Weekly Forecast Update: Mortgage and Treasury Rates, Case-Shiller Index, Consumer Confidence Index Jobless Claims, Mortgage Purchase Applications, GDP

A weekly analysis of the economic data released during the past week, and how current economic conditions are affecting the real estate market.

• The interest rate on the 30-year fixed mortgage rate has increased from approximately 4.2 percent in autumn of last year to the 5 percent range in January following increases in the 10-year Treasury rate.
• The increase in the treasury rate has been precipitated in part by stronger economic growth prospects as well as an increase in inflation expectations. The market is currently pricing inflation over the next ten years to be approximately 2.35 percent. This represents a 25 bps increase from inflation expectations in early November of 2.10 percent.
• Higher inflation expectations and growth prospects will put upward pressure on long term interest rates, including mortgage rates. However, greater consumer demand, and improved employment will buttress housing demand and offset some of the effects of increased borrowing costs.
• Expect mortgage rates to hit about 5.5 percent by the year end.

• The Case-Shiller 20-city index fell 1.6 percent in November compared to the reading in November of 2009. November’s decline was sharper than the 0.8 percent slide reported in October and 16 of the 20 cities in the index reported a decline. For the month, prices eased 0.5 percent down, from a 1.0 percent decline in October. This index reflects home price data for the 3-months of September, October and November.
• The FHFA also released its home price index for November this morning. According to the FHA, home prices were unchanged from October to November, but down 4.3 percent over the 12-month period ending in November of 2010. The FHFA revised its figures from November downward for both the monthly change and annual change. The FHFA index covers mortgages insured by Fannie Mae and Freddie Mac and is thus a narrower measure of the market than the Case-Shiller index, but it only covers data from November reaping a sharper measure of the month in question.
• Consumer confidence jumped from an upwardly revised 53.3 (from 52.5) in December to 60.6 in January. The outlook for the present situation rose 6.1 points, while expectations increased 8 points. Consumers’ view of the job market and business conditions both improved as did the share of consumers planning to make big ticket purchases likes cars and homes.
• The two price indexes released this morning were a mixed bag. Both show a downward trend in home prices, but to varying degrees. Price growth has slowed for sure, but no consensus on a double-dip has developed yet. The confidence measure was decidedly positive, though, showing that consumers started 2011 with a positive outlook on both the economy and home purchases, an impression that is in line with recent home sales data.

• Mortgage purchase applications were down 8.7 percent for the week ending January 21st. Purchase applications dropped to the lowest level since October. Bad weather in many parts of the country as well as the shortened holiday week may have played a part in the weakness in the index.
• Purchase applications do not always translate into loan acceptances and transactions. Also, purchase applications do not take into consideration cash buyers who according to the November REALTORS® Confidence Index make up as much as 31 percent of transactions. In Las Vegas and Miami, the cash purchases have said to approach 50 percent.
• Mortgage purchase applications were down 20.1 percent from the same week a year ago.
• Refinances, which made up 70.3 percent of mortgage activity, fell 15.3 percent as mortgage rates rose slightly to 4.8 percent on a 30-year fixed mortgage.
• New home sales jumped 17.5 percent in December to a seasonally adjusted annual rate of 329,000.
• New home sales were down 7.6 from the previous year.
• The median price of a new home rose to $241,500 the highest level since April 2008.
• Sales were up 71.9 percent in the West, 3.2 percent in the Midwest, 1.8 percent in the South, but were down 5 percent in the Northeast.
• At 191,000 units, the inventory of new homes is the lowest since 1968.
• The improvement in new home sales in December follows NAR’s strong report last week on existing home sales in December.

• Initial jobless claims unexpectedly rose last week by 51,000 to 454,000. The increase also brought the four-week average up to 428,750. Falling below 400,000 initial jobless claims would suggest improving job market.
• The labor department said that winter weather in Alabama, Georgia, North Carolina and South Carolina in previous weeks created a backlog of claims which were then filed last week boosting the numbers. The labor department indicated that this volatility in jobless claims is characteristic of this time of year. Next week should be more indicative of the actual jobless claims trending.
• The most recent net job creation figures showed 103,000 net addition in December and 1.1 million net addition in the past 12 months.
• The Fed’s Federal Open Market Committee issued a statement yesterday suggesting no change to their current policy of purchasing longer-term Treasury securities and targeting federal funds rate at 0 to 1/4 percent.
• This suggests that the Fed will continue lending at low rates, which translates into low borrowing rates for consumers, and that the Committee expects stable inflation trends.

• The economy grew at a 3.2 percent rate in the fourth quarter 2010 according to today’s advance GDP estimate. This estimate is based on incomplete data and will be revised, but the growth rate is in-line with expectations of an economy growing near trend and an improvement over the third quarter’s 2.6 percent growth. The growth in GDP from the 2009 annual level to 2010 annual level was 2.9 percent.
• While this is better than growth during the recession, above trend growth is more typical of a post-recession economy and will be needed to restore the labor market to balance. The level of real GDP growth has finally exceeded its pre-recession high. At the same time, the number of payroll employees is still 7.2 million lower than it was at the previous peak in real GDP.
• In separate data, Consumer Sentiment declined slightly in January from 74.5 to 74.2. This was due to a slight decline in the index of current conditions that was not fully offset by improved expectations compared to December 2010. Compared to January 2010, the expectations index lost some ground but and the current conditions index improved.