More Good News on the Employment Front August 6, 2014

MARKET RECAP More Good News on the Employment Front Six in a row, which is the number of months payrolls have increased 200,000-or-more per month. The latest employment data show 209,000 jobs were created in July. At the same time, the unemployment rate inched up to 6.2% from 6.1%. More jobs and more unemployment? This phenomenon is the result of a higher labor participation rate. As more jobs become available, more people are compelled to enter the labor force. At the beginning of the year, we mentioned that job creation running at 200,000+ per month was key to sustaining the economy and housing. The good news is the economy is meeting our expectations for job growth. In time, we expect to see a spillover effect: Housing sales, construction, and investment will rise as people become more settled in their new jobs. Interestingly, strong job growth is holding little sway over interest rates. When job growth picks up, interest rates usually pick up with it. That hasn't been the case. Mortgage rates continue to hold near 2014 lows. Bankrate.com's latest survey has the national average on the 30-year, fixed-rate loan at 4.29%; Freddie Mac's survey has it at 4.14% To understand why mortgage rates remain low look no further than the yield on the 10-year U.S. Treasury note. Its yield is down to 2.4%. This bellwether security yields 60 fewer basis points than it did at the beginning of the year. Interest rates remain low because consumer-price inflation remains low. A rush to quality is another factor. Quality interest-paying investments (like bonds and notes) have gained additional support in recent months due to turmoil surrounding the Ukraine and Russia, and, separately, the Middle East. Investors have flocked to haven investments – like the 10-year Treasury note – to wait out the turmoil. Their demand, in turn, has helped keep interest rates in general, and mortgage rates in particular, low. Low rates are certainly good news for anyone seeking a mortgage these days. The fact that lending standards continue to ease is more good news. A recent survey of lenders by the Federal Reserve shows that lenders have indeed made credit available to more people. Then again, we've known this for some time. The MBA's Mortgage Credit Availability Index (MCAI) has risen substantially over the past nine months, and has trended higher over the past two years. Expect this important trend to continue because of falling mortgage delinquencies. The delinquency rate has dropped five-consecutive quarters and is at the lowest level since the fourth quarter of 2007, according to the MBA's National Delinquency Survey . An expanding economy, job growth, low interest rates, and available credit: This is the perfect storm for anyone considering a housing change. We suggest anyone interested in a home to take advantage of today's opportunities before the storm passes – and it will pass one day.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Aug. 13, 7:00 am, ET	None	Important. Purchase activity remains frustratingly low, which means the housing market has yet to normalize.
Retail Sales (July)	Wed., Aug. 13, 8:30 am, ET	0.2% (Increase)	Moderately Important. Rising sales are reflective of an improving economy.
Import Prices (July)	Thurs., Aug. 14, 8:30 am, ET	0.1% (Increase)	Moderately Important. Import prices remain subdued and non-inflationary.
Producer Price Index (July)	Fri., Aug. 15, 8:30 am, ET	0.3% (Increase)	Moderately Important. Producer prices have increased in recent months, but the increase is due largely to volatile energy prices.

 

Why We Long for Normalization The Phoenix housing market provides an insightful, if not cautionary, tale. If you enjoy roller-coaster rides, then Phoenix is your kind of housing market. Over the past 10 years, Phoenix has seen a bubble followed by a bust followed by a strong upswing. According to data from Case-Shiller, Phoenix house prices bottomed in August 2011, traded flat for the remainder of the year, and then increased 23% in 2012 and 15% in 2013. Now it appears Phoenix has crested and could be headed down again. Overall housing sales dropped 17% year over year in July, according to the Arizona Regional Multiple Listing Service . Investors, who have driven Phoenix's market over the past couple years, appear to be loosing interest: Cash sales dropped to 25% of total sales in July compared to 43% a year ago. We imagine most people don't like roller-coaster rides in real estate. The whipsawing is much more painful when your wallet is involved. Volatility also tends to repel both buyers and sellers on the margin. Volatility raises uncertainty, and people don't want to feel uncertain when contemplating a big purchase like a house. Of course, we wish the best for Phoenix. But the key to Phoenix, and every other volatile housing market, is a return to single-digit annual price appreciation and a market driven by mortgage-financed owner-occupiers. Slow and steady always wins the race over the long haul, and always will in housing. Article Courtesy of Patti Wilson, American Momentum Bank.

Housing Takes a Medium Step Forward and a Big Step Back _ Market update for July 28, 2014

MARKET RECAP Housing Takes a Medium Step Forward and a Big Step Back It has taken nearly a year, but existing-home sales are finally moving in the right direction. Sales were up once again, climbing 2.6% to a seasonally adjusted annual rate of 5.04 million homes in June. This marks the third-consecutive month of national gains. The existing-home market appears as healthy as it has been for some time. Sales were up, and so were prices. The median price of an existing home increased a stout 5.3% month over month to $223,300. What's more, total existing-home inventory rose to a 5.5-month supply at the current sales pace. So we have rising inventory and rising sales, which point to a lower rate of price appreciation. As more supply comes to market, price growth will naturally ease (though the rate of easing will be tempered by additional demand). Slower price growth coupled with a consistent level of inventory and demand point to a healthier overall market. Many market participants were encouraged by double-digit annual price increases after the bubble burst in 2008, but double-digit annual increases aren't the norm. They can lead to another bubble if they continue for an extended period. This is why we welcome annual price appreciation in the low-to-mid single digits at the national level. Of course, local markets are impacted by variables unique to the area – demography, supply, demand, job growth, composition of jobs, etc. – but over the long-haul the rate of price appreciation and the rate of sales will tend to moderate to a lower-single-digit mean. The good news is the existing-home market is progressing at the national level. The bad news is the new-home market is regressing. This is somewhat surprising, given the strong gains in home-builder optimism in recent months. New-home sales were actually quite pitiful in June, plunging 8.1% month over month to 406,000 units on an annualized rate. The drop in sales raised supply to 5.8 months vs May's 5.2 months. Total new homes for sale increased to 197,000 vs 191,000. What's more, discounting couldn't even move inventory. The median price of a new home declined 3.2% month over month to $273,500. Year over year, the median price of a new home is up 5.3%, but sales are down 11.5%. If demand falls to pick up, either more discounting is in store or fewer homes will be constructed. If either scenario materializes, you can be sure builder sentiment will dive.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales Index (June)	Mon., July 28, 10:00 am, ET	4% (Increase)	Important. Based on recent job-market strength, sales should continue to trend higher.
Mortgage Applications	Wed., July 30, 7:00 am, ET	None	Important. Purchase activity needs to trend higher to maintain existing-home-sales gains.
Gross Domestic Product (2nd Quarter 2014)	Wed., July 30, 8:30 am, ET	3.2% (Annualized Growth)	Important. After a poor first quarter, growth is expected to pick up pace for the remainder of 2014.
Employment Situation (July)	Fri., Aug. 1, 8:30 am, ET	Unemployment Rate: 6.1% Payrolls: 240,000 (Increase)	Very Important. Monthly job growth at the current rate will increase pressure for interest rates to rise.
Construction Spending (June)	Fri., Aug. 1, 10:00 am, ET	0.4% (Increase)	Important. Residential real estate spending will likely post lower based on the recent drop in permit applications.

 

State of the Mortgage Market The housing market is a mixed-bag nationally. The mortgage market, on the other hand, is trending higher. To be sure, we are still plagued by a dearth of purchase activity (though purchase applications increased 0.3% for the latest reported week). We'd love to see purchases trend materially higher; for no other reason that it will signal a more normalized housing market – one driven by owner-occupied buyers. We mentioned a couple weeks ago that lending standards have eased considerably over the past two years based on the MBA's Mortgage Credit Availability Index . We don't expect that trend to reverse. We see further easing in the future. For one, the state of the mortgage market looks pretty darn good. Black Knight (formerly LDS) reports loan delinquencies are down 15% year over year. Overall, foreclosure inventory is now at its lowest since May 2008. Fewer loan delinquencies and lower foreclosure inventory are by-products of improved job growth and higher home prices. On job growth, the economy has been adding 200,000+ new jobs a month for the past five months. An improving employment outlook makes lenders more willing to lend – more jobs, more risk tolerance. At the same time, mortgage loans are still cheap. Bankrate.com shows the national average on the 30-year fixed-rate loan below 4.3%. Freddie Mac shows it below 4.15%. These are 2014 lows. Today, the mortgage market is as favorable to lender and borrower alike as it has been in the past six or seven years. Therefore, we highly recommend borrowers take advantage of the opportunity, because it's impossible to know how long it will last.

