Real Estate, Home Loan Mortgage Rates, and the Economy

It you have been listening to the national media talk about the continued decline in home prices and think it is safe to wait for the bottom a little longer, think again. There are two major components: price and payments.
For price, you need to forget the national media, and even the local news, and consider your specific neighborhood of interest and your price range. We have hit bottom in many areas of San Diego already. In fact, for homes priced under $430,000, it is an extremely hot market throughout most of San Diego. Supply and demand are reasonably balanced up to $900K and then prices get weak due primarily to the difficulty in getting a loan.
For payments (what it is actually going to cost you to live in the house), you need to pay close attention to interest rates. The table below shows the differences. A few short weeks ago, you could get a loan at 4.375% and pay $2,082 per month in principal and interest on a loan of $417,000. Today, the same loan will run about 5%. To make the same monthly payment, you can now only get a loan of $387,842. A decrease of 7%.

San Diego home values are not going to drop faster than interest rates will go up. If you’ve been thinking about getting into your first home or especially if you want to buy up in a down market, now is the time to take action. Get pre-approved by your lender first so that you and your Realtor are only looking at homes you can afford.

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Consumer credit saw its largest increase in more than two years during October, according to the Federal Reserve’s latest report released last week. October’s consumer credit increased at an annual rate of 1.75 percent for the month, marking the second straight monthly increase.

Non-revolving credit, such as home and student loans, increased at an annual rate of 6.75 percent to $1.59 trillion, while revolving credit, such as credit cards, decreased at an annual rate of 8.5 percent, dropping to $800 billion. This was the 26th straight monthly drop for credit cards.

The largest segment of the non-revolving debt’s growth was student loans, which may suggest that Americans are seeking degrees that could improve their job-hunting prospects.

Bearing that in mind, the Department of Labor reported last week that for the week ending Dec. 4, the advance figure for seasonally adjusted initial claims for unemployment benefits was 421,000, a decrease of 17,000 from the previous week’s revised figure of 438,000. Also, the four-week moving average was 427,500, a decrease of 4,000 from the previous week’s revised average of 431,500.

Meanwhile, wholesale performance was up according to the Census Bureau’s latest report last week. October sales of merchant wholesalers were $362.1 billion, up 2.2 percent from September’s revised level and up 13.4 percent from October 2009. Inventories of merchant wholesalers were $427.1 billion at the end of October, up 1.9 percent from September’s revised level and 9.9 percent from a year ago. This put the October inventory/sales ratio for merchant wholesalers at 1.18, in comparison to October 2009′s ratio of 1.22.

This week’s financial headlines kick off Tuesday with the Census Bureau’s retail sales data for November, which is expected to gain 0.8 percent over October. Tuesday will also see the Bureau of Labor Statistics’ release of the November producer price index, followed by its counterpart the consumer price index on Wednesday. Both are expected to shift little from October’s figures with the PPI forecast to increase by 0.5 percent and the CPI by 0.2 percent.

Also expected to be released on Wednesday are the Federal Reserve’s figures for November’s industrial protection and capacity utilization, which respectively report the output of U.S. factories, mines and utilities, and how much more they could have produced if needed. Production is expected to gain 0.3 percent over October. November capacity is forecast to ring in at 75 percent of production capacity.

On Thursday, the Census Bureau will release its figures for November housing construction starts and building permits, which are expected to reach 545,000 and 570,000, respectively.

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Better-than-expected retail sales data led the week’s financial headlines, with advance estimates for October’s retail and food services sales hitting $373.1 billion, a respectable 1.2 percent jump from September and a 7.3 percent increase over October 2009.

On their own, retail trade sales were up 1.3 percent (0.5%) from September 2010, and 7.7 percent above last year; auto and other motor vehicle dealers sales were up 14.7 percent from October 2009; and nonstore retailer sales were up 13.5 percent from last year.

In related news, October’s Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent, the Bureau of Labor Statistics reported last week. While this was slightly below the 0.3 gain experts were hoping for, last month’s gain perpetuated a healthy trend.

The Bureau noted in its report for October that, as has often been the case in recent months, an increase in the energy index was the major factor in the overall CPI increase. The gasoline index rose for the fourth month in a row and accounted for almost 90 percent of the “all items” increase, and the household energy index rose as well.

The Producer Price Index for Finished Goods in October — also released by the Bureau last week — showed improvement similar to October’s CPI, with a PPI increase of 0.4 percent showing improvement, but not as much as experts’ expectations of a 0.8 increase. This continued a positive trend, with October’s advance following a 0.4 percent rise for both September and August.

Meanwhile, in housing news, the Census Bureau reported that construction was down for October, with construction starts on privately owned homes at a seasonally adjusted annual rate of 519,000. This was a whopping 11.7 percent below September’s revised estimate of 588,000. That said, starts on single-family homes in October were at a rate of 436,000, which is only 1.1 percent below September’s revised figure of 441,000.

However, permits were up for October, with the Census Bureau reporting that authorizations for privately owned homes were at a seasonally adjusted annual rate of 550,000. This was 0.5 percent above September’s revised rate of 547,000. Likewise, October’s authorizations for single-family homes were at a rate of 406,000, which was 1.0 percent over September’s revised figure of 402,000.

This week’s big financial and economic headlines lead tomorrow with the Bureau of Economic Analysis’s second estimate on gross domestic product for the third quarter, which is expected to increase by 2.3 percent. Despite the sometimes volatile nature of quarterly GDP data, given that the previous quarter enjoyed 2 percent growth, a follow-up increase could point to a developing trend.

Another important figure to be released tomorrow is the National Association of REALTORS®’s existing home sales data for October, which is expected to show a very slight gain. October’s home sales data from the Census Bureau will be released the day before Thanksgiving, and are expected to show an increase, as well (in terms of volume, market watchers are hoping for 320,000).

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Foreign trade topped last week’s headlines, with the foreign trade deficit for September dropping while the G-20 struggled to avert a trade war fueled by currency disputes.

The nation’s international trade deficit in goods and services decreased to $44 billion in September from August’s revised $46.5 billion. September exports were $0.5 billion more than August exports of $153.6 billion, and September imports were $2 billion less than August imports of $200.1 billion.

September’s performance beat forecasts by $1 billion and, when matched with last week’s jobless claims data, gave some cause for optimism. Last week, the Department of Labor reported that for the week ending November 6, the advance figure for seasonally adjusted initial claims was 435,000, a decrease of 24,000 from the previous week’s revised figure of 459,000. The four-week moving average was 446,500, a decrease of 10,000 from the previous week’s revised average of 456,500.

“Two months ago, three months ago there was a real growth scare and people were talking about a double dip (recession),” Jim O’Sullivan, chief economist at MF Global, told the Financial Express. “Now, the numbers are not only not showing double-dip, but they’re showing reacceleration.”

That said, the world’s financial leaders faced a rocky start to the G-20 economic summit due to the dispute over some nations keeping their currency undervalued in order to gain a trade advantage. The greatest rift was between the United States and China, with President Obama calling for nations to let the markets set the value of their currencies (rather than China’s artificially low yuan).

However, other nations pointed to the Fed’s plans to generate $600 billion in new money for the U.S. market as a way to undervalue the dollar.

This left the summit as “largely an exercise in damage limitation and papering over the huge cracks that exist between the positions of the deficit and surplus countries,” Julian Jessop, an economist with Capital Economics, stated in a report. “We do not therefore expect anything of much substance to emerge, but there is plenty of scope for continued frictions.”

This week’s financial reports kick off with retail sales data for October from the Census Bureau, which experts are expecting to increase by 0.7 percent.

Another important indicator will be October’s producer price index and consumer price index data from the Bureau of Labor Statistics, to be released on Tuesday and Wednesday, respectively. Market watchers are expecting a 0.7 percent increase in PPI and a 0.3 percent increase in CPI.

Also on Wednesday, the Census Bureau will release data on housing starts and building permits for October. Industry watchers are expecting a slight retreat from September’s performance.

Rounding out the week will be the Conference Board’s release of leading economic indicators for October. The report, which summarizes previously released data on factors such as new orders, jobless claims, money supply, average workweek, building permits and stock prices, is expected to show some slight improvement.

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After an encouraging increase in August, personal income figures fell below market expectations for September, according to figures released by the Bureau of Economic Analysis last week.

Personal income decreased $16.8 billion, or 0.1 percent, and disposable personal income (DPI) decreased $20.3 billion, or 0.2 percent, in September, according to the bureau. That said, personal consumption expenditures (PCE) increased $17.3 billion, or 0.2 percent. Market watchers had expected a 0.2 percent increase in income and 0.4 percent increase in spending.

Because of this, September’s personal savings — DPI minus personal outlays — dipped to $607.6 billion, compared with $642.0 billion in August. Personal savings as a percentage of disposable personal income was 5.3 percent in September.

Moving forward to the week ending October 30, the advance figure for seasonally adjusted initial claims for jobless benefits was 457,000, an increase of 20,000 from the previous week’s revised figure of 437,000. The figure was also much higher than experts’ expectations of 445,000.

Pair the jobless statistics with a report from the Bureau of Labor Statistics that nonfarm business sector labor productivity increased at a 1.9 percent annual rate during the third quarter of 2010, and it would appear that employers are squeezing every possible ounce of output from their employees. Worker output increased 3.0 percent and hours worked increased 1.1 percent in the third quarter.

To help push rates down and increase demand, the Fed said it would buy $600 billion in new Treasury securities, in addition to continuing a previous program of asset purchases. This spurred a global stock market rally that sent some indexes to new highs for the year. In fact, the Dow Jones industrial average rose above 11,400 points, its highest level since August 2008.

Another segment of the economy that showed decent performance in last week’s headlines was U.S. auto sales, for which October was the industry’s strongest month so far this year. Industry sales increased 13.4 percent to 950,165 units.

“The trends are positive, and we are going in the right direction,” Jesse Toprak, vice president of industry trends at car pricing tracker TrueCar.com, told the Associated Press.” We are seeing more confidence by consumers to make big-ticket purchases in an uncertain economic environment.”

This week’s financial news leads with data on wholesale inventories for September from the Census Bureau, to be released today. Most of the financial news will be made on Tuesday, with the Census Bureau reporting on September’s trade balance and October’s export and import prices. While any strengthening in U.S. trade performance could signal good things for the nation’s economic position, the trade gap is expected to widen.

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Housing construction performance unexpectedly rose last month, beating both the market’s and analysts’ expectations. The big surprise was initial home construction for September.

Construction starts on private homes in September ticked up to a seasonally adjusted annual rate of 610,000, which was 0.3 percent better than August’s revised estimate of 608,000. Starts on single-family homes in September reached a rate of 452,000, which was 4.4 percent over August’s revised figure of 433,000.

“The 0.3 percent monthly increase in U.S. housing starts in September, to 610,000 from 608,000, is better than it looks as starts were revised up in each of the previous two months,” Paul Dales, an economist with Capital Economics, told the International Business Times.

That said, building permits for private housing in September dropped 5.6 percent below August’s performance to a seasonally adjusted annual rate of 539,000. However, permits for single-family homes issued in September were at a rate of 405,000, which was 0.5 percent higher than August’s revised figure of 403,000.

Builder confidence in the market for new, single-family homes rose three points to 16 for October, according the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), a survey of U.S. home builders. This was the first improvement registered by the HMI in five months, and returns the index to a level last seen in June of this year.

“The new-homes market is finally moving past the lull that occurred when the home buyer tax credits expired and economic growth stalled this summer,” said NAHB Chief Economist David Crowe in a public statement.

The HMI tracks three indexes. Besides the October figures on the present market, NAHB/Wells Fargo’s index gauging sales expectations for the next six months rose five points to 23, and the index gauging traffic of prospective buyers rose two points to 11.

This week is full of pertinent real estate news, starting with existing home sales data for September from the National Association of REALTORS®, which hits the headlines today. Then the Census Bureau releases its new home sales data for September on Wednesday. If last week’s limited regional sales reports were any indication, expect performance to be down.

Also coming out this week is consumer confidence data for September on Tuesday from the Conference Board, which offers consumers’ appraisal of their current situations and their expectations for the economy. A good companion piece of data, the University of Michigan’s consumer sentiment data for September, will be released on Friday.

Other data to be released this week are durable goods orders from the Census Bureau on Wednesday and data on the third quarter’s gross domestic product from the Bureau of Economic Analysis on Friday.

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Producer prices continued their upward trend in September, the Bureau of Labor Statistics reported last week. The Bureau’s producer price index (PPI) for finished goods increased 0.4 percent in September, seasonally adjusted, mirroring August’s 0.4 percent increase.

Similarly the PPI for intermediate materials, supplies and components increased 0.5 percent thanks to a broad-based increase in prices for various items. For instance, prices for foods and feeds climbed 2.1 percent and prices for energy advanced 0.7 percent.

However, the PPI for crude materials requiring further processing dropped 0.5 percent, countering a three-month rise. The Bureau chalked up September’s decrease to the index for crude energy materials, which fell by a sizable 8.8 percent.

The PPI increase for finished goods beat out economists’ expectations of a slight 0.1 percent rise, which should certainly nix any concerns of a deflation. But any concerns over inflation due to the increase would be unjustified, according to Mesirow Financial’s chief economist Adolfo Laurenti.

“Food prices are high, but the index is relatively stable in its core component,” Laurenti told Northwestern University’s Medill Reports. “It’s not enough of a change to convince the Federal Reserve there is any uptick in inflation.”

Meanwhile, the trade balance remained at a deficit for August, with total exports at $153.9 billion and total imports of $200.2 billion for the month, according the Census Bureau’s latest figures released last week. This put the goods and services deficit at $46.3 billion, up from July’s $42.6 billion.

The increase in the deficit was thanks to our largest trading partner, China, which had a record trade gap with the United States for the month. China accounted for more than half of August’s $46.3 billion gap. This can be chalked up to the weaker yuan, which makes Chinese products cheaper in the U.S. and other overseas markets.

On the bright side, while the trade gap widened, exports ceased their slide in August, totaling $153.9 billion, up 0.3 percent from July.

This week’s financial headlines kick off today with the latest NAHB/Wells Fargo Housing Market Index (HMI) figures for October, which provide a gauge of recent home sales, as well as indications of future home construction.

This is followed Tuesday by the Census Bureau’s data on housing starts and building permits, which provide information on how much new construction was started and how much more construction was approved — another good measure of the housing market.

The Conference Board rounds out the week with its latest report of leading indicators, a compendium of previously announced data on new orders, jobless claims, money supply, average workweek, building permits and stock prices to provide a broader picture of where the economy is headed.

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Consumers have money to spend, but are keeping a tight grip on it. That was last week’s word from the Bureau of Economic Analysis, which reported that personal income for August increased just 0.5 percent over July to $59.3 billion, and disposable personal income (DPI) increased $52.0 billion, or 0.5 percent, as well. Personal consumption expenditures (PCE) increased by $41.3 billion, or 0.4 percent, over July.

“Real” DPI (i.e., after taxes) was up 0.2 in August, which marked a turnaround from July’s 0.2 percent decline. Similarly, real PCE was up 0.2 percent.

With income outstripping spending, personal savings (DPI minus personal outlays) was up $661.9 billion in August, compared with July’s $650.0 billion, putting personal savings as a percentage of disposable personal income at 5.8 percent in August, compared with 5.7 percent in July.

An instinct to save is definitely in line with the Conference Board’s report last week that consumer confidence is dipping. The Conference Board’s Consumer Confidence Index retreated in September to 48.5 (the 1985 baseline is 100), down from 53.2 in August. September’s Present Situation Index, how consumers feel about their current financial circumstances, decreased to 23.1 from 24.9. The Expectations Index, how consumers feel about the economy’s future, declined to 65.4 from 72.0 last month.

“September’s pull-back in confidence was due to less favorable business and labor market conditions, coupled with a more pessimistic short-term outlook,” said Lynn Franco, director of the Conference Board Consumer Research Center. “Overall, consumers’ confidence in the state of the economy remains quite grim. And, with so few expecting conditions to improve in the near term, the pace of economic growth is not likely to pick up in the coming months.”

Consumers’ assessment of current conditions also worsened in September with those saying business conditions are “bad” increasing to 46.1 percent from 42.3 percent, and those claiming business conditions are “good” declining from 8.4 percent to 8.1 percent. Those claiming jobs are “hard to get” rose to 46.1 percent from 45.5 percent, while those stating jobs are “plentiful” decreased to 3.8 percent from 4 percent.

Construction spending rounded out last week’s headlines with not unexpected news of declines in August. Spending on private construction was at a seasonally adjusted annual rate of $498.2 billion, down 0.9 percent from July’s revised estimate of $502.6 billion. August’s residential construction was at a seasonally adjusted annual rate of $238.5 billion, down 0.3 percent from the revised July estimate of $239.1 billion.

Early this week look for news on factory orders and inventories (October 4) from the Census Bureau, but the big news will come later in the week when the Federal Reserve releases its monthly report on consumer credit (October 7). The Bureau of Labor Statistics will provide data on non-farm payrolls (October 8 ), hourly earnings (October 8 ) and the average workweek (October 8).

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American consumers are using less credit, according to the Federal Reserve, which reported last week that July’s total consumer credit decreased at an annual rate of 1.75 percent. July’s total consumer credit was down $3.9 billion from $2.42 trillion.

The big drop was in credit card use, with revolving credit decreasing at an annual rate of 6.25 percent to $827.8 billion in July from June’s $832.2 billion. This was the 23rd straight monthly drop in revolving credit usage.

In line with the Fed’s findings, a survey from Javelin Strategy & Research found that 56 percent of U.S. consumers used credit cards in 2009, which was well below an early 2007 survey’s findings of 87 percent. That reticence to use credit cards is rooted in the uncertain job market, said Javelin President James Van Dyke.

“People are being extraordinarily cautious because of concerns about a double-dip recession, and jobs not being returned,” Van Dyke told USA Today.

While revolving debt continued its tumble, non-revolving credit loans such as those for cars for July actually increased at an annual rate of 0.5 percent. This most likely reflected an increase in auto sales over the summer.

Meanwhile, July’s trade deficit dropped to $42.8 billion down from $49.8 billion, with exports of $153.3 billion and imports of $196.1 billion, the Bureau of Economic Analysis reported last week. July’s exports were $2.8 billion more than June exports of $150.6 billion. July imports were $4.2 billion less than June imports of $200.3 billion.

The trade deficit news came as the Department of Labor reported last week that first-time unemployment insurance claims for the week ending September 4 were down 27,000 from the previous week. Claims dropped to 451,000, from the previous week’s revised figure of 478,000. This was well below most economists’ expectations.

While the nation’s extremely high unemployment level is anything but good, the narrowing trade gap and increased exports, paired with better-than-expected employment news, could be reason for cautious optimism.

This week, keep an eye out for news on retail sales and business inventories (September 14) and export and import prices (September 15) from the Census Bureau; industrial production and capacity utilization (September 15) from the Federal Reserve; and the producer price index (September 16) and consumer price index (September 17) from the Bureau of Labor Statistics.

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Dominating last week’s financial news was a precipitous plunge in sales of both new and existing homes for the month of July.

Sales of existing single-family homes, townhomes, condominiums and co-ops during July dropped a shocking 27.2 percent to a seasonally adjusted annual rate of 3.83 million units, down from June’s downwardly revised rate of 5.26 million units, according to figures from the National Association of REALTORS®. Existing housing sales in July were the lowest figures on record since NAR’s existing home sales data began in 1999.

Single-family home sales (the lion’s share of existing home sales) dropped 27.1 percent to a seasonally adjusted annual rate of 3.37 million in July, down from 4.62 million in June. This was the lowest single-family home sales rate since May 1995, according to NAR.

Once again, the end of the homebuyer tax credit incentive was chalked up as the main driver in July’s plummet.

“Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired,” said Lawrence Yun, NAR chief economist, who added that the poor sales pace will likely continue for a few months. “Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September.”

While July’s existing home sales were off by an alarming amount, prices continued to hold their line. The median price for all types of existing homes was $182,600 in July, up 0.7 percent from a year ago.

Despite the fact that total housing inventory at the end of July increased 2.5 percent to 3.98 million existing units, which represents a 12.5-month supply at the current sales pace, Yun does not predict a tapering in home prices.

“Over the short term, high supply in relation to demand clearly favors buyers,” he said. “However, given that home values are back in line relative to income, and [given] very low new-home construction [rates], there is not likely to be any measurable change in home prices going forward.”

Sales of new single-family homes during July dropped to a record-low rate of 276,000, which was 12.4 percent below June’s revised rate of 315,000, according to figures released last week by the Census Bureau. This is the lowest rate on record since 1963.

In terms of pricing and inventory, the median sales price of new houses sold during July was $204,000 and the average sales price was $235,300. The estimate of new houses for sale at the end of July was 210,000, representing a 9.1-month supply at the current sales rate.

“A double-digit drop suggests to me that there wasn’t just a tax effect at work in July, but a change in sentiment, a change in the willingness to make such a big purchase,” FTN Financial chief economist Christopher Low told the Los Angeles Times. “It is especially surprising given where mortgage rates were. It is just a reminder of how much work there is still left to do before housing can be deemed healthy again.”

This week, monitor the financial headlines for news on personal income and spending (August 30) from the Bureau of Economic Analysis; consumer confidence (August 31) from the Conference Board; car and truck sales (September 1) from the auto manufacturers; construction spending (September 1) and factory orders (September 2) from the Census Bureau; and the unemployment rate (September 3) and hourly earnings and the average workweek (September 3) from the Bureau of Labor Statistics.

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