Week of February 21, 2011 

INFO THAT HITS US WHERE WE LIVE

Quote of the week... "I've been blamed for just about everything that's wrong with this country."--Elvis Presley

We who work in the real estate and mortgage industries know exactly how Elvis felt. The same people who unfairly blamed us totally for the recession now look to us alone for signs the economic recovery has taken hold. They might want to remember the health of the housing market is directly dependent on the health of the jobs market, which is not under our control. In any case, everyone felt better last week when January Housing Starts were UP a surprising 14.6%. Even though starts are down 2.6% from a year ago, this still shows builders are more hopeful going forward. The boost came from multi-family units, though single-family starts were off a mere 1% for the mon21th.

A lot of home buying activity is due to the affordability now out there. The National Association of Home Builders (NAHB) and a major bank reported their index shows home affordability in Q4 of 2010 at its highest level in 20 years. Their measure found that 73.9% of the new and existing homes sold in Q4 were affordable to families making the national median income of $64,400.

Business tip of the week... A big part of success is not giving up. Studies show that one trait shared by all very successful people is perseverance. They are persistent, determined, tenacious, pursuing a goal far beyond the point where the average person gets discouraged.

Review of Last Week

THE BULLS KEEP CHARGING... It's not like the running of the bulls at Pamplona just yet, but the bulls on Wall Street are definitely picking up steam. We had another weekly gain in the stock market as the three major indexes were up around 1% and the Dow and the S&P 500 hit new two-year highs. The Nasdaq reached a three-year high, just short of its 2007 peak. If the stock markets are a leading indicator of the overall economy, the recovery should pick up steam as the year goes on.

There were worries over rising Chinese interest rates and disruptions in the Middle East, but these were dispelled by the economic reports. The consumer is key to the recovery, so it was good to see retail sales are now UP seven months in a row. Inflation was a little hotter than expected, as year-over-year, the Core Consumer Price Index is now up 1.0%. Core CPI, the Fed's key inflation reading, is still within their target range and observers feel deflation concerns are now put to rest.

In other news, the Empire State Index showed manufacturing continuing to expand. This is great, though the jobs recovery depends on the services sector, where over 85% of the workforce is employed. Fortunately, that sector is expanding at its fastest pace in five years. Let's hope the jobs follow.

For the week, the Dow ended UP 1.0%, at 12,391; the S&P 500 was also UP 1.0%, to 1,329; and the Nasdaq went UP 0.9%, ending at 2,834.

Even with the stock surge, bond prices held on. Inflation was a little hotter than expected, but still tame. The FNMA 4.0% bond we watch ended up 18 basis points for the week, closing at $97.18. Mortgage rates, which had been inching up, fell back a bit. Freddie Mac's weekly survey of conforming mortgages showed national average fixed-rate mortgage rates remained near historic lows.

This Week’s Forecast

JANUARY HOME SALES, CONSUMER MINDSET, Q4 GDP... Happy Presidents Day! The markets will be closed Monday but then we'll have some important economic reports. January Existing Homes Sales on Wednesday are expected to be a tad off December's pace. The same goes for January New Home Sales on Thursday.

The week begins and ends with readings on the consumer mindset. Tuesday's Consumer Confidence is forecast up for February while Friday's Michigan Consumer Sentiment should hold steady. January Durable Goods Orders are predicted to be growing again, a sign business is investing in capital equipment and, perhaps next, in jobs. Friday, we get the second estimate of Q4 GDP, expected to be up a bit from the original estimate.

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 February 21 – February 25

Federal Reserve Watch   

Forecasting Federal Reserve policy changes in coming months  You hear a lot more experts now disagreeing with Fed policy, including some Fed members. But Fed Chairman Bernanke seems determined to keep the Funds Rate at its rock bottom level until we see stronger signs of economic growth and jobs recovery. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

Week of February 7, 2011 

INFO THAT HITS US WHERE WE LIVE

There's good news in the latest housing market forecast for 2011 from the National Association of Realtors (NAR). After dipping 4.8% last year, sales of existing homes are predicted to grow 7.9%  this year, to 5.3 million. The gain for 2012 is forecast to be a little less, up 4.5%, to 5.53 million. The existing home median price went up 0.3% in 2010, a nice recovery from the 12.9% price drop of 2009. For 2011, the NAR sees it rising 0.5%, to $173,000, then another 2.4%, to $177,900, in 2012.

