Austin Mortgage Market Update – For the week of January 10, 2011

INFO THAT HITS US WHERE WE LIVE Last week’s housing market news featured forecasts for the year. With the factors affecting home affordability at their best levels in years, many expect increased home sales in 2011, spurred on by the expected improvements in the job situation. The National Association of Realtors (NAR) reported existing homes sales up for November, returning to growth after hitting bottom in July. Existing homes are now at their strongest sales pace since the home buyer tax credit expired in April.

The NAR’s chief economist commented, “The relationship recently between mortgage interest rates, home prices and family income has been the most favorable on record for buying a home since we started measuring in 1970. Therefore, the market is recovering and we should trend up to a healthy, sustainable level in 2011.” Economists feel the key to sustaining that growth in home sales will be the jobs recovery.

But in spite of all that’s happened in housing in the last few years, people want to be home owners. A 2010 survey reported 90% of the respondents had no regrets buying their current home. Even better, a recent Fannie Mae study showed that most Americans strongly desire to own a home and to maintain home ownership. The survey included both people who now own homes and people who rent.

>> Review of Last Week

CONTINUING THE TRIP NORTH… Many people head to points south come January, but it’s always nice to see stock prices maintaining a steady trip north. The stock market indexes have historically been leading indicators for the economy, so trends upward on Wall Street bode well for us all. Last week, the Dow and the broadly based S&P 500 were both UP in the 1% neighborhood, while the tech-heavy Nasdaq shot UP almost 2%.

The big focus of the week was December employment. Things got a bit giddy Wednesday when the ADP Employment number came in with an increase of 297,000 civilian jobs. But Friday’s government report, which carries more clout, quieted things down. This showed a less-than-expected gain of only 103,000 jobs overall, with the private sector increase at 113,000 jobs. However, October and November’s payroll figures were revised upward, adding 70,000 more jobs to the picture. Surprisingly, the unemployment rate fell from 9.8% to 9.4%, largely due to a decline in the work force. The four-week moving average of weekly unemployment claims dropped to its lowest level since July 2008, though still above 400,000. Continuing claims also fell a bit, but remain above the 4 million mark.

While the labor market recovers at a still slow, but thankfully steady, pace, business is showing the economic strength that should eventually create the jobs we need. Evidence of this came from the ISM Manufacturing index, which was up to 57.0 in December, and the ISM Non-manufacturing index, up to 57.1 for the month. Levels above 50 signal economic expansion.

For the week, the Dow ended up 0.8%, at 11,675; the S&P 500 went up 1.1%, to 1,272; and the Nasdaq shot up 1.9%, ending at 2,703.

Bond prices got hammered midweek after the ADP Employment figure. But Friday when the government numbers came in less than expected, bonds recovered a bit. The FNMA 30-year 4.0% bond we watch ended the week where it began, closing at $99.18. Average fixed-rate mortgage rates dropped a tad according to Freddie Mac’s weekly survey of conforming mortgages. This survey’s national averages remain below where they were at the start of 2010, which should help the housing recovery.

>> This Week’s Forecast

WHAT’S HAPPENING AT RETAIL?… We’ll first look at inflation, starting with the wholesale version tracked by Thursday’s Producer Price Index (PPI) for December, which is expected to show a slight downward movement. Friday’s Consumer Price Index (CPI) measures the more important consumer inflation situation, which should also be under control. These will be accompanied by December Retail Sales, whose growth could be a trifle down from the prior month.

Michigan Consumer Sentiment is expected to hold steady, while manufacturing continues to recover, gauged by Industrial Production and Capacity Utilization for December.

>> 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 January 10 – January 14

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months With the gain in December payrolls falling short of expectations, economists see the Fed keeping the Funds Rate at its super low level well into the year. Inflation will be watched, there are no signs of any problems on that front so far. 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: