With the health of the economy and the housing market hanging on a limb, the Fed hoped to spark confidence by cutting their target Fed Funds rate by 125 basis points in a period of 8 days. Lower home prices and declining mortgage rates have made buying home now more affordable than it has been for years. New home affordability is at its highest levels since July 2003 while existing home affordability is back to levels not seen since February 2005. Although the threat of a recession still looms, the Fed has made it apparent that they have now shifted focus to the state of our economy while inflationary pressures seem contained for the time being.
Equities rallied on news of the Fed rate cuts. After an emergency meeting and ¾ point rate cut last week, the Fed cut rates another ½ point at their regularly scheduled this week.The DJIA closed trading with over a 4% gain for the week while the Nasdaq increased 3.7% and the S&P 500 index increased over 1%. Retailers, homebuilders, and financials all gained heavily from the Fed action. Crude prices also dropped to end the week as prices fell below just $89/barrel. The Fed has induced a short-term rally but lingering effects of a stagnant housing market and concerns of an economic slowdown still exist.
Further evidence of an economic slowdown was the contraction we saw in the labor markets in January. Seasonally adjusted non-farm payrolls fell by 17,000 in January; the first monthly decline since August 2003.Total non-farm employment fell by 2.2% from December levels while only increasing 0.7% from the same year-ago period. The unemployment rate, which is calculated off of a different survey, declined slightly to 4.9% from 5.0% last month.
Early estimates for fourth quarter growth also showed extremely weak growth at the end of last year. Advance estimates for fourth quarter gross domestic product experienced a large drop to 0.6%. Final estimates for third quarter growth came in at 4.9%. Although it was widely expected that economic growth had slowed in the fourth quarter, the drop to 0.6% was more than most had expected. Continued troubles in the financial sector and the housing market will keep growth extremely weak going into 2008.
In December, personal incomes in the United States reached $11,928.4 billion, an increase of 0.5% from an upwardly revised $11,873.3 billion in November. On an annual basis, personal income increased 5.8% from December 2006. Personal incomes have increased every month since April. Personal income growth in December exhibits the slowest annual growth since January.
Both the new and existing homes market showed further weakness in December signaling that a bottom has not yet been reached for the housing market. New home sales fell 4.7% in December to a seasonally-adjusted 604,000 homes, down from a downwardly revised November figure of 634,000. New home sales are now at their slowest annual pace since February 1995. At the current sales pace, there are 9.6 months of new homes supply on the market. Inventory levels continued to decline as builders have been scaling back production until the market stabilizes. The number of new homes for sale declined to 494,000 which are the lowest it's been since October 2005. Builders dropping prices did not help sales in December as a 10.9% declined did not help to increase sales. The median price for a new home is now at $219,200 while December's year-over-year decline in prices is the largest drop since 1970.
After increasing slightly last month, existing home sales reverted back to a slower pace as annualized sales of existing homes fell to 4.89 million units. December's annualized pace is the slowest since August 1998. Sales of existing homes are down 22.0 % from the 6.27 million units in December 2006. Median existing home prices in December fell a slight 0.14% to $208,400. Inventory of existing homes fell for the second straight month to 9.6 months of inventory, while the number of existing homes for sale declined 7.4% to 3.905 million units.
National average mortgage rates increased for the first time in five weeks to 5.68% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on January 31st. Rates were at their lowest levels since March 2004 in the previous week. In the week ending January 25th, the MBA's seasonally-adjusted Purchase Index fell to 362.0 from 439.9 in the previous week. This is the second straight week the purchase index has declined and is back to its lowest levels since the beginning of the year. The latest figure reflects a 17.71% drop from last week and an 11.27% decline from the same period last year.
For ratings and key metrics, follow the links below. For more information, go to http://www.hwmarketintelligence.com/.
|Real GDP Growth||0.6%||D-|
|Purchase Mortgage Applications||362.0||D+|
|Median Price Existing Home||$208,400||F|
|Existing Home Sales||4,890,000||D+|
|Existing Home Inventory||3,905,000||F|
|Existing Home Affordability||51.8%||C+|
|Median Price New Home||$219,200||F|
|New Home Sales||604,000||F|
|New Home Inventory||494,000||F|
|New Home Affordability Ratio||49.7%||A-|