Sunday, January 23, 2011
MARKET RECAP 01/23/2010
The economic news stumbled out of the gate this week when the Commerce Department reported that homebuilders began work on the second fewest number of homes in more than fifty years in 2010, breaking ground on only 587,600 homes. Of course, the first fewest was the year before, 2009, when they broke ground on 554,000 homes, so there was an improvement.
The news quickly regained its footing, though. Builders appear to be planning more projects in 2011, based on permits rising 16.7 percent in December to a seasonally adjusted annual rate of 635,000 units, the best pace since last March. Fannie Mae is even more optimistic. It expects overall starts to increase 17.3 percent and hit 710,000 units this year, with another 42 percent increase to 1.1 million units in 2012, followed by a 42 percent gain to 1.5 million units in 2013.
As for the existing home market, RE/MAX reported a 13.2 percent increase in December sales. More encouraging, crisis hotspots Arizona and Florida produced double-digit yearly gains, proving once again the ironclad law of economics – lower prices equal more demand. According to RE/MAX CEO Margaret Kelly, “December's trends put the housing market in a strong position for growth as the home shopping season nears.”
The NAR corroborated RE/MAX's bullish outlook with bullish data of its own. The NAR reported that existing house sales increased 12 percent to a 5.28-million annual rate in December. Moreover, the number of homes on the market dropped 4.2 percent to 3.56 million units. At the current sales pace, it would take 8.1 months to sell these houses compared with 9.5 months at the end of November. An eight-to-nine month supply is considered consistent with stable prices.
Stable prices have been the defining characteristic of the mortgage market so far in 2011. The prime 30-year fixed-rate loan has been holding around 5 percent, vacillating only a few basis points in either direction. However, rates could be pressured higher if China continues to sell US government debt, particularly 10-year Treasury notes. Mortgage rates aren't directly tied to 10-year Treasury notes, but these instruments hold tremendous sway over the direction of long-term debt instruments, including mortgage-backed securities.
Therefore, it's worth repeating that although mortgage rates are off November's lows, they're still historically low. We doubt lower rates are in our future, and we are unsure how long price stability will last. At this point, we simply cannot offer any sound economic reason for people to wait on a refinance or a home purchase.
Economic
Indicator
Release
Date and Time
Consensus
Estimate
Analysis
Case-Shiller Home Price Index
(November)
Tues., Jan. 25,
9:00 am, et
0.4% (Decrease)
Important. Data released from other sources suggest the consensus estimate is low.
Mortgage Applications
Wed., Jan 26,
7:00 am, et
None
Important. Stable rates are reviving refinance activity.
New Home Sales
(December)
Wed., Jan 26,
10:00 am, et
285,000 (Annualized)
Important. Excessive inventory continues to weigh on sales.
Federal Reserve FOMC Meeting
Wed., Jan 26,
2:15 pm , et
Federal Funds Rate: 0.0% to 0.25%
Important. The Fed will hold the fed funds rate low, but a few board members are considering raising it.
Pending Home Sales Index
(December)
Thurs., Jan 27,
10:30 am , et
89 Index
Important. The index suggests an uptrend is waiting in 2011 home sales.
Gross Domestic Product
(4th Quarter 2010.)
Fri. Jan. 28,
8:30 am , et
3.5% (Annualized Increase)
Important. Economic growth appears to have accelerated in the closing months of 2010.
The Economy is More Than the Consumer.
Economists expend a lot of time and energy analyzing the consumer. It's understandable, given that personal consumption represents 70 percent of gross domestic product. However, GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy – namely intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages.
A more thorough accounting of total spending at all stages actually doubles GDP. By this measure, the consumer represents only 30 percent of the economy, while business investment (including intermediate output) represents over 50 percent. In other words, businesses stimulate the economy as much, if not more so, than consumers.