A Tale of Two Markets???

MARKET RECAP A Tale of Two Markets Actually, we refer to one market – the new-home market. But we say two, because we refer to the new-home market now and the new-home market in the future. As for the here and now, the market appears somewhat languid. New-home starts come in at 893,000 units on an annualized rate in June. This is 9.3% lower than the revised 985,000 units posted in May. As for the important single-family segment, starts come in at 575,000 units on an annualized rate, which is 9% lower than the number of units in May. The good news is that the future new-home market appears more robust – at least that's our take from the latest Home Builder Sentiment Index . Builder confidence for new single-family homes surpassed an important milestone in July, rising four points to a reading of 53. Anything above 50 indicates that builders are more positive than negative on the outlook for new-home activity. This is the first time since January that the index has crested above 50. This suggests we should look forward to more new-home construction and more new-home sales in coming months. Let's hope that's the case. We say “hope” because we'd be more optimistic on a pick up in both new- and existing-home activity if we saw a pick up in purchase-mortgage activity. Unfortunately, weekly activity across the country is down, and not by an insignificant percentage. The Mortgage Bankers Association reports its purchase index fell 8% for the July 11 week, more than reversing a 4% gain in the prior week. Of course, we offer our usual caveat: all markets are local. So, what occurs in any local market doesn't necessarily jibe with a national number. (For instance, a large slice of fewer housing starts in June was centered on the South.) Still, we would like to see more purchase activity, especially purchase activity driven by the owner-occupied buyer. Fortunately, rates are still very favorable for anyone seeking financing. Bankrate.com's national survey has the 30-year fixed-rate conforming loan pegged at 4.3%, about where it has been for the past month. Freddie Mac's survey has the 30-year loan at 4.13%. To be sure, mortgage rates have shown little inclination to go anywhere, but another month or two of 200,000+ monthly job gains could easily (and quickly) set rates on a path to higher ground.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Price Index (June)	Tues., July 22, 8:30 am, ET	All Goods: 0.3% (Increase) Core: 0.2% (Increase)	Important. Consumer-price inflation has been rising in recent months. Another unanticipated increase could move mortgage rates higher.
Existing Home Sales (June)	Tues., July 22, 10:00 am, ET	4.97 Million (Annualized)	Important. More inventory and moderating prices point to rising sales.
Mortgage Applications	Wed., July 23, 7:00 am, ET	None	Important. Purchase applications continue to frustrate by failing to establish a rising trend.
New Home Sales (June)	Thurs., July 24, 10:00 am, ET	478,000 (Annualized)	Important. Sales are expected to abate after a very strong May, but the long-term trend remains up.

 

Young and Apparently More Restless A couple weeks ago, we lamented the dearth of young adults venturing out on their own. Indeed, Pew Research , a think tank, reports that nearly one in four young adults (age 25-to-34) still live with their parents, more than double the 11% who lived with their parents in 1980. We reasoned that many of these young adults have either poor job prospects or are weighted down by onerous student-loan debt. Perhaps we over-reacted a bit. Now, it appears more of these young adults are willing to become actual adults by moving out on their own. What's more, many of them are buying a home. Trulia reports that the number of young adults age 18-to-34 who became homeowners rose 0.9% in 2013. Trulia's data contrast with Census Bureau data that show ownership fell by 0.1%. More millennials entering the market would be the start of an important housing trend. Better yet, it would be the start of a trend with considerable staying power. A large percentage of young adults out of the housing market is a source of large pent-up demand, which could lift overall demand for years to come. As more millennials enter the market, they will have a ripple effect that will lead to more demand for more expansive homes. As millennials become more established in their jobs, they'll naturally seek to trade up. Living with mom and dad is comfortable, but unhealthy as an adult. Eventually everyone has to make a break. This basic fact of life bodes well for housing over the long term.

