Economic Review

as published by Hanley Wood

Executive Summary

Can we expect the Fed to keep the rate hikes coming? Most of the recent data points to the economy remaining robust and despite fifteen consecutive quarter point hikes and another on the way, the Fed may still need to do more to control inflation. The yield on the 10 year treasury has continued to climb and put pressure on mortgage rates, as it closed above the 5% mark for the first time in over 3 years on April 13. The 10 year treasury is currently yielding 5.132% as of Monday’s close. Crude oil remains trading above the $70/barrel mark. Higher energy prices remain worrisome, as it will start to hurt the average consumers’ spending habits and also its eventual effect in passing price pressure onto consumer goods. But so far, it has not dampened consumer sentiment since consumer confidence showed an unexpected rise for the second straight month. Stronger than expected GDP, new homes, and personal income data contributed t! o the rise in rates towards the end of April and strengthened the case that further rate hikes are to come.

The Economy

The advance estimates for first quarter GDP increased at an annual rate of 4.8%, up from the final fourth quarter real GDP gain of 1.7%. The advance figure represents the fastest growth since the third quarter of 2003. The advance number for the GDP Price Inflator came in at 3.3%, which was lower than the 3.5% final number reported for 4Q05. The personal consumption expenditure index showed a 2% increase, which lies near the high end of the Fed’s comfort zone. Both the GDP Price Inflator and PCE index are important, because they are gauges used to determine inflationary price pressure.

Consumer confidence also rose unexpectedly to 109.6, which is its highest rating since May 2002. The present situation index, which came in at 136.2, was at its highest levels since August 2001, which shows unusual optimism from consumers about our current economy in the face of rising energy prices and interest rates. Personal incomes increased 0.8% in March, which is its largest increase since September 2005. This marks the seventh straight month that personal incomes grew and the gain was larger than most economists had expected.

Housing Market

New home sales surged in March, increasing a stronger than expected 13.8% from its February number to 1,213,000 units. Although the month over month number showed sharp increase in sales, new home sales are still down 7.2% from the same period a year ago and have been trending down since they peaked in October 2005 until this rebound. Prices for new homes declined for the second straight month, decreasing 2.7% to $224,200 from $230,400 in February and at even at the current sales rate, there remains 5.5 months of supply in the market. In March 2006, annualized sales of existing single-family homes increased slightly to a seasonally adjusted 6.92 million units from a revised 6.90 million units in February. March’s sales pace is down slightly from the same period in the previous year, as year-over-year sales are down 0.7% from March 2005. The median sales price of existing single-family homes in the U.S. was $218,000, a one-year increase of ! 7.39% and the same as February’s revised number. Even with a healthy year-over-year increase, existing median home prices remain well off their 12 month highs for all U.S. regions. National mortgage rates increased for the sixth straight week as Freddie Mac’s weekly Primary Mortgage Market Survey showed that current 30 year fixed mortgage rates average 6.59%, with an average 0.5 points. Average rates continued to rise as average points paid in this period decreased slightly. In the week ending April 21st, the MBA’s seasonally-adjusted Purchase Index hit its lowest level in more than two years at 389.4. The index has since rebounded in May, likely due to seasonality in home buying, but is still 10% off the levels of the same period last year. The overall trend of decline is another indicator that the home loan industry will start to feel a major squeeze as rates rise.
For market-level data and analysis please visit our website at http://www.hanleywood.com/hwmi/.

(Courtesty of Louise RoseELB Mortgage Brokers, Inc.)