SLOWLY RISING… Like bread dough in the pan, the markets kept rising, though ever so slowly, last week. Basically, investors remained positive if not exactly exuberant. There were no big market moves to speak of, the result of no big news coming out of a fairly sparse economic calendar.

Economic readings included January’s trade deficit shrinking to $37.3 billion, with the total volume of imports plus exports finally falling after months of rebounding. But experts weren’t worried, since this happens in normal times and total trade volume remains up at a 26% annual rate since last Spring’s bottom. We had new unemployment claims down by 6,000 last week. Continuing claims increased 37,000, but the four-week average stayed at its lowest level in around fourteen months. Some observers expect a large payroll increase in March. Let’s hope they’re right.

Friday’s February Retail Sales report was a stunner. Overall retail sales were UP 0.3% — way better than expected — and sales excluding autos were UP 0.8% — way WAY better than expected! These are amazingly strong numbers, considering they’re for the year’s shortest month, whose shopping days were shortened even more by record snow storms and other forms of harsh weather in several regions of the country. Those worried about the consumer’s participation in this recovery, please take note!

For the week, the Dow headed UP 0.6% to 10624.69; the S&P 500 hiked UP 1.0%, to 1149.99; while the Nasdaq climbed UP 1.8%, to 2367.66.

There wasn’t a ton of housing news last week, but one can always find a few significant items. For example, foreclosure filings in February were down 2% from January and up just 6% from a year ago — their smallest increase in four years. Most significantly, in the six states that made up 61% of the national total for February, foreclosure filings were down 15% from a year ago. We’re definitely heading in the right direction.

On the mortgage front, the Mortgage Bankers Association reported applications for purchase loans were up a seasonally adjusted 5.7% from the week before. It looks like people are trying to take advantage of today’s historically low rates before the end of the month. That’s when the Fed stops buying mortgage bonds, which has helped keep rates low, and no one knows what will happen once that Fed buying program ends. Mortgage applicants also have their eye on the homebuyer’s tax credit, which requires a signed contract by April 30.

Finally, current buyers are getting today’s great prices, which may not be headed much lower. One property search site announced that sellers had lowered prices on less than 20% of their listed homes, for the first time since they started tracking price reductions last April.

IN LIKE A LION… March came in and the markets roared, as the Dow clawed its way up to a 2.3% gain for the week that brought it to its highest level for the year. Investors were basically pleased with a slew of encouraging economic data that came in ahead of expectations, while credit market conditions continue to improve. For the week, the Dow headed UP 2.3% to 10566.20; the S&P 500 hiked UP 3.1%%, to 1138.69; while the Nasdaq soared UP 3.9%, to 2326.35.

Last week’s housing report gave us the National Association of Realtors Pending Home Sales index, down 7.6% for January. But year over year, the NAR index is up 12.3%. Also, it’s now at 90.4 and a score of 100 equals the average level of contract activity for 2001, the base year, when activity was at a record high. So pending sales are still in pretty good territory.

Meanwhile, a quarterly report from a builders group and a major bank revealed that home prices are at near record levels of affordability. In the last three months of 2009, a family making the median income of $64,000 a year could afford to buy 70.8% of all homes sold during that time! According to this report, a home is affordable if a family making the metro area’s median income would have to spend no more than 28% of their take-home pay for housing. Of course, there are variations in affordability around the US, but this is a great overall trend.

Buyers, however, shouldn’t expect great affordability to last forever. According to a Freddie Mac index, in the last quarter of 2009 four out of nine regions showed home price gains! And the NAR’s monthly market forecast, out last Thursday, projected the median price of existing homes UP 2.8% for 2010 with the new home median price UP 2.0%. In addition, no one knows what will happen to mortgage rates once the Fed stops buying mortgage bonds at the end of this month. Smart buyers shouldn’t drag their feet, especially those wanting the tax credit, which requires a signed contract by April 30.

That’s not to say there weren’t a few disappointments, starting with the dip in pending home sales covered above. ISM Manufacturing for February also came in below estimates, at 56.5, but, hey, that’s still comfortably above the 50 level that signals expansion. On the other hand, ISM Services bested expectations, reporting a 53.0, its best reading since 2007.

Friday we had an employment report some experts feel shows an economy that’s poised to start adding jobs. Nonfarm payrolls were still down by 36,000 in February, but this was way better than expected. Even better than that, the unemployment rate held at 9.7%, avoiding an expected increase. And some observers feel the underlying data is pointing to job creation. We’ll see. 

INFO THAT HITS US WHERE WE LIVE  New home sales fell 11.2% in January to a record low level. Existing home sales weren’t very pretty either, down 7.2%, though they’re UP 11.5% over a year ago. Let’s remember that last Fall we all thought the tax credit was going away at the end of November. Many sales got pushed into October and November, causing sales drops the next two months. But the median new home price is down just 2.4% year over year and the average price is now UP 3.7%. For an existing home, the median price is unchanged from a year ago and the average price is UP 2.6%. More evidence home prices are stabilizing, with some analysts expecting modest gains for the year. Supporting this, the Case-Shiller home price index was UP 0.3% in December, its seventh straight monthly rise. 

Even more interesting was the news that this has actually been a very good decade for home prices. From January 2000 to December 2009, prices were UP 46%, making residential real estate a clearly profitable investment. And that’s not even factoring in the mortgage interest and real estate tax deductions homeowners get!

Finally, we’ve reported that the Fed will stop buying mortgage bonds at the end of this month and experts feared rates may edge up. Now analysts say mortgage rates might not move much at all. This stems from the fairly calm market reaction to last week’s hike of the Fed’s discount lending rate (which is NOT the key Fed funds rate). Seeing little or no move in today’s low mortgage rates is good news for the near term.

MINOR SLIP… Another volatile week on Wall Street, as investors drove stock prices down two days, then up two days, with all three major indexes slipping just slightly for the week. Things got off to a weak economic start with Consumer Confidence dropping sharply in February, much like the temporary drop in January 1996 when, curiously, there was another big blizzard on the East Coast.  For the week, the Dow was down 0.7%, to 10325.26; the S&P 500 was down 0.4%, to 1104.49; while the Nasdaq skidded down 0.3%, to 2238.26.

Folks didn’t much like the drop in new home sales either, but good news did come with the Richmond Fed Index, which showed that manufacturing in the mid-Atlantic region went from -2 in January to +2 in February. Then there was Fed Chairman Ben Bernanke’s monetary policy report to Congress, which he serves up every six months. Bernanke assured everyone rates will remain low, a message loved by investors. 

 Yale economist Robert Shiller states it bluntly: “If you look at the trend in rents to see where housing prices are headed, you’re looking at the right measure.” Shiller is the co-developer of the S&P Case/Shiller Home Price Indices that monthly track residential real estate values nationally and in 20 metro areas.

Traditionally, people have been willing to pay a modest premium to own a home rather than rent it. Recent studies report that in 1999 rents averaged 87% of the after-tax mortgage payment for houses and condos of similar size in the same neighborhood.

When home prices took off, this percentage changed. By mid-2006, rents had fallen to less than 60% of after-tax mortgage payments. In some markets, owners were paying twice as much as renters for a similar property in the same neighborhood. In a few places, owner monthly payments were three times average rents.

The 87% ratio of rent to ownership cost for 1999 is a good benchmark because it stayed around that level throughout the 1990’s and the steep rise in home prices hadn’t really begun.

With that as our guide, we can conclude that home prices at last appear to be stabilizing. By the end of October 2009, rents on average were up to 83% of ownership costs!

Conditions vary from market to market, so check your own area. But with historically low mortgage rates, plus the homebuyer tax credit, this could be a great time to be buying or selling…. Have a great month!

Earlier in the week, the reading on wholesale inflation came in a little higher than expected, but this was balanced by the good news on housing starts, plus better-than-expected earnings from John Deere, Merck, Kraft, Hewlett-Packard and Wal-Mart. Equally encouraging, industrial production went UP 0.9% in January, putting it up at an 8.9% annual rate for the last six months. More evidence that manufacturing is at the heart of this recovery.

