Tuesday, December 23rd Mortgage Market Update

Tuesday Mortgage Market Update

Stocks are slightly ahead in choppy trading this morning and Treasuries are narrowly mixed. Pre-holiday trading volumes are thin and market participants are attempting to maintain an even keel. However, the lack of liquidity leaves the markets vulnerable to exaggerated price moves. Stocks may be eventually feel the pressure from today's weak housing news and bond traders are facing more supply today.

In today's barrage of economic releases, the Commerce Department reported that, according to its final calculations, the gross domestic product contracted at a 0.5% annualized rate in the third quarter.

As expected, this was no change from the preliminary calculation reported last month but it was still the worst reading since a 1.4% decline in the third quarter of 2001. The advance estimate, released in October, was a contraction of 0.3%.

GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy.

Today's report indicated that consumer spending declined at a 3.8% rate instead of the 3.7% cited in the preliminary report. But government spending rose at a 5.8% rate instead of the previously reported 5.4%.

The inflation data contained in today's report was positive for the markets. The GDP price index showed an increase of 3.9% for the third quarter, down from the preliminary reading of 4.2%. The core index for personal consumption expenditures (personal spending minus the volatile categories of food and energy) increased by 2.4% instead of the previously reported 2.6%.

Despite the improvements, however, the rise in the overall prices index was the largest since the first quarter of last year and the increase in the core PCE index was the biggest since the fourth quarter of last year.

The GDP news is having little impact on the markets as traders see it as old news. They are now focusing on the current and upcoming quarters. Recent estimates for the October through December period call for a contraction of between 3.0% and 4.5%.

In other news, the housing sales reports for last month were released this morning. The Commerce Department said that the seasonally adjusted, annualized pace of new home sales fell by 2.9% in November to 407,000, the lowest rate since January of 1991. Moreover, October's originally reported pace of 433,000 was revised down to 419,000.

The report said that the pace fell by 16.4% in the Midwest and by 7.1% in the South. The Northeast saw an increase of 14.3% and the West saw an increase of 11.0%.

With slumping sales, home builders are cutting back on new construction. The inventory level of new homes on the market (adjusted and annualized) was 374,000, the lowest level since February of 2004. At last month's sales rate, this represented 11.5 months of sales. Though down slightly from October's turnover time of 11.8 months, it was still high by historical standards

The average new home price rose by $8,000 last month to $287,500 but this was still 9.2% below the average of $316,800 posted in November of last year. The median price rose by $5,800 to $220,400 last month but was down by 11.5% from the previous November's $249,100.

In the larger category of existing home sales, the National Association of Realtors said that the pace fell last month by 8.6% to 4.49 million. October's originally reported rate of 4.98 million was revised down to 4.91 million. Forecasters had predicted a reading of about 4.90 million.
The decline was broad-based. The rate fell by 12.0% in the Northeast, by 10.9% in the South, by 7.4% in the Midwest, and by 4.3% in the West.

Inventories edged up from 4.198 million to 4.203 million. At the prevailing sales pace, this represented 11.2 months of sales, the highest turnover time since April.

The average existing home price fell by $5,500 in November to $224,200 and was down by 12.3% from the previous November's $255,700. The median price fell by $5,200 to $181,300 and was down by 13.2% from the $208,800 median price in November of last year.

The final news release of the day was stronger than expected. The final Consumer Sentiment Index for the month from the twice-monthly surveys conducted by the University of Michigan came in at 60.1, up from the preliminary reading of 59.1 and November's final reading of 55.3. Forecasters had predicted a weaker reading of 55.0.

The improvement came in consumers' outlook over the next six months. The expectations index rose by 54.0 from the preliminary 52.4 and November's final 53.9. The index of current conditions was little changed. It came in at 69.5, a tough higher than the preliminary reading of 69.4 but still a marked improvement over November's 57.5.

Still to come: The Treasury will be conducting its monthly offering of 5-Year Notes today. Last month's auction had mixed results. Bids exceeded the offer amount by 2.44 to 1, the highest in the last four auctions and above the average of 2.15 for the twelve auctions preceding November's. Noncompetitive bids, a gauge of individual investor demand, totaled about $101 million, up from October's $82 million and above the twelve-auction average of $90 million.

Today's offering has a record face value for a 5-year issue of $28 billion. The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.