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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