Higher Rates, Fluctuating Sales, Beach Property: What Lies Ahead

Mortgage rates hit 10-month high - 30-year fixed-rate loan hits 6.53 percent, highest since August, bringing more pain for battered housing market.

Mortgage rates jumped to the highest level in 10 months after recent reports on unemployment, wage growth and labor costs fanned growing fears about a pickup in inflation, Freddie Mac said Thursday.

The average rate on 30-year fixed-rate loans climbed to 6.53 percent for the week ending June 7 from 6.42 percent the previous week, the mortgage finance firm said. Last year at this time, 30-year mortgage rates averaged 6.62 percent. The rate is the highest since August 10, 2006, when it averaged 6.55 percent.

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Home Sales Projected to Fluctuate Narrowly With a Gradual Upturn

Home sales are projected to move in a relatively narrow range with a gradual upturn becoming more pronounced by the end of the year, according to the latest forecast by the National Association of Realtors(R).

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Forget global warming: Beach property is hot - You'd think that the prospect of flooded coasts would mean that beachfront real estate prices would be sinking. But you'd be wrong. Fortune's Jon Birger dives into the topic.

It took me a while, but I finally got around to seeing Al Gore's global warming movie, "An Inconvenient Truth". (Clearly I don't get out enough. The last first-run movie I saw was "Happy Feet" with my kids.)

Truth be told, I was bored silly by much of the movie - I'm not a documentary person, I guess - but there was one part of the movie that really stuck with me. It was Gore's assertion that, by 2100, huge swaths of coastal America would be washed away by a 20-foot rise in sea level. As someone who writes about real estate off and on, I thought it begged an interesting question: With so much attention now being paid to global warming, why isn't the market for beach homes...well...under water?

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Getting a Subprime Loan When You Qualify for Prime?

Can that really happen? You bet. And it has happened to lots of unsuspecting folks, according to an article on CNNMoney.com. This will blow your mind, and probably make you angry: Freddie Mac estimates that 15% to 35% of the subprime loans it bought in 2005 could have qualified for prime-rate loans. We're talking about around 3 percentage points on the interest rate, which could add up to hundreds of thousands of dollars over the life of a loan.

With a credit score of 650 or higher you can normally qualify for a prime-rate loan. But consumers who don't know much about mortgage loans can end up with a pig in a poke.

Doug Duncan, chief economist for the Mortgage Bankers Association, said a 1999 MBA survey revealed that 31 percent of all home buyers never spoke to anyone except their real estate agent when they bought a home.

The survey needs to be updated, he said, but it still suggests that many consumers enter some of the biggest financial deals of their lives with their eyes wide shut.

"People take things too nonchalantly," said Hardester. "If you've got plenty of money and don't mind not getting the best rate, listen to your realtor."

The other culprits, besides lack of knowledge, are mortgage brokers who steer customers toward the subprime market simply because they can make more money on those kinds of loans.

"Dollar for dollar, it is much more lucrative for a broker to sell subprime loans," said Allen Fishbein, a director of credit and housing policy for the Consumer Federation of America.

"I have a friend who interviewed for a job with my company," said Hardester. "He told me, 'I'm not coming to work for you. I can't make enough money.'"

The friend, who had been working in the subprime industry, told Hardester he was used to getting an average of five points-plus for each loan he originated; that's more than $10,000 on a $200,000 mortgage. Hardester's company writes mostly prime loans, where the margins are much thinner - around 1 percent or less.

The answer to this problem is twofold: Educate yourself, and shop around.

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Rates Rise, Borrowing Falls

I know about supply and demand. I know it works, and I know how it works. But it's always neat to see it in action.

Mortgage applications declined last week as interest rates hit seven-month highs, according to the latest report by the Mortgage Bankers Association.

So CNNMoney tells us today. Some specifics:

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.32 percent, up from 6.23 the previous week. The rate was at its highest since the week ended Oct. 20.

