Interest Rate Roundup

Monday, June 09, 2008

On the road, limited posting

Just as an FYI, I'm in New York City for business this week. So my postings will probably be shorter and not as frequent. I'll also be doing my best not to pass out mid-post from the heat (it's been 95+ the past couple of days here)!

The big story of the day in housing is clearly the surprise gain in April pending sales. But I expect the gains to be relatively short-lived for a few reasons ...

* Buyer confidence remains weak. People are afraid house prices will continue to fall, and rightfully so. That lack of confidence in the ability of their homes to hold their value is sidelining many potential buyers. The latest Conference Board figures from May showed only 2.1% of those surveyed said they plan to purchase a home in the next six months, the lowest level since October 1982.

* The broad economy is struggling and joblessness is rising. The economy grew just 0.9% in the first quarter and 0.6% in the fourth. That’s not very impressive. Moreover, the economy shed 49,000 jobs in May – the fifth decline in a row – and the unemployment rate soared to 5.5% from 5%, the biggest one-month gain since February 1986.

* Rising interest rates are another threat – The Fed is caught between a rock and a barrel of oil. It has slashed interest rates deeply into negative territory (nominal funds rate of 2% vs. a 3.9% YOY rate of CPI inflation in April). That has helped drive the dollar much lower and commodities through the roof – including a $10+ surge in oil prices on Friday alone. Consumers are now expecting an inflation rate of 5.2% over the next year, according to the most recent University of Michigan confidence survey. That’s the highest since February 1982.

So I believe the Fed really can’t afford to cut short-term rates any longer. That means no further breaks will be forthcoming for HELOC and ARM holders. Meanwhile, long-term rates have been RISING along with inflation fears. Freddie Mac’s average 30-year fixed rate is up to 6.09% (week of June 5th) from a low of 5.48% in mid-January (week of January 24th). This is starting to drive mortgage demand lower, and that suggests the May and June numbers will look worse than the April ones.

If you want a bit more on this topic, you can check out my interview with Canada's BNN from this afternoon.


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