June 30, 2009

The Savings Rate

Personal income was up more than expected in May. The 1.4% rate of growth was more than four times the expected rate of increase. Personal spending also increased by 0.3% and that is good news because additional consumer spending will help the economy recover. Taking a closer look at these numbers, we see that income is rising faster than spending. Why? Personal saving as a percentage of disposable personal income was 6.9% in May, an increase from the 5.6% increase in April. The savings rate was the highest level in more than 15 years, going back to December 1993. Savings is increasing and that is good and bad news.

The bad news is that a higher savings rate will curtail spending and will delay the onset of the recovery. Most economists are expecting negative growth for the economy in the second quarter, but better than the recently revised negative growth rate of 5.5% we experienced in the first quarter. There is also a flip side of the coin. One reason the recovery is slow to happen is that banks do not want to lend to consumers who do not have a great financial record. For example, there are many who would like to purchase a home today but can’t because of tighter qualification standards. More savings will mean that there will be more consumers who will qualify to borrow in the future. So what will hurt the economy in the short-run will actually be good for recovery in the long run. Therefore, go out and spend a little. But don’t forget to save for the future.

The Markets. Rates were stable this week but moved lower towards the end of the week. Freddie Mac announced that for the week ending June 25, 30-year fixed rates averaged 5.42%, up from 5.38% the week before. The average for 15-year fell slightly to 4.87%. Adjustables were mixed as well with the average for one-year adjustables decreasing to 4.93% and five-year adjustables increasing to 4.99%. A year ago 30-year fixed rates were at 6.45%. “Mixed economic reports on the state of the housing market helped hold rates fairly flat this week,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Existing home sales rose for the second consecutive month in May by 2.4 percent, slightly less than the market consensus forecast; however the median sales price was 16.8 percent below that of the same time last year, according to the National Association of Realtors® (NAR). In contrast, new home sales fell 0.6 percent and the median sales price was only 3.4 percent lower than May 2008. "On a more positive note, the inventory of unsold homes has lessened from a year ago, which may help cushion further house price declines. The number of existing homes for sale was 15.3 percent below that of May 2008, and new homes for sale fell by 35.9 percent. In addition, distressed properties accounted for only about one-third of existing home sales in May, down from over a half in March, according to the NAR.”

Current Indices For Adjustable Rate Mortgages
Updated June 26, 2009

	Daily Value	Monthly Value
	June 25	May
6-month Treasury Security	0.31%	0.30%
1-year Treasury Security	0.47%	0.50%
3-year Treasury Security	1.66%	1.39%
5-year Treasury Security	2.58%	2.13%
10-year Treasury Security	3.55%	3.29%
12-month LIBOR		1.701% (May)
12-month MTA		1.210% (May)
11th District Cost of Funds		1.380% (April)
Prime Rate		3.25% (Dec)

First-time home buyers can be tough to catch because they are wary of overpaying and skeptical about buying homes in need of improvement. A survey for Coldwell Banker last year found that 81 percent of first-time buyers said move-in conditions were very important. Only 7 percent were willing to consider fixer-uppers that they could buy cheaply. Here, according to Coldwell Banker Associated Brokers in Southern California, are ways to lure a first-time buyer: New paint, decluttering, and removing odors are very important, but don’t urge too many expensive modifications; offer to pay closing costs; provide a home warranty; and make a counteroffer, even if the first offer is really low-ball. Source: The Wall Street Journal

A recent poll by Housing Predictor asked consumers if they believed home prices would one day hit the record highs last seen during the residential property boom. Of those surveyed, 62 percent anticipate a recovery and expect record high prices to be achieved down the road. Consumers appear to have faith in housing, despite troubling media reports triggered by the foreclosure crisis. Source: PR.com

Foreign real estate investors expect the U.S. real estate market to recover by the end of the second quarter of 2010, according to a survey released recently by the Association of Foreign Investors in Real Estate (AFIRE). Survey respondents were optimistic about the prospects for good returns, with more than two-thirds planning to invest in U.S. real estate before the end of the year. About 31 percent said they were more hopeful now about the health of the U.S. real estate market than they were in January, 16 percent said they were more pessimistic, and 53 percent said their opinion had stayed the same. The 200 members surveyed predicted that Washington, D.C., New York City, and San Francisco would be the first cities to recover, followed by Boston and Los Angeles. Source: Association of Foreign Investors in Real Estate