Inside Lending - By Brent Kluge - For the week of June 29, 2011

For the week of June 27, 2011 - Vol. 9, Issue 26

>> Market Update 

QUOTE OF THE WEEK..."For the resolute and determined there is time and opportunity."--Ralph Waldo Emerson

INFO THAT HITS US WHERE WE LIVE...It certainly takes plenty of determination to find the opportunities in today's housing market. Last week the National Association of Realtors (NAR) reported Existing Home Sales down 3.8% in May to an annual rate of 4.81 million units, a six-month low. The median price was up for the month, though down 4.6% from a year ago. Inventories declined, but the months' supply increased to 9.3 because of the slower sales rate. Nevertheless, the NAR's economist opined, "...sales activity in the second half of the year is expected to be stronger than the first half, and will be much stronger than the second half of last year." 

Thursday's New Home Sales showed a 2.1% drop for May, to a 319,000 annual rate, but this did beat expectations. The months' supply fell to 6.2, as inventories dropped to their lowest level on record. Yet the FHFA home price index, which measures prices for homes bought with conforming mortgages, was up 0.8% for March, its largest monthly gain since 2005! The Mortgage Bankers Association (MBA) reported purchase loan demand down a seasonally adjusted 3.9% from the week before, but up 4.4% over a year ago.

BUSINESS TIP OF THE WEEK...Diversify. Don't depend on one customer type, one sales channel, or one product or service. It's great to specialize, but bring your expertise to new areas. And keep your marketing diversified: don't let the web replace personal contact time.

>> Review of Last Week

ONE UP, TWO DOWN...It was a volatile week in stocks, with only the Nasdaq index up, while both the Dow and the S&P 500 were off. The up-and-down stock prices mimicked Wall Street's responses to the economic situation. The week started on an up note, as Greek debt problems (which could impact U.S. banks) seemed closer to solution. But on this side of the pond, investors found little solace in Fed Chairman Bernanke's admission that the economic recovery is slower than expected. He thinks food and energy prices will subside, but doesn't have a clear take on why the slow pace of recovery persists. He also said that the majority of home sales "have much more stable prices than houses sold on a distressed basis," as reported here on June 6.
 
The next day, the International Energy Agency (IEA) announced it will release 60 million barrels of oil from strategic reserves, with half coming from the U.S., to make up for Libya's shortfall. This should eventually bring down gas prices and calm inflation fears, both good for the economy. Q1 GDP was revised up to 1.9%, still well below Q4's 3.1% growth rate. And on the jobs front, key to the housing market, new weekly unemployment claims edged up to 429,000. But corporate profits were up 12.1% annually and May Durable Goods Orders showed encouraging growth.

For the week, the Dow ended down 0.6%, at 11,935; the S&P 500 was down 0.2%, to 1,268; but the Nasdaq was UP 1.4% to 2,653.

Weaker stock prices and stronger concerns over European sovereign debt sent investors to the safe haven of bonds, whose prices benefited. The FNMA 4.0% bond we watch ended the week up .84, closing at $101.09. In Freddie Mac's weekly survey, national average rates for conforming mortgages held at levels that are near the lowest for the year.

DID YOU KNOW?...Many of the first homes in the American colonies were built with bricks carried as ballast in ships sailing to the New World. Here, the bricks were sold for home building and replaced in the ships' holds with goods being exported.

>> This Week's Forecast

PENDING HOME SALES, INFLATION, CONSUMER CONFIDENCE...It will be interesting to see if Wednesday's Pending Home Sales give us some positive signs about the state of housing sales a few months out. The expectation is for a small gain. The week begins with the Fed's favorite inflation reading, Core PCE Prices, forecast to be up a benign 0.2% for May.

We'll all watch for signs of improvement in Thursday's Initial Unemployment Claims, but the figure should still be above the 400,000 threshold. Nevertheless, consumers aren't too discouraged, as Tuesday's Consumer Confidence and Friday's University of Michigan Consumer Sentiment index are both expected to hold steady for June.

>> 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 June 27 - July 1

>> Federal Reserve Watch   

Forecasting Federal Reserve policy changes in coming months...In last week's presser, Fed Chairman Bernanke explained that keeping the Funds Rate where it is for an "extended period" means at least two or three meetings. Economists are taking him at his word. 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: