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MARKET RECAP Are we progressing, regressing or standing still? It's hard to tell, given the litany of often-contradictory economic news over the past few weeks. What's more, this week's releases offer little in the way of elucidation. We were pleased to see that the pending home sales index for August beat analyst expectations, rising 4 percent to 82.3 from July's 78.9 posting. When we dug a little deeper, we were further pleased to find faster-than-expected gains in those markets that popped the loudest – easterly sections of California, Arizona, and Las Vegas – when the real estate bubble burst nearly two years ago. The obvious question is will the sales trend hold and will it be able to sustain the housing-price gains we've seen this year? We think so, though others disagree. According to real estate data provider Clear Capital, national home prices actually dropped 0.2 percent over the three months ending in September. Many market watchers believe this is only the beginning and that prices will continue to drop well into 2011. We remain encouraged, nonetheless, knowing that national prices are 10 percent above their 2009 lows and continue to make some headway despite the tax-credit expirations and recent spat of discouraging economic news. We also remain encouraged because of the trend toward localization, meaning Las Vegas , Phoenix , Miami , and other desultory burgs are no longer capable of infesting the rest of the country with their dire outlooks. Mortgage rates are another story, adhering mostly to a national trend. That trend, as we all know, remains down. Indeed, this past week most of the mortgage products shed at least a few basis points on concerns the economic recovery has stalled and that the Federal Reserve will have to inject more money into the economy (euphemistically known as “quantitative easing”) by purchasing more mortgage-backed securities. More quantitative easing will likely occur after Friday's employment report, which showed that the private sector added only 64,000 jobs in September while the total workforce shrank by 95,000 jobs (mostly due to the federal government letting go temporary census workers). Meanwhile, the unemployment rate held at 9.6 percent. In short, expect today's low mortgage rates to hold into the near future. But keep in mind, rate drops have been realized in single-digit basis-point increments; increases, when they come, will likely be another story. |
Economic |
Release |
Consensus |
Analysis |
Federal Reserve FOMC Minutes |
Tues. Oct. 12, |
None |
Important. Fed watchers are expecting a downgrade in the economic outlook |
Mortgage Applications |
Wed., Oct. 13, |
None |
Important. Purchase activity could slip after the new FHA FICO-score requirements. |
Import Prices |
Wed., Oct. 13, |
0.2% |
Moderately Important. Stable and falling import prices will help maintain low interest rates. |
International Trade |
Thurs., Oct. 14, |
$43.1 Billion (Deficit) |
Moderately Important. The recent increase in the deficit reflects increased domestic spending. |
Producer |
Thurs., Oct. 14, |
All Goods: 0.1% (Increase) |
Important. Higher energy and commodity prices are being offset by falling prices in other business sectors. |
Consumer |
Fri., Oct. 15, |
All Goods: 0.1% (Increase) |
Important. Constrained pricing will help maintain a low interest-rate environment. |
Retail Sales |
Fri., Oct. 15, |
0.3% |
Important. Continued spending buttresses the argument that there will be no double-dip recession. |
The Downside to Low Interest Rates Many mortgage brokers and bankers remain enthusiastic over the low (and possibly lower) mortgage-rate environment. We prefer to restrain our enthusiasm; low mortgage rates have long ceased to be the stimulus they were earlier in the crisis. Actually, low rates are doing more harm than good these days. The fact is that interest rates are artificially low and are hindering private investment, which there is a sorry dearth of these days. Freddie Mac and Fannie Mae continue to fill the void, which means everyone must adhere to their inflexible underwriting standards. Unfortunately, it appears that Freddie Mac and Fannie Mae – with their one-size-fits-all regimes – will continue to rule the roost until we achieve a more normalized interest-rate environment, where rates genuinely reflect market risk. The upside to a normalized market includes a greater variety of loan products and greater latitude in underwriting standards, thus making for a more diverse and accommodating market. Rising interest rates would also put an end to the carry-trade game, where banks can simply make money borrowing at short-term rates will simultaneously lending at higher rates to the US Treasury. Once this game is curtailed, more lenders would turn to underwriting riskier loans; thus creating a more sweeping and inclusive market. If today's market is in need of anything, it's more sweep and more inclusiveness. |
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