Keeping you updated on the market! June 2, 2008

MARKET RECAP

A funny thing happened on the road to recession: We got lost. The economy plowed ahead at an unexpected 0.9% pace in the first quarter of 2008, according to data released by the Commerce Department last week. The new reading on gross domestic product was an improvement from the initial growth estimate for the January-to-March quarter, raising hopes that the country can dodge a full-blown downturn.

Continued economic growth is inspiring, particularly when considering that the fallout from the housing meltdown has been a huge drag on overall economic growth. But it’s a drag whose tension appears to be abating. Housing demand in many areas of the country is increasing. In California, homes sales increased 2.5% in April, following 30 consecutive monthly declines, the California Association of Realtors reported. Meanwhile, the National Association of Realtors reported that sales jumped 20% or more in April in hard-hit areas like Las Vegas, Fort Myers, Florida, and Riverside, California.

A number of factors are at work here, none more important than lower prices luring buyers into the market. Foreclosure auctions are doing their part as well. Many banks holding repossessed properties are so eager to unload them that they are giving buyers discounts of as much as 40%, according to data gathered by Economy.com. Of course, bargain-basement prices will only last so long before the inventory is cleared and prices begin to rise.

Stable mortgage prices could also entice buyers into the market. On that front, mortgage rates continue to trade within a relatively narrow band. Last week, the prime 30-year fixed-rate mortgage averaged 6.2%, the prime 15-year fixed-rate mortgage averaged 5.8%, the 5/1 adjustable-rate mortgage averaged 5.7%, and the 30-year fixed jumbo mortgage averaged 7.4%, according to Bankrate.com’s latest survey.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Construction Spending
(April)

Mon. June 2,
8:30 am, et

0.6%
(Decrease)

Important. Residential spending remains weak, but other areas are showing signs of strength.

Factory Orders
(April)

Tues. June 3,
10:00 am, et

0.2%
(Increase)

Moderately Important. Manufacturing continues to grow despite reduced consumer spending.

Mortgage Applications

Wed. June 4,
7:00 am, et

None

Important. Stricter underwriting guidelines continue to restrict activity.

U.S. Productivity (Revised 1st Quarter 2008)

Wed. June 4,
8:30 am, et

2.6%
(Increase)

Important. Previously reported gains are expected to show additional improvement.

Employment Situation
(May)

Fri. June 6,
8:30 am, et

Unemployment: 5.1%
(Increase)
Hourly Wages: 0.2% (Increase)

Very Important. A better-than-expected employment report, though good for the economy, could send interest rates higher.

Wholesale Trade
Sales
(April)

Fri. June 6,
10:00 am, et

0.6%
(Increase)

Moderately Important. The expected increase is another sign the economy could avoid a full-blown recession.

Consumer Credit
(April)

Fri. June 6,
3:00 pm, et

$7.6 Billion
(Increase)

Moderately Important. This volatile credit measure should have little impact on credit rates.

AN APPETITE FOR RISKIER LOANS

Lower home prices stimulating demand is good news, but cautious mortgage underwriting standards isn’t. We’ve probably moved too far to the cautious side on the latter, which is understandable given that commercial banks across the nation have had to recapitalize to the tune of $100 billion, due in large part to bets gone awry on subprime-mortgage investments. Unfortunately, overly-strict underwriting standards are preventing legitimate buyers from entering the market.

Thankfully, the purse strings will eventually loosen. The key will be the return of non-agency sponsored mortgage-backed securities. When the private sector returns to the MBS market en mass, mortgage originators will be less subjugated to the decrees of Fannie Mae and Freddie Mac. That will mean more choice for borrowers and more lending opportunities for originators.

The worst of the subprime mess is probably behind us and investors have shown an increased willingness to invest in banks and other lending institutions. It’s possible we could see the purse strings loosen as early as the fourth quarter.

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