Weekly Economic Recap

The laws of economics really do hold. Sales of existing homes rose to a 5.03 million annual rate in February, an unexpected 2.9% increase from January's revised 4.89 million annual rate, according to the National Association of Realtors last Monday. The news flew over the heads of the putative experts, who were calling for a drop to 4.85 million.

So why do the laws of economics hold? Increased sales are being spurred by lower prices. The median existing home price was $195,900 in February, down 8.2% from $213,500 in February 2007. Some of the same experts lamented the drop in price, but shouldn't have. Falling prices improve affordability and encourage people to make purchases, which is exactly what's beginning to occur.

The same holds true on the new-home front, where the median price decreased 2.7% to $244,000 and sales dropped 1.8% to a 590,000 annual rate, which, though a decrease, still beat the consensus estimate by 15,000 units. Just as important, the number of new homes for sale at the end of February dropped to 471,000, the fewest since July 2005, indicating builders are making headway in clearing the inventory glut. (Lower prices also motivate suppliers – builders in this case – to cut production.)
Lower prices have also stimulated mortgage activity. The Mortgage Bankers Association reported that its four-week moving average for the seasonally adjusted market index is up 11.3%, with the purchase index up 3.1% and the refinance index up 18.3%, thanks to recent Federal Reserve actions that have shored up the mortgage market by allowing the 30-year fixed-rate mortgage to remain below 6% and the 15-year fixed-rate mortgage to hang around 5.5%.

Eric P. Egeland
RE/MAX ADVANCED (Deerfield)
847.337.7090
DeerfieldsAgent.com

Weekly Economic Recap

The Federal Reserve's goal last week was to lube the credit-markets' sticky gears. Mission accomplished. First, the Fed buckled and agreed to serve as guarantor of last resort for Bear Stearns – a once mighty Wall Street investment house – and its rapidly depreciating portfolio of mortgage-backed securities (MBS). In turn, the guarantee prompted another Wall Street firm, JP Morgan, to buy Bear for little more than a song and a quick two-step dance.

The Fed then applied more gear-lubing grease with a 75-basis point cut in the fed funds rate. "The outlook...has weakened further," the Fed said in an accompanying statement. "Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth."

The cut in the Fed funds rate was actually less than what many pundits wanted, but salubrious nonetheless: Stocks soared and the credit-market gained much-needed traction. Fixed-rate mortgages improved dramatically across the nation. The benchmark 30-year fixed-rate mortgage dropped 41 basis points, to average 5.98%, while the 15-year fixed-rate mortgage fell 39 basis points, to average 5.46%, according to Bankrate's survey of large mortgage lenders.

Even homebuilders managed to maintain a stiff upper lip. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index for March remained at 20, still two points above the historic low of 18 reached in December. It wasn't the greatest news, but at least it suggests that things aren't getting worse.

Eric P. Egeland
RE/MAX Advanced
847.337.7090
DeerfieldsAgent.com

Weekly Mortgage Recap

An old saying declares that every cloud has a silver lining. After last week's torrent of miserable news, one can be forgiven for questioning the sanity of the saying's originator.

Let's start with the heaviest downpour: According to the Mortgage Bankers Association, more than 2% of the nation's 46 million mortgage loans were in the foreclosure process in the fourth quarter of 2007, with 0.83% of loans entering the process during the quarter. Both figures are the highest they've been in 35 years.

What's more, neither figure is likely to improve soon. The delinquency rate for home loans hit 5.82% in the fourth quarter, up almost a quarter percentage point from the previous quarter and the highest since 1985, when the rate topped 6%. The latest increases affected all loan types, but were most pronounced for subprime, adjustable-rate mortgages (no surprise).

The data explain the growing attention paid to proposals aimed at encouraging lenders to write down the value of troubled loans. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," commented Federal Reserve Chairman Ben Bernanke. With low or negative equity in their home, a stressed borrower has less ability – because there is no home equity to tap – and less financial incentive to try to remain in the home, so the reasoning goes.

It's a tough sell; the last thing lenders want now is to become ensnared in an uncontrollable, morally hazardous spiral of debt forgiveness.

Meanwhile, the number of people who can afford houses has decreased. Payrolls fell by 63,000, the biggest drop since March 2003, after a decline of 22,000 in January, the Labor Department reported on Friday. The jobless rate also declined to 4.8%, reflecting a shrinking labor force, as more people gave up seeking work.

The silver lining in these pessimism-heavy clouds is that prime-mortgage rates reversed course and dropped, with the 30-year fixed-rate mortgage averaging 6.32%, the 15-year fixed-rate mortgage averaging 5.79% and the five-year Treasury-indexed hybrid adjustable-rate mortgage averaging 5.72% last week, according to Bankrate's weekly survey. (But even this lining is tarnished; Bankrate admits rates spiked after collecting its data.)

Eric P. Egeland
RE/MAX ADVANCED (Deerfield)
847.337.7090
DeerfieldsAgent.com

Weekly Economic Recap

Scheduled economic news was scarce last week; actual economic news was another matter. Not surprisingly, the mortgage and housing markets garnered most of the headlines on what was reported.

To state the obvious, the economy's fate still hangs on the value of home prices. On that front, the news was discouraging. According to Zillow.com, a real estate data service, 39% of people who purchased a home two years ago owe more than they own. Adding insult to injury, Fannie Mae reported that it expects home prices will decline 4.5% this year and 2.6% in 2009.

Fortunately, more help is on the way. Congress passed an economic stimulus plan that raised the maximum loan sizes for some conforming and Federal Housing Administration-insured mortgages. The new conforming limit will vary by metropolitan area. In some places it will remain $417,000; in pricier areas, like San Francisco, it will rise to $729,750. Most of the country though will fall between these bookends.

Project Lifeline, a federal government and mortgage-servicer sponsored program for people on the verge of losing their homes, offers additional hope. Project Lifeline is unique in that unlike previous government programs, the benefits won't be confined to borrowers with adjustable rate mortgages. On the other hand, it will exclude anyone who is currently bankrupt, who hasn't missed more than three months of payments, or who is less than 30 days away from foreclosure. It will also exclude vacant or investment properties.

Eric P. Egeland
RE/MAX ADANCED (Deerfield)
847.337.7090
DeerfieldsAgent.com

Weekly Economic Recap

For all the chatter about impending economic doom, it's amazing how the economy keeps plugging along. To wit, the Commerce Department reported that orders for manufactured goods rose 2.3% in December, following a revised 1.7% increase in November. The report is evidence that the putative economic slowdown has yet to hit America's producers of durable products.
All of America's producers – durable and otherwise – are producing what they produce more efficiently, as well. Worker productivity grew at a 1.8% annual rate in the final quarter of 2007, a faster-than-expected pace, which suggests productivity remains healthy and labor costs remain tame.

The productivity report provides the Federal Reserve with more wiggle room to continue lowering interest rates, if needed. And the Fed just might need to. The NAR's pending sales index posted at 84.9% in December, 24.2% below the 113.3 posted in December 2006. The NAR projects existing-home sales at 5.38 million this year and 5.60 million in 2009, with existing-home prices falling 1.2% to a median of $216,300 for all of 2008 before climbing 3.2% to $223,200 in 2009.

NAR chief economist Lawrence Yun predicts sales activity will remain soft through the first half of the year, but he hedges his prognostication by saying that the market could improve more quickly if the higher conforming loan limits are implemented sooner.

Eric P. Egeland
RE/MAX Advanced (Deerfield)
DeerfieldsAgent.com
847-337-7090