End of the Week Market Projection

The “second” reading of GDP growth in the 4th quarter of last year was unchanged – a basically flat 0.6 percent growth rate. As we go forward, economic growth in the first half of this year will be essentially non-existent. But there is some light at the end of what many pundits view as a dark tunnel. By the second half of the year, the economy will expand at slightly higher than 2 percent. The 2008 fiscal stimulus package contains over $100 billion in tax rebates. Those checks should be in taxpayers’ mailboxes in early summer. This tax cut is more than twice as high as a similar rebate passed in 2001. Past research suggests that consumers’ propensity to spend out of those tax rebates is about 40 cents to 50 cents on the dollar. That translates into additional consumer spending of $60 to $80 billion in the second half of the year. Make no mistake – this stimulus is the key factor in helping move the economy in the second half of the year. Other Factors than Housing Involved in Economic Doldrums Seems like most people blame the housing downturn for our economic doldrums. But there are other factors. This tax rebate is needed to compensate for outrageously high oil prices and from falling stock market values. A $104 dollar per barrel oil price is a major drag on consumer spending – and something that virtually every consumer feels. Europeans are not paying as much because of their stronger currencies. The higher oil price, which is priced in U.S. dollars, is partly driven by the very weak dollar. The weaker dollar is caused in part by a higher inflation rate in the U.S. vis-à-vis the rest of the world’s advanced economies. If a currency is losing its purchasing power, why hold that currency? Recall, the oil price was under $20 per barrel just 10 years ago. When the price of oil rises, it is essentially a tax placed on consumers with less money available to spend on more enjoyable items and activities. This “oil tax” unfortunately does not even go into the U.S. Treasury. Rather it fills the coffers of the governments of Russia, Venezuela, Saudi Arabia, Nigeria, and Iran. In today’s world, it is a transfer of money from a democratic country to a non-democratic country. The housing market will also get some relief. A higher loan limit – up to $729,000 from $417,000 – in several local areas, including Los Angeles, Orange, and San Francisco counties, will have a big impact in bringing out the buyers. As a result, home sales in the second half of 2008 will no doubt be much stronger than in the first half. Look for existing-home sales to rise to a 5.7 million-unit pace in the second half versus 4.9 million in the first half.Pent-Up Demand Rising sales will also bring down inventory and help strengthen home prices. The national median price of an existing home will fall in the first half of the year and then rise in the second half. For the year as a whole, the median price will have fallen by 1 percent – after having fallen 1.4 percent last year. Of course, there will be tremendous local market variations. The Northeast region is likely to be first region to show signs of stabilizing and then strengthening housing market conditions. The West region will likely trail behind. The West region could, nonetheless, surprise us on the upside. What is unique about the current housing cycle is the pace of price declines in some local markets, which can significantly improve affordability conditions in a short time. Home prices are falling at or near a double-digit pace in California, Nevada, and Arizona. A sudden quick home price adjustment may be just the thing to quickly induce buyers back into these marketplaces. After all, as is the case in many parts of the country, jobs have been created in those Western states over the past two years even against the backdrop of a housing market slump, and hence, there exists significant pent-up demand. New home sales will take much longer to turn around. That is simply due to the fact that there are far fewer new homes being built. Single-family housing starts have fallen by more than 50 percent in the past two years. Based on housing permits – generally a reliable indicator of upcoming housing starts – new home construction will fall further for the remainder of the year. New home inventory has been trending down but more cutbacks are needed. Therefore, homebuilders need to further bite the bullet and hold back construction. Loan modifications and other foreclosure mitigation programs are all well intended and good, but the best policy assistance in our current market condition is to unleash the pent-up demand. Any measures that violate the sanctity of private contracts – such as permitting judges to reset interest rates – should be avoided as those can greatly harm home sales by raising the cost of borrowing on new loan originations. There is some discussion of a possible tax credit for first-time home buyers. Such a policy will be a great stabilizer for the housing market and the economy.

