Home Sales and Rate Trends

>> Market Update
INFO THAT HITS US WHERE WE LIVE... Thursday saw Existing Home Sales shoot up 12.3% in December, to an annual rate of 5.28 million, well ahead of the 4.87 million rate the consensus expected. Overall, existing home sales are off 2.9% compared to a year ago, but that's when sales were artificially boosted by the homebuyer tax credits. All regions showed sales gains in single family homes, condos and coops.

The supply of existing homes dropped to 8.1 months from 9.5 months in November. The pace of existing home sales is up 38% since July and sales are now only around 5% off the long-term trend, which has been a 5.5 million annual pace. All this has happened without government tax credit support. Smart buyers don't want to miss out on housing affordability that's at its highest level in 40 years.

Earlier in the week we saw housing starts drop 4.3% for December to a 529,000 unit annual rate. But colder temperatures and more snow than usual slowed starts in many parts of the country. Home completions actually increased for the month, while building permits shot up a strong 16.7%, to a 635,000 annual rate. We're not out of the woods yet, as permits are off 6.8% from a year ago and starts are down 8.2% compared to last year.
>> Review of Last Week
SHORT WEEK FALLS SHORT... The holiday shortened week ended its four days of trading with only the Dow ahead, the S&P 500 and the Nasdaq both dropping a bit. What bothered investors were some Q4 corporate earnings that fell short, plus more worries that China will hike its interest rates to cool down an overheating economy, already growing at about a 10% annual rate.

Earnings disappointments included a couple of the big financials, although three others in the sector beat expectations. Beyond that, General Electric, IBM, and Google all reported strong, better than expected Q4 earnings. GE even went so far as to forecast increasing profits in the years ahead. Apple then showed up to hit the ball out of the park with Q4 revenues up 70.5% year over year, blowing estimates out of the water with ease. But it was unfortunate to learn that Apple CEO Steve Jobs is taking another indefinite leave to deal with health challenges.

The Empire State Index, which gauges manufacturing in New York, grew to 11.9 in January from 9.9 the previous month, reflecting manufacturing gains across the country. New weekly unemployment claims dropped by 37,000, putting the four-week moving average at 412,000, its lowest level since July 2008. Meanwhile, continuing claims dropped to 3.86 million, their lowest number since October 2008. The Philadelphia Fed Index of manufacturing activity in that region was down in January, but the Leading Economic Indicators (LEI) index was up, better than expected.

For the week, the Dow ended up 0.7%, at 11872; the S&P 500 was off 0.8%, to 1283; and the Nasdaq dropped 2.4%, ending at 2690.

Bonds were under pressure last week, with yields going up as prices headed down. The FNMA 4.0% bond we watch ended down 83 basis points for the week, closing at $98.31. According to Freddie Mac's weekly survey of conforming mortgages, average fixed-rate mortgage rates changed little, remaining at super low levels. Tame inflation is the reason, with core consumer prices compared to December 2009 up a paltry 0.8%, their smallest yearly gain since 1958.
>> This Week’s Forecast
THE FED, PLUS OUR FAVORITE TOPIC... There's another Fed meeting this week to grab everyone's attention, but no one expects a hike in the Funds Rate quite yet. The FOMC statement will be closely examined to see how the nation's central bank views our economic recovery. The housing part of that recovery will also be covered with Wednesday's December New Home Sales, expected to be up slightly from the prior month. But Thursday's Pending Home Sales for November should be down slightly for existing homes.

The week is bookended with readings on the consumer. Tuesday's Consumer Confidence and Friday's Michigan Consumer Sentiment are both forecast to be improving in January. Finally, we close the week with the advanced Q4 GDP number, expected to come in at a solid 3.8% annual growth rate.
>> The Week’s Economic Indicator Calendar
Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Economic Calendar for the Week of January 24 – January 28
Date Time (ET) Release For Consensus Prior Impact
Tu
Jan 25 10:00 Consumer Confidence Jan 53.5 52.5 Moderate
W
Jan 26 10:00 New Home Sales Dec 300K 290K Moderate
W
Jan 26 10:30 Crude Inventories 1/22 NA 2.62M Moderate
W
Jan 26 14:15 FOMC Rate Decision 1/26 0%-0.25% 0%-0.25% HIGH
Th
Jan 27 08:30 Initial Unemployment Claims 1/22 408K 404K Moderate
Th
Jan 27 08:30 Continuing Unemployment Claims 1/22 3.835M 3.861M Moderate
Th
Jan 27 08:30 Durable Goods Orders Dec 1.5% -0.3% Moderate
Th
Jan 27 10:00 Pending Home Sales Nov -0.5% 3.5% Moderate
F
Jan 28 08:30 GDP-Adv. Q4 3.8% 2.6% Moderate
F
Jan 28 11:00 GDP Chain Deflator-Adv. Q4 1.6% 2.1% Moderate
F
Jan 28 08:30 Employment Cost Index Q4 0.4% 0.4% HIGH
F
Jan 28 08:30 Univ. of Michigan Consumer Sentiment-Final Jan 73.0 72.7 Moderate

>> Federal Reserve Watch
Forecasting Federal Reserve policy changes in coming months Rumblings have begun that the Fed is sure to hike the Funds Rate in the second half of the year. But with inflation still well under control, economists do not expect any rate increases for the next few months. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.
Current Fed Funds Rate: 0%–0.25%
After FOMC meeting on: Consensus
Jan 26 0%–0.25%
Mar 15 0%–0.25%
Apr 27 0%–0.25%

Probability of change from current policy:
After FOMC meeting on: Consensus
Jan 26 <1%
Mar 15 <1%
Apr 27 <1%