Keeping you updated on the market!
For the week of
December 22, 2008
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MARKET RECAP Interest rates were the story of the week, thanks to moves by the Federal Reserve to keep them trending lower. On Tuesday, our central bank sliced the fed funds rate – a key short-term lending rate – 75 basis points (a basis point is 1/100 of a percentage point) to 0.25%. The new, lower fed funds rate, in conjunction with plans to buy securities backed by mortgages, should keep mortgage rates low into the near future. Lower mortgage rates, in turn, will help revive a moribund housing market. How moribund is it? Well, new housing starts and permits plunged to record lows in November to a seasonally adjusted annual rate of 625,000 units from 771,000 units in October. The news isn't as bad as some pundits suggest. When prices are falling, the smart move is to reduce supply – which is what homebuilders are doing these days. The cutback will limit the supply of new homes hitting the market, reducing the glut of unsold homes pressuring prices. The glut won't last forever. In fact, in some areas of the country borrowers (those with strong credit histories and hefty down payments) were reducing the glut by picking up 30-year loans in the 4% range. The national average isn't quite that good, but it's good nonetheless. According to Bankrate's latest survey, the prime 30-year fixed-rate mortgage fell 38 basis points to average 5.42%, the prime 15-year fixed-rate mortgage fell 21 basis points to average 5.3%, and the prime 5/1 adjustable-rate mortgage fell 33 basis points to average 5.84%. Best of all, the money is readily available; lending standards aren't nearly as onerous as some media outlets suggest. Given the recent plunge in mortgage rates, it's no surprise that mortgage application volume continues to rise. The Mortgage Bankers Association reported its application index rose 2.9% for the week ended December 12. Look for a significant spike this week to reflect last week's fed fund rate cut. Indeed, most mortgage professionals experienced a noticeable spike in application activity last week, particularly on the refinance side. Not to repeat ourselves too much on this issue, but mortgage activity continues to reflect an iron-clad law of economics – lower prices produce higher demand. |
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Economic Indicator |
Release Date and Time |
Consensus Estimate |
Analysis |
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Gross Domestic Product |
Tues, Dec 23, |
0.5% (Decrease) |
Important. The final GDP data is expected to post in line with past preliminary reports. |
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Consumer Sentiment |
Tues, Dec 23, |
56 Index |
Moderately Important. Recent job loses have raised consumer pessimism. |
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Existing Home Sales |
Tues, Dec 23, |
4.9 Million (Annualized) |
Important. Sales are expected to hold at recent levels, but we could see a sales increase on lower home prices and mortgage rates. |
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New Home Sales |
Tues, Dec 23, |
420,000 (Annualized) |
Important. Homebuilders continue to struggle with oversupply and low volume. |
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Mortgage Applications |
Wed, Dec 24, |
None |
Important. Applications are expected to surge on falling mortgage rates. |
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Durable Good Orders |
Wed, Dec 24, |
2.5% (Decrease) |
Important. Consumers are reducing purchases on big-ticket items (those most likely to be financed) on rising economic concerns. |
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Personal Income & Outlays |
Wed, Dec. 24, |
Income: 0.1% (Increase) |
Important. Recent job cuts are cutting into overall consumer income and spending. |
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Is an End to Low Prices Near?
Home prices are low, purchase and refinance mortgage rates are low, home equity rates are low. On the former, home prices at the national level have fallen 21% from their 2006 peak. In certain bubble markets – Phoenix and Las Vegas, for instance – prices have dropped even further. In Southern California, the median home price has slid to $285,000, its first dip below $300,000 since 2003. On the mortgage front, rates have fallen sufficiently enough that reports have the Treasury Department abandoning a plan to drive mortgage rates down to 4.5%. The good news is, the plan isn't needed. Rates have fallen without any additional help from the Treasury. At this point, we have to consider probabilities. Home prices and mortgage rates could continue to drop, but what are the probabilities they will continue to drop? According to Freddie Mac (whose rates tend to be less conservative than Bankrate's), mortgage rates are at multi-decade lows, while the fed funds rate is at 0.25%. (It can't drop below zero.) The probability is rising that mortgage rates won't drop much further and that home prices will continue to stabilize and then rebound. Prices don't grow to the sky nor do they drop into the ground, meaning we are likely much closer to a bottom than to a top.
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