New home sales are forecast to come back more briskly, up 17.7% in 2011, following their 15.5% drop in 2010. The 2012 projection is for a strong 51.1% sales gain, to 565,000 homes. The median price for new homes, which gained 2.2% last year, should go up another 1.8% in 2011, to $224,700, then 1.9% in 2012, to $229,000. The NAR's chief economist says this rebound in home sales does depend on an improvement in the jobs market. Affordability also matters and in Q4 of 2010 housing was the most affordable on record, according to NAR numbers going back to 1971. The NAR feels the current situation of low home prices along with low interest rates should continue.

Review of Last Week

HELLO, 12,000!... Last week saw strong corporate earnings, more indications the economy is healing, and Ben Bernanke telling the National Press Club the Fed won't be withdrawing its policy support anytime soon. The net result? The Dow shot up five days in a row, crossing the 12,000 threshold and staying there, trading near its highest levels since the middle of 2008. All three major indexes delivered impressive gains, with the S&P 500 enjoying its best January since 1997. Investors shrugged off worries the Egyptian protests might further de-stabilize the whole Mideast.

Corporate earnings are running way ahead of expectations and, even more encouraging, future earnings estimates are up. The week's star performers included mammoth Exxon Mobil, drug biggie Pfizer, and video gamer Electronic Arts. The vast majority of companies reporting beat their Q4 earnings expectations, as retailers chimed in with better than expected monthly same store sales results for January.

Investors also liked the economic data. Q4 productivity was up 2.6%, proving that, yes, we ARE working harder. But we're also being compensated for that extra effort, as personal income rose in December along with personal spending, which helps fire up the economy. But things aren't overheating yet, since Core PCE Prices, the inflation number the Fed watches, was up just 0.7% the past year. ISM Manufacturing and Services indexes both showed strong economic growth. The January Employment Report showed a gain of just 36,000 jobs, but this was put to the unusually bad weather preventing people from working -- several hundred thousand more than usual. Private sector payrolls were up 50,000, their 11th monthly gain in a row, which helped drop the unemployment rate to 9.0%.

For the week, the Dow ended UP 2.3%, at 12,092; the S&P 500 was UP 2.7%, to 1,311; and the Nasdaq shot UP 3.1%, ending at 2,769.

While stocks soared higher, bonds got hammered. Even the Egyptian unrest couldn't ignite a flight to safety, as investors wanting to catch the rising wave of stock prices took their money out of bonds. The FNMA 4.0% bond we watch ended down 187 basis points for the week, closing at $97.22. In spite of this drop, news of an improving economy and low inflation kept mortgage rates at historically low levels. Freddie Mac's weekly survey of conforming mortgages reported average fixed-rate mortgage rates pretty much unchanged.

This Week’s Forecast

A QUIET WEEK... We'll have the usual weekly and continuing jobless claims, and no one is expecting huge drops in these numbers just yet. Optimistic observers expect serious declines in claims in another month or so. We'll also see the December Trade Balance showing imports growing versus exports, although U.S. companies' export revenues are still strong, a good thing. Finally, consumer confidence in the economy is forecast to be growing, at least the way the February Michigan Consumer Sentiment Index sees it on Friday.

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 February 7 – February 11

Federal Reserve Watch    

Forecasting Federal Reserve policy changes in coming months  Fed Chairman Bernanke spoke before the National Press Club last week and certainly left the impression that the Funds Rate will stay at its rock bottom level for a decent while longer. This week's economic reports shouldn't inspire the Fed to hike the Rate any time soon. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.