Hunter Palmer

Mortgage rates held up well last week as the Federal Reserve auctioned off a whopping $200 billion in US Treasury debt and even managed to improve somewhat by week’s end as I had predicted. This week has been another story however. After sliding to 5.25%, the rate on the benchmark thirty-year, fixed-rate climbed back to 5.50% as the ten-year Treasury note yield rose to 3.73% by Wednesday morning. Bonds prices have been falling in reaction to positive economic news and a renewed rally in the stock market though stocks looked ready to pull back by mid week. After a period of relative calm over the past several weeks, we are seeing a return to volatility and I expect to see some see-sawing of rates over the short-run as investors try to digest the mix of economic data and corporate earnings.

Yet another sign of a thawing housing market could be seen in a report released on Tuesday that showed pending home sales rose for the fifth consecutive month in June. According to the National Association of Realtors, the Pending Home Sales Index rose to 3.6% during June. That was 6.7% higher than in June of 2008 and the first five consecutive month increase since July of 2003. The number surprised most analysts who had expected a meager .7% increase. The majority of the sales were in the lower-end segment of the market indicating that many first-time buyers are getting off the fence, lured by low rates, low prices and the $8,000 tax credit. With a deadline closing date of November 30 to be eligible for the credit, I expect we will see a surge of first-time buyer activity in the next ten weeks or so.

Mortgage Rates have managed to survive some significant volatility in both the equity and bond markets over the past week to remain at 5.50% for thirty-year, fixed-rates. Stocks reacted positively last week after some better than expected initial corporate earnings but have since pulled back on more sober earnings reports and a second monthly decline in consumer confidence. Bond market volatility has been driven by a reaction to stocks along with a massive $200 billion government debt auction this week. It is expected that the Chinese and others will readily buy up this new debt but concerns linger as to how much of an appetite they will have in the long run as the Federal Reserve raises an unprecedented amount of cash to pay for stimulus and the purchase of mortgage-backed securities. As I have discussed before, it is this delicate balance between the issuance of new government bonds, creating excessive supply, and the purchase of mortgage-backed securities, to create demand, that has managed to keep rates low thus far. If bond prices can hold up through this week we should see reduced volatility and perhaps a slight dip in rates next week.

Last Friday the National Association of Realtors released June existing home sales figures that, while showing an increase of 3.6%, also showed prices of existing homes were 15.4% lower than in June of 2008. Still, the 3.6% increase in sales was slightly better than the 3.4% most economists had expected. On an even more positive note, the government said on Monday that new home sales rose by a whopping 11% in June to a seasonally adjusted 384,000 homes. And while that was still 21% below the same month last year, it still easily beat economists’ forecasts of 352,000 new homes sold. Perhaps the best news of the week came on Tuesday when the Case-Shiller index of home prices was released for May showing that home values rose on a monthly basis for the first time in nearly three years. The .50% increase was the first month-over-month increase since July of 2006. The Case-Shiller index also showed that home prices for May were off some 17.1% in the 20 major markets but May also marked the fourth straight month where the year-over-year decline lessened in those markets.

I have been reporting a lot of real estate statistics over the past eight months and what jumps out at me most is the in January it seemed for every positive report on housing, there were two that were negative…a kind of ‘one step up and two steps back’ scenario. By the middle of the spring, I was reporting roughly a 50/50 split between good news and bad news but now, for the last several months, all I am seeing is positive news. Granted, much of it, though positive, has not exactly been enough to make one jump for joy for a resurgent real estate market but it has been encouraging nonetheless. Two things are abundantly obvious in the recent data. Home sales, both new and existing, are rising and home prices are stabilizing. This has what has long been needed to correct the oversupply of housing through lower prices and increased demand. Let us hope this positive trend continues.

Mortgage rates have managed to hold steady despite renewed optimism in the stock market spurred by better than expected corporate earnings reports and evidence the recession is nearing an end. The benchmark thirty-year, fixed-rate is right at 5.50% with no points and we are seeing more parity with other mortgage programs lately as both FHA and VA thirty-year rates are also at 5.50%. The rate on the fifteen-year, fixed-rate stands at 5.00%. Mortgage rates have benefited from reassuring remarks from Fed Chairman Ben Bernanke who on Tuesday told lawmakers at his semi-annual address before congress that he plans to keep monetary policy “extremely accommodative” for some time meaning no rate increases are likely for the foreseeable future. I do not expect to see rates rise over the next week unless the stock market gets on an exceptional run of gain. Many analysts still feel the market exuberance seen of late is still premature as investors continue to cheer less than expected losses instead of actual increases in net profits.

We had some great news on the housing front last Friday as the government reported that initial construction of homes as well as new applications for building permits surged more than economists had expected. Housing starts rose to as seasonally adjusted annual rate of 562,000 in June, up 3.6% from May. The consensus estimate was for an annual rate of 524,000. Single-family housing starts were up a whopping 14.4%. Building permits rose 8.7% in June to an annually adjusted 563,000 while economists had expected only 530,000. This was the highest number of new permits since December and the second straight month of increases since the all-time low set in April. All this is just more evidence that the battered housing market has bottomed and finally on the upswing despite a continuing rise in unemployment.

Mortgage rates have eased slightly after their steep run up over the past three weeks. Thirty year mortgage rates now stand at 5.625% after peaking at 5.75%. Rates could have been pressured above 6% had it not been for the stalled rally on Wall Street that has seen stock prices fall modestly over the past couple of weeks. Investors are beginning to question whether the economy will pull out of the recession as soon as once thought. Continued weakness in the job market coupled with higher interest rates, a lackluster housing report showing weaker than expected existing home sales and a somber assessment by the World Bank of the world economy’s short-term prospects have combined to send stocks to their lowest levels in three weeks. This has helped renew interest in government bonds as evidenced by Tuesday’s well received auction of $40 billion in two year notes. It was weak demand for government bonds three weeks ago that sent mortgage rates soaring.

The Federal Reserve’s Open Market Committee began its two day meeting on Tuesday to discuss monetary policy and the direction of interest rates. It is almost universally believed that the Fed will leave rates unchanged at their current level of nearly zero. What investors will be most interested in when the Fed adjourns on Wednesday will be their statement which often reveals far more about the future direction of rates than any current action it may take. Interestingly, Ben Bernanke is coming up for reconfirmation as Chairman of the Federal Reserve and is likely to face some tough questions from members of Congress on how well he has handled the economic crisis thus far.

As I mentioned before, existing home sales rose 2.4% to an annualized rate of 4.77 million units in May from 4.66 million units in April. Sounds positive but analysts had expected a rise to 4.82 million units. Adding insult to injury - median home prices for May fell 16.8% over last year at this time. This contrasts last week’s report that housing starts for May surged some 17%. The mixed signals we are getting from the housing markets have been more positive than negative lately and are a sign the market is feeling for the bottom nationally. Locally, I still contend that bottom was reached back in February. I am seeing rising demand from first-time homebuyers and out of state condo purchasers in addition to those who had been on the fence and are now jumping into the market as rates begin to rise and home prices stabilize. This is, in my opinion and the opinion of economists, the best time in twenty five years to purchase a home and many it appears are starting to get that message.