UP UP UP UP… YUP, stocks went UP four days in a row, which constituted all the trading days there were in the holiday-shortened week. Investors seemed to be responding to a cessation of fears coming out of Europe, encouraging economic data, good corporate earnings and the news from the Fed.  For the week, the Dow was UP 3.0%, to 10402.35; the S&P 500 was UP 3.1%, to 1109.17; while the Nasdaq climbed UP 2.8%, to 2243.87.

Median home price: $371,000

Value lost since 2006: 15.2%

Forecast gain by 2011*: 3.8%

Seattle has become a world-class city with a diverse, vibrant economy. As a home to manufacturers such as Boeing and software providers such as Microsoft, the job market has held up better than average, with a current unemployment rate of 8.8%.

Home prices had a softer landing as well, dropping just 15.2% over the past three years, about half the national average. However, prices do tend to be volatile, according to Mark Fleming, chief economist for First American CoreLogic. The lack of available land for development is one reason for that volatility, as are political restrictions on growth.

After another modest price decline of 2.3% in the next eight months, the market should begin to turn up. Between June 2010 and June 2011, the city should see a gain of 6.2%. Averaged out, that means a 3.8% gain over the next two years*.  

And while that may not sound all that robust for those jaded by the annual double-digit returns recorded during the boom, that performance will be one of the best of any large city during that period.

Investors also aren’t completely sold on our own recovery.  The problem of course is jobs, the most lagging of all economic indicators.  Weekly initial jobless claims rose by 8,000, a bit worse than expected. Then Friday’s January employment report showed a loss of 20,000 jobs, when a 13,000 gain was expected. But hey, the unemployment rate fell to 9.7%!  Average hourly earnings were UP 0.2% for the month and UP 2.0% over last year. Also, total hours are up at a 1.8% annual rate in the last three months. This works out to about 200,000 jobs a month, showing there’s a growing demand for labor, which companies are meeting by increasing hours. Needless to say, they can’t keep that up indefinitely.

Now some really good news…..Personal income was UP 0.4% in December and personal consumption rose 0.2%. Over the past three months, real inflation-adjusted consumer spending is UP at a strong 3.6% annual rate.  Not surprising, given that in the last nine months, compensation per worker is UP at a 4.7% annual rate. In line with that, several retailers announced same store sales, with most beating estimates — some by substantial amounts! The ISM Manufacturing index hit 58.4, a five-year high, and ISM Services went to 50.5 in January, signaling expansion in the non-manufacturing sector too.

The Pending Home Sales Index recovered from its November slump, increasing 1.0% in December, putting it 10.9% over its level of a year ago. National Association of Realtors chief economist Lawrence Yun sees “…a broad improvement over year-ago levels. December activity was the fifth-highest monthly tally in two years.” The slump was attributed to the rush before November to grab the tax credit set to expire at the end of that month.  We now know the tax credit was extended to buyers who can sign a contract by April 30 and close on the home by June 30. It’s also been expanded, adding a $6500 credit for repeat buyers to the $8,000 credit for first timers. The NAR’s Yun estimates 2.4 million households should take advantage of the credit this year.

The National Association of Realtors also released their adjusted overall outlook for this year and next. They estimate existing home sales will grow from 5.19 million in 2009 to 5.66 million in 2010 and 5.7 million in 2011.  They see new home sales growing from 375,000 in 2009 to 446,000 in 2010 and 637,000 in 2011. They believe prices have bottomed, projecting a 3.4% hike in the median price for existing homes to $179,800 this year and then a 4.3% rise to $187,500 in 2011.  New homes should go up 3.7% this year to a $221,300 median price and then 4.7% in 2011 to $231,700.

Friday we got the terrific news that the U.S. economy grew in Q4 of last year at a 5.7% pace, the fastest GDP growth rate in six years.  Pessimistic observers seem scared to admit the economy is in fact improving, commenting that inventories accounted for a large part of Q4 growth.  In fact, final sales, which is GDP excluding inventories, are UP at an accelerating pace for three straight quarters!  The Chicago PMI, expected to decline, instead increased, showing growing strength in Midwest manufacturing. And the employment index came in at the highest level since 2005, reporting its first positive number since 2007.

Last week began with December Existing Home Sales dropping 16.7%.  Some observers felt this was the result of uncertainty over the homebuyer tax credit, scheduled to expire at the end of November.  The tax credit was, as we now know, extended into this year, but it wasn’t announced soon enough to help December sales.  Nonetheless, Existing Home Sales are UP 15.0% over a year ago. And the median price of an existing home is now $178,300, UP 1.5% over a year ago and the best year-over-year comp since 2006. Finally, inventories are now down to 3.29 million, their lowest reading since March 2006.  Wednesday, New Home Sales were reported at a 342,000 annual rate, down 7.6% for December. But inventories are now at 231,000, 59.6% below their mid-2006 peak and at their lowest level since 1971, when the population was two thirds its size today.

Last week featured a combination of unexpected developments — Chinese credit tightening, Presidential sword-rattling over bank regulatory reform and doubts about Fed chairman Ben Bernanke’s Senate confirmation. These surprises shook investors, sending all market indexes down for the week. But China was just raising interest rates to cool down an economy now growing at 10%. And the President’s tough talk to bankers, plus Senators cooling on Bernanke, were seen by many as political efforts to appeal to people who don’t like the Wall Street bailouts. Of course, all this happened after Republican Scott Brown took Ted Kennedy’s Massachusetts Senate seat. Talk about surprises!

The only encouraging words came from corporate pronouncements on Q4 earnings. Results were better than expected, as 47 of the 60 S&P companies reporting delivered upside results. These included biggies like Google, GE, McDonalds’s and IBM. There were also winners in the financial sector, but investor uncertainty pushed stocks down overall.  For the week, the Dow fell 4.1%, to 10172.98; the S&P 500 dropped 3.9%, to 1091.76; while the Nasdaq was off 3.6%, to 2205.29.

December housing starts were reported down 4.0% last week. This put them at a 557,000 unit annual rate, a little below expectations. We did have a colder and wetter December than usual, with a good part of the East hit with the biggest snowfall ever recorded for the month. The drop in starts all came from single-family units, but they’re still 27.7% above their January/February 2009 lows. Volatile multi-unit starts were up 12.2% for the month, following their 69.8% November rebound.  Building permits, which are less effected by weather, were UP 10.9% in December, to an annual rate of 653,000 units, well above expectations. There was an 8.3% hike in permits for single-family units, which are up 48.5% over their January 2009 low. Over the past two months, the 18.5% gain in building permits is the largest in 20 years. In line with this, the National Association of Home Builders, which held its annual convention last week, reported that builders expect to start construction on 610,000 homes in 2010. That’s UP 38% over last year!

In the mortgage world, most experts feel the rates on 30-year fixed-rate mortgages will head up during the next two years, so smart homebuyers are focusing on taking advantage of the present very favorable rate situation along with the tax credit still available.

A NICE START… The new year began very nicely on Wall Street with investors optimistically sending all major stock market indexes UP for the week. There were several pieces of economic data to feel good about. The ISM Manufacturing index rose to 55.9 in December, its highest level since April 2006, signaling industrial expansion five months in a row and indicating real economic growth at a 4.6% annual rate. The December ISM Services index hit 50.1, also signaling expansion, with its employment index moving to the highest level since September 2008.  For the week, the Dow was UP 1.8%, to 10618.19; the S&P 500 was UP 2.7%, to 1144.98; while the Nasdaq was UP 2.1%, to 2317.17.

Retailers across the board came in with higher than expected results for December. For example, Target’s same store sales were up 1.8% and Sears were up 0.4%, with Q4 earnings beating estimates. Auto companies reported December sales at an 11.2 million annual rate. This was a faster rise than expected, up 16% from June. Cash-for-clunkers got things started, but car and truck sales continue to build.

Thursday, Initial Unemployment Claims came in at 434,000, putting the four-week moving average at its lowest level since September 2008. Continuing Claims shrank to 4.8 million. Challenger, Gray & Christmas, the major Chicago-based job placement firm, reported layoffs down 72.9% from last year. But the big news came Friday with the December Employment Report. Nonfarm jobs declined 85,000, not as good as expected, but revisions to the prior month’s data showed jobs INCREASED 4,000 in November, their first gain in two years! The December unemployment rate held steady at 10.0%