Saturday, September 15, 2007


The markets jitters come from more mixed news. July’s unemployment rate remained at 4.6 percent, but payrolls shrank by 4,000 for the first time in 4 years—as opposed to the 100,000 plus monthly jobs average of late. The NAR’s pending existing-home sales index fell, as did construction spending. But both manufacturing and service sector activity continue to expand. And retail sales are robust, especially at the high end.

All of this makes it virtually certain that the Federal Reserve will begin to reduce short-term interest rates sometime this month—maybe this week. Their mandate is not only to fight inflation, but nurture “sustained economic growth”. And any jobs uncertainty is a sure sign that employers are holding off on hiring until the real estate market settles down.

Lawrence Yun, NAR senior economist, said abnormal factors are clouding the existing-home sales picture. “It’s difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren’t closing because mortgage commitments have been falling through at the last moment,” he said.

These temporary problems are primarily with jumbo loans, and there are continuing issues for subprime borrowers. But new lenders are stepping into the breach to replace those who have stopped lending—contrary to the early 1980s, when the disparity between short and long term interest rates caused even the largest banks to stop mortgage lending. This is not the case today, as banks are flush with profits from the 5-year expansion.

The economy as a whole seems to be doing quite well of late, including consumers. One such indicator is consumer spending, which had declined but now is rising again along with personal incomes, as I have said. The government’s latest figures show that personal incomes jumped 0.5 percent in July, while real consumption expenditures have averaged 3 percent annually, indicating that third quarter economic growth could also be above 3 percent. Q2 GDP was revised to a 4 percent growth rate.

UNEMPLOYMENT—July’s unemployment rate was unchanged at 4.6 percent because the same number left the workforce as lost their jobs—more than 300,000 in each case, according to the telephone survey of households. There was a 68,000 plunge in construction and manufacturing employment, while education and health services’ employment rose 63,000, according to the payrolls survey. This balancing act is keeping the economy chugging along.

What about real estate sales? Interest rates are already plunging, with conforming 30-year fixed rates now at 5.875 percent for slightly more than a 1 point origination fee. And if the Fed drops its short-term fed funds rate, the Prime Rate and other ARM indexes would follow its lead.

“Some consumer concerns remain, but since mid-August the market has been stabilizing somewhat,” said the NAR’s Yun. “If lenders focus on the essentials of creditworthiness and adjusted valuations based on comparable sales, and ignore speculation on what might happen in the future, broader stabilization will come sooner rather than later,” Yun said.

By not acting sooner, the Fed seems to be trying to downsize the largest issuers of jumbo subprime and Option ARMs, who can no longer sell these loans on the secondary market. Neither consumers, nor these lenders will see any relief until the ARM indexes, including the Prime Rate at 8.25 percent, begin to decline.

Copyright © 2007

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