Fixed 15-year mortgage rates rose to 6.05 percent from 5.96 percent in the previous week. Rates on one-year adjustable-rate mortgage ARMs climbed to 5.74 percent from 5.72 percent.

Not only is this not a great time to sell, it's not even a great time to buy!

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Week in Review: Economic Highlights

Monday, May 21st

The National Association of Business Economics or NABE polled 48 economists about the near term outlook for the economy and any associated risks. Survey results showed economists expect GDP to grow at an annual rate of 2.3% this year, down from 2.8% in February due to the slowdown in housing and subprime lending woes. Economists raised their estimates for inflation but only slightly because of below potential growth rate. Consensus estimates are for the core PCE to rise 2.1% in 2007, just a bit higher than the Fed's comfort zone of 1-2%. Recession risks remain minimal according to the economists with just a 25% chance of one occurring this year.

Tuesday, May 22nd

Fed funds futures traders are pricing in just a 21% chance the Fed will lower rates by one quarter percentage point in September. That is down from 41% odds just a week ago.

Wednesday, May 23rd

The MBA mortgage applications index rose 1.6% to 686.2% for the week that ended May 18. Both purchase and refinancing activity increased last week. Demand for refinancing firmed despite an uptick in rates. The improvement in the MBA index since April offers one of the only hopeful signs of improvement in housing market conditions.

Thursday, May 24th

New orders for durable goods rose 0.6% in April less than an expected gain of 0.8%. Core capital goods orders, which is considered a proxy for business investment, rose a strong 1.2% on the month. Despite some volatility it appears that the rebound in manufacturing has taken hold and that the sector will contribute positively to Q2 GDP.

New home sales unexpectedly jumped 16.2% in April to an annual rate of 981,000. Expectations centered on an annual rate of 860,000. The outsized gain last month follows three straight months of declines and leaves new home sales 10.6% below their year ago level. Economists warn about reading too much into this report because the data is highly subject to revisions and other evidence that the housing market is still undergoing correction.

Jobless claims increased 15k to 311k for the week that ended May 19. This was the first increase in jobless claims in the past six weeks. Jobless claims still remain at a low level indicating fairly tight labor market conditions.

Mortgage rates jumped this week on mixed expectations of a rate cut by the Fed this year. Rate cut expectations have dwindled recently on hawkish Fed rhetoric and stronger than expected economic data. 30-year fixed rate mortgages averaged 6.37% this week compared to 6.21% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac now expect mortgage rates to rise gradually this year, revised from earlier forecasts of little change in rates.

Friday, May 25th

Existing home sales fell 2.6% in April to an annual rate of 5.99 million compared to expectations for no change and a rate of 6.12 million. This was the lowest level of sales in four years as tighter lending standards sapped demand. The inventory of homes for sale shot higher while prices eased over the last year.

Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13507.28 13556.53 -49.25 or -0.36%
NASDAQ 2557.19 2558.45 -1.26 or -0.05%

WEEK IN ADVANCE

A fresh batch of economic data should get the financial markets rolling in the post-holiday week. Key indicators on the manufacturing sector, the labor market, consumer spending and inflation will show how the second quarter is progressing. Also, the FOMC meeting minutes from May 9 should help to clarify the interest rate outlook.

Key Interest Rates Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25% 8.25% 8.00%
Fed Discount 6.25% 6.25% 6.00%
Fed Funds 5.25% 5.24% 4.98%
11th District COF 4.299% 4.382% 3.624%
10-Year Note 4.86% 4.58% 5.05%
30-Year Treasury Bond 5.00% 4.66% 5.15%
30-Yr Fixed (FHLMC) 6.37% 6.18% 6.62%
15-Yr Fixed (FHLMC) 6.06% 5.91% 6.23%
1-Yr Adj (FHLMC) 5.64% 5.49% 5.61%
6-Mo Libor (FNMA) 5.3581% 5.3898% 5.2879%

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

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Snapshot: Mid-Week Major Indexes

(Click image to enlarge.)



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WEEK IN REVIEW

Monday, May 7th

Consumer credit outstanding increased at a 6.7% annual rate or by $13.5 billion in March. Consumers used credit cards and took out car loans at an almost equally fast pace in March as mortgage equity withdrawals decreased. Credit usage is expected to remain elevated as consumers use other lines of credit to finance spending due to weakening in the housing market and slower cash out refinancings.

Tuesday, May 8th

The NAR lowered their forecasts for home sales and prices again this month after a similar sized downgrade last month. The Association expects existing home sales to decline 2.9% this year to 6.29 million compared with its April sales forecast of 6.34 million. New home sales are now expected to drop 18% to 864k, vs. the earlier forecast for a 14% decline. In its first ever projected price decline, the NAR said that prices for existing homes will fall 1.0% this year while new home prices are expected to remain unchanged. Forecasts of 2008 existing and new home prices are for gains of 1.0% and 2.0% respectively.

Wednesday, May 9th

The MBA mortgage applications index rose 3.6% to 680.7% for the week that ended May 4. The purchase index climbed 2.6% higher on the week while the refinance index gained 4.9%. After falling steadily from mid-2005 though 2006, home purchasing activity has stabilized in the last 5 months. Refinancing activity continues to surge as many homeowners facing resets in adjustable rate mortgages are opting to refinance into a more favorable loan.

The FOMC opted to hold the target for the fed funds rate steady at 5.25% at their policy meeting today. This was the seventh straight meeting policymakers have left rates alone. Moreover, there were only minimal changes to the post-meeting statement. The Fed acknowledged slower growth in the first part of this year and that recent indicators have been mixed. They stated again that the correction in the housing market was ongoing and forecast moderate economic growth ahead. The Committee reiterated that core inflation remained somewhat elevated but that they were optimistic that inflationary pressures would moderate. The current high level of resource utilization poses an upside risk to inflation. The Fed maintained that inflation continues to be the predominate risk to the economy and that future policy adjustments will remain dependent upon incoming economic data.

Thursday, May 10th

Import prices jumped 1.3% in April led by a 6.5% gain in petroleum prices. Excluding petroleum, import prices rose just 0.2% on the month. Overall import prices gained 1.9% over the past year.

The international trade deficit jumped to $63.9 billion in March from a shortfall of $57.9 billion in February. The trade gap widened because of a 4.5% surge in imports. Exports increased 1.8% on the month. The wider trade gap will detract from Q1 GDP in subsequent revisions.

Jobless claims fell 9k to 297k for the week that ended May 5. The four week moving average, used to smooth out weekly volatility, also fell 12k to 317k. The low level of claims is consistent with tight labor market conditions.

Friday, May 11th

Retail sales fell 0.2% in April, much lower than an expected gain of 0.4%. However, retail sales were upwardly revised in March from a gain of 0.7% to an increase of 1.0%. Sharp declines in sales of motor vehicles, building materials, clothing and general merchandise weighed down overall sales. Excluding motor vehicles, core retail sales also fell 0.2% on the month. Consumer spending was weak in April but is still expected to grow modestly in coming months.

The producer price index jumped 0.7% in April as energy prices shot up 3.4%. The PPI was up 3.2% over the last year. Excluding food and energy from the index, core consumer prices were unchanged in April and gained a moderate 1.6% over the last year. Core wholesale inflation remains contained at this time but the headline figure remains a concern due to the pass through of energy prices.

Stock Market Close for the Week

Index Latest A Week Ago Change
DJIA 13326.22 13264.62 +61.60 or +0.46%
NASDAQ 2562.22 2572.15 -9.93 or -0.38%

WEEK IN ADVANCE

More inflation and housing market data on tap this week. Financial markets will be looking for the consumer prices index to support an easing inflation outlook and housing starts data to point toward some stabilization in new home construction. Also, Fed Chief Ben Bernanke will discuss the subprime mortgage market Thursday, in Chicago.

