December 10th 2008 ~ Weekly Commentary on Loans & Real Estate

December 10th 2008 ~ Weekly Commentary

Thumbnail Sketch: The non-manufacturing sector ISM (Institute of Supply Management) survey fell from 44.4 to 37.3 last month. This is very much in keeping with declines in retail sales and employment and, indeed, the employment figures for October were very grim, with 533,000 lost payroll jobs (largest one-month drop since December 1974), and a spike in the unemployment rate to 6.7% (highest rate since 1993).

Looking at the plunging non-manufacturing ISM data (which indicates the rapidly declining vibrancy in the service sector), Aaron Smith of Moody’s Economy.com opined: “The survey's plunge reinforces the case that this recession will be the worst since 1981-1982.”

And that, for the most part, is the nature of the news today. Sales, employment and orders are all down dramatically, even after a relatively good post-Thanksgiving shopping day. Factory orders in October were down 5.1%. Consumer credit was down by a precipitous 3.5%. And chain store sales were down 2.7% in November, though Wal-Mart had a very good month.

So one wonders why the number of mortgage loan applications climbed so incredibly high over Thanksgiving week while the rest of the economy was busy exploring the bottom of the proverbial barrel.

The simplest answer is that available mortgage interest rates fell to extremely attractive levels. But that answer doesn’t fully satisfy—for you can reduce the cost of a mortgage to zero and people won’t act on the lower rates unless they want to buy real estate.

Look at the reality of the situation. “The contract rate for 30-year fixed rate mortgages finished at 5.47%, down 51 basis points from a week ago, down 100 basis points from four weeks ago, and down 34 basis points from a year ago” [Economy.com]. If anything, this should bring refinancers out of the woodwork. And indeed it did. Applications were up by 203.3%--which was 37.7% higher than the level of applications a year ago.

But what about applications for purchase money loans? This is where the real estate market’s pedal hits the metal. A strong spike in applications would almost certainly indicate the powerful demand for real estate currently waiting to be fulfilled. Applications were up 38% (but down 22% from their year-ago level). Surely we can conclude, at least tentatively, that the market is ready to revive itself. Just give it half a chance!

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