Current Environment, economy, inflation, mortgage rates

Current Environment

Typically, there are positives and negatives relating to the housing sector at any point in time, but negatives continue to dominate.

The economy grew only 0.6% in the first quarter of 2007 (1Q07). The economy expanded 3.8% in the second quarter and advanced 4.9% in the third quarter. The economy then slowed again, registering 0.6% improvement in Q4'07. The advance estimate of real GDP growth for the 1Q08 was also 0.6%, but then subsequently raised to a still anemic 0.9%. The employment situation has been soft so far in 2008 with non-farm payroll employment averaging 64,800 per month in declines for the first five months of the year and job losses of 49,000 in May. The unemployment rate has been rising and reached 5.5% in May, although it is still below the 30-year average of 6.1%. Consumer confidence, as measured by the Conference Board's broadest measurement of consumer confidence, has been generally deteriorating since August 2007, decreasing from 111.2 in July 2007 to 90.6 in December 2007 and 57.2 in May 2008. The index stands at a 16-year low. (The University of Michigan's consumer confidence index for May fell to the lowest level in 28 years.) The Conference Board indicated that 'weakening business and job conditions coupled with growing pessimism about the short-term future have further depleted consumers' confidence in the overall state of the economy.

Consumers' inflation expectations, fueled by increasing prices at the pump, are now at an all-time high and are likely to rise further in the months ahead. As for the short-term outlook, the expectations index suggests little likelihood of a turnaround in the immediate months ahead.

Thirty-year fixed mortgage rates, which were as low as 5.48% in late January of this year, averaged 6.09% most recently and were 44 basis points below a year ago. Of course, the current rates are low by historical standards. Adjustable-rate mortgages (ARMs) represented only 6% of conventional mortgage loans in April 2008, a percentage that has been steadily declining during the past few years and reflects tightened mortgage standards. In recent weeks, the Mortgage Bankers Association's Weekly Mortgage Applications Survey's unadjusted index has noticeably weakened compared to preceding weeks and the same weeks one year earlier. The market for subprime loans is essentially non-existent, and within Alt-A, only a limited number of prime-like Alt-A loans are currently being originated.