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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (44936)	11/7/2005 10:08:54 AM
From: ild	Respond to of 110194

Berson's Weekly Commentary Economic Commentary November 7, 2005 More signs that housing has peaked. Although the most recent national data on housing market activity are positive (with housing starts and new home sales up, and existing sales unchanged -- and with all of them at near-record levels), more recent data on mortgage applications and anecdotal evidence from local Realtor boards suggest that home sales have peaked. We have consistently viewed the purchase component of the weekly mortgage applications survey from the Mortgage Bankers Association (MBA) as the best near-term (one-to-three months) leading indicator of home sales because so many households get preapproved for mortgages before they begin house hunting. The figure below shows the purchase applications index over the past five years. There are two important things to take away from this figure. First, the level of purchase applications remains very strong -- suggesting that home sales in coming months will remain at high levels. And second, the applications have tumbled in recent weeks. Since it’s a weekly survey, the figures can be quite volatile -- so care must be taken when looking only at a particular week. Still, the most recent week’s purchase applications fell to the lowest level since February. Viewing the monthly averages of the weekly data (so that some of the weekly volatility is averaged away), purchase applications in October fell by 5 percent from September (which was the second strongest month ever) and were at the lowest level since March. Moreover, mortgage rates in the MBA survey continue to rise, and the 6.21 percent contract rate for 30-year fixed-rate mortgages in the latest week was the highest level since the end of June 2004. (Interestingly, long-term interest rates -- including FRM rates -- moved generally lower after the Fed began tightening, at least until the last six weeks or so). The other thing that we are seeing that suggests that home sales may have peaked are data from local Realtor boards on unsold inventories of homes. These data show that inventories have jumped in certain previously hot markets over the past couple of months. Is this evidence that markets are simply moving into better balance, after what could arguably be viewed as several years of excess demand? Or is it a sign that perhaps investors have decided that this is the right time to move out of housing and into other assets, leading to an excess supply of homes on the market? Unfortunately, we currently don’t have the data to choose between these competing hypotheses. Most likely, it is a little of both -- and we will see modestly lower home sales in coming months, along with more sustainable price appreciation in the majority of housing markets. Our forecast for the housing market continues to show a modest slowdown beginning in the current quarter, with a further slipping of home sales in 2006. Still, with a growing economy, positive housing demographics, and still-low (albeit rising) mortgage rates, the housing market should continue to do well next year -- although down by perhaps 5-10 percent from 2005's record pace. There won't be much interesting economic data released this week, although the consumer sentiment figures will be parsed to determine if lower gasoline prices in recent weeks have made people feel more positive about economic conditions. On Monday, consumer credit for September is expected to increase by $6.2 billion -- a pickup from the $4.9 billion rise in the prior month. On Wednesday, wholesale inventories are projected to increase by 0.3 percent in September -- keeping the inventory-sales ratio at historically low levels (and suggesting greater increases in coming months). On Thursday, import prices for October should decline by 0.1 percent -- stemming from a small decline in oil prices, after huge run-ups in the previous couple of months. Also on Thursday, the trade deficit for September is expected to climb to a record $62.0 billion -- mostly because of the jump in oil prices and the need to import significantly more crude oil (as well as refined petroleum products) in the wake of the hurricanes. Additionally on Thursday, initial unemployment claims are expected to edge down to around 320,000 for the week ending November 5th -- as the effects of Hurricane Katrina are just about over in this series. Finally, on Friday, the University of Michigan’s index of consumer sentiment is projected to edge up to 76.0 in the first half of November in response to lower gasoline prices -- after huge drops in the previous two months that suggested that economic activity could stall. David W. Berson Fannie Mae Economics Last Revised: November 7, 2005 fanniemae.com