Key Interest Rates Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25% 8.25% 7.79%
Fed Discount 6.25% 6.25% 5.79%
Fed Funds 5.25% 5.24% 4.84%
11th District COF 4.299% 4.382% 3.624%
10-Year Note 4.67% 4.64% 5.14%
30-Year Treasury Bond 4.85% 4.74% 5.22%
30-Yr Fixed (FHLMC) 6.15% 6.33% 6.58%
15-Yr Fixed (FHLMC) 5.87% 6.04% 6.17%
1-Yr Adj (FHLMC) 6.76% 5.55% 5.62%
6-Mo Libor (FNMA) 5.3581% 5.3898% 5.2879%

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

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Video Tutorial: How to Read a Mortgage Rate Sheet

The Real Estate Investing Brain has put together a couple of very informative videos explaining how to read a mortgage rate sheet. Well worth your time if you want to invest in real estate.

How to Read a Mortgage Rate Sheet Part 1

How to Read a Mortgage Rate Sheet Part 2

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Week in Review

*Monday, April 30th*
Personal income increased 0.7% in March, a bit better than expected. But consumer spending only gained 0.3% compared to expectations for a 0.5% advance as spending on services declined sharply. A closely watched inflation gauge contained in this data series, the core PCE deflator was unchanged in March and up 2.1% over the past year, very close to the Fed's comfort zone. Construction spending rose 0.2% in March, after a gain of 1.5% in February. Construction spending in February was originally reported as a gain of 0.3%. Even with the gains, construction spending continues to trend much lower led by weakness in residential investment.

*Tuesday, May 1st*
The ISM manufacturing index increased to 54.7% in April from 50.9% in March. The gain was stronger than expected and indicates a rebound in manufacturing conditions nationwide. Input prices increased last month as a result of stronger activity. Higher new orders and lower inventory levels bode well for manufacturing activity going forward. The NAR's pending home sales index dropped 4.9% to 104.3% in March. The NAR said that the decline was the largest since February 2003 and related to tighter lending standards and curtailed subprime lending volumes. The pending home sales index is considered a leading indicator of existing home sales and suggests Q2 home sales will slow.

*Wednesday, May 2nd*
Motor vehicle sales slipped 0.3% in April to a rate of 16.3 million. In a reverse of recent trend domestic vehicle sales increased 1.3% to 12.4 million as imported motor vehicle sales tumbled 5.3% to 3.9 million. It looks like motor vehicle sales, slow enough in Q1 to be a modest drag on growth, started the second quarter with little momentum. In more signs of recovery in the manufacturing sector, factory orders increased 3.1% in March. Durable goods orders surged 3.7% on a huge jump in aircraft orders. Excluding the transportation sector, factory orders increased 1.9%. Solid factory gains imply that the inventory correction in the manufacturing sector has abated and factory activity will contribute positively to economic growth in coming quarters. The MBA mortgage applications index rose 0.6% to 657.2% for the week that ended April 27. The purchase index increased 4.0% on the week but was down 1.4% on the year. The refinance index fell 3.2% for the week but was up 28.8% for the year. Mortgage application activity continues to be supported by relatively low rates. However, volumes are being affected by less subprime activity and tighter lending standards.

*Thursday, May 3rd*
The ISM non-manufacturing index rose to 56.0% in April from 52.4% in March. Employment in the sector gained while prices remained firm. The level of the index shows expansion in the services, construction and government sectors of the economy despite the correction in the housing and mortgage finance markets. Productivity increased at a rate of 1.7% in the first quarter, more than double expectations. Nevertheless, productivity growth continues to trend lower. Unit labor costs rose only 0.6% during the quarter, breaking a rising trend that has been in place the last three years. Jobless claims plunged 21k to 305k for the week that ended April 28. The four week moving average, which smoothes out weekly volatility also fell by 5k last week. The low level of claims indicates strong labor market conditions. Recent projections of housing and auto-manufacturing related layoffs have yet to materialize in these data.

*Friday, May 4th*
Payroll employment increased by 88k in April, shy of expectations for a gain of 100k. Moreover, there were downward revisions in payrolls in the prior two months. Job declines occurred in construction, manufacturing and retail sectors. Slower job creation has capped wage growth. Average hourly earnings rose just 0.2% last month pulling the year-over-year rate down to 3.7%. The unemployment rate was up a tick to 4.5% of the workforce.

*Stock Market Close for the Week*
*Index* *Latest* *A Week Ago* *Change*
DJIA 13264.62 13120.94 +143.68 or +1.09%
NASDAQ 2572.15 2557.21 +14.94 or +0.58%

*WEEK IN ADVANCE*
The FOMC meets on Wednesday and key inflation and consumer spending data is due out Friday. The Fed is expected to remain sidelined on monetary policy while wholesale inflation numbers and retail sales results figure prominently in the second quarter outlook and direction of the economy.

*Key Interest Rates* *Latest* *6 Mos Ago* *1 Yr Ago*
Prime Rate 8.25% 8.25% 7.75%
Fed Discount 6.25% 6.25% 5.75%
Fed Funds 5.25% 5.25% 4.83%
11th District COF 4.299% 4.382% 3.624%
10-Year Note 4.64% 4.64% 5.14%
30-Year Treasury Bond 4.80% 4.74% 5.22%
30-Yr Fixed (FHLMC) 6.16% 6.31% 6.59%
15-Yr Fixed (FHLMC) 5.87% 6.02% 6.22%
1-Yr Adj (FHLMC) 5.42% 5.53% 5.67%
6-Mo Libor (FNMA) 5.3581% 5.3898% 5.2879%

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

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Where to Find a Great Mortgage: Mortgage Lenders PLUS

In today's market, even though there's a lot of bad news for homeowners who need to sell, things change when you switch hats and become a buyer. Home sales are down, which means that sellers are getting desperate, which means that buyers have the upper hand.

So if you are a buyer and are therefore in a position of strength, you need to get the best deal on a mortgage that you possibly can. So where do you go? Whom can you trust?

There's a mortgage lender directory web site I found that is an excellent place to start no matter what state you live in. It's called Mortgage Lenders PLUS. Just like when you want to buy any other product, comparing lenders in order to find the best deal possible is an important step, and that's just one of the things Mortgage Lenders helps you do.

An additional arrow in the buyer's quiver is information. The more educated you are in terms of loans and lenders, the more power you have in the transaction. Mortgage Lenders PLUS has a very helpful section of articles that will make you, as a potential borrower, knowledgeable enough to sift the wheat from the chaff and get a deal that you'll be happy with down the road.

Mortgage Lenders isn't only for home buyers though. It's also for homeowners who are in a position to refinance or get a good home equity loan. A special section on home equity on their web site will help you find out what's best in your specific situation.

Give them a visit and see what I'm talking about. You'll be happy you did.

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WSJ Reports: 15 Top Mortgage Delinquency Markets

The mortgage-delinquency rate climbed to 2.87% in the first quarter from 2.51% at the end of last year, and from a recent low of 2.03% in the fourth quarter of 2005, according to a new study by Equifax Inc. and Moody's Economy Inc. That's the highest level since the companies began tracking delinquencies at the beginning of 2000. Delinquencies also were up sharply for home-equity loans and lines of credit.

"The erosion [in credit quality] is greater than I expected," says Mark Zandi, chief economist of Moody's Economy.com, who expects mortgage delinquencies will peak at about 3.5% in mid-2008. "It's the noxious mix of all those aggressive loans now facing resets combined with falling house prices and a deceleration in job growth, particularly in some markets."

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Lenders to the Rescue

As everyone knows, the bursting real estate bubble has lenders worried about people having bitten off more than they can even get in their mouths, financially speaking. They are motivated to keep borrowers from defaulting. Here's a story from the Orlando Sentinel...

Freddie Mac on Wednesday committed to buy as much as $20 billion in subprime mortgages, while Washington Mutual Inc. offered to refinance $2 billion in loans as the U.S. mortgage-finance industry made its biggest gesture yet to help borrowers with poor credit histories avoid losing their homes.

"To the maximum extent possible we want to approach this from a market driven kind of approach," Freddie Mac Chief Executive Officer Richard Syron said after meeting with lawmakers in Washington about the burgeoning subprime mortgage-finance crisis.

At least 50 lenders have failed since the beginning of last year, more than one-eighth of subprime mortgages were delinquent in the fourth quarter, and the number of foreclosures started rose 47 percent in March from a year earlier. Congressional leaders Wednesday told industry representatives they are opposed to a federal bailout.

Freddie Mac, the second-largest source of money for home loans, says lenders can count on the $20 billion to fund less-burdensome loans for subprime borrowers.

Syron said the company still needs approval from its regulator -- the Office of Federal Housing Enterprise Oversight -- for both the amount of capital needed and the new financing mechanisms proposed.

Washington Mutual, the biggest U.S. savings and loan, will refinance some adjustable-rate subprime mortgages into 30-year, fixed-rate loans that charge half a percentage point of interest less than normal.

"Customers who work with us to develop a payment plan are more likely to succeed in avoiding foreclosure and balancing other household financial obligations," said David Schneider, Washington Mutual's home-loan group president.

The top Democrat and Republican on the Senate Banking Committee said that they oppose a federal bailout of subprime borrowers, who pushed delinquency rates to a four-year high of 13.3 percent in the fourth quarter, according to the Mortgage Bankers Association. Committee Chairman Christopher Dodd of Connecticut and Richard Shelby of Alabama, a Republican, also said there is no need for legislation to curb foreclosures.

Good news if you're stuck between a rock and a foreclosure.

*WEEK IN ADVANCE*

Earnings season gets into full swing this week while data on consumer prices and the pace of new residential construction moves to the forefront of the economic
calendar.
*Key Interest Rates*Latest*6 Mos Ago*1 Yr Ago*
Prime Rate  8.25%  8.25%  7.75%
Fed Discount  6.25%  6.25%  5.75%
Fed Funds  5.25%  5.23%  4.76%
11th District COF  4.376%  4.277%  3.604%
10-Year Note  4.76%  4.78%  4.98%
30-Year Treasury Bond  4.93%  4.91%  5.05%
30-Yr Fixed (FHLMC)  6.22%  6.37%  6.49%
15-Yr Fixed (FHLMC)  5.90%  6.06%  6.14%
1-Yr Adj (FHLMC)  5.47%  5.56%  5.61%
6-Mo Libor (FNMA)  5.3212%  5.3704%  5.1196%
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of 
San Francisco

*WEEK IN ADVANCE*

With the economy on solid footing, inflation remains the name of the game for Fed monetary policy. This week's economic calendar is dominated by inflation indexes, which for the most part will drive market action and the direction of interest rates.

*Key Interest Rates* *Latest* *6 Mos Ago* *1 Yr Ago*
Prime Rate 8.25% 8.25% 7.50%
Fed Discount 6.25% 6.25% 5.50%
Fed Funds 5.25% 5.25% 4.51%
11th District COF 4.392% 4.177% 3.347%
10-Year Note 4.59% 4.79% 4.74%
30-Year Treasury Bond 4.73% 4.94% 4.72%
30-Yr Fixed (FHLMC) 6.14% 6.47% 6.37%
15-Yr Fixed (FHLMC) 5.86% 6.16% 6.06%
1-Yr Adj (FHLMC) 5.47% 5.63% 5.45%
6-Mo Libor (FNMA) 5.3723% 5.4501% 4.9907%

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of
San Francisco

*WEEK IN ADVANCE*

The employment report Friday caps off an otherwise quiet economic calendar this week. Payrolls are expected to come in at just 100k. Signs of weakness in labor market conditions will continue to exert downward pressure on rates. Also, the Fed's beige book, due out on Wednesday will garner interest from the financial markets looking to clarify the economic outlook.

