David Olson

FOCUS ISSUE FOR THE WEEK: The key trend for the week was the disappointing figure for second quarter GDP. This low figure of 2.4% brought down the ten year Treasury yield, lowered the dollar, increased talk of a double dip, and increased pressure on Congress to provide more federal stimulus and the Fed to buy more MBS.

MORTGAGE MARKET SUMMARY: For the week, the DJIA rose from 10,424 to 10,465. There were 10 positive trends offset by 13 negative trends.

Positive Trend

• The 30 YFR mortgage yield fell to 4.54% this past week, down from 4.56% the prior week. This is the lowest rate ever measured by this survey.

• The ten year Treasury yield fell to 2.91% from 3.00% last week. This brings the Treasury rate below where it was two weeks ago as well as 16 months ago. A survey of economists by Bloomberg forecasts the ten year Treasury at 3.29% by year-end. The biggest surprise in the economy over the past six months has been the persistently low rate on this Treasury.

• New home sales were 330,000 in June up 24% from 267,000 in May (which was a very low month). June was still the second lowest month since the Commerce Department began measuring it is 1963.

• Case Shiller reported in May that for the 20 cities, prices were up 0.47%. Using seasonally adjusted data prices were down in 5 cities–Detroit, Charlotte, Las Vegas, Cleveland, and Denver.

• The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half, according to MPF Research. That’s almost double the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6 percent last month from 8.2 percent in December.

• Initial claims for unemployment fell to 457,000 for last week ending July 23, down from 468,000 the prior week. Continuing claims rose to 4,565,000 from 4,484,000 the prior week. The rate of claims remains high amid a sluggish job market.

• New capital goods orders excluding defense rose 0.6% in June from May. Orders have been climbing since early 2009. Total durable goods orders fell 1% in June, the second decline in a row.

• Federal Express raised its earnings forecast for 3Q and 2010 on improving demand for express and ground deliveries.

• Last week the three credit agencies ceased offering ratings on debt offerings. But last Friday, the SEC relented by suspending for six months the requirement that certain new debt must have a ratings seal that resulted in opening up the market again.

• The Chicago PMI report rose to 62.3 in July from 57.1 in June. This index is an early predictor of the national PMI index which will be released on Monday.

Negative Trends

• GDP rose 2.4% in 2Q10, down from 3.7% in 1Q10. GDP for first quarter was revised up from 2.7% to 3.7% mostly due to increases in inventories. Revisions of the past three years show the recession was deeper than previously thought. Economists believe the GDP for the second half of 2010 will be around 2% which is not high enough to bring down the rate of unemployment.

• The MBAA’s July forecast has become more pessimistic than earlier in the year. They predict mortgage originations falling to 1,150,000 in 2011, down from 1,486,000 this year. The unemployment rate peaks in 3Q10 at 9.8% and GDP slows down to 2.2% in 4Q10. Home prices don’t reach a trough until 1Q11.

• LPS Applied Analytics reported there were 4.56 million loans in default or in some type of foreclosure in June, down slightly from May. But the number of new foreclosures initiated by Fannie Mae and Freddie Mac increased sharply rising 21% in June from May.

• According to the Bureau of Labor Statistics, the private sector added 593,000 new jobs so far this year, of which 218,000 were temporary jobs. Businesses remain hesitant to hire permanent employees.

• Layoffs in construction have accounted for 27% of private sector job losses since 2007. Adding loan officers, real estate agents, etc. then housing related layoffs account for at least one-third of the total.

• Homeowner vacancy rate are 2.6%, down a little from their peak but still above the average rate of 1.7% in the period 2000-2005.

• The Consumer Confidence index published by the Conference Board fell to 50.4 in July, the second consecutive monthly decrease.

• Local governments are projecting a loss of 500,000 jobs between 2010 and 2012.

• Freddie Mac reported that in 2Q10 consumers took out $8.3 billion in cash-out loans, down from $8.4 billion in 1Q10. This means consumers are paying off more of their debt and consumer spending will not lift GDP much in the future.

• Foreclosure filings rose in 75% of U.S. cities over 200,000 in population in the first half of 2010 due to high rates of unemployment reported Realty Trac. The highest rates were in NV, FL, CA, and AZ. The cities with the highest rates were Las Vega, Cape Coral, Modesto, Merced, and Riverside.

• The Euro has risen from a low of $1.18 to $1.31 as investors have begun to question the strength of the U.S. recovery.

• The U.S. is at risk of falling into a Japan-like deflationary trap and the best way for the Federal Reserve to avoid that would be to revive its securities buying program, Federal Reserve Bank of St. Louis President James Bullard said on July 30. He said the best way for the Fed to avoid falling into a deflationary trap is to shift away from insisting that interest rates remain low for a while to instead focusing on “quantitative easing” measures by buying Treasurys, funneling money into the economy and boosting inflation expectations.

• The U. of Michigan consumer sentiment index rose slightly in its final July report to 67.8 up from 66.5 from its preliminary July report. But it is still down substantially from the level it was in the prior five months and suggests growing pessimism, especially over unemployment.

Conclusion

The slowness of the economy and falling popularity of the Democratic controlled Congress is putting pressure on Congress and the Fed to provide more economic stimulus.
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18th Benchmark Study Meeting for the Retail and Consumer Direct Channel – September, 2010 in Milwaukee.
18th Benchmark Study Meeting for the Broker Channel – Fall 2010
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