Fannie &Freddie on Rocks Fears of a meltdown in the financial system have sent shockwaves across the markets in the past several days. Financials are still reeling from the effects of the meltdown in the mortgage markets. These issues have now brought into question the stability of the two large government-sponsored enterprises, Fannie Mae and Freddie Mac, which back or own nearly half of all outstanding national residential mortgage debt. The collapse of the two would be near catastrophic but is also highly unlikely. The real issue is if they have enough capital to ride out the current storm or will the Federal Reserve need to intervene in order to keep the two afloat.

While the Fed played a key role in the JPM acquisition of Bear Stearns, the question is whether they should OR can continue to bail out these faltering financial institutions. In the case of Fannie and Freddie, it's reasonable to assume the federal government will not allow them to fail, but the ramifications in terms of regulation and fiscal burden for taxpayers could be significant.

Pending existing home sales figures released by the National Association of Realtors continued to show weaker conditions in the housing market. With the current distress in the financial markets, heightened inflationary pressures and the weakening economy, we can expect to see more downward pressure on housing in the near-term. After plunging over $9/barrel over a two-day period earlier in the week, crude prices rebounded on Friday to trade at new all-time intraday highs of over $147/barrel due to geopolitical concerns in Brazil and Iran. The markets seemed poised for a rough second half of the year as rising food and energy costs, stumbling housing and financial markets, and geopolitical concerns surround the upcoming Presidential election.

The Economy The economy continued to shed jobs in June as non-farm payrolls have no declined in all six months so far this year. There was a seasonally-adjusted 62,000 jobs lost in June while payrolls have dropped by 438,000 since the beginning of the year. Non-seasonally adjusted total non-farm employment in June was 167,000 lower than in June 2007. Currently, non-seasonally adjusted total non-farm employment shows a figure of 138,624,000, a loss of 0.12% from over June 2007. The unemployment rate remained unchanged from the previous month at 5.5%.

Final estimates for first quarter gross domestic product were revised slightly higher to 1.0% from the preliminary figure of 0.9%. First quarter growth was revised higher with each estimate during the first three months of the year. Many had expected the economy to contract during the first quarter due to the credit crunch and the continued troubles in the financial and housing markets. Slight positive revisions to both consumer and government spending along with increased exports helped to improve economic expansion during the quarter.

Housing Market National average mortgage rates increased slightly to 6.37% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on July 10th. Rates have now posted weekly increases in six out of the past seven weeks. In the week ending July 4th, the MBA's seasonally-adjusted Purchase Index increased to 365.8 from 342.8 in the previous week. This is the second straight week that purchase applications have increased while reaching their highest levels in a month. The latest figure reflects a 6.71 percent increase from last week but a 19.41 percent drop from the same period last year.

New and existing home sales moved in opposite directions again in May but it was the existing home market that showed improvement while new home sales faltered. New home sales declined in May after posting its first monthly gain since October 2007 last month. Sales fell 2.5% in May to a seasonally-adjusted 512,000 homes, down from a revised April figure of 525,000. At the current sales pace, there are 10.9 months of new homes supply on the market. New home inventory declined to 450,000 which is the lowest it has been since May 2005. In May, median new home prices fell back to their lowest levels since March to $231,000 after posting a strong rebound in the previous month. Lower prices helped to increase the new home affordability ratio to 48.8% in May.

Annualized sales of total existing homes in May increased for the first time since February, rising 2.0% from April levels to 4,990,000 units. Sales of existing homes are still down 15.9% from the 5.93 million units in May 2007. Median existing home prices in May increased for the third straight month to $208,600 from a revised $201,200 in April. This is the highest median existing home prices have been since November 2007. The number of existing homes for sale declined 1.4% to 4.485 million units in May. At the current sales pace, there are 10.8 months of existing homes supply on the market. Existing home affordability declined for the third straight month due to increases in both mortgage rates and existing home prices in May.

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