David Olson

FOCUS ISSUE FOR THE WEEK: The key economic statistic for the week was the decline in nonfarm payrolls of 125,000 in June. Further payroll declines are expected next month with the further layoffs of temporary census workers. There were also declines in consumer sentiment, auto sales, pending home sales, and the manufacturing index (PMI). On the positive side, mortgage rates fell to new lows for the second week in a row and caused mortgage activity to increase. Home prices continued to rise in most parts of the country. Personal incomes rose in May.

MORTGAGE MARKET SUMMARY: The economy is growing at a slow pace with no improvement occurring in total employment even though the unemployment rate declined. Mortgage originations are rising slowly due to rising refinances even though home sales are declining and mortgage rates are at historic lows.

The DJIA is now 13.5% below its prior peak and in a major correction. For the week there were 10 positive trends offset by 13 negative trends.

Positive Trends

• According to the weekly Freddie Mac survey, the average yield on the 30 year FRM was 4.58% down from 4.69% the prior week. Both figures were at the lowest level since Freddie Mac began reporting these figures in 1971.

• The yield on the ten-year Treasury slipped to 2.98% on July 1, down from 3.05% last week.

• Personal income for May rose 0.4%, a bit slower than 0.5% in April but personal spending rose 0.2% in May, up from 0% in April. This suggests some strengthening of the economy. The savings rate rose to 4%, up from 3.8% in April.

• The Case Shiller data on average home prices in 20 cities was up 0.4% in April on a seasonally adjusted basis. It has been rising steadily since May 2009. The index rose 0.8% on a non-seasonally adjusted basis. Prices rose in 17 cities and fell in only Miami, New York City, and Seattle. The increase was probably due to the tax incentives for new home buyers. That suggests home prices will show a decline in May when sales declined.

• Chinese exports face “strong headwinds” in the second half of the year from policy tightening measures and the European debt crisis, according to a study released by Citicorp. This means their economic growth rate will slow down.

• The Senate passed a three month extension of the tax credit for home purchases. It gives homebuyers an extra three months to close on a purchase that qualifies them for a federal tax credit of up to $8,000. It extends the deadline for closing tax credit eligible transactions from June 30 to September 30, 2010. The legislation only needs the President’s signature to become law.

• Democrats scratched the $19 billion tax on banks attached to the Financial Reform Bill which increased the likelihood that the bill would pass. As a substitute the Senate added an early end to TARP and an increase in the FDIC fee. Several other changes were made to make it more acceptable to Republicans such as exempting small banks from some of the fees and requirements. The bill is expected to pass the Senate in mid-July.

• Morgan Stanley hired 100 bankers to offer jumbo mortgages and structured loans to their clients. It may raise this number to 500 by the end of 2011.

• For the week ended June 11 on the MBA survey, mortgage originations were up 17.7% from the prior week. Purchase activity was up for the first time in six weeks and refinance activity was up for the first time since May 2009. This mainly reflects record low mortgage rates. Despite the increase in refinancing, the levels were half those in 2009.

• The U.S. government sold more of its Citicorp stock bringing its stake down to 18%. With this sale, the government has now sold one-third of its holdings for which it earned $2 billion.

Negative Trends

• The BLS reported that nonfarm payrolls fell 125,000 in June after rising 433,000 in May. Private employment rose by 83,000 jobs which is less than the 110,000 expected. As a rule of thumb, 150,000 new jobs are needed each month to keep up with normal growth in the labor market. We need 250,000 new jobs per month if we wish to bring down our very high rate of unemployment. The government cut 225,000 temporary census workers. States cut 10,000 jobs. The labor force also fell by 652,000 so the rate of unemployment fell from 9.7% to 9.5%. The average workweek fell to 34.1 hours from 34.2 hours in May. Average hourly earnings fell -0.1%, down from +0.2% in May.

• The Financial reform act requires lenders to maintain 5% capital for all mortgages bundled and sold to investors as securities that are riskier types of loans, such as option ARMs and low doc or no doc loans. Loans back by GSEs are exempt. The bill says regulators “may” issue regulation on the portability of appraisals which doesn’t mandate portability.

• The consumer sentiment index published by the Conference Board fell to 52.9 in June from 62.7 in May. Their index is now back down to the level reached in March.

• According to the Mortgage Bankers Association, mortgage applications for a home purchase are down 39% since the end of April. The decline in mortgage rates below 5% in May had relatively little impact on raising the level of refinances. It is now believed that unless mortgage rates fall to 4.5%, there will be little growth in refis. According to the Conference Board, only 1.9% of consumer surveys plan to buy a home in the next six months. This is one of the slowest readings since 1982.

• The Congressional Budge Office estimates the cost of bailing out Fannie Mae and Freddie Mac will total $389 billion.

• Sales of new homes continue to decline. KB Home said its second quarter orders are down 23%. Lennar recently cut some prices more than 15% in Las Vegas without increasing sales. It is now surmised that sales of new homes won’t increase until 2011.

• The Chicago PMI report for June fell to 59.1 down from 59.7 in May. This measure of the manufacturing industry was up for the past nine months in a row. Any number larger than 50 represents expansion. The national PMI index was 56.2 in June, down from 59.7 in May. This was the lowest level of the year.

• ADP reported payrolls rose by 13,000 in June which is down from 57,000 in May. This suggests that the BLS report on July 2 will be down.

• The DJIA fell to 9,686 which is 13.5% below the high point of 11,204 reached in late April, 2010. The stock market is in a correction. Some of the worst performing sectors are: mortgage finance, farming & fishing, alternative fuels, consumer electronics, aluminum and iron and steel. The mortgage finance sector is down 34.4%.

• Initial jobless claims for the week ending June 25 were 472,000, up from 459,000 the prior week. Continuing claims for unemployment rate to 4,616,000, up from 4,573,000 the prior week.

• According to the NAR, pending home sales fell 30% in May, down from a 6.0% increase in April.

• Auto sales were 983,738 in June which is down 11% from the May level.

• Factory orders fell 1.4% in May after rising 1.0% in April according to the Census Bureau.

Conclusion: There is little further that the Fed can do to lower interest rates since the Fed Funds is already close to zero. Therefore, the only alternative for the government is to lower taxes or raise spending. With the current state of economic weakness, we expect the mortgage rates to drift down to 4.5% or lower in the near future.
Survey being conducted by Access Mortgage Research in cooperation with Menlo Company, Scotsman Guide, Ellie Mae, Calyx Software and others.
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18th Benchmark Study Meeting for the Broker Channel – Fall 2010
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