The most acute challenges facing the housing market as it struggles to stabilize in 2011 are an expected flood in foreclosures and weak employment growth.  Despite reaching a record-high level of activity in 2010, consensus estimates call for foreclosures to rise to new all-time highs again this year.  This is in part because a number of the largest banks suspended foreclosure proceedings in October, causing a backlog in activity.   According to comprehensive transactional information available in Housing IntelligencePro, total foreclosures (non-seasonally adjusted) in the U.S. fell almost 29% from September to October.  Compared to the same period last year, foreclosures were off 21%.  Just before foreclosures were halted by the banks in October, the number of foreclosures in September hit an all-time high for any month since the beginning of our data series in 2005.  This suggests that foreclosures would likely have remained on the rise if the freeze not taken place.  On an index scale with October of 2005 being equal to 100, that would put September 2010 foreclosure activity at a rating of 451 (or in other words, 451% of the number of foreclosures seen 5 years ago) and with October 2010 falling all the way back down to 323, the lowest level since April 2009.  Expect to see this recent trend turn again around in the coming months.

In broader economic news, inflation data on both the producer and consumer levels showed larger-than-expected increases in December.  U.S. producer prices rose 1.1% in December while consumer prices increased 0.5%.  The notable increases in fuel and food prices will be felt by consumers directly, further complicating the pace of economic recovery.

The Economy
The consumer price index increased in December due to significant increases in transportation and energy costs. However, inflation on the consumer level continues to be below the historical rate.  The consumer price index increased 0.5% from the previous month on a seasonally-adjusted basis while core consumer prices, excluding food and energy, increased 0.1% from the previous month.  The 0.5% monthly rise on a seasonally-adjusted basis is the largest one-month increase in headline consumer inflation since June 2009.

On an unadjusted basis, headline CPI increased 1.5% from its year ago levels while core CPI increased 0.8% year-over-year in December. This is the largest annual increase for any month in headline consumer prices since May.

According to the University of Michigan/Thomson Reuters, consumer sentiment declined in January.  The consumer sentiment index fell to a reading of 72.7 from 74.5 last month.  Surging gasoline prices at the pump were credited for the weakness in consumer sentiment this month.

Despite a sluggish job market and inclement year-end weather, retail sales closed out the year with solid gains in December.  The Commerce Department reported that U.S. retail sales increased 0.6% in December which means consumer spending increased for 6 straight months to end the year.  Retail sales increased 6.6% from the previous year in 2010 which is the biggest annual gain in spending since 1999.

Initial jobless claims have now increased for two consecutive weeks after falling to an 18-month low just two weeks ago.  First-time unemployment claims for the week ended January 8th jumped by 35,000 to 445,000.  This increase was higher-than-expected and reverses the downward trend in jobless claims over the past couple of months.  However, initial unemployment claims data during this time of the year are very unpredictable so take the data with a bit of skepticism.

Housing Market
The National Association of Realtors’ Pending Home Sales Index increased for the second straight month in November which suggests conditions are stabilizing in the housing market following the breakdown in sales activity after the federal homebuyer tax credit expired.  The Pending Home Sales Index increased 3.5% to a reading of 92.2 in November compared to a downwardly revised reading of 89.1 in October.  The index has experienced gains in four out of the past five months.

National average mortgage rates declined from the previous week to 4.71% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on January 13th.  This is the second straight week that rates have declined and the lowest rates they have been since the second week of December.  This is the 36th straight week that 30-year fixed mortgage rates have averaged under 5.0%.

In the week ending January 7th, the MBA’s seasonally-adjusted purchase index declined 3.7% from the previous week and was down 10% compared to the same time last year.  This is the second straight week that the purchase index has declined and the lowest it has been since mid-November.  However, overall mortgage application activity increased 2.2% due to an increase in refinance activity which offset declines in purchase activity.

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