Slowly but Surely Economy, Housing Improving

Written by: David Lereah   Mon, August 17, 2009 Commentary, Market Activity

Slowly but surely progress is being made for both the economy and housing sector. According to an advanced estimate GDP fell by only 1 percent in the second quarter compared to a 6.4 percent contraction in the first quarter. The economy has now contracted for four consecutive quarters, but at least the pace of contraction is slowing. It is now likely that the economy will expand in the third quarter of this year. Similarly, the employment situation continued to deteriorate in July, shedding 247,000 non-farm jobs for the month, but the July job losses were the smallest since August of last year.

Although there is some improvement in economic activity, other recent releases remind us that the recovery will be slow and modest. Retail sales dropped 0.1 percent in July and according to a University of Michigan survey, consumer sentiment fell to 2.8 percent to 63.2. Both economic releases suggest that household finances remain fragile, inhibiting future spending. Consumer spending accounts for over two-thirds of economic activity, indicating that a modest rebound ahead of us.

The Federal Reserve’s Open Market Committee met last week and kept their target federal funds rate unchanged at a range of 0 to 0.25 percent. The Fed stated that the recession appeared to be hitting bottom and consumer spending had begun to stabilize. The central bank also gave the impression that it had no plans to expand its purchases of mortgage-backed security and Fannie Mae and Freddie Mac debt. But it also confirmed that it would continue with its plans to purchase this debt at current levels. We can only conclude that the Fed is not yet comfortable with permitting the economy and financial markets to go it alone without Federal Reserve and Treasury aid.

On the housing front, the National Association of Realtors released its quarterly home price report for metropolitan areas across the nation last week. Median prices for existing homes in the U.S. rose 4.1 percent in the second quarter from the first quarter, the first quarterly increase since the first quarter of 2007. Median home prices on a quarterly basis rose in 126 out of 159 metros. However, for the nation as a whole, the median home price fell 15.7 percent on a year over year basis.

According to a Realty Trac report last week, foreclosure filings continue to mount. There were more than 360,000 foreclosure filings in July, another monthly record. Despite the Obama’s administration efforts to mitigate foreclosures (e.g., Home Affordable Program), the foreclosure situation continues to deteriorate. A steady flow of foreclosures promises to exert downward pressure on home values into the foreseeable future.

Finally, in the week ending August 7, mortgage application activity was mixed. The refinance index fell 7.2 percent due to an increase in mortgage rates for the week, while the purchase index rose 1.1 percent. Mortgage rates have trended upward during the past several weeks, constraining the refinancing business. However, the rate rise has not inhibited applications to purchase homes which have trended slightly upward during the past month. This is a positive sign that home sales have hit bottom and are now trending upward despite rising mortgage rates.

Going forward, we expect home sales to post modest gains during the next several quarters, while home prices continue their descent (year over year). It is obvious that the greatest obstacle to a healthy housing recovery remains a fragile economy, a dismal employment situation and falling home values.

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