The National Bank of the United States

The U.S. government now controls the U.S. mortgage industry, which means two very favorable things for home builders:

1. The near-term future of mortgage liquidity will be set by policy rather than economics. In an election year, that can only be positive for housing.
2. The mortgage-backed securities market will now officially have the full faith and credit of the U.S. government behind it, resulting in very low interest rates that may morph into very small spreads over Treasuries.

While taxpayers should revolt and throw every Congressman out of office who took a check from Freddie and Fannie’s lobbyists, the bottom line is that our government has come to the rescue. We will be monitoring the government policies closely to determine if a turnaround is on the horizon. While the events of last week are positive, the looming recession makes it premature to call a turnaround, especially in regards to home prices.

The government action on September 7th sent mortgage rates tumbling, with 30-year fixed rates dropping more than 40 basis points from the previous week, and restored some confidence to investors. The graph below shows the high correlation between low mortgage rates and strong sales activity

Economic Growth…………………………………………………………………..C-
The economic growth indicators continued to perform at below-average levels this month. The employment sector continued to weaken, recording the third straight month of year-over-year losses in non-farm payroll jobs and the unemployment rate rose to a near-5-year high, far surpassing its historical average. Second-quarter GDP growth was revised to an annual rate of 3.3%, up considerably from the preliminary report of 1.9%, while worker productivity also rose significantly to an annual rate of 4.3%. Retailers have been suffering as consumers cut back on spending, and retail sales have grown just 1.6% year-over-year. Inflation continues to rise, with the Full CPI now at 5.4% and the Core CPI (all items less food and energy) reaching 2.5%.

Leading Indicators…………………………………………………………………D
The leading indicators continued to deteriorate, suggesting that economic conditions will remain poor in the near future. Stocks were mixed this month, but continued to exhibit negative year-over-year declines of 9-14%. Homebuilding stocks improved slightly from the previous month, but also remain down year-over-year, evidenced by a 22% annualized drop in the S&P Homebuilding Index. Oil prices continued to correct in August, but remains above the $100 mark. The Leading Economic Index dropped again this month and continues to exhibit negative year-over-year growth, indicating that the economic slowdown will likely worsen in the near future. Meanwhile, the Purchasing Managers Index fell to a level that suggests that the sector is no longer expanding and, despite a rise in the Non-Manufacturing Index, both ISM indices hint at further weakening of the job market in the near term.

Mortgage Rates…………………………………………………………………….B
Mortgage rates plunged following the announced government rescue of Fannie Mae and Freddie Mac. The August month-end 30-year fixed rate of 6.40% and one-year adjustable rate of 5.33% (shown below) fell to 5.93% and 5.21%, respectively, in the week of the announcement. The Federal Reserve held the Fed Funds rate constant at 2.0% in its September 16th meeting. The Mortgage Bankers Association reported that the share of ARM applications was at 7.9% in the last week of August. Meanwhile, performance of subprime loans issued in the first half of 2006 continues to weaken, as measured by the ABX 06-2 BBB- series index, which has declined 87% in the last year.

Consumer Behavior………………………………………………………………….D
Several components of consumer behavior improved this month, but overall consumer behavior remains weak compared to historical averages. Consumer confidence rose to 56.9 for the month, but remains at nearly of the confidence level of early 2007. The University of Michigan’s Consumer Sentiment Index also rose in August, but remains below its historical average as well. The Consumer Comfort Index declined this month, however, after making gains in the previous month. While the dollar volume of equity per owned home is quite high, the debt percentage of home value (LTV) is currently at its worst level in history. Revolving consumer credit outstanding continues to grow, but at a slower annual rate of 5.5%.

Existing Home Market……………………………………………………………….D
The existing home market continues to weaken, reporting mostly declines this month. The annualized existing home sales volume rose to 5 million transactions in July, but has decreased 13% from one year ago. The volume of pending home sales decreased this month, indicating slower sales activity in the housing market to come. A growing number of foreclosures and a shrinking pool of buyers have left a glut in the resale market, which stands at 11.2 months of inventory. The median price in the resale market has fallen nearly 8% year-over-year to $210,900, according to the National Association of Realtors, while the Case-Shiller index shows a decline in paired sales that was twice that level through the second quarter of the year.

New Home Market……………………………………………………………………F
The new home market fundamentals were mixed this month. Builder confidence improved slightly in September from August’s historical low. While new home prices and the annualized sales volume have both increased from the previous month, prices and sales continue to post year-over-year declines of 6.3% and 35%, respectively. On a positive note, the level of unsold new homes continues to fall, currently at 10 months of supply.

Housing Supply…………………………………………………………………….F
The supply of housing continued to decrease this month, largely due to decreased volumes in the multifamily market. The annual volume of new home completions fell to 1.04 million and remains comparable to levels of the early 1990s. Both single-family and multifamily starts declined in July, pushing total starts down to 965,000 units. Multifamily permits had increased the prior month due to a change in permit codes, but returned in July to a level more consistent with this stage of the cycle. Year-over-year, total permit activity has fallen 32%.

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