Bill Gross Just Bought $60-Million Worth of Bonds: Why That's a Big Deal

Keeping you updated on the Market - For the week of July 14, 2014

MARKET RECAP Bill Gross Just Bought $60-Million Worth of Bonds: Why That's a Big Deal The name Bill Gross is meaningless to most Americans. For those in finance, it's different. The name is universally known, because Bill Gross is the preeminent bond investor in the country. Specifically, Gross manages the $270-billion PIMCO Total Return Fund Institutional closed-end fund, which is the largest bond fund in the United States. Gross' actions attract attention. This past week, he attracted considerable attention when it was revealed he had poured $60 million of his personal wealth into bond funds he manages. This $60 million is on top of the $140 million he already has invested in these funds. In short, Gross in betting in a big way that low interest rates will remain low for quite a while longer. When you look at the yield performance on the 10-year U.S. Treasury note over the past six months, it's difficult to disagree with Gross' bet. Yields have actually shown more of an inclination to go lower than higher. The 10-year Treasury note is a good proxy for mortgage rates, particularly the 30-year fixed-rate loan. If you lack access to immediate mortgage information, a quick glance at the yield on the 10-year note (readily accessible at Yahoo! Finance) will give you a good idea to the direction of rates. As for the actual 30-year fixed-rate loan, it remains subdued. Bankrate.com had the 30-year loan averaging 4.31% for the past week, a slight increase over the previous week. Freddie Mac had it at 4.15%. Over the past day or so, the rate has actually drifted a little lower. Last week, we cautioned that another strong jobs report – which we got – would pressure rates to rise. Rates rose, but only by a few basis points. That interest rates remain low in the face of improving job prospects (which is indicative of an improving economy) suggests there is little impetuous for interest rates, in general, and mortgage rates, in particular, to rise. As for our prediction of 5% on the 30-year fixed-rate loan by the end of the year? Anything can happen, but it's a more distant target than it was at the beginning of the year. That said, we still have nearly six month until Dec. 31. By October, the Federal Reserve is expected to have ceased buying Treasury notes and mortgage-backed securities (MBS). What's more, the Fed will likely cease or cut back reinvesting interest and principal from maturing notes and MBS into more notes and MBS. Basically, this means that the Fed – a key factor to low mortgage rates for the past six years – will be a much smaller player as we progress through the fourth quarter. What this means to the direction of interest rates is anyone's guess. At least we know what Bill Gross' guess is – rates will remain low. But, of course, that's subject to change.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Retail Sales (June)	Tues., July 15, 8:30 am, ET	0.6% (Increase)	Moderately Important. Sales momentum points to a pick up in consumer confidence.
Mortgage Applications	Wed., July 16, 7:00 am, ET	None	Important. Purchase applications inched higher last week, but a sustained trend is still in the waiting.
Home Builder Sentiment Index (July)	Wed., July 16, 10:00 am, ET	50 Index	Important. Rising sentiment points to rising building activity in coming months.
Housing Starts (June)	Thurs., July 17, 8:30 am, ET	1 Million (Annualized)	Important. Starts remain muted, but builder sentiment suggests more activity is forthcoming.

 

Yes, Credit Is Becoming More Widely Available Tight credit is frequent lament. In a Redfin survey , 16% of respondents stated that difficulty in obtaining financing was a challenge in the second quarter of 2014 compared to 8% in the first quarter. This might be the perception, but the reality is that credit is gradually becoming easier to obtain, and that's been the case for the past two years. The Mortgage Bankers Association Mortgage Credit Availability Index continues to creep higher. In June, the index posted at 115.8 compared to 115.1 in May, which was better than the 113.8 in April. The index was set at 100 in March 2012. To be sure, the younger crowd still has some difficulty with financing. As we noted a couple weeks ago, high student- loan debt is an issue. Obviously, that drives up the debt-to-income ratio. That aside, the issues aren't materially different for younger people today compared to younger people of previous generations. When starting off in life, most of us lack assets and have to scrimp to get head. That hasn't change. The good news is housing continues to change for the better for all age groups. Price appreciation is falling back in line with historical norms. The prospect of slower price growth will bring more homes to market; there will be less incentive to hold out for a higher price. This, in turn, will further slow price growth. The bottom Line: More people will be able to afford a home, and more funding will be available to those who want to buy a home. That's good news for everyone .

Market Update for the week of July 7, 2014. "Trends We Want to See (Mostly)

MARKET RECAP Trends We Want to See (Mostly) Trends are frequently like starting a roll of new tape: Sometimes they are tough to get started, but once started, they tend to flow easily. For the past year, it's been tough getting a trend started in existing home sales. Just maybe one could be starting now. Existing home sales showed gains in April and May. The trend should extend into June. The Pending Home Sales Index rose a strong 6.1 percentage points in May. This is the largest gain since the housing-stimulus days of April 2010. Best of all, all regions posted gains. This points to stronger existing home sales in June, which seems likely based on our observations. More important, it appears sales momentum will extend into July. So, home sales are on the rise. Unfortunately, the rise isn't reflected in mortgage demand. Mortgage rates have remained low over the past couple weeks, but buyers haven't taken advantage of them. The Mortgage Bankers Association's application data show purchase activity fell 1% last week. For most of the past month, activity has been either down or flat. Obviously, we'd like to see more mortgage activity; not only for our own self interest, but for the good of the overall housing market. We've mentioned that a solid housing market is driven by owner-occupied buyers. Most of these buyers use a mortgage to finance their purchase. Young people – those without significant wealth – are most likely to use a mortgage. There's been a dearth of new, young buyers in the housing market. Slow economic growth and difficult job prospects are certainly culprits. There is another, perhaps more insidious, culprit – excessive student-loan debt. A recent article in The Hill reports that average student-loan debt for 71% of graduates who took out loans is $30,000. The NAR has found that 49% of Americans state that student loan debt is an obstacle to homeownership. Because they are not forming their own households, many young adults still live with their parents. A study produced by Deutsche Bank found that a third of 18-34 year olds live with mom and dad. Poor job prospects and student debt no doubt have contributed to the trend of so many people extending their adolescence. The upside is there is a lot of pent up demand. Deutsche Bank estimates that if households were to return to levels that prevailed in the early 2000s, more than four million new households could be formed. We are all aware there is plenty of slack in the system – low housing sales, low housing starts, low household formation, low mortgage usage – by historical standards. It's frustrating, to be sure, but the slack points to a low likelihood housing will backslide anytime soon. To the contrary, the slack points to sustainable all-around future growth.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (May)	Tues., July 8, 3:00 pm, ET	$15 Billion (Increase)	Important. Rising revolving credit use points to rising consumer confidence and rising economic growth.
Mortgage Applications	Wed., July 9, 7:00 am, ET	None	Important. Growth in purchase activity would provide more evidence that recent sales trends are sustainable.
Federal Reserve FOMC Meeting Minutes	Wed., July 9, 2:00 pm, ET	None	Moderately Important. The Fed will state what most of us know: the economy is improving, but not enough to alter the Fed's low-rate policies.

 

This is Exactly What We Want to See 288,000 new jobs were created in June, which dropped the unemployment rate to 6.1%. What's more, job gains in April and May were revised higher, with April jobs ratcheted up to 304,000 and May jobs increased to 224,000. Our economy has now benefited from five-consecutive months of 200,000+ new jobs. This is a trend we can all support. To maintain economic prosperity, 200,000-or-more new jobs need to be created each month. Given the strong gains we've seen in recent months, we expect the trend will continue, possibly through the end of the year. More jobs should lead to more household formation, and more housing and mortgage activity. As we note above, excessive student-loan debt remains a problem, but with more jobs available to young people, more of them should be able to service their debt and leave their parents' basements at the same time. One final note: Keep an eye on mortgage rates, with job growth picking up steam, the pressure for rates to trend higher will rise.

