| Title: | Cooling Housing Activity Keeps Long-term Yields Low | |
| Date: | 8/28/2006 | |
Overview:This week’s economic data provided further evidence of a cooling of the housing market and the economy. Existing home sales declined for the fifth time this year to a seasonally-adjusted annualized rate (SAAR) of 6.33 million — the slowest pace since January 2004. New home sales declined in July for the second consecutive month to 1.07 million (SAAR). Year-to-date total home sales (new plus existing) through July were 7.4 percent below levels in the first seven months of 2005. The decline in the new home market has been more pronounced than that for the existing home market, with year-to-date sales down by 14.3 percent, compared with a 6.0 percent decline for existing home sales.
Inventories for all types of homes continue to build up, especially for existing homes. The months’ supply (inventory-sales ratio) for single-family homes rose to 7.2 months — the highest level since May 1993. For new homes, the months’ supply was the highest since November 1995 at 6.5 months.
Sharply rising unsold home inventories are putting an increasing downward pressure on home prices. The median price for new homes increased 0.4 percent in July from a year ago, compared with a 1.5 percent increase for single-family existing homes. Median prices for condo properties declined on a year-over-year basis for the third time in the past four months.
Leading indicators suggest a further slowdown in home sales. The Purchase Index in the Mortgage Bankers Association weekly survey of mortgage applications declined in five of the past six weeks. The average monthly index fell below 400 in July for the first time since October 2003. It has remained below that level over the past six weeks.
Housing and Mortgage Indicators:
Existing home sales decreased 4.1 percent in July to a seasonally-adjusted annualized rate of 6.33 million. Single-family home sales decreased 5.0 percent while condo sales increased 2.8 percent.
From a year ago, existing home sales declined 11.2 percent. The inventory of single-family homes escalated sharply in July, increasing 40.4 percent from last July to 3.3 million units. Condo inventory rose to 556,000 units — a 36.9 percent increase from a year ago.
New homes sales decreased 4.3 percent in July to a seasonally-adjusted annualized pace of 1.07 million. Sales decreased 21.6 percent from last July. The number of homes available for sale increased to a record to 568,000 units — a 22.4 percent increase from last July.
The Mortgage Bankers Association Weekly Survey of Mortgage Applications for the week ending August 19 showed that mortgage demand was little changed, with the Market Index increasing 0.1 percent to 561.5. The increase was due to refinance activity, which increased 1.3 percent — the fifth consecutive increase.
The 30-year fixed mortgage rate decreased 15 basis points to 6.38 percent, while the 1-year adjustable rate decreased 6 basis points to 5.91 percent. The spread between fixed and adjustable mortgage rates narrowed 10 basis points to 57 basis points. The ARM share of mortgage applications was 26.4 percent of the number and 39.6 percent of the dollar volume of new applications — declining by 0.8 and 1.6 percentage points, respectively, from the previous week.
Economic Indicators:
Durable goods orders fell 2.4 percent in July, following an increase of 3.5 percent in June. The weakness was concentrated in both autos and civilian aircraft orders. Nondefense capital goods excluding aircraft orders — a proxy for business investment — posted a solid 1.5 percent, the second straight month of acceleration. This suggests that, as residential investment declines, business investment will remain a positive contributor to economic growth through the rest of the year.
Interest Rate Outlook:
The combination of signs of slowing economic growth and moderating inflation has brought the Treasury yields steadily down over the past two weeks. The financial market has significantly reduced its expectation for another Fed’s rate hike next month. The yield on the 10-year Treasury note was around 4.80 percent by mid Friday afternoon — 4 basis points lower than the rate on the previous Friday.
Next Week:
Next week is a busy week for economic calendar, with releases of major economic indicators for August, including the employment report and the Institute of Supply Management (ISM) manufacturing survey (both on Friday). The Fed’s favored measure of inflation — the core personal consumption expenditure — for July will also be available. Finally, the Fed will release the minutes from the Federal Open Market Committee (FOMC) August 8 meeting. Past releases of the minutes had significant market-moving effects.
Tuesday – The Conference Board Consumer Conference for August and Federal Open Market Committee minutes from August 8 meeting;
Wednesday – The preliminary estimate for the second quarter gross domestic product;
Thursday – Personal income and personal consumption for July and July factory orders;
Friday – July employment report; the final estimate of the July University of Michigan Consumer Sentiment; July construction spending; the Institute of Supply Management (ISM) manufacturing survey for August.
Orawin Velz
Director, Economic Forecasting
August 25, 2006
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