Commercial Real Estate

NAR: Commercial Index Eases Commercial real estate market activity is expected to decline moderately with fewer business opportunities for commercial practitioners in the months ahead, according to a forward-looking index for the commercial real estate sectors published by the NATIONAL ASSOCIATION OF REALTORS®.

The Commercial Leading Indicator for Brokerage Activity slipped 0.4 percent to an index of 120.1 in the fourth quarter from a reading of 120.6 in the third quarter. However, it remains 0.1 above the fourth quarter of 2006 when it stood at 119.9. This is the second straight quarterly dip in the index, after reaching a record of 120.7 in the second quarter of 2007.

The index showed nine consecutive quarterly gains prior to these declines; NAR’s track of the index dates back to 1990.Lawrence Yun, NAR chief economist, says the latest index suggests reduced business opportunities for commercial real estate practitioners in the months ahead. “The decline in the index implies that commercial activity, as measured by net absorption and the completion of new commercial buildings, is likely to contract moderately over the next six to nine months, which is consistent with an expectation for slower overall economic expansion in upcoming quarters,” Yun says.

Rising unemployment insurance claims and falling durable goods shipments were the key factors in lowering the CLI, but a weaker rate of return on investment as measured by the NAREIT Price Index was also a factor. However, positive contributors to the index were seen in the growth in wholesale and retail trade, and rising personal income, according to NAR.The latest data imply that investment in private nonresidential structures, which rose a solid 13.2 percent in 2007 according to a preliminary GDP estimate, could show only minimal growth or even decline in 2008, Yun says The Commercial Leading Indicator also implies weakening activity for commercial leasing and building sales activity. “Commercial practitioners can anticipate a weaker, though positive, net absorption in the office and industrial sectors later in the year with fewer new commercial buildings reaching the market,” Yun says. The index is a tool to assess market behavior in major commercial real estate sectors, which incorporates 13 variables that reflect future commercial real estate activity.

Quarter Rate Cut

Today's FOMC adjournment brought us the expected quarter point rate cut that was expected by many, but the post-meeting statement created concern about inflation. The Fed referenced the weak housing market as a contributing factor to the change in short-term interest rates, but also indicated that inflation remains an issue, particularly with the high energy and oil prices we are currently seeing.The move and comments leads many to believe that the Fed will not make another rate cut in the near future.

The stock markets have surprisingly reacted well to the news with the Dow up 131 points and the Nasdaq gaining 35 points. However, the bond market and mortgage rates have not faired so well. The bond market is currently down 23/32, which will likely revise this afternoon's mortgage rates higher by approximately .25 of a discount point from this morning's rates.

This morning's release of the 3rd Quarter Gross Domestic Product (GDP) revealed a 3.9% annual pace of economic growth, exceeding forecasts of a 3.1% rate. This means that economic activity was moderately stronger than expected. However, offsetting that was good news in the key inflation reading within the report. It showed a significantly lower reading than was expected, indicating inflationary pressures were well under control.

Also posted this morning was the 3rd Quarter Employment Cost Index (ECI), which tracks employer costs for salaries and benefits. It showed a 0.8% that was slightly lower than forecasts. This can also be taken as good news for bonds and mortgage pricing because it eases wage inflation concerns.

Now that the Fed meeting is behind us, we have to turn our attention to the remaining economic news of the week. There are a couple of high-impact reports still left to be posted that may significantly affect the markets and mortgage rates. September's Personal Income and Outlays report will be posted early tomorrow morning. This data gives us an indication of consumer ability to spend and current spending habits. It is important to the markets because consumer spending makes up two-thirds of the U.S. economy. Rising income generally indicates that consumers have more money to spend, making economic growth more of a possibility. This is bad news for the bond market and mortgage rates because it raises inflation concerns, making long-term securities such as mortgage related bonds less attractive to investors. Analysts are expecting to see increases of 0.4% in income and 0.4% in outlays.

