ECONOMIC FOCUS

Volume 15, Issue 33 For the week of August 22, 2011 Update: Key Factors Impacting Housing The housing market is having trouble escaping from its prolonged slump. Total home sales have been declining. Single family homebuilding construction is off. Soft job growth and tight mortgage lending are constraining home sales. KEY FACTORS IMPACTING HOUSING Falling Conforming Limits: The federal government will allow the conforming loan limit for government-sponsored enterprise and Federal Housing Administration loans to drop on schedule in October. Allowing the limits to decline on schedule will help allow private lenders back into the mortgage market, but the move is likely premature given the still-weak state of the housing market. The higher loan limits affected approximately $120 billion in loans originated in 2010, or about 8% of the $1.5 trillion in mortgages made that year. Big Foreclosure Pipeline: Foreclosure processing delays are slowing distress sales. Distressed homes remain a large share of home sales, with the National Association of Realtors reporting a 31% share. Processing delays are hitting both ends of the pipeline. Servicers are filing fewer new foreclosures and they are disposing of fewer existing foreclosures. On balance though, servicers are disposing of distressed homes more quickly than they are filing new foreclosures. However, it may take longer than expected to work through all the foreclosures. Weak Employment & Job Creation: Weak employment and job creation poses a downside risk that the faltering job recovery weighs on the demand for housing. Many uncertainties remain around the timing of foreclosures that could easily delay the end of the price correction. Legal issues surrounding the foreclosure process could take longer to resolve than expected. Limited Access to Credit: Difficulties that the homebuilding industry may have in accessing credit pose a downside risk for the construction and new-home sales outlook. Excess US Housing Inventory: The number of unwanted vacant homes is contracting, a positive sign for a struggling U.S. housing market. Excess inventory weighs on house price appreciation and homebuilding. Unwanted vacant homes are defined as those empty year-round and listed for sale or rent or held off the market for unspecified reasons. Such houses are always present on the market in some number, but the current supply is well above the norm. The share of unwanted vacant homes was 7.4% in Q2, according to the latest Housing Vacancy Survey. A share consistent with long-term trends is 6.4%. The difference translates into 1.28 million excess vacant units, a large number, but the lowest reading since mid-2008. The Move to Rentals: Rental activity is chipping away at the excess inventory. Households who lost homes to foreclosure and newly formed households are driving demand for rentals. Job growth remains weak, but the economy has still expanded for more than two years, producing more young families who are more likely to rent than to buy. BOTTOM LINE Many observers predict that the lingering housing correction will play out by early next year. House prices will be one of the last metrics to hit bottom. With prices balanced with respect to fundamentals, distress sales will drive the remaining modest 3% decline. Key Economic Reports Released This Week RELEASE DATE ECONOMIC INDICATORS RELEASED BY CONSENSUS Wt. INFLUENCE ON INTEREST RATES Mon 08/22 1:00 pm et Weekly Bill Auction Dept. of the Treasury N/A **  If strong demand  If weak demand Tue 08/23 10:00 am et New Home Sales for July '11 Bureau of the Census Dept. of Commerce 315k **  If above consensus  If below consensus Tue 08/23 1:00 pm et 2-Year Note Auction Dept. of the Treasury $35.0B offering ** If strong demand If weak demand Wed 08/24 7:00 am et MBA Mort Apps Survey for week ending 08/19 Mortgage Bankers Association of America N/A * Undetermined Wed 08/24 8:30 am et Durable Goods Orders for July '11 Bureau of the Census Dept. of Commerce 2.0% **  If above consensus  If below consensus Wed 08/24 1:00 pm et 5-Year Note Auction Dept. of the Treasury $35.0B offering ** If strong demand If weak demand Thu 08/25 8:30 am et Jobless Claims for week ending 08/20 Bur. of Labor Statistics Department of Labor 410k *  If above consensus  If below consensus Thu 08/25 1:00 pm et 7-Year Note Auction Dept. of the Treasury $29.0B offering ** If strong demand If weak demand Fri 08/26 8:30 am et Gross Domestic Prod (GDP) Q2 '11 preliminary Bur. of Econ. Analysis Dept. of Commerce 2.3% ****  I! f above consensus  If below consensus Fri 08/26 10:00 am et Consumer Sentiment for August ' 11 University of Michigan 55.0% *  If above consensus  If below consensus * Low Importance ** Moderate Importance *** Important **** Very Important

