab our attention on Tuesday, then Friday everyone will key on the January Employment Report. The consensus expects no change in the unemployment rate but does think we’ll see some new jobs added. That would be great! The week will also bring us the important ISM read on manufacturing, plus personal income and spending numbers.

>> 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 1 – February 5

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Last week the Fed repeated its commitment to keep the Funds Rate at current low levels for “an extended period.” Ben Bernanke was then confirmed by the Senate for a second term as Fed Chairman by a 70-30 vote. Most economists think things will stay as they are. 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: