Kathleen Wainwright

"Don't believe the hype!" The words from Public Enemy's hit song title rang true once again last week when the Commerce Department reported the Gross Domestic Product (GDP) for the 3rd Quarter. As you can see from the chart below, GDP rose by 3.5% for the first gain in a year and the strongest reading in two years.

While most media outlets were giddy about the news and started the hype that the recession is behind us, it's important to remember that there's more to the economic data than just the headlines.

The temporary "Cash for Clunkers" program has now expired, but was a big part of last quarter's GDP gain. If we remove it from the total, the reading would have been a more modest 1.9%. But there is even more to the rise in the latest GDP number that is just temporary...

Also bolstering the economy has been the $8,000 first-time homebuyer tax credit - which is set to expire at the end of this month. Many home buyers have been taking advantage of this program - and wisely so.

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Chart: US Gross Domestic Product (By Quarter)

New Home Sales were reported last week, showing a 7.5-month supply of inventory. While that number is slightly worse than last month's 7.3 reading, it's still a big improvement from where we were in January. Back in January, inventory levels reached a high of 12.4-month supply! The improvement in housing inventories has been due in large part to the $8,000 First Time Homebuyer Tax Credit, which is set to expire on November 30.

There is a real possibility of an extension of this program through a proposed Bill, but it is not yet a certainty. The extension Bill still must be reconciled between the House and Senate, and then voted on for final approval. Under the current extension proposal, sales with signed purchase agreements by April 30th that close before June 30^th, 2010 would qualify for the credit.

Another positive element would be the possible addition of $6,500 tax credit for other primary home purchasers, meaning the tax credit would no longer be limited only to first-time homebuyers. There is also a possibility that qualifying income limits could increase from $75,000 to $125,000 for singles, and from $150,000 to $250,000 for joint tax filers.

I will be keeping an eye on this for you, so stay tuned.

Economic Update for July 13, 2009

Pending home sales show a sustained uptrend, rising for four consecutive months with very favorable housing affordability and a first-time buyer tax credit boosting activity, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in May, increased 0.1 percent to 90.7 from an upwardly revised reading of 90.6 in April, and is 6.7 percent higher than May 2008 when it was 85.0. The last time there were four consecutive monthly gains was in October 2004.

One thing all real estate professionals should be aware of is that more stringent appraisals and delays in short sales and foreclosures will effect the actual closings from May contracts.

This week retail sales activity was up +0.5% for the second consecutive week. Retail sales are based primarily on purchases in department stores that have multiple outlets around the country. These include stores such as include Macy's and Target. Department stores account for about 10% of all household expenditures. The results are useful in that they are available each week whereas most business data is published monthly. The figures tracked are only for stores that have been open for one year or longer.

Interest rates on the 30-year fixed mortgage rate according to Freddie Mac survey data decreased ten basis points from 5.42% to 5.32% for the week (lowest rate in one month). Mortgage rates typically move in the opposite direction of economic news. Good news in the market that sends investors toward stocks and away from bonds will create a decrease in bond prices but an increase in bond yields (interest rates)

This week the mortgage application survey indicated a +7.2% gain from the same week a year ago. This 21-year old mortgage survey is based on approximately 400 responses per month and correlates well with single family housing starts and building permits out to six months in advance. The index covers both conventional and government-backed mortgage applications as well as various maturities. When mortgage applications are on the rise this should be viewed not just as a positive for the housing sector, but for the overall economy.

Summary: Though we are clearly in a recession it appears to have bottomed and there are strong indicators that economic activity will begin to pick up in the coming months. The biggest concern at present is government spending that could trigger inflation down the road. At present there are no short term worries in this area. Home prices are affordable and interest rates are still at some of their lowest levels in decades.

The Wave of REO's and Foreclosures

Inventories of unsold homes are expected to rise in the up-coming months as lenders begin to push a growing backlog of repossessed homes up for sale -- often in communities already awash in distressed properties.

Builders have cut back drastically on the production of new homes it's likely lenders will soon be putting pressure on inventories even if they succeed in efforts to keep more troubled borrowers in their homes rather than foreclosing on them.

Because it can take weeks or months for lenders to put repossessed homes on the market, the impact of real estate-owned (REO) properties on inventories lags behind foreclosures. Government efforts to recapitalize banks through the Troubled Asset Relief Program (TARP) and other bailout measures may also have taken some of the heat off of lenders to unload REO properties at fire-sale prices.

"It's almost like a tsunami -- you can see it coming and you know it's going to hit but you cant get out of the way.

The value of REO property on the books of FDIC-insured banks at the end of the third quarter surged 21 percent from the previous quarter, to $23 billion. That total -- which includes single-family to four-family homes valued at $11.5 billion and another $1.5 billion in property purchased with FHA-backed loans securitized by Ginnie Mae -- represents a 134 percent increase from a year ago.

Not all of those homes are in areas hard-hit by speculation and subprime lending, either. About six out of 10 homes in Fannie and Freddie's REO inventory were purchased with prime loans available only to borrowers with good credit.

Fannie and Freddie both stopped foreclosing on loans they own over the holidays.

With more than half of the loans modified by lenders in the first half of 2008 already in default again it's clear that lenders will have to take the more drastic step of reducing the principal balance to make loan mods work.

Ominous statistics

The Mortgage Bankers Association's members suggest one out of 10 mortgages was either delinquent or in the foreclosure process at the end of September, and Moody's Economy.com estimates 12 million homeowners are "upside down" -- they owe more on their homes than their properties would fetch in today's market.

As many as 75 percent of distressed properties have yet to hit the market, and that many of those homes will soon be putting pressure on inventory and prices as banks repossess them and put them up for sale.

I've learned that I like my teacher because she cries when we
sings "Silent Night".
Age 5

I've learIned that our dog doesn't want to eat my broccoli
either.
Age 7

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Age 9

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Mom makes me clean it up again.
Age 12

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Age 14

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Age 15

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Age 24

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Age 26

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Age 29

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Age 30

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Age 42

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Age 44

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Age 47

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Age 48

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for hours.
Age 49

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from the phone.
Age 50

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medicine cabinet full of pills.
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parents, you miss them terribly after they die.
Age 53

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