Tuesday, October 20, 2009

New construction of U.S. homes rose less than expected in September as ground-breaking activity for multi-family homes fell sharply, highlighting the economy's uneven path to recovery.
Construction of new single family homes, which account for about 85% of the homebuilding industry, increased 3.9% last month.

Work on multi-family units, which make up the rest of the housing industry, fell by 15% over the same time period - slashing the overall housing start number to a modest gain of 0.5%. Total permits, a measure of future construction activity, fell by 1.2% in September.

The overall story here is that homebuilding is healing - but at a very slow pace. The imminent end of the first-time homebuyer tax credit on December 1st is likely responsible for that oversized drop in the September building and permits figures. No one is sure what the demand curve will look like once government sponsored support programs for homebuyers are terminated -- so homebuilders are taking a "rather-safe-than-sorry" approach to adding new inventory.


A separate report from the Labor Department showed prices paid at the farm and factory gate fell an unexpected 0.6% in September -- primarily as the result of a 2.4% decline in energy prices. Excluding the more volatile food and energy costs, the core producer price index actually declined by 0.1% from its August mark. Most analysts had anticipated the core rate of inflation at the wholesale level would climb 0.2% higher. With output and employment growth expected to remain modest until at least mid-2010 - producer price inflation will almost certainly have little, if any direct influence on the trend trajectory of mortgage interest rates for many months to come.


As mentioned here yesterday -- it is highly likely that trading action in the stock markets will exert the strongest influence on the trend trajectory of mortgage interest rates this week. After a 60% run-up in the stock market since March -- and with the DOW again trading above the psychologically important mark of 10,000 - stock market investors are making strong bets that corporate earnings will continue to "surprise" to the high side of expectations.

According to Thomson Reuters data -- 79% of the companies in the S&P 500 that have already reported third-quarter operating results have exceeded Wall Street expectations. The earnings season is still very young - with roughly 400 of the S&P 500 companies still due to turn in their third-quarter financial performance report cards. If these remaining companies successfully follow the current pattern -- stock markets will almost certainly continue to rally at the expense of fractionally higher mortgage interest rates.

On the other hand, if the remaining companies fail to solidly beat current earnings expectations, their stock will likely begin to sell-off. The larger the number of under-performing companies (as compared to analysts' expectations) the stronger the likelihood stock markets will roll-over into a heavy sell-off - a condition that will tend to be strongly supportive of steady to fractionally lower mortgage interest rates.


Well before the end of the month the belief is we will know decisively whether stock market trading activity is going to spook mortgage investors into pushing mortgage interest rates higher - or whether a slump in share prices will treat mortgage market participants to another round of fractionally lower mortgage interest rates.