Volume 7, Issue 10 - November 2006

Industry Indices 

Housing Market Softening Continues

The Federal Reserve released its “Beige Book” report summarizing economic conditions in the 12 Fed districts.

While commercial real estate was strong virtually everywhere, with some mixed reports in areas like Chicago and St. Louis, “nearly all districts reported that housing market conditions continued to soften, though several noted that activity increased in some markets,” the report said. “Most districts reported higher home inventories, and several said that home builders and sellers continued to offer incentives to attract buyers.”

The report also noted that demand for residential mortgages slowed in the districts of New York; Philadelphia; Cleveland; Richmond, Va.; Atlanta; Chicago; Dallas and San Francisco.

And conditions in the labor market, a source of inflationary concerns for the Fed, remained “taut,” the report noted. Labor markets in Boston, Philadelphia, Richmond, Minneapolis and Dallas were characterized as “generally tight,” especially for skilled workers, while the remaining districts noted that job growth was steady to stronger over the preceding period reviewed in the Beige Book.

Although the Fed appeared to have ended its interest rate hikes this summer, leaving its federal funds rate unchanged at 8.25 percent at its last two policy-setting meetings, members of the board have indicated that inflationary pressures have still not been reduced to optimal levels, and inflationary concerns helped nudge up mortgage rates last week.

The average rate on a 30-year fixed-rate mortgage rose to 6.37 percent for the week ending on Thursday, October 12, up from 6.30 percent the prior week, according to Freddie Mac’s Primary Mortgage Market Survey. The average rate on a one-year Treasury-indexed ARM climbed from 5.46 percent to 5.56 percent.

“Renewed concern that inflation is still an issue put some upward pressure on bond yields, which generally translates into higher interest and mortgage rates,” said Frank Nothaft, Freddie Mac’s chief economist. “ARM rates especially felt the weight of increased inflation fears, narrowing the gap between ARMs and fixed-rate mortgage rates. Thus, ARMs may become less desirable.”

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