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Week of 1/14/2008

This week brings us the release of eight pieces of economic data to digest. There is no relevant data scheduled for release tomorrow (01/14/08), but two of the week's most important releases are coming Tuesday morning. December's Retail Sales data is the first. It measures consumer spending by tracking sales at retail establishments in the U.S. Since consumer spending makes up two-thirds of the U.S. economy, any related data is watched closely. Current forecasts are calling for an increase in sales from November's levels of approximately 0.1%

The second report of the day will be released by the Labor Department. They will post the Producer Price Index (PPI) at 8:30 AM, which helps us measure inflationary pressures at the producer level of the economy. Rapidly rising prices will raise inflation concerns and may lead to mortgage rates rising. If it reveals a decline, especially in the core data that excludes more volatile food and energy prices, the bond market should fair well. If we see weaker than expected readings, the bond market may rally and mortgage rates could move lower. Current expectations are calling for a 0.2% rise in the overall reading and a 0.2% increase in the core data.

There are three relevant reports on the agenda for Wednesday. The first is December's Consumer Price Index (CPI). This is also one of the most important monthly reports that we see since it measures inflationary pressures at the consumer level of the economy. It is very similar to Tuesday's Producer Price Index (PPI), but is considered to be of higher importance since it tracks consumer prices. The overall index is expected to rise 0.2% while the core data is also expected to increase 0.2%. Weaker than expected readings should lead to a bond rally and improve mortgage rates Wednesday.

December's Industrial Production report is the second report to be posted Wednesday. It will be released at 9:15 AM ET and measures output at U.S. factories, mines and utilities. This gives us a good indication of manufacturing sector strength or weakness. Current forecasts are calling for a decline of 0.1% from November's production. A larger than expected drop would be good news and should lead to lower mortgage rates Wednesday as long as the CPI doesn't reveal any surprises.

Wednesday afternoon, the Fed Beige Book report will be posted, detailing economic activity regionally throughout the U.S. The Fed uses this data during their Federal Open Market Committee (FOMC) meetings when deciding whether or not to change key short-term interest rates. Accordingly, its results can cause a fair amount of movement in the bond market and mortgage rates. This could lead to an afternoon revision in mortgage pricing Wednesday.

December's Housing Starts report will be released early Thursday morning, but I don't see it causing much movement in mortgage rates. This report gives us an indication of housing sector strength and future mortgage credit demand, but it is the least important of this week's news.

December's Leading Economic Indicators (LEI) will be posted late Friday morning. This index attempts to measure economic activity over the next three to six months. It is considered to be of moderate importance to the bond and mortgage markets. Analysts are currently expecting to see a 0.1% decline, meaning that economic growth over the next few months will likely slow. A larger than expected rise would be good news for the bond market and mortgage rates, but a larger than expected rise could lead to bond selling and an increase to mortgage rates Friday morning.

The final report of the week is January's preliminary reading to the University of Michigan Index of Consumer Sentiment. This index measures consumer willingness to spend and can have enough of an impact on the financial markets to change mortgage rates. If it shows a reading weaker than the 74.5 that is expected, the stock markets will probably drop and bond prices will rise. This could lead to mortgage rates moving lower Friday.

Overall, Tuesday and Wednesday are the most important days of the week with the Retail Sales, PPI and CPI reports scheduled. If the CPI meets or is lower than forecasts, I expect to see mortgage rates close the week lower than tomorrow's opening levels. However, stronger than expected readings could lead to a spike in mortgage pricing.

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut a key interest rate by three-quarters of a percentage point on Tuesday. The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5%, down by three-fourths of a percentage point from 4.25%

In addition to cutting the funds rate, the Fed said it was reducing its discount rate, the interest it charges to make direct loans to banks, by a similar three-quarters of a percentage point, pushing this rate down to 4%.

Commercial banks responded to the Fed's action on the funds rate by announcing similar cuts of three-quarter of a percent on its prime lending rate, the benchmark for millions of business and consumer loans. The action will mean the prime lending rate will drop from 7.25% down to 6.50%. This is a GREAT time to refinance your HELOC's!

Before Tuesday's move, the Fed had cut interest rates three times, beginning in September, the month after a severe credit crunch had roiled Wall Street and global financial markets. The Fed cut the funds rate by a half-point in September and then by smaller quarter-point moves in October and December.

"The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risk," the Fed statement said.

The Fed's action was approved on an 8-1 vote with William Poole, president of the Fed's regional bank, dissenting. The statement said that Poole objected because he did not believe current conditions justified a rate move before the Fed's meeting next week. 

It was another week of choppy trading in our financial markets which made the home loan interest rate pendulum swing toward and away from us more than once during the course of last week. In the end, there was a net improvement to delivery rates of 147 basis points (BPS) or 1.47% for the week.

There is nothing wrong with that small of an improvement considering the magnitude of the rate declines over the past month. This was the fifth consecutive week of improvements in the home loan interest continuum for conforming fixed rate loans. The sailing in the water was not as good in jumbo fixed rate (over $417K) arena as the secondary market for those mortgage-backed securities still has not stabilized. Part of the reason for this instability is that there are no implied or explicit government guarantees on jumbo loans like there are with conforming loans sold through Fannie Mae and Freddie Mac.

Week-in and week out we continue to hear of wholesale lenders going away. A high visibility Northern CA regional wholesale lender, Countrywide (along with what was a net branch operation) that was doing $500 million a month in funding in 2006 is no more. They made their announcement on Wednesday the 16th that they were no longer accepting any new submission and "will try" to honor the locks of the transaction in their pipelines.

The most dramatic event of the week was the President announcing a proposed tax rebate of $800 per individual tax filer and $1,600 for a married couple filing jointly. This will be an immediate positive jolt for the economy. As much as the Fed and the government would like to prevent recessions from happening, economists will tell you preventing them is impossible. However, there is a silver lining to the could over the economy. Weakening economic activity tends to drive interest rates down and lower interest rates tend to spawn higher levels of home sales and refinancing activity. The housing market and related industries could use an  influx of new business.

Some of the econonews highlights of the week include the report detailing contained inflation within the economy; an unexpected large decline in new claims for jobless benefits; a decline in housing starts and building permits; declining leading economic indicators; declining retail sales in December; and a surprisingly healthy rise in consumer sentiment in January, according to the University of Michigan. Rising confidence can help future home sales.

The upcoming week will have little in econonews releases except for December pre-owned home sales for December, which is not expected to be pretty. This, too, could help the home rate cause, but...Stay tuned!

• 7 New Parks each with their own identity and quality which we share with non-residents
• A New state of the art High School described by the Mayor as "One of the most beautiful High Schools in the U.S - bar none"
A New Elementary School

• Partnership with the School District on the new Performing Arts Center and the Aquatic Center at the new High School
• The Farmer's Market at Forest Home Farms which the Mayor said was "One of the best in the East Bay 2007"
• New City Police Department which received over 100 applications for the 56 positions they recruited for. The Mayor said that San Ramon took the best of the best - "It's all about taking ownership"
• Regional Emergency Planning
• A $13M grant from Housing and Urban Development (HUD) for affordable senior housing
• Approved Design for the San Ramon City Center which has solid support from the Chamber and the Business Community
• A Balanced 2007 Budget in San Ramon even though the State has a $15B debt and the Contra Costa County has financial concerns. San Ramon has over 50% reserves and is one of the most financially strong cities in the U.S.

Mayor Wilson said about San Ramon's schools - "Academic Excellence is demanded by Residents". He went on to recognize the work of the city's departments including that of Public Works who keep the city clean and take ownership. He mentioned that Parks & Commission Service sets the standard.

The Mayor referred to Money Magazine 2006 that San Ramon was on the list of 100 Best Cities in the U.S. to live. The Mayor recommended the Common Sense Approach of talking to each other is the best. He said to the residents of San Ramon "The Buck Stops Here". He touched on the plans to keep residents safe and deal with any kind of emergency whether during a work week, during the weekend, or when children are in schools.

The Mayor said that last month the Joint-Powers Agreement was put into place which allowed the counties of Alameda and Contra Costa County and their Police, Fire, Sheriffs, and First Responders to communicate with each other during an emergency. The Tri-Valley has received $800,000 from Washington D.C to help defray the cost of equipment to talk to and work together. Mayor Wilson said that the Joint-Powers Agreement was the first of its kind in the U.S.

Looking at 2007-2008, the San Ramon City Center Final Plans have been approved. Mayor Wilson said "Downtown will set the standard for others". He further said that that the San Ramon City Center plans will be analyzed by an outside, independent source to ensure that the City is getting the most "Bang for the Buck", and that the partnership with Sunset is equitable. Mayor Wilson said that the City Center will have a "Norman Rockwell family environment" that residents will be proud to share with others who want to experience all the best life has to offer.

The Mayor highlighted 3 basic things for 2008:
1. Economy & Housing
2. Unemployment
3. Cost of Gas

The Mayor touched on the fact that he doesn't like short term solutions that come back to bite you and does not want quick fixes since the crisis can recur. He likes to ensure that residents' money is being spent correctly.

Mayor Wilson briefly mentioned that there is an issue regarding stop signs and speed limits in San Ramon which the City Attorney has escalated to determine its validity. He said that the City is being more proactive than they need to thus ensuring that they protect San Ramon's citizens.

In closing the Mayor said that he was a very fortunate person to have a job he truly loves. While San Ramon is not perfect they are striving to make it such. He said that there are 4 legs working together - Residents, San Ramon Staff, Business Community, and the San Ramon Council.

Questions Posed to the Mayor:
1. What are the 3 Top Reasons that bring cities down?
Mayor answered with 2 reasons - Communication being imperative and the Ability to say "I don't know, explain it to me and bringing the experts in". Mayor Wilson said that you have to remember who you work for.

2. What is your favorite Challenge, Opportunity?
Mayor answered - "Raising my children!". Also, he said, "Being prepared in any kind of Emergency"

3. What are the youth focused activities with the San Ramon City?
Mayor answered - that there are plans in the works for internships, training, apprenticeships for students to work in cities.

The State of the City Address will be broadcast on Comcast Cable Channel 26 at 7:00 am and 7:00 pm from January 13 to 19, 2008.