Are Things Really That Bad? Market Update for the week of June 30, 2014

MARKET RECAP Are Thing Really That Bad? This was a shocker: Gross Domestic Product (GDP) for the first quarter was revised down to a 2.9% contraction, meaning the economy shrunk 2.9% in the three months of 2014. Sounds rather distressing; a 2.9% contraction is the stuff of a serious recession. Should we be alarmed? Not necessarily, because we are looking in the review mirror. Markets are always forward looking processes. But if we do look to the past, we see a few mitigating factors. The weather was one. An unusually severe winter weighed heavily on consumption, investment, and trade. In other words, snow pretty much smothered the economy the first three months of the year. Looking forward, the second quarter is expected to show significant improvement. The economists at Merrill Lynch picture a rosy scenario. They expect the economy will have grown 4% for the quarter. What's more, they expect the economy to grow 3% for the remainder of the year. If Merrill's prediction holds, we can look forward to a robust second half. (Overall, though, 2014 won't appear so robust in hindsight. Averaging the four quarters will show the economy grew only 1.8% for the year.) Housing appears well positioned to lead a rebound. Existing home sales surged 4.9% higher in May to 4.89 million units on an annualized basis. When we factor in April's 1.5% gain, we get the first back-to-back gain in existing home sales since April and May of 2013. The jump in sales pushed the inventory down to 5.6 months in May from 5.7 months in April (based on the higher sales pace). Pricing remains strong, with the median price of an existing home increasing 5.9% to $213,400 in May (which moves more people into positive equity). A key takeaway is that the rise in the median price is the result of falling distressed sales. In May, only 11% of sales were attributed to distress properties compared to 18% a year ago. This suggests that the market is moving in the right direction. Speaking of the right direction, new-home sales surged 18.6% in May, rising to 504,000 units on an annualized rate. The South and the West lead the charge: The former saw a 14.2% monthly increase; the latter saw a whopping 34% increase. Best of all, home builders weren't discounting to move inventory. The median price of a new home increased 4.6% to $282,000. Though we didn't think the news on first-quarter GDP was distressing, it did impact mortgage rates. Across the country, rates moved lower this week. Bankrate.com's survey has the average rate on the 30-year fixed-rate loan pegged at 4.28%. Freddie Mac's survey has the average rate pegged at 4.14%. Both are roughly 30-basis points lower than where they were this time last year. The mortgage-rate trend has defied nearly all predictions (including our own). If you had asked market watchers on January 1 if the 30-year fixed-rate loan would be closer to 4% or 5% heading into July, the vast majority would have said closer to 5%. Lest we get too comfortable with today's low rates, let's keep an eye on the employment numbers that will be released this coming Thursday. Another month of 200,000-plus job gains could get rates moving higher.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales (May)	Mon., June 30, 10:00 am, ET	0.8% (Monthly Increase)	Important. The sales trend is expected to improve through the summer and fall months.
Construction Spending (May)	Tues., July 1, 10:00 am, ET	0.5% (Increase)	Important. Builder sentiment and improving home sales point to higher residential construction spending.
Mortgage Applications	Wed., July 2, 7:00 am, ET	None	Important. Purchase activity must improve to sustain long-term sales growth.
Employment Situation (June)	Thurs., July 3, 8:30 am, ET	Unemployment Rate: 6.3% Payrolls: 220,000 (Increase)	Very Important. Continual 200,000-plus payroll gains will eventually pressure interest rates to rise.

 

A Possible Fly in the Ointment Low mortgage-purchase activity is one of our frequent laments. Activity simply refuses to gain traction. The latest data from the Mortgage Bankers Association once again show another weekly decline – 1% – in the purchase index. To return to full normalcy, the residential real estate market must be dominated by owner-occupiers. These buyers by far rely on mortgage financing to secure their purchase. With purchase activity low, the housing market is still relying on cash buyers, which to a large degree comprises institutions and people trading up. High mortgage activity would be indicative of more organic growth.