The Institute for Supply Management (ISM) will release their Manufacturing Index for October late Thursday morning. This index measures manufacturer sentiment and can have a considerable impact on the financial markets and mortgage rates. Current forecasts call for a decline from September's 52.0 reading. If we get a reading below 51.5, we should see mortgage rates drop tomorrow morning. On the other hand, a reading above 51.5, indicating manufacturing activity may be stronger than thought, could fuel a stock rally and drive mortgage rates higher.

If I were considering financing/refinancing a home, I would....Float if my closing were taking place within 7 days...Float if my closing were taking place between 8 and 20 days...Float if my closing were taking place between 21 and 60 days...Float if my closing were taking place over 60 days from now...This is only my opinion of what I would do if I was financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Mortgage Commentary

This week is packed with economic releases and major events that will likely lead to a fair amount of volatility in the markets and mortgage pricing. There are seven reports scheduled for release along with another FOMC meeting. There is no relevant data scheduled for release today, but there is data being released every other day of the week.The first will be posted tomorrow morning with the release of the Consumer Confidence Index (CCI) for the month of October. This Conference Board index will be posted at 10:00 AM and gives us a measurement of consumer willingness to spend. It is now expected to show a small decline from last month's 99.8 reading, indicating that consumers are a little less likely to make large purchases in the near future. As long as the reading doesn't exceed 99.5, we will likely see the bond market react favorably to this report. This data is watched closely because consumer spending makes up two-thirds of the U.S. economy.The second report of the week will be posted Wednesday morning with the release of the preliminary reading of the 3rd Quarter Gross Domestic Product (GDP). The GDP is considered to be the benchmark measurement of economic growth because it is the sum of all goods and services produced in the U.S. and is likely to have a major impact on the financial markets and mortgage pricing. There are three versions of this report, each a month apart. Wednesday's release is the first and usually has the biggest impact on the markets. Current forecasts call for an increase of approximately 3.1% in the GDP. I think we need to see a smaller increase for the bond market to rally and mortgage rates to drop. Just matching the estimate will probably bring a stock market rally and could cause mortgage rates to rise.The second report of the day Wednesday will be the 3rd Quarter Employment Cost Index (ECI), which tracks employer costs for salaries and benefits. Rapidly rising costs raises wage inflation concerns and may hurt bond prices. It is expected to show an increase in costs of 0.9%. A smaller than expected increase would be good news for bonds and mortgage rates.The week's FOMC meeting is a two-day meeting that begins tomorrow and adjourns Wednesday afternoon. It is expected to bring another rate cut to key short-term interest rates. Assuming this does happen, traders will be looking at the post-meeting statement for any indication of the Fed's next move. While it is widely expected that the Fed will cuts rates at this meeting, there is a lot of different opinions of when the following cut will come, if at all. The meeting will adjourn at 2:00 PM Wednesday, so look for quite a bit of volatility during afternoon hours.Overall, it is going to be a pretty active week for the bond market and mortgage rates. Wednesday's GDP report and Friday's Employment report are the single most important releases of the week. Wednesday will likely be the most important day with the GDP and FOMC meeting, but Friday's data can also lead to sizable changes in mortgage rates. I am expecting to see significant movement in rates this week, so please maintain contact with your mortgage professional.

MORTGAGE MARKETS

"The market volatility continues as Mortgage Bonds are trading higher after yesterday’s 34 basis point sell-off. Prices still remain below a very tough and now tested ceiling of resistance at the 200-day Moving Average.
The Preliminary Gross Domestic Product, or GDP, for the second quarter was revised to 4.0%, which was slightly below expectations of 4.1%. The number is better than Q1, but still a bit on the slow side.
Traders will be very focused on tomorrow's action which includes a speech from Fed Chair Ben Bernanke and the release of the Core Personal Consumption Expenditure; the Fed’s favorite measure of consumer inflation.
For today, I am recommending to float ahead of tomorrow's events."