Austin Mortgage Market Update – For the week of December 31, 2012

>> Austin Mortgage Market Update

QUOTE OF THE WEEK… “Believe and act as if it were impossible to fail.”–Charles F. Kettering, American inventor

INFO THAT HITS US WHERE WE LIVE… If you need some encouragement to follow the advice of the inventor of the automobile starter motor, look to last week’s November New Home Sales, UP 4.4% to a 377,000 annual rate, and now UP 15.3% versus a year ago. The new home median price of $246,000 is UP 14.9% over a year ago. And the months’ supply of new homes is now down to 4.7, equal to the lowest level since 2005. Economists say new home sales are usually the last part of the housing market to recover, so this is truly encouraging news.

Slightly less encouraging was the S&P Case-Shiller Index, which had October home prices falling for the month in 12 of the 20 cities tracked. But the index still showed a 4.3% gain for the year. The Chairman of the S&P Index Committee said, “Annual rates of change in home prices are a better indicator of the performance of the housing market,” as they even out seasonal variations. Pending Home Sales, measuring homes under contract, gained for the 19th month in a row, UP 1.9% In November, and they’re now at their highest level in two and a half years!

BUSINESS TIP OF THE WEEK… If you want to be convincing, don’t talk too fast. Speech experts say the more slowly you talk, the more authoritative you sound.

>> Review of Last Week

CLIFFHANGER… Investors on Wall Street were certainly left in suspense by Washington politicians trying to avoid both reality and their responsibilities, as they continued to fall short of coming to agreement on how to prevent the economy from going over a fiscal cliff come Tuesday. The uncertainty drove investors out of riskier stocks, sending all three major market indexes down for the week. The fear is that the fiscal cliff’s mandated tax increases and spending cuts could send the economy back into recession.

The markets paid so much attention to statements coming out of Washington, the economic data seemed to have little impact. The Richmond Fed index of manufacturing sentiment in the mid-Atlantic region registered a +5 for December, down from +9 in November. Housing reports were encouraging, as mentioned above, and the Chicago PMI beat expectations, showing manufacturing expansion in the Midwest. But Consumer Confidence missed. Jobless claims were down, although many states estimated their numbers due to the extra federal holiday December 24.

For the week, the Dow ended down 1.9%, to 12938; the S&P 500 was down 1.9%, to 1402; and the Nasdaq was down 2.0%, to 2960.

While stocks were getting hammered over fiscal cliff fears, bonds benefited from the flight to less risky assets. The FNMA 3.5% bond we watch ended the week up .05, at $106.19. In Freddie Mac’s weekly Primary Mortgage Market Survey, average fixed mortgage rates finished the year near record lows. In the Mortgage Bankers Association weekly survey, applications for purchase loans increased for the fifth week in a row and are almost 10% above their level at this time last year.

DID YOU KNOW?… The January Effect is the tendency of the stock market to rise between December 31 and the end of the first week in January. This happens because many investors sell right before year end for tax purposes, then quickly reinvest in the new year.

>> This Week’s Forecast

MANUFACTURING, FED MINUTES, JOBS… A short week of reports will reveal whether we start off a happy new year. Wednesday’s ISM Manufacturing is expected over 50, indicating growth. Later that day, FOMC Minutes from the December 12 Fed meeting might shed light on how they arrived at that 6.5% unemployment rate we need before they start hiking rates. Meanwhile, Friday’s Employment Report is expected to show unemployment holding at 7.7%, with the number of new jobs up a bit.

Today, the U.S. Treasury market closes at 2 PM ET, U.S. equities have regular hours, but all markets are closed tomorrow, in observance of New Year’s Day. Happy New Year!

>> 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 Dec 31 – Jan 4

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months… Unless unemployment unexpectedly dives to 6.5% in this week’s December Employment Report, don’t expect the Funds Rate to move up at all. 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: