Costa Mesa Real Estate Market Update

Forecast for the Week: High-impact reports hit the markets…with the big news coming this Friday!

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First, the good news. The housing market received a serving of good news last week, as New Home Sales reportedly rose 17.5% in December to come in better than expectations. Overall, the report demonstrated that housing continues to recover – albeit slowly. Despite that good news though, the markets were keyed in on another more important event last week: the release of the Fed’s Interest Rate Decision and Monetary Policy Statement.

As expected, the Fed made no change to the Fed Funds Rate and even the Policy Statement was pretty much the same. But that didn’t stop the markets from getting a little fired up about the release. Let’s take a look at why.

It’s important to understand that the Fed has to be very careful with how bullish their economic comments are, as they don’t want to see long-term rates move higher. Well, the Fed’s comments certainly were not bullish as they said “employers remain reluctant to add to payrolls” and “the housing sector remains depressed.”

So why did Bonds initially improve nicely on the news and then crumble later in the day? The answer is, not everyone in the trading pits is buying what the Fed is saying. Instead, some people believe the Fed is talking down the true underlying strength of the economy, so that it can justify injecting the full $600 Billion of Quantitative Easing into the economy.

Speaking of comments that impacted the markets… President Obama delivered his State of the Union Address to members of Congress last week. Although the President’s call for a freeze on discretionary spending for 5 years may appear to be Bond bullish in that any reduction in the deficit would be good for Bonds, the reality is that so much more has to be done to really get our long-term debt in check. And some of last week’s weakness in Bonds was likely attributed to the feeling that the speech came and went without any real sense that the deficit is going to be reduced in a meaningful way, especially in the near term. The Bond market probably would have liked the word “cut” in spending rather than “freeze,” since a “freeze” suggests only a temporary halt in spending at current levels.

In the end, the news last week demonstrated that economic conditions are improving, but they are doing so gradually. As a result, the market remains volatile, as Bonds and home loan rates move up and down depending on what reports or speeches hit the news wires. The good news is that despite the volatility, home loan rates remain extremely low for now and present a tremendous opportunity for buyers who lock in at the opportune moment.

To learn more about the volatility and how you or someone you know can benefit from a knowledgeable advisor like myself, please call or email today. I’ll be happy to discuss the current economic climate and what it means to your unique situation.

The markets will continue to watch the political unrest in Egypt closely this week. In addition, a number of high-impact reports will hit this week with the big news coming this Friday!

• We start off right away Monday morning with reports on Personal Spending and Personal Income, as well as the Personal Consumption Expenditures (PCE) Index, which is the Fed’s favorite gauge of inflation.
• Manufacturing will also be in the news this week. On Monday, we’ll see the Chicago PMI, which surveys more than 200 Chicago purchasing managers about the manufacturing industry and is a good indicator of overall economic activity. Then on Tuesday, the ISM Index will be released. This is the king of all manufacturing indices and is considered the single best snapshot of the factory sector.
• The big topic of the week will be employment. First up is the ADP National Employment Report on Wednesday, which measures non-farm private employment.
• The ADP report will be followed by another round of Initial Jobless Claims on Thursday. In last week’s report, Initial Jobless Claims came in well above expectations. We shouldn’t read too much into that spike, since weather could have played a sizable role in the jump. However, if readings over the next couple weeks don’t settle back down closer to the 400,000 level, there may be reason for concern.
• Finally, the busy week culminates in the all-important Jobs Report on Friday. This report features new data regarding Non-Farm Payrolls, the Average Work Week, Hourly Earnings and the Unemployment Rate. Needless to say, this report can be a big market mover!

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.

As you can see in the chart below, Bonds received a bit of a bump at the end of last week, helping home loan rates recover from losses earlier in the week. This boost was prompted by political turmoil in Egypt that had investors seeking the safety of Bonds. As a result, home loan rates are still near historic lows, making this a perfect time to see how you or someone you know can benefit! Call or email today to get started.

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Economic Calendar for the Week of January 31 – February 4, 2011

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of January 31 – February 04