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Week in Review

Last Week in Review : What does the wild market mean to home loan rates? Forecast for the Week : The markets will be waiting with bated breath. Read why! View : How do you maintain focus on your work? Two tips to achieve success! Last Week in Review "It's a small world after all." The wild ride over the last few weeks continued again last week, as the US markets danced to the tune of the European debt and economic crisis. Here's what it means to home loan rates here in the US. Even inflation hasn't stopped Bonds. Last week, consumer inflation and producer inflation came in above expectations. Remember inflation is the archenemy of Bonds and home loan rates, so hotter inflation would normally negatively impact Bonds and home loan rates. But even last week's inflation news didn't impact Bonds. Seeing Bonds dismiss that inflation news indicates that the Bond market senses that the economy (which is already hardly growing) is in a very vulnerable position with things in Europe uncertain and gloomy at best. And when the situation deteriorates further, it may push many world economies into a recession. It's all about Europe. US Bonds - including Mortgage Bonds - have been seen by the markets as a safe haven bid on existing and growing fears that Europe's debt crisis is coming to a head…and global growth, which is already anemic, is being threatened further. Not helping the situation was the news last week that there is no concrete solution to the European debt problems. Last week, French President Nicolas Sarkozy and German Chancellor Angela Merkel met. However, following the meeting, Sarkozy stated that "EuroBonds can be imagined one day, but at the END of the European integration process, not at the BEGINNING." That was a pretty clear message to the financial markets that the creation of a EuroBond is not within the remote daydreams of Germany, which is the strongest nation in Europe and who will determine whether it gets created or not. So let's be clear, the German taxpayers want no part of a EuroBond, since it would use the surplus that Germany has worked hard to create to fund the poor habits and debt of weaker and less responsible member States. The bottom line is that the fear and uncertainty right now is pretty overwhelming, which is supporting Bonds and home loan rates. But Bonds are at "nose bleed levels" and sentiment can change very quickly. If you or someone you know has been considering refinancing or purchasing a home this is an ideal time to look at their unique situation. It only takes a few minutes to look at the options that are available right now. Forecast for the Week This week's economic calendar is light but the impact could be big: New Home Sales will be released on Tuesday. This report comes after a drop in Existing Home Sales, Housing Starts and Building Permits. It would be nice to see some improvement - but the market expectation isn't high. Gross Domestic Product for the 2nd quarter will be released on Friday, and investors will be waiting with bated breath for signs of weakening in the US economy. The initial read for Q2 came in low. If the second read is weak, Stock markets could move a leg lower and give Bonds a boost. But the report isn't released until Friday, so Stocks and Bonds will fight for investing dollars throughout the week. Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Bonds and Home loan rates improved last week but tapered off a bit on Friday. Stock markets fell once again last week on fears of a double-dip recession. That coupled with a plunge in the Philly Fed Index along with weak housing numbers fueled a rally in the Bond markets that saw Mortgage Bonds hit fresh 2011 highs before giving up some of those gains on Friday. Overall, however, home loan rates are still at some of the most attractive levels ever seen - making now a great time to consider a refinance or home purchase. ----------------------- Chart: Fannie Mae 3.5% Mortgage Bond (Friday Aug 19, 2011) The Mortgage Market Guide View... Focus to Finish: A Mindset By Jason W. Womack, MEd, MA When it's time to sit down and work on your work, how do you hold your focus? Over the past 5 months I've been working on the book. In that time, I've tried it ALL! I've planned extra days in hotel rooms, blocked time on the calendar, hired editors, I've even kept the calendar completely clear for one 3-day stretch, all to buy a little extra time to write. Here's what I've learned (or deepened my understanding of) over the past several months: 1. I've got to have a solid "start point." When I sit down to write, it helps a TON if I've already decided WHAT I'm going to draft in that session. Now, EVERY time I do this, the topic is expanded on, but...I don't waste any time getting started. I sit down. I write. 2. I (and this is me, what about you?) need to have some finish line in mind. And, it can't be time. I don't know why, but saying to myself, "I'm going to write until 3:45pm" just doesn't get me going as much as, "I'll take my next break after I've written 3,000 words." A starting line. A finish line. Maybe that's why I like triathlons so much! Jason W. Womack is an author and advisor, and founder of The Womack Company, a productivity-training firm based in Ojai, California. Jason's next book will be published in January 2012. Pre-order copies today at http://www.amazon.com/Your-Best-Just-Got-Better/dp/1118121988/ref=sr_1_1?ie=U... . -------------------------- Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise. Economic Calendar for the Week of August 22 - August 26 Date ET Economic Report For Estimate Actual Prior Impact Tue. August 23 10:00 New Home Sales Jul 310K   312K Moderate Wed. August 24 08:30 Durable Goods Orders Jul 2.0%   -1.9% Moderate Thu. August 25 08:30 Jobless Claims (Initial) 8/20 400K   408K Moderate Fri. August 26 08:30 Gross Domestic Product (GDP) Q2

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Volatility Rules the Markets.

In This Issue...           Last Week in Review: Volatility was the name of the game, with steep selloffs in Stocks and whipsaw trading. How did Bonds and home loan rates fare? Forecast for the Week: With housing news, manufacturing news, and inflation news, plus the continued credit crisis in Europe, more volatility could be in store. View: Still trying to understand the implications of Standard & Poor's downgrade of the United States' credit rating? Check out the key points below.           Last Week in Review           "Where do we go from here?" That question from Alicia Keys' song was one many traders were probably asking, after a week where we saw a massive and historic selloff in Stocks and rallies in safe-haven instruments like Treasuries and Gold. What happened and what does all of this mean for Bonds and home loan rates? Read on for details. Standard and Poor's downgrade of the United States' credit rating from AAA to AA+ late Friday, August 5th led to an especially volatile week, with the Dow Jones Industrial Average falling over 600 points and the S&P 500 Index experiencing its worst day since December 1, 2008-and that was just on Monday! The extreme volatility continued through the week, including Tuesday after the Fed released their Policy Statement, which was rather downbeat on the economy. In fact, Fed Chairman Ben Bernanke said, "Economic growth so far this year has been considerably slower than the Committee had expected." So where does our economy go from here? The incoming economic data will be under a microscope, as global markets try to decipher if the US (and the world) is slipping back into a recession, or just experiencing a slow patch. If economic reports here in the US show even modest strength and an improvement from the recent weak news, Stocks could retrace some lost ground, which would come at the expense of Bonds and home loan rates. We saw some of this happen late last week, after Initial Jobless Claims fell below 400,000 for the first time in weeks and Retail Sales for July had their biggest increase in four months. That being said, the current and ongoing concerns out of Europe should continue to provide a safe haven bid into the US Bond market... and this will help Bonds and home loan rates. But as you can see, with so many if's, about the only thing we can be sure of is more volatility. Wherever we go from here, the key takeaway is that RIGHT NOW, home loan rates remain near some of the best levels we've ever seen. If you've been thinking about buying or refinancing a home, give me a call or send me an email to learn how you can take advantage of this situation. Or forward this newsletter on to someone you know who may benefit.           Forecast for the Week           A slew of economic reports this week could give us a hint as to where we're heading. Look for: Housing news with July's Housing Starts and Building Permits Report on Tuesday and July'sExisting Home Sales Report on Thursday. Inflation news with the Producer Price Index, which measures inflation at the wholesale level, on Wednesday, followed by Thursday's Consumer Price Index. Inflation readings are important to watch right now, as a deflationary or low inflation environment will support low home loan rates. Manufacturing news with Thursday's Philadelphia Fed Index. Thursday also brings another weekly Initial and Continuing Jobless Claims Report. Last week's Initial Claims came in at 395,000, below the crucial 400,000 level which signals real improvement in the labor market. Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Bonds and home loan rates reached some of their best levels last week, and still remain at great levels even with all the volatility. Let me know if you have any questions at all about whether you can benefit from this situation. ----------------------- Chart: Fannie Mae 3.5% Mortgage Bond (Friday Aug 12, 2011)           The Mortgage Market Guide View...                   The Downgrade and Home Loan Rates Standard & Poor's (S&P) downgrade of the United States' credit rating from AAA to AA+ was historic-and Stocks have certainly been volatile since the downgrade. But US Bonds and home loan rates haven't been crushed by the news. If you've heard questions about the downgrade and home loan rates, keep the following points in mind: Despite the downgrade, there are a number of factors that bode well for US Bonds and home loan rates. S&P is currently the only credit rating agency that has downgraded the United States. Both credit rating agencies Moody's and Fitch have maintained the United States' AAA rating. More importantly, the ongoing credit crisis in Greece and other parts of Europe means that US Bonds are still considered one of the safest places to invest. The bottom line is that home loan rates remain near their historic best levels, but about the only thing that is certain in the markets right now is the volatility. If you know someone who has been thinking about buying a home or refinancing, call or email today to get started. -------------------------- Economic Calendar for the Week of August 15-19, 2011 Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise. Economic Calendar for the Week of August 15 - August 19 Date ET Economic Report For Estimate Actual

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