Businesses make decisions based on two factors: current consumption and expected future consumption. We often forget the latter, which businesses gear up for by purchasing commodities, capital equipment and workers' services ahead of consumer sales. Therefore, while consumer spending might lag at the time, that doesn't mean the economy is lagging too. The good news is that business spending has been strong over the past few months, which we think portends better things for 2011.
The news quickly regained its footing, though. Builders appear to be planning more projects in 2011, based on permits rising 16.7 percent in December to a seasonally adjusted annual rate of 635,000 units, the best pace since last March. Fannie Mae is even more optimistic. It expects overall starts to increase 17.3 percent and hit 710,000 units this year, with another 42 percent increase to 1.1 million units in 2012, followed by a 42 percent gain to 1.5 million units in 2013.
As for the existing home market, RE/MAX reported a 13.2 percent increase in December sales. More encouraging, crisis hotspots Arizona and Florida produced double-digit yearly gains, proving once again the ironclad law of economics – lower prices equal more demand. According to RE/MAX CEO Margaret Kelly, “December's trends put the housing market in a strong position for growth as the home shopping season nears.”
The NAR corroborated RE/MAX's bullish outlook with bullish data of its own. The NAR reported that existing house sales increased 12 percent to a 5.28-million annual rate in December. Moreover, the number of homes on the market dropped 4.2 percent to 3.56 million units. At the current sales pace, it would take 8.1 months to sell these houses compared with 9.5 months at the end of November. An eight-to-nine month supply is considered consistent with stable prices.
Stable prices have been the defining characteristic of the mortgage market so far in 2011. The prime 30-year fixed-rate loan has been holding around 5 percent, vacillating only a few basis points in either direction. However, rates could be pressured higher if China continues to sell US government debt, particularly 10-year Treasury notes. Mortgage rates aren't directly tied to 10-year Treasury notes, but these instruments hold tremendous sway over the direction of long-term debt instruments, including mortgage-backed securities.
Therefore, it's worth repeating that although mortgage rates are off November's lows, they're still historically low. We doubt lower rates are in our future, and we are unsure how long price stability will last. At this point, we simply cannot offer any sound economic reason for people to wait on a refinance or a home purchase.
Economic
Indicator
Release
Date and Time
Consensus
Estimate
Analysis
Case-Shiller Home Price Index
(November)
Tues., Jan. 25,
9:00 am, et
0.4% (Decrease)
Important. Data released from other sources suggest the consensus estimate is low.
Mortgage Applications
Wed., Jan 26,
7:00 am, et
None
Important. Stable rates are reviving refinance activity.
New Home Sales
(December)
Wed., Jan 26,
10:00 am, et
285,000 (Annualized)
Important. Excessive inventory continues to weigh on sales.
Federal Reserve FOMC Meeting
Wed., Jan 26,
2:15 pm , et
Federal Funds Rate: 0.0% to 0.25%
Important. The Fed will hold the fed funds rate low, but a few board members are considering raising it.
Pending Home Sales Index
(December)
Thurs., Jan 27,
10:30 am , et
89 Index
Important. The index suggests an uptrend is waiting in 2011 home sales.
Gross Domestic Product
(4th Quarter 2010.)
Fri. Jan. 28,
8:30 am , et
3.5% (Annualized Increase)
Important. Economic growth appears to have accelerated in the closing months of 2010.
The Economy is More Than the Consumer.
Economists expend a lot of time and energy analyzing the consumer. It's understandable, given that personal consumption represents 70 percent of gross domestic product. However, GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy – namely intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages.
A more thorough accounting of total spending at all stages actually doubles GDP. By this measure, the consumer represents only 30 percent of the economy, while business investment (including intermediate output) represents over 50 percent. In other words, businesses stimulate the economy as much, if not more so, than consumers.
Businesses make decisions based on two factors: current consumption and expected future consumption. We often forget the latter, which businesses gear up for by purchasing commodities, capital equipment and workers' services ahead of consumer sales. Therefore, while consumer spending might lag at the time, that doesn't mean the economy is lagging too. The good news is that business spending has been strong over the past few months, which we think portends better things for 2011.
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