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  • Economy Stabilizes, Mortgage Market Provides Relief

    By Ted Ahern, Guaranteed Rate CFO
    June 4, 2009

    The US economy is slowly beginning to stabilize after several quarters of heightened volatility brought on by the credit crunch and ensuing recession. Retail sales, corporate earnings and home sales are all beginning to show positive trends indicating the worst might be over. Banks and financial service firms are cleaning up their balance sheets and taking advantage of the myriad of Treasury and Fed sponsored funding programs to increase lending and profitability. The mortgage market is doing quite well as FNMA, FHLMC and FHA are providing much needed liquidity to credit-worthy borrowers with refinances giving many households much needed relief.

    Conforming thirty year mortgage rates are near their historical lows although they have creeped back up over 5% in the last few weeks as market participants fear heightened inflation and a weaker dollar down the road due to the aggressiveness of the Fed in stimulating the economy. Low rates and a stabilizing economy are also drawing in new buyers making the spring selling market better than many had hoped. First time homebuyers are also beginning to take advantage of the $8000 tax credit for new purchases. April and May homes sales came in higher than most analysts predicted and existing home sales have increased three straight months posting the first 120 day increase since June 2006. Short sales and foreclosures are still estimated to make up 30-40% of all purchase transactions currently with outstanding values and financing to be had by astute buyers. Inventory is also slowly but surely moving down with an estimated 10.7 months of home inventory currently listed.

    The Federal Reserve continues to purchase FNMA, FHLMC and GNMA mortgage backed securities in the open market. In November of 2008 the Fed committed to buying $500 billion of mortgage backed securities which in turn brought mortgage rates down to their current low levels. The program was increased to $1.2 trillion and has been very successful in achieving its goals.

    Leading indicators for the 2nd quarter, which include factors like stock market sentiment, interest rate spreads, factory output and anticipated home sales, show an economy that is beginning to turn with most economists predicting positive GDP growth for the 2nd half of the year. Look for the US economy to continue to slowly recover over the next 4-6 quarters. While the economy is still in a deep recession (overall GDP is expected to contract 5-6% on an annualized basis), it will ultimately end. Housing remains the most troubled sector on the horizon with a slow recovery and possible modest price drops over the next 1-2 years.

    ted ahern
    Ted holds an MBA in Finance from the University of Chicago and is also an Adjunct Professor of Economics at Lake Forest College.
    Jun 4 2009