David Olson

FOCUS ISSUE FOR THE WEEK: It now looks clear that the U.S. will win the most medals at the Winter Olympics, doing better than in the past and better than expected. The big loser was Russia (with 13 vs. 32 for the U.S.) and they weren’t taking it graciously. Little South Korea was ahead of giants Japan and China. There was some parallelism in the economy with U.S.’s GDP growing faster than Europe.

WORLD TRENDS: The euro continues to plummet and Greece is showing increasing political instability as Greek citizens protest tightening moves by the state. Emerging markets (primarily in Asia) are recovering much faster than are the U.S., Europe, or Japan.

The DJIA was down 0.7% to 10,325 from 10,402 last week. There were 9 positive trends offset by 10 negative trends.

Positive Trends

• The second estimate of GDP for 4Q09 was raised to 5.9% from the initial estimate of 5.7%. The GDP Deflator was lowered to 0.4% from 0.6% in the initial estimate. This shows the U.S. growing faster and with less inflation than first estimated. Strength came from business equipment spending and inventories. Business construction fell.

• The Federal Reserve Bank of Chicago’s national activity index, a composite of 85 economic indicators, rose to 0.2 in January from -0.58 in December. It has been negative since mid-2007. Any number above zero indicates that the overall pace of economic activity is faster than usual.

• The derivatives market is continuing to signal that the euro will slide further against the U.S. dollar from a peak of $1.515/euro on Nov. 25, 2009 to $1.36/euro on Feb. 26. They expect it to fall to $1.30/euro soon and ultimately as far as par ($1/euro). This will help keep U.S. interest rates low. The euro has traded above $1/euro since 2002.

• The Case Shiller index of home prices rose 0.3% in December from the prior month using the seasonally adjusted index of home prices in 20 major cities. Prices fell 0.2% using the unadjusted index. December was the seventh consecutive month that the seasonally adjusted price index rose.

• Fed Reserve Bank Chairman Bernanke told Congress on February 24 that while policy makers will need to tighten monetary policy at some point, the “nascent” economic rebound still requires low interest rates for an extended period. That is being interpreted to be until the end of the year or early 2011. This statement of assurance caused interest rates to decline and the stock market to rise.

• On February 24, a jobs bill passed 70-28 in the Senate. It now goes to the House where Democratic leaders must decide whether to pass it without changes or to try to merge it with a $150 billion jobs plan the House approved in December.

• Durable goods orders rose 3.0% in January, up from 1.9% in December. The increase was mostly due to volatile transportation sector.

• The yield on the ten year Treasury fell from 3.77% last week to 3.58% this week. This huge slide means low mortgage rates in the future.

• The Chicago PMI rose to 62.6 in February, up from 61.5 in January. This was higher than expected and again shows strength in manufacturing.

Negative Trends

• Initial claims for unemployment rose to 496,000, up from 474,000 the prior week and 442,000 the week before that. This was the highest rate since November 14, 2009. The 4-week moving average also retreated back to nearly a three month high. Continuing claims were also higher than last week. Part of these increases was due to heavy snows in early February that prevented workers from processing claims.

• Existing Home Sales fell to 5.05 million in January, down from 5.44 million in December. This was the second consecutive monthly drop from a peak of 6.5 million in November. This was the lowest sales rate since June 2009. The inventory of unsold homes is down to 3.2 million and represents 7.8 months of sales. This was the lowest level of raw inventories in over a year.

• Sales of new homes fell to 309,000 in January down from 348,000 in December. This was much lower than expected and is the lowest level on record. The median price of a new home in the U.S. decreased to $203,500 in January, the lowest since December 2003, from $208,600 in the same month last year. The supply of homes at the current sales rate increased to 9.1 months’ worth, the highest since May 2009.

• The Conference Board’s Index of Consumer Confidence fell in February to 46 from 56.5 in January as the outlook for jobs diminished. This was the lowest level since in April 2009 and was a bigger decline than anticipated.

• The final U. of Michigan Consumer Confidence survey for February fell to 73.6 from 73.7 in its preliminary estimate for February.

• The FDIC included 702 banks with $402.8 billion in assets on its confidential list as of Dec. 31, a 27 percent increase from 552 banks with $345.9 billion in assets at the end of the third quarter, the regulator said on Feb. 23 in a quarterly report. “Problem” banks account for 8.7 percent of all U.S. lenders. This suggests an increase in bank failures this year. There were 140 bank failures last year. Banks wrote down (net charge-offs) $53 billion in 4Q09. This was the highest quarterly write-off rate in the 26 years the FDIC has collected data. A total of $391.3 billion of all loans and leases (5.4%), were at least three months past due at year end 2009.

• The FDIC reported that total bank loans outstanding fell 7.4% in 2009, the biggest decline in the 67 years the FDIC has reported statistics. Banks are plagued by losses on commercial real estate and are less willing to extend loans.

• Freddie Mac reported a net loss of $6.5 billion in 4Q09 and a loss of $21.6 billion for the year. This was lower than the $50.1 billion in 2008. To date, Freddie Mac has received $51 billion in government infusions. Over the next three years the Obama administration has promised to cover unlimited losses.

• The 30 YFR mortgage rate measured by the Freddie Mac weekly survey rose to 5.05% from 4.93% the prior week. We have no idea why this rate moved in the opposite direction of the ten year Treasury.

• On February 25, Bloomberg reported, ”The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.”

Biggest strengths: labor productivity and affordability of homes are way up, new home inventories and interest rates are down, rising dollar vs. euro, and home prices have been rising for the past seven months.

Biggest weaknesses: high unemployment, low consumer confidence, high delinquency and foreclosures, very tight underwriting, no liquidity for jumbo mortgages, increasing bank failures, rising losses on commercial real estate loans, further exodus of mortgage firms, declining home sales, and rising federal deficit.

Forecast: slow, rocky growth forcing more government support for housing and the economy.

Future meetings run by Access Mortgage Research:
17th Benchmark Study Meeting for the Wholesale Channel – in Washington, DC, April 12-13, 2010.
17th Benchmark Study Meeting for the Retail and Consumer Direct Channel – May 2010
Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmtgresearch.com or phone 410-772-1161.