| Key Indicator Summary - Tax Credit Extended, Unemployment Rises |
| Written by Jonathan Dienhart | |
| 11.06.2009 | |
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The homebuyer tax credit extension and several key credit upgrades of blue chip stocks fueled investor optimism on Friday, but were countered by October employment figures that came in worse than most economists had forecasted. Continued job losses have pushed the U.S. unemployment rate to its highest levels in 26 years, presenting a challenging obstacle to broad economic recovery. The three major stock indices have been volatile in morning trading but are all trading roughly flat around noon. On Friday, President Obama is expected to sign the Homeowner, Worker, and Business Assistance Act of 2009 (H.R. 3548) which was approved by Congress on Thursday. The act was strongly lobbied for by the homebuilding industry, as it extends the current $8,000 first-time homebuyer tax credit as well as including a new $6,500 credit for other potential homebuyers, albeit with some income restrictions. Existing homeowners would have to have owned their current residence for at least five years to qualify. To be eligible, buyers would have to have a sales agreement signed by May 1 and would have to close before July 1. The tax credit only pertains to purchases of primary residences costing less than $800,000 and is subject to income caps. The bill also extends federal unemployment benefits for an additional 20 weeks while allowing businesses to write off losses for the past two years against profits earned in the previous five years. The Federal Reserve kept their target Fed Funds rate unchanged on Wednesday. The Fed Funds rate remains at an all-time low of a range between 0 – 0.25%. Most of the communication from the Fed remained consistent with what they have been saying: economy is improving but growth will likely be sluggish for quite some time, inflation is contained, Fed Funds rate will remain low for the foreseeable future. The only slight difference is that the Fed now plans to purchase $175 billion of Fannie Mae and Freddie Mac debt compared to the $200 billion maximum they previously announced. In related news, Fannie Mae has requested another $15 billion in aid from the federal government, as well as announcing a new program to rent foreclosed properties back to their prior owners, likely at a net loss which will make its balance sheet that much more challenging. One can only speculate what unintended impact such action will have on the rental market as one of the largest holders of mortgages in the nation also becomes one of the largest property management companies. The Economy The U.S. economy shed a seasonally-adjusted 190,000 payrolls in October which was driven by continued job losses in manufacturing, construction and retail. Continued weakness in the employment markets pushed the U.S. unemployment rate to 10.2% which is the highest it has been since April 1983. The U.S. economy has now posted job losses for 22 consecutive months. Total non-farm employment is now 4.65% lower than it was this time last year. The economy has lost 7.304 million jobs since January 2008. On Thursday, the Labor Department reported that the number of people filing for initial state unemployment claims fell by 20,000 to a seasonally-adjusted 512,000 in the week ending October 31. While the number remains high, it was the fewest initial claims filed since the beginning of January. In the third quarter 2009, the national homeownership rate increased slightly from the previous quarter to 67.6 percent. This is the second straight quarter that the homeownership rate has increased. While the homeownership rate was not statistically different than the previous quarter, it was still higher than the 67.4% figure during that time but still lower than it was this time last year when it was 67.9%. Housing Market According to the National Association of Realtors, pending home sales rose for the eighth consecutive month in September. The Pending Home Sales Index, which is a forward-looking indicator based on contracts signed in September, increased 6.1% to a reading of 110.1. Existing home sales have been buoyed by the homebuyer tax credit and lower mortgage rates. The extension of the first-time homebuyer tax credit along with the enhancements for move-up homebuyers should continue to fuel sales activity in the coming months. National average mortgage rates declined from the previous week to 4.98% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on November 5th. This is the first weekly drop in mortgage rates since the week ending October 8th and they are back under 5.0% for the first time since the week ending October 15th. In the week ending October 30th, the MBA’s seasonally-adjusted purchase index dropped 1.8% from the previous week and was down 4.2% compared to the same time last year. This is the fourth straight week that purchase applications have declined and the lowest it has been since March. New and existing home sales moved in separate directions in September. Demand for resales remained strong as homebuyers rushed to take advantage of the homebuyer tax credit while new home sales activity declined.
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