MARKET RECAP

Keeping you updated on the market! For the week of August 8, 2011
MARKET RECAP
Over the past couple weeks we've featured good news on home prices. This week, the good news continues... sort of. Clear Capital reports that home prices improved by 4.1 percent nationally in the second quarter of 2011 compared to the same year-ago quarter. On the flip-side, Clear Capital also says it expects home prices to decline 2.4 percent in the second half of 2011.
We're not quite ready to put any money on Clear Capital's price prediction, because its own data show that all four U.S. regions posted quarterly gains, led by a 6.3 percent gain in the Midwest – the first widespread, non-tax-credit-induced gain in five years.
Reduced inventory levels have helped support prices in recent months. We've noted in past editions that inventory levels have been falling, thanks in large part to a dearth of new-home construction and fewer homes listed for sale.
Normally, shrinking inventory is a positive, because it means demand is rising, which leads to higher home prices. Of course, times aren't normal. In today's environment, an inventory decline also reflects the slow pace at which banks are processing foreclosures, thus pushing the number of newly initiated foreclosures to a three-year low. Concurrently, the backlog of homes in foreclosure has been pushed up to 2.1 million.
The principal concern is that if these homes hit the market in a flood, the price trend could reverse course. Then again, if they hit in a trickle, the up trend could continue unabated. At this point, we think a trickle is more likely than a flood.
Mortgage rates are a more difficult call. After slightly rising the past few weeks, rates tumbled over the past few days, and are the lowest they've been in eight months. There are a number of contributing factors to the mortgage-rate drop: U.S. Treasury securities are again viewed as the ultimate haven. The yield on the 10-year Treasury note has fallen 100 basis points over the past six months and now yields a mere 2.5 percent. (The 30-year fixed rate mortgage tends to be two percentage points higher than the 10-year note.)
The fact is that risk of default was never a concern for U.S. debt investors, or yields would have been rising instead of falling. Investors are more concerned with a slowing economy, and with good reason: gross domestic product grew only 1.3 percent in the second quarter. This puts the annual growth rate far below the Federal Reserve's expectation for 2.7-to-2.9 percent GDP growth this year.
The prospect of a slowing economy, in turn, has pulled a lot of money out of stocks and directed it toward bonds. Stocks have been on their longest losing streak since the financial crisis of 2008; the S&P 500 has lost over 1,000 points over the past 10 trading days.
Fortunately, the economy hasn't ground to a halt. ADP's latest employment report shows that private-sector payrolls grew by 114,000 jobs in July. It's not great, and more job growth is needed to sustain a recovery, but it does show that parts of the economy continue to thrive and grow. That said, the 30-year fixed-rate mortgage is unlikely to clear 5 percent in the near future.

Economic Indicator
Release Date and Time
Consensus Estimate
Analysis
Productivity & Costs(2nd Quarter 2011)
Tues., Aug. 9,8:30 am, et
Productivity: 0.8% (Decrease)Costs: 1.6% (Increase)
Important. Productivity appears to have reached a temporary high, which could lead to a hiring spurt if the economy improves.
Federal Reserve FOMC Meeting Announcement
Tues., Aug. 9,2:15 pm, et
Federal Funds Rate: 0.0% to 0.25%
Important. Short-term rates remain near zero, but talk of more monetary easing could roil credit markets.
Mortgage Applications
Wed., Aug. 10,7:00 am, et
None
Important. Refinance and purchase activity spike on a drop in mortgage rates.
International Trade(June)
Thurs., Aug. 11,8:30 am, et
$47.9 Billion(Deficit)
Moderately Important. The deficit has widened on a weakening dollar.
Retail Sales(July)
Fri., Aug. 12,8:30 am, et
0.5% (Increase)
Moderately Important. Sales have slowed along with economic growth.
Another Contrarian Indicator
We like to keep our eyes open for novel indicators that a market might have reached a saturation point and is ready to turn. We think the Wall Street Journal has provided us with one: Reality television shows are jumping into the foreclosure-deal market, the WSJ reports.
If you think back five years, shows featuring buying and flipping homes were all the rage. Their peak popularity coincided with a peak in the housing market. (As an aside, anyone interested in collectibles should note the surfeit of shows – pawn shops, pickers, storage-unit hunters, and antique auctions – that are the rage today.)
We view the rising popularity of foreclosure shows positively: For one, it raises interest (and prices) on foreclosed homes, which will help clear the market sooner. More important, these shows suggest a market saturation point, and a possible turning point toward fewer foreclosures and higher-priced foreclosures.
Of course, this “reality-show” indicator is far from scientific, but than again, the past frequently is prologue, and these shows have frequently pointed to market tops and bottoms.


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