March 21st, 2009 8:05 AM by Jason Compton
Housing will take center stage in an otherwise quiet data week with reports on both existing and new home sales.
The reports will not reflect the impact of the the Federal Open Market Committee’s decision announced on Wednesday to purchase up to $300 billion of Treasury bonds and up to $750 of mortgage-backed securities, both of which had the immediate impact of eddying mortgage interest rates.
The FOMC announcement indeed overwhelmed economic data on inflation at the wholesale and retail levels and a surprise jump in housing starts.
The movement by the FOMC to further expand the money supply through the purchase of Treasurys still avoids the heart of the economy’s problems: frozen credit markets.
The Federal Reserve’s announcement is sure to boost mortgage demand – even before the announcement the Mortgage Bankers Association reported a second consecutive weekly increase in mortgage applications, the first back-to-back increases since December.
The surge in demand for mortgages has been met by a less-than-enthusiastic response from lenders. According to the MBA, the approval rate for all applications has been falling steadily. In the first half of 2008 – before credit markets froze – the approval rate dropped to under 60% after averaging about 68% for the prior eight years. Anecdotal evidence suggests the approval rate in the second half of the year fell faster, even as rates declined. (Indeed the rate decline may have contributed to the lower approval rates by increasing the number of applications – the denominator in the equation.)
The movement of the numbers suggests the recent actions by the FOMC may not automatically improve credit approvals since all it does is increase the supply of money, with no support for lenders. Credit standards remain higher than they had been with no support for lenders who try to expand their markets.
There’s a certain irony in that. Mortgage lending standards are generally set by Fannie Mae (FNM: 0.7089, -0.291, -29.1%) and Freddie Mac (FRE: 0.7498, -0.3002, -28.59%) as they determine which residential mortgages they will purchase. Lenders use those standards so they can offload their loans and use the proceeds to make new loans. With lending standards high, few borrowers qualify but that’s where Fannie and Freddie could step in, by agreeing to guarantee or in some other way protect lenders who make loans to borrowers falling just under the market standards. Such a step would encourage lending either for home purchases or refinances, which both have a positive impact on the economy.
Banks are whipsawed between safety-and-soundness constraints and pressures to lend. Data from the Federal Reserve suggest they haven’t been making loans and instead are hoarding cash as a buffer against future, unspecified losses. In September, before the passage of the TARP, commercial bank assets included about $389 billion in cash; as of mid-March the assets including over $800 billion in cash.
All of that will be backdrop as we look at numbers next week.
The reports on home sales likely will show continued sales declines. New home sales, released Wednesday, will be the timelier of the two home sales reports since it covers transactions for February when consumer confidence decline and the MBA’s purchase application index – measuring demand – dropped from 320.9 to 261.4. The only contributing factor suggesting new home sales might surprise positively was the dip in the rate for a one-year Adjustable Rate Mortgage, typically the loan instrument used by homebuyers. According to the National Association of Home Builders’ monthly survey, buyer traffic and immediate sales prospects increased in February which could also suggest an “upside” surprise though jobs continue to fall imperiling loan approval.
Monday’s report on existing home sales is more backward looking. The National Association of Realtors, which publishes the data reports closings, reflecting economic conditions roughly two months earlier, in this case December when home buying plans and purchase mortgage application demand while ARM rates dropped. Consumer confidence though also declined in December as the unemployment rate rose. The increase in foreclosures, which had provided a statistical boost to existing home sales, slowed in December with state moratoria.
Thursday – just in time for the end of the quarter – the Bureau of Economic Analysis will report the “final” data on GDP for the fourth quarter – five days before the first quarter ends. The final report is expected to show the economy slowed in the fourth quarter even more than earlier estimates suggested. A strong hint at first quarter performance will come Friday with BEA’s report on personal income and spending for February. Personal Consumption spending is about 70% of GDP and had increased slightly in January, an increase expected to be wiped out with data Friday, suggesting another struggling quarter.
Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.