*Key Interest Rates* *Latest* *6 Mos Ago* *1 Yr Ago*
Prime Rate 8.25% 8.25% 7.50%
Fed Discount 6.25% 6.25% 5.50%
Fed Funds 5.25% 5.24% 4.49%
11th District COF 4.392% 4.177% 3.347%
10-Year Note 4.50% 4.76% 4.61%
30-Year Treasury Bond 4.64% 4.91% 4.58%
30-Yr Fixed (FHLMC) 6.18% 6.44% 6.24%
15-Yr Fixed (FHLMC) 5.92% 6.14% 5.89%
1-Yr Adj (FHLMC) 5.49% 5.59% 5.34%
6-Mo Libor (FNMA) 5.3723% 5.4501% 4.9907%

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of
San Francisco

Slower economic growth predicted

WASHINGTON – Feb. 26, 2007 – Restrained by a worse-than-expected slump in housing, the economy will grow at the slowest pace in five years in 2007, leading economic forecasters say. They predict consumers will get a break on inflation from falling energy prices.

The survey of 47 top forecasters, released Monday by the National Association for Business Economics, found a greater expected impact from the ailing housing market this year than did the previous forecast in November. Stronger consumer spending will help offset the housing drag, according to the survey.

The panel predicted that the overall economy will grow by 2.7 percent this year. It would be slowest annual increase in the gross domestic product since a 1.6 percent rise in 2002, when the economy was pulling out of the last recession. In 2006, the GDP rose by 3.4 percent.

GDP measures the value of all goods and services produced in the United States. It is the broadest gauge of the country’s economic health. NABE’s November forecast put GDP growth this year at 2.5 percent.

The slight upward revision occurred even though the forecasters now believe housing construction will plunge by 14.9 percent this year. That would be nearly three times bigger than the 5.5 percent fall in residential construction they had projected in the earlier survey.

Construction spending dropped by 4.2 percent for all of 2006. That decline was a chief factor in the economy’s sluggish growth in the second half of last year. Thousands of construction workers lost their jobs and home builders struggled with slumping sales as the five-year housing boom ended abruptly.

But the economic forecasters see a cushion to the sharp drop in housing: stronger than previously expected consumer spending. This measure will grow by 3.2 percent in 2007, the same as last year, the panel said. The forecasters also saw good news on inflation. They predicted that consumer prices will rise by just 1.9 percent this year, down sharply from the 3.2 percent increase on an annual basis last year and the best showing in five years.

The Federal Reserve had lifted interest rates for two years, with the last increase in June 2006, in hopes of slowing growth enough to dampen inflation, but not too much that it would cause a recession.

“The forecast we are presenting is the picture of a soft landing,” said Carl Tannenbaum, NABE’s president and the chief economist at LaSalle Bank/ABN AMRO in Chicago. As housing stabilizes, the forecasters are looking for GDP growth to rebound to 3 percent in 2008.

Because of the slowdown in growth, the forecasters predicted the unemployment rate will tick up modestly to 4.7 percent this year and 4.8 percent in 2008. The rate averaged 4.6 percent last year, the lowest in six years.

The forecasters now believe the Fed will be content to remain on hold for the entire year. In November, they predicted the Fed would cut interest rates twice in 2007 to jump-start a sluggish economy.

“The economic expansion seems to be facing fewer risks today than it did when we took past surveys,” Tannenbaum said. “The drop in risks plus the moderation in inflation will allow the Fed to stay on hold.”

On the Net: National Association for Business Economics: http://www.NABE.com

*WEEK IN ADVANCE*

Financial markets will continue to look for rate direction in the data this week. New and existing home sales for January will provide the latest on housing sector performance at the start of the year. If weaker than expected, rates could decline in response. An expected downward revision to Q4 GDP could also place downward pressure on rates.

*Key Interest Rates* *Latest* *6 Mos Ago* *1 Yr Ago*
Prime Rate 8.25% 8.25% 7.50%
Fed Discount 6.25% 6.25% 5.50%
Fed Funds 5.25% 5.24% 4.49%
11th District COF 4.396% 4.090% 3.296%
10-Year Note 4.67% 4.81% 4.56%
30-Year Treasury Bond 4.78% 4.95% 4.51%
30-Yr Fixed (FHLMC) 6.22% 6.48% 6.26%
15-Yr Fixed (FHLMC) 5.97% 6.18% 5.89%
1-Yr Adj (FHLMC) 5.49% 5.60% 5.32%
6-Mo Libor (FNMA) 5.4014% 5.5473% 4.8126%

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of
San Francisco

WHERE ARE INTEREST RATES HEADED?

This week is light on economic data however there is one indicator of interest: the consumer price index, due out on Wednesday. Tame inflation and weaker-than-expected economic data released in the past couple of weeks will probably result in some downward pressure on rates in the near term.

*Key Interest Rates* *Latest* *6 Mos Ago* *1 Yr Ago*
Prime Rate 8.25% 8.25% 7.50%
Fed Discount 6.25% 6.25% 5.50%
Fed Funds 5.25% 5.23% 4.49%
11th District COF 4.396% 4.090% 3.296%
10-Year Note 4.69% 4.90% 4.59%
30-Year Treasury Bond 4.78% 5.03% 4.53%
30-Yr Fixed (FHLMC) 6.30% 6.52% 6.28%
15-Yr Fixed (FHLMC) 6.03% 6.20% 5.91%
1-Yr Adj (FHLMC) 5.52% 5.65% 5.36%
6-Mo Libor (FNMA) 5.4014% 5.5473% 4.8126%

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of
San Francisco

WEEK IN ADVANCE

Fed Chairman Ben Bernanke delivers his semi-annual testimony on the economy and monetary policy to Congress this week. The testimony plus a full economic calendar will keep the markets hopping but will likely do little to change the outlook in the long run. The Fed is expected to hold rates steady for some time to come.

Key Interest Rates* *Latest* *6 Mos Ago* *1 Yr Ago*
Prime Rate 8.25% 8.25% 7.50%
Fed Discount 6.25% 6.25% 5.50%
Fed Funds 5.25% 5.27% 4.50%
11th District COF 4.396% 4.090% 3.296%
10-Year Note 4.78% 4.94% 4.56%
30-Year Treasury Bond 4.87% 5.04% 4.53%
30-Yr Fixed (FHLMC) 6.28% 6.55% 6.24%
15-Yr Fixed (FHLMC) 6.02% 6.20% 5.83%
1-Yr Adj (FHLMC) 5.49% 5.69% 5.34%
6-Mo Libor (FNMA) 5.4014% 5.5473% 4.8216%

Analysts: Rate may not change in 2007

WASHINGTON – Feb. 1, 2007 – Analysts were not surprised that the Federal Reserve decided to hold the federal-funds rate steady at 5.25 percent at its meeting this week, but some were caught off guard by the central bank’s statements on economic growth and inflation.

A statement released after the meeting indicated that “inflation pressures seem likely to moderate over time,” cited “somewhat firmer economic growth,” and noted that the housing market appears to be stabilizing.

Analysts believe the central bank will leave the federal-funds rate unchanged for the rest of the year, but some predict that rate cuts are possible during the second half. Concerns about inflation have pushed up mortgage rates in recent weeks, with analysts noting that the 30-year fixed rate could soon hit 6.75 percent.

Source: Chicago Tribune (02/01/07) Crutsinger, Martin

30-yr. mortgage rates up to 6.25 percent

This week, mortgage industry experts polled by Bankrate.com say it’s time to lock – chances are that rates will move higher. Almost half of the panelists (45 percent) believe mortgage rates will rise over the next 30 to 45 days; 22 percent think rates will fall and the rest (33 percent) think they’ll stay about the same.