Data released this week on the housing front has brought about some reason for concern domestically, while international turmoil relating to sovereign debt has weighed heavily on the equity markets.  Purchase mortgage applications plunged for the second straight week to its lowest levels since May 1997 which suggests that sales activity will likely dip significantly following the expiration of the federal homebuyer tax credit.  Demand was high for the first few months of the year due to lower rates and the tax credit but now there may be a bit of a lull.  Builders are already bracing for a slowdown in activity.  Even though housing starts continued to rise in April, building permits dropped considerably.  The drop in building permits, which are an indicator of future activity, suggests that housing activity is likely to slow in coming months. 

Equity markets were dealt more news to fret about this past week while concerns about conditions in the Euro-zone continued to weigh on stocks.  Despite rebounding on Friday, all three major indices are set to post considerable losses for the week with the broader S&P 500 index on pace to lose about 4.6% as of early afternoon trading on Friday.  There are fears that last week’s $1 trillion bail-out package may not be enough to stem sovereign debt issues in Europe. Furthermore, there are concerns that the rescue package will burden the Euro-zone with debt and stall the global economic recovery.

An unexpected increase in first-time unemployment claims last week also put into question the sustainability of a recovery in the U.S. labor market.  Employment has posted strong gains in the past few months but recent troubles in Europe along with sweeping financial and healthcare reforms will give employers a reason to slow hiring.

The Economy
Initial unemployment claims for the week ended May 15 increased 25,000 from the previous week to 471,000.  This is the highest number of first-time unemployment claims in the past month.

Leading economic indicators in April posted its first monthly decline since March 2009 which suggests that economic growth may start to slow in the coming months. The leading index eased slightly to a reading of 109.3 in April which is a 0.10 point decline from March levels.  Declines in building permits, vendor performance, and the index for consumer expectations weighed on leading indicators in April.

Lower mortgage rates and a recovering economy helped to improve builder confidence again in May.  The NAHB Housing Market Index gained three points from April levels to a reading of 22.  This is the second straight month that the NAHB housing market index has increased and the highest it has been since August 2007.  Home sales activity got a boost from the federal homebuyer tax credit which expired at the end of April and helped jump-start the spring homebuying season.

Housing Market
U.S. housing starts increased for the second straight month in April to its highest levels since October 2008.  Total housing starts rose 5.8% last month to a seasonally-adjusted annual rate of 672,000 units.  Single-family housing starts jumped 10.2% from the previous month to a seasonally-adjusted annual rate of 593,000 units while multi-family starts dropped 18.5%. 

However, building permit activity moved in the opposite direction in April.  Total building permits fell 11.5% to a seasonally-adjusted annual pace of 606,000 units.  Single-family permit activity dropped 10.7% to a seasonally-adjusted annual rate of 484,000 units while multi-family issuances fell 14.7%.

National average mortgage rates declined from the previous week to 4.84% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on May 20th.  Rates have declined for four straight weeks and have not recorded a weekly increase in the past six weeks.  Mortgage rates are now back to their lowest levels since mid-February.  In the week ending May 14th, the MBA’s seasonally-adjusted purchase index plunged 27.1% from the previous week and was down 24.4% compared to the same time last year.  This is second straight week that the purchase index has declined and the lowest it has been since May 1997.  An increase in refinance activity due to lower mortgage rates last week was not enough to offset the plunge in purchase activity which led to a drop in overall mortgage application activity last week.

Despite lower rates which caused refinance activity to jump again last week, purchase activity continued to drop which is a sign that demand has definitely diminished since the expiration of the federal homebuyer tax credit just a few weeks ago.  According to the Mortgage Bankers Association, the refinance share of mortgage activity jumped to 68.1% last week compared to 57.7% during the previous week.

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