Market update for the week of June 23, 2104. "These “Twos” Really Aren't So Terrible"

MARKET RECAP These “Twos” Really Aren't So Terrible Bond markets were given a slight jolt this week on unexpectedly high consumer-price inflation. Specifically, the Consumer Price Index (CPI) jumped 0.4% month over month in May. This was the largest monthly increase since February 2013. The latest increase in consumer prices lifted annual CPI to 2.1%. This is within the Federal Reserve's tolerable inflation range, but it still raised a few eyebrows. Eyebrows were raised because inflation influences interest rates. When inflation rises, bond yields rise as well. At the same time, bond prices fall. Investors want to be compensated for lost purchasing power over time (which is the result of inflation). If investors anticipate higher inflation, they will demand a higher interest rate. The CPI was released Tuesday, and mortgage rates rationally rose. But they've actually eased back since. When we look at the national averages we don't see much change week over week: Bankrate.com's survey has the 30-year fixed-rate loan at 4.33%, a basis point lower than the previous week. Freddie Mac's survey pegs the 30-year loan at 4.17%, a three-basis point decrease. To be sure, the national surveys unlikely captured the full impact on rates when the CPI was released. (The 10-year U.S. Treasury note serves as a good proxy for the 30-year fixed-rate mortgage. You can see that the 10-year note's yield spiked higher .) But there is a mitigating factor for rates to remain subdued – low Gross Domestic Product (GDP) growth. We've been cautiously optimistic that growth would accelerate this year. Indeed, we've been encouraged by the trend in job growth, with the economy adding 200,000-plus new jobs each month for the past three months. This seemed like a good omen. Today, we are a little more cautious and a little less optimistic. This past week, the Fed cut its growth prediction to 2.2% from 3% for 2014. That's a sharp reduction and reflects the 1% economic contraction that occurred in the first quarter. The reduction also suggests the Fed is still wary that widespread predictions for an economic growth breakout will not occur. Low growth, in turn, will hold inflation at bay, because loan demand will remain muted. For anyone unfamiliar with how our banking system – which is based on fractional reserves – works, more lending increases the money supply. More money chasing the same amount of goods and services eventually leads to consumer-price inflation. Today, the 30-year fixed rate mortgage is as close to 3.5% as it is to 5% – the year-end prediction we proffered in January. So do we still think we'll hit 5% by the end of December? We have to confess that it's appearing less likely. That said, keep an eye on the monthly employment numbers, which are released the first Friday of every month. Should the economy continue to create jobs at a 200,000-plus rate each month, 5% on the 30-year remains a possibility.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Existing Home Sales (May)	Mon., June 23, 10:00 am, ET	4.7 Million (Annualized)	Important. Sales have yet to gain traction, but recent job numbers could lead to sales growth.
New Home Sales (May)	Tues., June 24, 10:00 am, ET	440,000 (Annualized)	Important. Sales have sputtered in recent months, but could trend higher on better weather.
Mortgage Applications	Wed., June 25, 7:00 am, ET	None	Important. Purchase activity points to sluggish sales activity.
Gross Domestic Product (1st Quarter 2014 Revision)	Wed., June 25, 8:30 am, ET	2.0% (Contraction)	Important. Downward revisions point to low economic growth through 2014.

 

Mixed News on Housing Existing home sales account for the majority of sales and mortgage-finance activity, but new home sales and construction contribute more to overall economic growth. Therefore, we were someone disappointed that housing starts eased in May, with starts falling 6.5% month over month to a 1.001 million annualized rate. Single-family starts dropped 5.9% after a 4.6% rise in April. Permits followed a similar pattern, falling 6.4% month over month. This suggests starts could tread water over the next month or two. That said, we could still see a pick up in starts based on home builder sentiment. The National Association of Home Builders' confidence index rose four points to a seasonally adjusted 49 in June. The future sales component also moved higher, up 3 points, to 59. This is the best reading since January. This is particularly encouraging, because the future matters more than the past. Topping our wish list, though, is rising purchase mortgage activity. Unfortunately, purchase applications – after posting a couple weeks of gains – decreased 5% in the Mortgage Bankers Associations' latest survey. With institutional buyers (cash buyers) pulling back, we want to see the individual owner-occupied buyer – the buyer likely to take on mortgage – move into the lead. We still haven't seen that. Until we do, we don't expect to see continual improvements in the housing numbers.